How One Hedge Fund Profited From The Housing Crash

Planet Money, ProPublica and This American Life collaborated on a project that's airing this weekend on This American Life. A text version of the story is up now on ProPublica's Web site.

It's about a little-known hedge fund called Magnetar that "helped revive the Wall Street money machine" during the boom, then "earned outsized returns in the year the financial crisis began," the story says. Here's how the story begins:

In late 2005, the booming U.S. housing market seemed to be slowing. The Federal Reserve had begun raising interest rates. Subprime mortgage company shares were falling. Investors began to balk at buying complex mortgage securities. The housing bubble, which had propelled a historic growth in home prices, seemed poised to deflate. And if it had, the great financial crisis of 2008, which produced the Great Recession of 2008-09, might have come sooner and been less severe.

At just that moment, a few savvy financial engineers at a suburban Chicago hedge fund helped revive the Wall Street money machine, spawning billions of dollars of securities ultimately backed by home mortgages.

When the crash came, nearly all of these securities became worthless, a loss of an estimated $40 billion paid by investors, the investment banks who helped bring them into the world, and, eventually, American taxpayers.

Yet the hedge fund, named Magnetar for the super-magnetic field created by the last moments of a dying star, earned outsized returns in the year the financial crisis began.

Read the complete story at ProPublica.



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