"The bits that got swollen were to do with the complex versions of securitised credit, the CDOs and CDOs-squared.
Paulson counters that deciding what assets ultimately went into the CDOs was a process of negotiation.
Morgan Stanley did not market the CDOs – they were underwritten and sold by Citigroup and UBS.
The agencies were paid by, and so beholden to, the banks that created the CDOs.
The CDOs slice and dice these debts to suit potential investors.
That was largely the result of liquidity support agreements from the CDOs it issued.Also, even tougher times may lie ahead.
By paying one for rating the CDOs, some may have laid themselves open to a conflict of interest.
The bank was more wary because some of the investors in the CDOs would be pension funds and endowments, not just hedge funds, the book says.
But at the same time, Magnetar was betting (or hedging, depending on how you look at it) heavily against the failure of the CDOs they were buying into.
They protected investors from initial losses on the mortgages backing the CDOs, while offering better returns than bonds with a similar rating.
The CDOs are sliced into "tranches" of different riskiness and sold to investors: the riskier the tranche, the higher the expected return.
