Magnetar CEO Alec Litowitz: Proud Democrat
[Welcome, Naked Capitalism readers! -- lambert]
Yves has a whole chapter on Magnetar in her terrific book, ECONned. Here's what Magnetar was all about, via Pro Publica:
In late 2005, the booming U.S. housing market seemed to be slowing. The Federal Reserve had begun raising interest rates. Subprime mortgage company shares were falling. Investors began to balk at buying complex mortgage securities. The housing bubble, which had propelled a historic growth in home prices, seemed poised to deflate. And if it had, the great financial crisis of 2008, which produced the Great Recession of 2008-09, might have come sooner and been less severe.
At just that moment, a few savvy financial engineers at a suburban Chicago hedge fund   helped revive the Wall Street money machine, spawning billions of dollars of securities ultimately backed by home mortgages.
When the crash came, nearly all of these securities became worthless, a loss of an estimated $40 billion paid by investors, the investment banks who helped bring them into the world, and, eventually, American taxpayers.
Yet the hedge fund, named Magnetar for the super-magnetic field created by the last moments of a dying star, earned outsized returns in the year the financial crisis began.
How Magnetar pulled this off is one of the untold stories of the meltdown. Only a small group of Wall Street insiders was privy to what became known as the Magnetar Trade. Nearly all of those approached by ProPublica declined to talk on the record, fearing their careers would be hurt if they spoke publicly. But interviews with participants, e-mails, thousands of pages of documents and details about the securities that until now have not been publicly disclosed shed light on an arcane, secretive corner of Wall Street.
According to bankers and others involved, the Magnetar Trade worked this way: The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations -- CDOs. If housing prices kept rising, this would provide a solid return for many years. But that's not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.
So make a horse-racing analogy: Magnetar formed a syndicate, and got a ton of suckers to bet on a horse they were backing. Then, in secret, they bet against the horse. Bad enough. But it gets worse: They crippled their own horse, to make sure the suckers lost and they won! (And then it gets worse: We taxpayers covered the bets for the suckers...)
Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. ... An independent analysis   commissioned by ProPublica shows that these deals defaulted faster and at a higher rate compared to other similar CDOs. According to the analysis, 96 percent of the Magnetar deals were in default by the end of 2008, compared with 68 percent for comparable CDOs.
Yay! Well, who owns Magnetar? A hedgie from Chicago named Alec Litowitz. And which party does our Alec contribute to? You'll never guess:
Oddly, or not, a story from Daily Finance by Moe Tkacik that covers this story -- Rahm Emanuel and Magnetar Capital: A Love Story -- isn't available any more, not even in Google's cache. Traces of it do, however, still exist at Hedgehogs, Yahoo, and Bing. Tkacik is for real (see, e.g., Felix Salmon) so what happened to her story?
NOTE Via Yves.