Investment deals involving Magnetar Capital are garnering renewed interest from the Securities and Exchange Commission (SEC), as the regulator steps up its investigation into how hedge funds like Magnetar made huge profits on instruments that produced billions of dollars in losses for investors.
The investments in question are mortgage-related collateralized debt obligations (CDOs). As reported June 19 by the Wall Street Journal, the hedge fund known as Magnetar played a key role in the CDO market, keeping sales growing even as cracks began to appear in the housing market.
Magnetar also worked with most of Wall Street’s top banks in its deals, including Merrill Lynch, Lehman Brothers, Citigroup, UBS and JPMorgan Chase.
Magnetar bought the riskiest portion of CDOs, while simultaneously placing bets that portions of its own deals would fail. Along the way, Magnetar allegedly did something to enhance the chances of that happening. According to an April 10 article by ProPublica, Magnetar pressed to include riskier assets in its CDOs so as to make the investments even more prone to failure.
Apparently Magnetar acknowledges that it bet against its own deals but says the majority of those short positions involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.
The bottom line is Magnetar ended up making big profits when the CDOs collapsed. Meanwhile, investors in the supposedly safer parts of the CDO suffered big losses.
Now the SEC wants to know how the assets that were put into the CDOs were valued at the time, the terms of the deal, what triggers were put in place to determine whether investors would incur losses and at what point did the banks that were involved in the deal bet against the assets in the CDO.