ABWTQ - New Investigations into CDS
This investigation by the SEC may lay further groundwork for us into the ABH, ABY, BOW CDS schemes as of the 2007 Merger Date with Bowater.
Article - below
SEC Steps Up Probe of Crisis Deals By Fund
By: KARA SCANNELL
The Securities and Exchange Commission is stepping up its investigation into the complicated mortgage securities at the heart of the financial crisis, focusing on deals by an Illinois-based hedge fund that made big profits as these securities went sour.
Investigators carrying out the SEC's broad examination into these securities, known as collateralized-debt obligations, are holding face-to-face meetings with Wall Street executives about deals involving hedge fund Magnetar Capital, according to people familiar with the matter.
The focus of the interviews is how these particular securities were put together, people familiar with the matter said.
The highest-profile case to come out of the SEC's wide-ranging investigation is the civil fraud suit the SEC has brought against Goldman Sachs Group Inc. But in that case, the focus was on how the securities were sold to clients and whether all of the important information about them was properly disclosed to clients.
Magnetar, which is named after a type of neutron star, a remnant of a collapsed sun, played a key role in the market for complicated mortgage securities. It helped keep sales growing even as the housing market started to stumble. It did that by stepping in to buy the riskiest portions of the CDOs, which are packages of mortgage securities that are sliced up by risk and return. Without a buyer for the riskiest slice, the supposedly least risky, generally triple-A rated portions of the CDO could not be sold.
Critics have said that the actions of players such as Magnetar helped fuel the boom in mortgage-linked securities after cracks had begun to show in the subprime housing market. That subsequently worsened the financial crisis when Wall Street banks incurred heavy losses from CDOs they bought or were unable to sell.
Magnetar offset its risk by betting against the default of these securities using instruments called credit default swaps. Magnetar ended up making big profits when these CDOs collapsed, while the investors in the supposedly safer parts of the security suffered big losses.
Among other things, investigators want to know how the assets that were put into the CDOs were valued at the time, what the terms of the deal were, what triggers were put in place to determine whether investors would incur losses and at what point did firms involved in the deal bet against the assets in the CDO, people familiar with the matter say.
A spokesman for Magnetar said, "As we understand it, the entire CDO market has for some time been under review by various regulators. From time to time, Magnetar has received related inquiries and we have responded to the best of our ability to these requests." Magnetar said it "was transparent in its dealings with market participants."
The fund was started by Alec Litowitz, a former Citadel Investment Group trader.
An SEC spokesman declined to comment.
Normally, an independent manager would work with a bank to put together the CDOs and investors would decide whether or not to buy them.
People familiar with Magnetar's deals say the firm actually played a role in how the securities were put together, encouraging these independent managers to pick mortgage assets with certain characteristics to put in them.
Magnetar told its investors in April that it "did not control asset selection in CDOs in which it participated" but said it "often communicated" with the bank and asset managers when the deals were being put together.
Magnetar rejected the characterization of its deals as bets on a collapse of the mortgage market. "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 long term," the firm said in its letter.
The SEC has several open investigations in the area of mortgage CDOs. Investigators have sought documents and information from nearly every major Wall Street firm and are seeking information from Goldman Sachs about several deals it constructed.
In April, the SEC sued Goldman and one of its traders for allegedly misleading investors in a CDO it sold named Abacus. Goldman denies the charges and says disclosure was sufficient.
Both sides have held discussions to try to reach a settlement, people familiar with the matter have said, but no deal is close. Goldman has been given extra time to file its response to the SEC's suit, people familiar with the matter said. The response to the suit was originally due Monday.
—Serena Ng
contributed to this article.
Write to Kara Scannell at kara.scannell@wsj.com
AI
