Personal Loans

United States (ProPublica) – by Cora Currier

According to the Wall Street Journal, the Securities and Exchange Commission has warned a top banker that it may bring civil charges against him for his role in creating a risky collateralized debt obligation, or CDO, that exploded spectacularly as the housing market crashed. It’s the first public evidence that the SEC is considering charges against a top banking executive involved in CDOs, which fueled the financial crisis.

The CDO, from the end days of the boom in 2007, was one of dozens that had been created with the help of the hedge fund Magnetar. As we reported with This American Life and NPR, Magnetar often pushed for riskier assets to be included in CDOs, and placed bets against many of the same investments so that it would profit if those risky assets went sour. (Magnetar has never been charged with any wrongdoing, and has always maintained that it did not have a strategy to bet against the housing market.)

The banker warned by the SEC, Alexander Rekeda, helped create a $1.6 billion CDO for Japanese bank Mizuho called Delphinus CDO 2007-1. Investigators allege that investors were not told Magnetar stood to profit if the investments failed. (Here’s the pitchbook for Delphinus.)

Delphinus is not the first deal involving Mizuho and Rekeda that the SEC has looked into. As the Journal reported last year, the agency has been investigating another CDO that Magnetar created with Mizuho called Tigris. That CDO was a collection of the riskiest bits of other CDOs — as we described it, they were “bundling up the dregs of a CDO,” a “rare, if not unprecedented” strategy. The Tigris deal has not yet resulted in charges.

We’ve reached out to Rekeda, who no longer works at Mizuho, but have yet to hear back. A spokesman for Mizuho told the Wall Street Journal that it “has been asked by the SEC to provide related documents and information, and it’s currently dealing with it.” (We also have reached out to Mizuho.)

The warning sent to Rekeda, called a Wells notice, says that the SEC has made a “preliminary determination…to recommend charges based on alleged misrepresentations in connection with the structuring of a CDO.”

As we noted last fall, the SEC has also warned ratings agency Standard & Poor’s that it also may face civil charges in connection with the Delphinus CDO. Standard & Poor’s abruptly downgraded Delphinus just a few months after the security was issued and received a top rating.

Other banks have been charged by the SEC and settled allegations involving CDOs. In 2010, Goldman Sachs settled with the SEC for more than $500 million. Last June, J.P. Morgan agreed to pay $153 million and in October, Citigroup reached a $225 million settlement.

– Provided by ProPublica.org

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