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Rubicon Associates is headed by a Chartered Financial Analyst with over 20 years of experience in the investment management industry focused on the analysis, investment and management of fixed income and preferred stock portfolios. Over the years, he has analyzed and invested in both public and... More
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  • Hedge Fund Witchhunt - Same Old Same Old 0 comments
    Nov 1, 2010 11:09 PM

    From ProPublica (Nov. 1, 2010)


    The Securities and Exchange Commission is investigating whether JPMorgan Chase allowed a hedge fund to improperly select assets for a $1.1 billion deal backed by subprime mortgages, according to people familiar with the probe.

    Called "Squared" and completed in May 2007, the deal was a collateralized debt obligation, or CDO, made up of pieces of other CDOs. The hedge fund, Magnetar Capital, based in Evanston, Ill., purchased the riskiest slice of Squared as part of a strategy to bet against the mortgage market.

    Magnetar often purchased the riskiest portion of CDOs, enabling the banks to complete the deals. Magnetar also frequently bet against those same CDOs, using side bets. Magnetar's purchases ultimately spawned at least $40 billion worth of risky CDOs in 2006 and 2007.

    According to a person familiar with how the deal came together, Magnetar committed to purchase $10 million worth of Squared's riskiest part, called the equity. Magnetar's purchase allowed JPMorgan to create and sell the CDO.

    One participant in the deal told ProPublica that Magnetar pushed the bankers to select riskier bonds. "They really cared about it," this person said. "They wouldn't pull punches. It was always going to be crappier assets." The hedge fund requested that Squared include slices from other CDOs that Magnetar helped spawn, according to this person.

    JPMorgan's sales force sold parts of the CDO to 17 institutional investors, according to a person familiar with the transaction. These investors included Thrivent Financial for Lutherans, a Minnesota-based not-for-profit fraternal organization, whose $10 million investment was wiped out. Thrivent didn't respond to requests to comment. Small pieces of Squared also ended up in mutual funds run by Morgan Keegan, a regional investment bank based in Memphis, Tenn. 

    Welcome to the world of wall street.  Investors show up like big boys and go home crying like preschoolers.  Wonder if anyone actually looked at the deal before buying it.  Probably not.

    Story here:sec-investigating-deal-between-jpmorgan-and-hedge-fund-magnetar


    An earlier story (April 9, 2010) by the same publication states (Italicized comments are mine):

    From what we've learned, there was nothing illegal in what Magnetar did; it was playing by the rules in place at the time. And the hedge fund didn't cause the housing bubble or the financial crisis. But the Magnetar Trade does illustrate the perverse incentives and reckless behavior that characterized the last days of the boom.

    And in the same April 9, 2010 article:


    Other buyers of the CDO could have figured out they were getting relatively risky bonds, but they would have had to look hard at the minutiae of the deal (Not for nothing, but this is why you get paid folks, I did the same thing on the credit side). By this point in market history, the ratings had less and less meaning. Two sets of bonds rated AA could have very different levels of risk. Most investors chose not to dig too deeply.

    Typical populace focused biased journalism.  While I think the series of articles gives good insight into the trades underlying the CDO boom, the focus on this fund and the speculation as to what they may have done is typical.

    Suck it up.  Maybe you should have read the docs.  Just a thought.  If you didn't understand it, you shouldn't have bought it.  Also notice those mentioned are QIBs (qualified institutional buyers) - you know, those folks who are supposed to have a clue and the resources to support their clue.  I worked with some folks who were crying over their own bad investments - they didn't understand it, but thought they did after some surface level investigation.  Seriously, maybe everyone is looking at the wrong folks.  Where was the buyer's fiduciary responsibility to their ultimate client?  Does greed qualify as "prudent person"?

    Disclosure: no positions
    Themes: CDO
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