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Goldman's activity sounds a lot like the trade that UBS, Merrill, Citi, and 6 other IBs helped Magnetar perform. http://www.propublica.org/feature/all-the-magne
by rjett 17y ago
Goldman's activity sounds a lot like the trade that UBS, Merrill, Citi, and 6 other IBs helped Magnetar perform. http://www.propublica.org/feature/all-the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble http://www.propublica.org/feature/all-the-magnetar-trade-how...
- jamiequint 17y agoThe difference is that these were synthetic CDOs so they didn't generate more demand for residential mortgage backed securities, rather they piggybacked off pre-existing ones. This likely did nothing to expand the bubble.
- btilly 17y agoThey didn't directly generate more demand, but the existence of deals like this generated a market for the low quality bonds in deals, which made the hardest part of structuring those deals much easier. So no, it didn't directly expand the bubble. But this kind of activity indirectly did so. (Though this particular deal came late enough that the bubble was about to collapse anyways.)
- jamiequint 17y agoI'm not sure this is true. If the packagers of the non-synthetic CDOs realized no benefit from Synthetic CDOs being made off of theirs why would they have incentive to cater to the Synthetic CDO creators.
- btilly 17y agoThe market for synthetic CDOs like this only arose because the demand for low quality debt exceeded the available supply. Evidence that demand exceeds supply is encouragement to create more low quality debt. So no, it is not a direct connection. But it is indirect encouragement.
- jfager 17y agoI don't think that makes much sense. Consider a music analogy: samplers and sequencers didn't kill demand for new music. If anything, they spawned a whole new sub-industry dedicated to simply finding and selling new interesting snippets of sound.
- jashkenas 17y agoThanks for linking to a great story. The documents that they reference are part of a project I'm working on (DocumentCloud). Here's a direct link to Magnetar's response to the investigation: http://www.propublica.org/documents/item/magnetars-responses-to-our-questions http://www.propublica.org/documents/item/magnetars-responses...
- jfager 17y agoGoldman was in a similar role to UBS, Merrill, Citi, etc., and Magnetar was in a similar role to Paulson & Co. I think that's probably what you meant, but just wanted to clarify.
- minouye 17y agoFYI this was featured on This American Life last week: http://www.thisamericanlife.org/radio-archives/episode/405/inside-job http://www.thisamericanlife.org/radio-archives/episode/405/i...