Max Bialystock and CDOs

by Elaine Schwartz    •    Apr 27, 2010    •    626 Views

Comparing the deal to Bialystock, Bloom, and Springtime For Hitler in The Producers, NPR’s This American Life looked at how a Chicago hedge fund made money on seemingly unprofitable CDO transactions. Available as a podcast, the story made the CDO derivatives world entirely understandable. 

The protagonist of the story is Magnetar, a Chicago hedge fund. The plot focuses on why Magnetar would buy a “layer” of a package of mortgage securities that was so speculative that its default was probable. The “climax” relates to the “insurance” that the firm purchased on the package. The podcast uses broadway music, a derivatives song that they commissioned, and clear explanations that provide insight. Listening to it is worth the opportunity cost.

The Economic Life

Imagine a big box filled with mortgages. Fundamentally, you are looking at a CDO, a collateralized debt obligation. Through financial reform legislation, Congress wants to limit who can buy and sell these packages and the securities that relate to them.


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