I’ve been writing a bit over at Housingwatch about the recent news surrounding reasons behind housing market crash, viewed through the 20/20 hindsight lenses we all posses. While this article was originally published on April 24th 2010 on my site at TheXbroker, I wanted to bring it to Active Rain too because I enjoy the comments and subsequent engagement so much. I even stripped out all the 'colorful' language a.k.a. 'swear/cuss' words and any analogies that could be misconstrued as sexist, ageist, religiously biased, insensitive to animals or otherwise...so as not to incite any raucous exchanges, be they in the comments or in follow-up posts, between members who may be offended by such (at least for one post). I would like people to focus on the relevant content of the entire article and links within, not just 4-5 words...call me an idealist. Anyway- on with the article...
You can’t make this stuff up:
Magnetar Capital, a Chicago based hedge fund with an epically ironic name , went into business in 2005 at about the time that Sub-Prime mortgages were recognized as being ‘toxic’ in the sense that they don’t perform, as in- Homeowners don’t make their payments and investors don’t get paid. Nonetheless, they started buying up these toxic loans (through various conduits) and bundling them up in Collateralized Debt Obligations (CDO’s), creating huge demand and liquidity for 'toxic' mortgages to put people in.
All Magnetar CDO’s contained the worst kind of mortgages…the No Income No Asset, No Job, Low FICO, short term ARM variety located in states with the highest appreciation mortgages…the mortgages that default like the consumers they gave them to had no income or jobs with a poor track record of paying debts back.
Magnetar subsequently bought Credit Default Swaps (CDS’s) or insurance policies against the 'toxic' CDO’s (they created) just in case they defaulted. CDS’s cost money in the form of premiums, just like you pay on your car insurance. Magnetar used the higher yields from the CDO’s they created to pay the CDS insurance premiums…until the CDO’s defaulted that is…then they collected the insurance policies payout. These insurance policies paid out far more to the hedge fund than any loss they would incur if, err, when the CDO defaulted.
This became known as ‘The Magnetar Trade’ as is being pegged as the primary reason the US Housing market crashed so hard and pulled the world economy down with it.
For review: The Magnetar Trade strategy was to fuel the marketplace by purchasing 'toxic' mortgage securities (creating liquidity and loans) bundle them up into CDO’s, achieve a AAA rating from the relative agencies, sell them to investors as such, then bet Big Money on the fact the CDO would default and collect said Big Money when they did. It was simple, even an elegant piece of financial engineering...and legal.
Almost every major institution on Wall Street played this game, executing ‘Magnetar Trades’…Merrill Lynch, JP Morgan, Lehman Brothers even The Streets most prestigious firm: Goldman Sachs. John Paulson of Paulson and Co. created the Abacus Fund for Goldman. Abacus was architected after the Magnetar blueprint.
Recently the SEC decided to bring a lawsuit against Goldman Sachs alleging fraud around the Paulson created Abacus hoo-ha. The core of the suit alleges Goldman deceived and sold investors on a security that Paulson helped design to fail, and made a bunch of money because of it.
Regardless of lawsuits and agendas, there is no getting around the fact that these sort of ‘investment strategies by ‘Wall Street’ negatively effected millions of homeowners…never mind the investors and investment banks. It’s not hard to draw a pretty straight line between Wall Street greed and the implosion of the US Housing market.
I don’t think the lawsuit sticks but it raises an incredible amount of awareness in the public arena around a sophisticated and ethically challenged Wall Street play that negatively effected millions of homeowners. That’s great for pushing an agenda, especially a political one as the timing of all this is obviously politically motivated…but this isn’t a political post- I pro-actively filibuster this article from political based arguments so it doesn’t turn into a 300 comment finger pointing contest.
Consumers were either unwitting pawns or consumed by greed and subsidized this game of sophisticated capitalism…at least that’s whats going to be played out in the press on on TV.
So, will a public growing more weary by the day of Big Government side favorably with Big Government in having its way with Wall Street?
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