“ProPublica simply got the story wrong,” Magnetar told investors yesterday, referring to the ProPublica report that bashes Magnetar for creating a huge portion of the ultimately worthless CDOs that in part aided the mortgage crisis.
John Gapper at FT has found and released Magnetar’s rebuttal to ProPublica, and more generally, defends synthetic CDOs.
Their defence is harsh. They say: either ProPublica didn’t understand the information we gave to them, or they chose to ignore it.
“Assuming that the reporters understood the information that we relayed, they chose to disregard the key fundamental facts that we outlined in our discussions and supporting documentation.”
They insist that their short position was merely a hedge.
It was not a “bet” that any CDO, any group of CDOs, or the housing or mortgage markets as a whole would fail either in the short term or the long term.
Financial institutions usually insist what they do is not “betting.” In the letter, Magnetar repeatedly explains that they did not bet one way or another, as evidenced by a portfolio which “did not express a view on the direction of the market.”
Now here is the most interesting part we’ve read so far: they say, everyone else did it too.
“Magnetar’s portfolio and structural preferences were expressed in a manner consistent with general market practices.”
In the narrative of defence banks and hedge funds are building, the argument, we were acting the same way as everyone else is becoming a key point. Goldman cited Magnetar’s similar trading actions yesterday saying the same thing – we’re all guilty, don’t pin this on us.
Magnetar’s defence also cites Bear Stearns’ creating a riskier CDO than they did, with the same CDO manager that worked with Magnetar. ProPublica had cited an email from Magnetar to the CDO manager’s asking for a larger yield. The CDO manager then emailed back, “we will not assemble a portfolio we are not proud of.”
Magnetar’s defence against the email is: we never even completed the deal but when Bear Stearns did later, it was much worse.
“The same Collateral Manager subsequently executed a CDO with Bear Stearns in December 2006… This transaction was initiated shortly after the email discussed above was written, and was completed at spreads approximately 10% wider and with a weighted average rating factor (or WARF) 7% higher (and implying a need for commensurately “riskier” assets) than what Magnetar had proposed in its email. Magnetar was not an equity investor in that subsequent transaction.”
They also include more emails between the two parties (in the last 4 pages) which show how the two counterparties, the CDO manager and Magnetar, interacted while creating the CDO: amicably, but we don’t see why the deal fell through.
Magnetar’s defence doesn’t change much of anything; we knew before that Magnetar probably didn’t do anything illegal. Their argument that “everyone else did it too” is the most telling. It’s a needless argument if they didn’t do anything illegal.