Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Silver Short-Term Trend Analysis - 26th June 19
Iran and the Dying Days Of the US Empire - 26th June 19
Why a Saturated Online Gaming Market Spells Good News for Gamblers - 26th June 19
Natural Gas Sets Up Bottom Pattern - 26th June 19
Has Gold Price Broken Out Or Not? Technicals And Fundamentals - 26th June 19
Stocks and XAU Gold Miners Next Bull and Bear Markets are Now Set Up - 26th June 19
Gold Price Trend Forcast to End September 2019 - Video - 25th June 19
Today’s Pets.com and NINJA Loan Economy - 25th June 19
Testing the Fed’s Narrative with the Fed’s Data: QT Edition - 25th June 19
What "Pro Traders" use to Find Profitable Trades - eBook - 25th June 19
GDX Gold Stocks ETF - 25th June 19
What Does Facebook’s LIBRA New Crytocurrency Really Offer? - 25th June 19
Why Bond Investors MUST Be Paying Attention to Puerto Rico - 25th June 19
The Next Great Depression in the Making - 25th June 19
The Bad News About Record-Low Unemployment - 24th June 19
Stock Market New High, but…! - 24th June 19
Formula for when the Great Stock Market Rally Ends - 24th June 19
How To Time Market Tops and Bottoms - 24th June 19
5 basic tips to help mitigate the vulnerability inherent in email communications - 24th June 19
Will Google AI Kill Us? Man vs Machine Intelligence - 24th June 19
Why are Central Banks Buying Gold and Dumping Dollars? - 23rd June 19
Financial Sector Paints A Clear Picture For Stock Market Trading Profits - 23rd June 19
What You Should Look While Choosing Online Casino - 23rd June 19
INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - 22nd June 19
Here’s Why You Should Drive a Piece of Crap Car - 22nd June 19
How Do Stock Prices React to Fed Interest Rate Cuts? - 22nd June 19
Gold Bull Market Breaking Out! - 21st June 19
Post-FOMC Commentary: Delusions of Grandeur - 21st June 19
Gold Scores Gains as Draghi and Powel Grow Concerned - 21st June 19
Potential Upside Targets for Gold Stocks - 21st June 19
Gold Price Trend Forcast to End September 2019 - 21st June 19
The Gold (and Silver) Volcano Is Ready to Erupt - 21st June 19
Fed Leaves Rates Unchanged – Gold & Stocks Rally/Dollar Falls - 21st June 19
Silver Medium-Term Trend Analysis - 20th June 19
Gold Mining Stocks Waiting on This Chart - 20th June 19
A Key Gold Bull Market Signal - 20th June 19
Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - 20th June 19
Investing in APPLE (AAPL) to Profit From AI Machine Learning Stocks - 20th June 19
Small Cap Stocks May Lead A Market Rally - 20th June 19 -
Interest Rates Square Minus Zero - 20th June 19
Advice for Financing a Luxury Vehicle - 20th June 19
Stock Market Final Blow Off Top Just Hit… Next Week Comes the FIREWORKS - 20th June 19
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

ProPublica's (and NY Times') "Untold" Magnetar Story Creates Excuses for Wall Street and Washington

Politics / Credit Crisis 2010 Apr 19, 2010 - 05:36 AM GMT

By: Janet_Tavakoli

Politics

Best Financial Markets Analysis ArticleProPublica, Planet Money, and radio show This American Life recently carried stories about Magnetar, a hedge fund that profited from the housing crisis. Unfortunately, many thought it was a fresh revelation. Magnetar wasn't a previously unknown hedge fund. Magnetar did not create the synthetic CDO structure, and the magnitude of Magnetar's role in the subprime crisis has been overblown.


The New York Times recently wrote that the synthetic CDO story has only begun to emerge in recent months, and referenced the ProPublica story. ("A Wall Street Invention Let the Crisis Mutate," April 16, 2010. I was mentioned as an early critic of synthetic CDOs.)

Yet, more than two years ago the Wall Street Journal featured Merrill Lynch, Magnetar, N.I.R. and others involved in a failed synthetic CDO called Norma in a PAGE ONE investigative report on December 27, 2007, and followed up with another article on Magnetar's strategy. Even earlier, on December 17, 2007, WSJ had a front page article in its markets section reporting a potential legal battle involving MBIA, Wachovia, Deutsche and UBS for the cash of Sagittarius, a synthetic CDO (in which Magnetar had also invested) that had declared an event of default. The Wall Street Journal had done many investigative articles on value-destroying CDOs, some even earlier.*

The Wall Street Journal did some brilliant investigative reporting in the fall of 2007, and Washington did nothing. The reports were early enough to plan for the worst, take corrective action, and minimize damage. The news appeared before Bear Stearns imploded in March 2008, and the financial crisis came to a head in September 2008.

[I was quoted in all the WSJ articles referenced in this commentary, which is why the links were handy. WSJ also published many other synthetic CDO exposes as did other financial media. See also my endnote on Magnetar.]

Classic and Massive Ponzi Scheme
My book on the financial crisis, Dear Mr. Buffett (Wiley 2009), explains how Wall Street banks were the key architects of the largest Ponzi scheme in the history of the capital markets. Phony debt packages (RMBS, CDOs) supplied the money for unwise--often predatory and fraudulent--mortgage lending. Banks had close business relationships with (and often direct investments in) mortgage lenders and mortgage loan servicers.

Wall Street banks stuffed bad loans and bad loan packages into even more complex packages--including synthetic CDOs--to disguise problems and continue to earn bonuses. As everything started to fall apart, banks accelerated the scheme. They produced the most complex value-destroying deals in the shortest period of time. These are the classic characteristics of a Ponzi scheme, which is illegal.

