'Built To Fail' CDOs Are In The SEC's Crosshairs

The Securities and Exchange Commission (SEC) has expanded its probe into Wall Street firms that had put together “built to fail” collateralized debt obligations (CDOs), according to the Financial Times and Investment News. Merrill Lynch’s CDO business deal with Magnetar has been the focus of the investigation with other firms like Citigroup, UBS, Wachovia and Deutsche Bank being haunted by their Magnetar deals.

Specifically, one of the more than 24 CDO deals with Magnetar, called Norma, was invested in the riskiest equity tranches of the CDO and Magnetar helped select the underlying assets of the CDO, while having a $600 million bet that would result in a huge payday if the CDO failed. Apparently, Magnetar’s role in selecting the underlying assets was not disclosed in the offering materials.

In another related investigation, JP Morgan Chase is reportedly near a settlement with the SEC over another Magnetar CDO deal known as Squared, which was a CDO comprised of other CDOs. In 2010, Goldman Sachs settled an inquiry revolving around its disclosures about a subprime linked CDO for a record $550 million.

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