All credit to the investigative website ProPublica for its report on how the hedge fund Magnetar contributed to the financial meltdown when it designed a bunch of risky securities, otherwise known as subprime mezzanine collateralized debt obligations (CDOs) that were guaranteed to fail. Magnetar made an absolute motzer by doubling bets that its own CDOs, and similar financial instruments, would fail. CDOs were bundles of bonds, loans and asset-backed debt securities divided into sections, or tranches, including the high-risk subprime mortgages that were worthless. While the aim of the CDOs was to spread the risk, it was actually like putting horse dung and rubbish into a grinder to make sausage.
All this invites inevitable comparisons to the classic Mel Brooks film The Producers and its portrayal of a musical Springtime for Hitler.
For those who never saw the film, Springtime for Hitler was a plan concocted by Max Bialystock and his hapless accountant Leo Bloom. A musical romp through Nazi Germany, it was designed to be so offensive and tasteless that it would fail on its first night, and the producers would walk away with all the money lost by investors.
According to ProPublica, Magnetar bought those risky CDOs, stuck even riskier assets in them to make the investments more vulnerable to failure. It then placed bets that those deals would fail.
It's all so perverse. Worse still, analysis by ProPublica reveals that Magnetar's deals defaulted at a higher rate, which meant they made a real bundle.
Magnetar didn't cause the meltdown but it's a story that highlights Wall Street's perverse incentives that created the crisis.
Writing in the Huffington Post, David Fiderer picks up the comparison with Springtime for Hitler.
In other words, these hot shot bankers and fund managers deliberately created financial vehicles that were designed to fail so they could make a big profit. That certainly contributed to the collapse of the housing market, if it didn't trigger it.
If this didn't actually happen, it would be perfect for comedy. You would have to wonder what Mel Brooks would do with it.
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