Washington Ignored Pre-Crisis Media Reports
Synthetic CDOs made the financial crisis worse. Many types of financial entities were involved, and the following media warnings are only two examples that should have spurred Washington and regulators to act.

In May 2007, ten months before Bear Stearns imploded, Business Week's cover story exposed value-destroying synthetic CDOs in Bear Stearns Asset Management's hedge funds. (Bloomberg News also covered the story). The hedge funds imploded in June 2007, and Bear Stearns absorbed the hedge funds' "assets." In March 2008, JPMorgan Chase bought Bear Stearns to save it from collpase. Citigroup created synthetic CDOs with the failed Bear Stearns hedge funds. Cititroup also gave the hedge funds a $200 million loan, so it's remarkable none of this came up in last week's FCIC hearings. [See embedded articles here: "Congress's FCIC Nearly Nailed Citigroup Executives to the Wall--Then Blew It"]

In a Wall Street Journal article in August 2007, I asserted AIG failed to write down losses for its credit derivatives linked to synthetic CDOs. In early October 2007, the Wall Street Journal wrote about a value-destroying synthetic CDO involving now-debased bond insurer MBIA. In the WSJ's January 14, 2008 article on Magnetar's strategy, Calyon was identified as the underwriter of a synthetic CDO called Cetus. Calyon was one of AIG's trading partners involved with other CDOs (unrelated to Magnetar)--including some done jointly with Goldman Sachs--that were purchased in the AIG bailout. AIG should never have been bailed out without pre-conditions. (see "Goldman Sachs: Spinning Gold")

Officials did nothing while the banks damaged the economy, but they acted very quickly when they needed to save the banks. In the months preceding the crisis, officials said the problem could be contained, but main stream media articles already showed they needed to perform investigations and institute financial reform.

The following video (C-Span April 2009) explains how cheap money, wide-spread bad (often predatory) lending, phony securities, credit derivatives, and Wall Street banks' massive over-borrowing led to our current financial crisis. Yet there is still no meaningful reform.

* The Wall Street Journal's Serena Ng and Carrick Mollenkamp wrote a front page about Merrill, Magnetar, and others involved in a CDO called Norma. "Wall Street Wizardry Amplified Credit Crisis," December 27, 2010 - This was a PAGE ONE article. On January 14, 2008 the Wall Street Journal's Serena Ng and Carrick Mollenkamp explained Magnetar's strategy, "A Fund Behind Astronomical Losses."

The Wall Street Journal's Aaron Lucchetti wrote about the complexity of the final payouts for a value-destroying synthetic CDO called Sagittarius (MBIA (LaCrosse Financial Products), Deutsche, Wachovia, UBS ended up in a dispute over the cash): "CDO Battles: Royal Pain Over Who Gets What" December 17, 2007. This article appeared on the front page of the Markets (C1) section.

Susan Pulliam, Randall Smith, and Michael Siconolfi wrote a PAGE ONE article on serious CDO pricing issues including shenanigans such as trades with various hedge funds to inflate marks and gimmicks to temporarily disguise the risk (I was quoted in the article). This was before Lehman's famous gimmick of REPO 105. "Investors Face an Age of Murky Pricing," Wall Street Journal, October 11, 2007.

End Note: Synthetic CDOs were well-known to professionals years before Magentar got involved. Synthetic collateralized debt obligations, which use credit derivatives technology, made the mortgage crisis worse by enabling the cover-up of losses. In 2003, I wrote a book on the dangers of synthetic CDOs, called "Collateralized Debt Obligations & Structured Finance." It includes the structure used by Magnetar and other hedge funds in the recent mortgage debacle, but the example used corporate credit risk (Wiley, 2003, Chapter 6). I don't know the first person to use that structure, but it wasn't new. The second edition released in 2008 explains the role of structured finance in the subprime crisis in more detail. Synthetic CDOs and many other new structures were used. [I sent gratis copies of each edition to the head of every branch of the Federal Reserve system when they were first published. I also sent a copy to the Chairman (Greenspan and later Bernanke) and received an acknowledgement.]

The first edition (2003) was written before subprime lending exploded. In subsequent years, I warned about new growing problems with subprime (ABS CDOs and synthetic CDOs) at CFA conferences, professional conferences, in numerous articles, in main stream media, and at the International Monetary Fund (April 2005). The 2008 edition consolidates some of those warnings and explains the deterioration in the financial markets due to many types of corrupt structured financial products.

One of the key people at Magnetar, David Snyderman, was in the structured products group at Citadel in August 2004 (and joined Magnetar in mid 2005). At that time, the group he headed asked me to meet with them after reading my CDO book. They said my book gave them the idea to apply the structure to the other loan markets, but banks had already approached many hedge funds with this trade to get around post-Enron accounting issues (among other reasons). The documentation for mortgage loans had already been developed, albeit ISDA didn't issue a template until June 2005; as usual it was behind market practitioners. As I recall, Snyderman did not attend his group's meeting on that day. I declined to get involved, since my book was written as a warning, not a manual for mischief. To the best of my knowledge, the entire group left Citadel shortly thereafter and scattered to various shops.

[In 1998, I wrote the first public book that explains problems with credit derivatives, Credit Derivatives (Wiley, 1998), before Long Term Capital Management blew up. Banks had a lot of risk to hedge funds using certain types of credit derivatives (total return swaps and esoteric credit derivatives), and I wrote that banks' exposure was too great, because hedge funds were overleveraged and could easily blow up. At the time, I sent gratis copies to the Fed heads.]

By Janet Tavakoli

web site: www.tavakolistructuredfinance.com

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2010 Copyright Janet Tavakoli- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules