can anyone explain "magnetar trade"/what Magnetar did in simple terms?

[weflyhigh]

been reading about it for a while and it is still pretty confusing. interesting, though.

can anyone explain what happened simply?

 

[highland145]

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.

And, supposedly pushed for even riskier assets in the CDO's.

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.

http://www.propublica.org/article/t...dge-fund-helped-keep-the-housing-bubble-going

 

[Doggiedog]

Correct me if I'm wrong but what Magnetar did was buy the riskiest portions of the CDOs. The most junior pieces. They were the first to get hit if there were any losses in the tranche. So if there was a loss in the tranche, Magnetar would keep eating it until its position was wiped out. In exchange for the risk, they got an extremely high yield. These CDOs were supposedly rated highly by the ratings agencies so it was tempting to many to see AAAs with such a high yield. Additionally, many of these CDOs may have had insurance backing them up to enhance their attractiveness. The problem was that the ratings were completely off and the insurance companies could not deal with all of these defaults so the insurance was worthless as well.