I don't know this specific situation, but NPR's This American Life just did an episode about a hedge fund called Magnatar. IF the description was accurate (auth

I don't know this specific situation, but NPR's This American Life just did an episode about a hedge fund called Magnatar. IF the description was accurate (authorities will have to determine that), this was the scenario: Magnatar aggressively bought the crappiest traunches of CDOs so that banks would be convinced to create more CDOs. The banks could then sell them, saying "even the crappiest traunches are selling like hotcakes - you can confidently buy these less-risky traunches." But actually, even the least-risky traunches were VERY risky, and Magnatar was pushing to have riskier stuff included in the higher-level traunches, setting them up to fail. Meanwhile, Magnatar's inevitable losses on the crappy traunches were nothing compared to the bets (CDOs) they were taking against the CDO as a whole. They might invest $10 million in the crappy traunches and effectively put an $100 million insurance policy on the CDO as a whole. A good analogy would be if you bought houses next to a dam you thought would burst, thereby convincing developers to build more such houses, and you then took out large insurance policies on all the houses in the neighborhood. Except that you're not allowed to take out insurance on houses you don't own, which is sane, but you ARE allowed to buy credit default swaps on CDOs you don't own, which is a recipe for disaster. So to the CDO investors in THOSE deals, at least, what the brokers told them was "these investments are rated as super-safe and everybody is buying them - the magic of bundling takes away the risk of the underlying mortgages." When the reality was, the brokers KNEW that the CDOs were created with the help of someone who wanted them to fail, and the ratings agencies were being paid by the people who wanted the investments rated well. (Another insane situation - it would be like if the food safety inspectors were paid by McDonalds when they came out to check things. How can they be objective?) Yes, there were investors who saw the crisis coming. But the banks did completely omit the fact that the investments were created, in part, by people who WANTED them to fail. If they had been up front about that, nobody would have bought them. So they lied, and had ratings agencies to back their lies. Not exactly a situation where the investor has a reasonable chance to make informed decisions.