Betting on disaster

In case you missed it last week, here's a terrific piece from "This American Life" on how a Chicago hedge fund called Magnetar bought collateralized debt obligations and then bet against its own securities. Not only that, the Magnetar people wanted to include the riskier assets in their CDOs. It sounds a lot like the Goldman Sachs situation. From a ProPublica investigation that was used in the "This American Life Report":

Magnetar says it was "market neutral," meaning it would make money whether housing rose or fell. Dozens of Wall Street professionals, including many who had direct dealings with Magnetar, are skeptical of that assertion. They understood the Magnetar Trade as a bet against the subprime mortgage securities market. Why else, they ask, would a hedge fund sponsor tens of billions of dollars of new CDOs at a time of rising uncertainty about housing?

This may be the first investigative story ever to include a Broadway-style tune. Think of a Wall Street version of "The Producers." (h/t cahwyguy)

Bet Against the American Dream from Alexander Hotz on Vimeo.