The SEC is investigating Merrill Lynch about their involvement in the Magnetar trade.
Magnetar, you’ll remember, is the hedge fund that used CDO managers to select tons of mortgages they were pretty sure would default and then invested in the probability that they would in fact default.
Merrill Lynch was one of the banks that created those CDOs (JPMorgan also did), and the accusation is that Merrill knew that Magnetar selected them because of the likelihood that they would fail, and should not have sold them to investors without disclosing that detail.
According to the Financial Times, regulators are looking into:
- whether Merrill mispriced assets for the $1.5 billion CDO
- whether Merrill told buyers that Magnetar helped select the assets included in the CDO and bet against those same assets
And FYI, while all of this is going on, real Magnetars, in the sky, are apparently having quite an exciting news day.
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