Bet Against the American Dream
CDO = A risky investment-grade security backed by a pool of bonds, loans and other assets. A few people, such as Warren Buffett, warned that CDOs spread risk and uncertainty about the value of the underlying assets. Credit rating agencies failed to adequately account for large risks (like a nationwide collapse of housing values) when rating CDOs. A few years before the crash, CDOs based on subprime lending became very popular.
Credit default swap = This is something like credit insurance. The buyer of (in this case) CDOs makes payments to a “protection seller” and if the CDO goes belly-up, the CDO owner gets a payoff.
Magnetar = A hedge fund that did all it could to prolong and enlarge the riskiest investments. Meanwhile, it bet against all its CDO purchases with credit default swaps so it would make a windfall when the housing bubble collapsed. Sure, it was helping to trash the economy and lose billions of investor dollars, but they won big and it wasn’t illegal.
Watch the movie! Less than two minutes! Well worth the time! (Listen to the “This American Life” episode, too, please.) If you have a less-than-speedy connection, just pause the video and let it load before watching.