The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going

Voltron says: A lengthy ProPublica article (to be featured on NPR's This American Life tomorrow) details how a hedge fund named Magnetar "sponsored" the creation of mortgage pools by purchasing the riskiest parts that were rapidly becoming unwanted in the markets, in order to keep the mortgage pipeline going and also use the money to fund large bets against the rest of the mortgage pool. The deal was also described in Yves Smith's book "Econned". Morgan Stanley lost $9 Billion by doing the opposite (funding bets on low rated debt by selling insurance against lots of high rated debt - right before it all went bad) according to Michael Lewis' book "The Big Short"

Excerpt:

Magnetar solved a conundrum of those who bet against the market. An investor might be confident that things are heading south, but not know when. While the investor waits, it costs money to keep the bet going. Many a short seller has run out of cash at the gates of a big payday.

...Even today, bankers and managers speak with awe at the elegance of the Magnetar Trade. Others have become famous for betting big against the housing market. But they had taken enormous risks. Meanwhile, Magnetar had created a largely self-funding bet against the market.

Explainer: http://www.propublica.org/special/the-anatomy-of-the-magnetar-trade

Full article: http://www.propublica.org/feature/all-the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble