Merrill Lynch Investigated for CDO Deal Involving Magnetar

Hedge Fund Probed

By Marian Wang

ProPublica, June 15, 2011, 3:10 pm

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The Securities and Exchange Commission is investigating whether Merrill Lynch short-changed investors and gave undue influence to the hedge fund Magnetar in the creation of a $1.5-billion mortgage-backed security deal.

The investigation, which was first reported [1] by the Financial Times ($), appears to be the agency’s first probe of Merrill Lynch’s CDO business since the financial crisis. (Check our bank investigations cheat sheet [2] for which other firms are being probed.) Here’s the FT:

The investigation is one of several SEC probes into banks that helped underwrite billions of dollars of collateralised debt obligations, securities comprised of mortgages or derivatives linked to them.

It also marks a broadening of the SEC’s investigation into the role of collateral managers, institutions that help select the assets included in CDOs.

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The deal that the SEC is investigating—a collateralized debt obligation, or CDO, called Norma—was detailed both in our reporting last year [3] and in a report [4] by the Financial Crisis Inquiry Commission released in January. Norma was one of more than two dozen CDO deals [5] done by Magnetar, whose bets against a number of CDOs earned it billions in the waning days of the housing boom.

As the FCIC detailed, Magnetar helped select the assets that went into Norma even though it had a $600 million bet that would pay off substantially if the CDO failed. As we reported [6], Magnetar often invested in the portion of the CDO that was riskiest and hardest for the banks to sell. Banks typically gave such investors—equity investors—more say in how the deal was structured. (Magnetar isn’t named as a target of the investigation and had no responsibility to investors. It has also maintained that it did not have a strategy to bet against the housing market.)

In the offering documents for Norma, there’s no mention of Magnetar’s role in asset selection, according to the FCIC. Investors were told that an independent collateral manager, NIR Capital Management, would be selecting the assets with their best interest in mind. The report concluded: “NIR abdicated its asset selection duties… with Merrill’s knowledge.”

Bank of America

Bank of America, which took over Merrill Lynch in 2008, declined our request for comment. The firm’s general counsel told [4] the Financial Crisis Inquiry Commission that it was “common industry practice” for equity investors to have input during the asset selection process, though the collateral manager had final say.

NIR Capital Management

NIR Capital Management is also being investigated by the SEC, according to the FT. The firm did not immediately respond to our request for comment. (The Wall Street Journal did an impressively detailed story in 2007 on how NIR came to be manager [7] of the Norma deal.)

Magnetar declined our earlier requests for comment on Norma, but FT reports it has denied claims [1] that it selected the assets for Norma.

Assessment

As we reported, the SEC had launched a probe of Merrill’s CDO business 2007, but that investigation petered out without resulting in any charges.

Conclusion

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9 Responses

  1. SEC Investigating Yet Another Magnetar CDO

    The Securities and Exchange Commission is investigating yet another mortgage securities deal involving the hedge fund Magnetar—this time over a deal with Japanese bank Mizuho, a latecomer to the CDO market and one of its biggest losers.

    So, check it out right here: http://www.propublica.org/blog/item/sec-investigating-another-magnetar-cdo

    Ann Miller RN MHA
    [Executive-Director]

    Like

  2. Why Merrill Lynch’s small-account penalty is a big mistake

    New policy could sour relationships in a business built on relationships.

    http://www.investmentnews.com/article/20120111/BLOG01/120119986

    Sheldon

    Like

  3. Financial Firm Fined for Misleading Investors on Magnetar Bets

    Yet another player, Boston’s State Street, was scrutinized over Magnetar deals and fined $5 million.

    http://www.propublica.org/article/financial-firm-fined-for-misleading-investors-on-magnetar-bets

    Josh

    Like

  4. More lawsuits in Bank of America, Merrill Lynch controversy

    It’s the deal that keeps on giving, for attorneys anyway.

    Bank of America’s 2008 purchase of Merrill Lynch continues to generate an awful lot of litigation. There was the SEC lawsuit, which was settled for $150 million in 2010, but the private litigation has been perhaps just as contentious, and now we’re seeing plaintiffs pitted against one another.

    http://www.nytimes.com/2012/04/21/business/bank-of-america-settlement-in-lawsuit-is-challenged.html?_r=1

    In fact, one group has struck a settlement with the bank’s directors for $20 million.

    Damion

    Like

  5. The Magnetar Fallout
    [Who’s Been Charged, Has Settled, or Is Being Investigated?]

    Here is a rundown of the various charges, settlements and investigations into the deals spawned by the hedge fund Magnetar that helped super charge the financial meltdown.

    http://www.propublica.org/article/the-magnetar-fallout-whos-been-charged-settled-or-is-being-investigated

    Szabo

    Like

  6. Emails Give Glimpse Into Deals That Fueled Financial Meltdown

    Hedge fund Magnetar and Wall Street banks created $40 billion of CDO deals. The emails show how they did it.

    http://www.propublica.org/article/emails-give-glimpse-into-deals-that-fueled-financial-meltdown

    Sheldon

    Like

  7. Why Would Anyone Buy Credit Default Swaps On The US?

    Why would anyone buy credit default swaps on the US government?

    http://www.bloomberg.com/news/2013-09-26/why-would-anyone-buy-credit-default-swaps-on-the-u-s-.html

    If the U.S. ever defaulted it would be because the world ended, so no one would be around to pay you on your CDs and CDOs, etc.

    Jerimy
    http://www.amazon.com/Financial-Planning-Handbook-Physicians-Advisors/dp/0763745790/ref=sr_1_1?ie=UTF8&s=books&qid=1275315635&sr=1-1

    Like

  8. BoA Nailed

    Bank of America’s Merrill Lynch just agreed to pay about $131 million to settle U.S. regulatory claims it failed to tell investors that hedge fund Magnetar Capital had a role in selecting assets for two 2006 mortgage-backed securities.

    http://www.financial-planning.com/news/bofa-merrill-to-pay-131-million-over-norma-cdo-marketing-2687618-1.html

    Szabo

    Like

  9. ‘Mother Merrill’ Nostalgia
    [ What You’re Really Missing?]

    Many financial advisors miss the old culture at their firms. What exactly are they longing for?

    http://www.financial-planning.com/news/career_advice/mother-merrill-nostalgia-what-youre-really-missing-2691661-1.html?utm_campaign=weekend-jan%2017%202015&utm_medium=email&utm_source=newsletter&ET=financialplanning%3Ae3668175%3A86235a%3A&st=email

    I say; screw you ML and do not RIP.

    Norman

    Like

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