JPMorgan Magnetar Deal Under SEC Investigation

Jesse Eisinger and Jake Bernstein, whose coverage of the Magnetar hedge fund and the big iBank CDO debacle has scooped the MSM, note that the SEC is investigating both JPM and Magnetar:

The Securities and Exchange Commission is investigating whether JPMorgan Chase allowed a hedge fund to improperly select assets for a $1.1 billion deal backed by subprime mortgages, according to people familiar with the probe.

Called “Squared” and completed in May 2007, the deal was a collateralized debt obligation, or CDO, made up of pieces of other CDOs. The hedge fund, Magnetar Capital, based in Evanston, Ill., purchased the riskiest slice of Squared as part of a strategy to bet against the mortgage market.

As we reported in April [1], together with Chicago Public Radio’s This American Life [2] and NPR’s Planet Money [3], Magnetar often purchased the riskiest portion of CDOs, enabling the banks to complete the deals. Magnetar also frequently bet against those same CDOs, using side bets. Magnetar’s purchases ultimately spawned at least $40 billion worth of risky CDOs in 2006 and 2007.

While Magnetar bought the riskiest slices, the CDOs were created and marketed by investment banks. In the case of Squared, the SEC is examining whether JPMorgan adequately disclosed to the investors it marketed Squared to that Magnetar had a role in picking the securities that went into the deal while also betting against segments of the deal. The 294-page Squared prospectus [4], which was created by JPMorgan, has generic language [5] warning that some investors and the CDO manager might have investments that conflict with the interests of other holders of the CDO. (Read the prospectus.)

The new & improved SEC seems to be pretty busy lately . . .


SEC Investigating Deal Between JPMorgan and Hedge Fund Magnetar
Jesse Eisinger and Jake Bernstein
ProPublica, Nov. 1, 2010, 2:20 p.m.

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