SEC Investigating JPM, Magnetar Deal
ProPublica reports that 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. Goldman Deja vu. Settlement due next? Or will money diverted from gold shorts to pay for legal fees mean the short squeeze onslaught in paper PM shorts is about to begin? Stay tuned to find out.
SEC Investigating Deal Between JPMorgan and Hedge Fund 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 , together with Chicago Public Radio’s This American Life  and NPR's Planet Money ,
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 ,
which was created by JPMorgan, has generic language 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 .)