On Thursday, President Obama will make his way to Wall Street to lecture the financial industry and push for passage of the Democrat reform bill. Some might say that this is arrogant or hypocritical. As I have been writing the past few articles, a number of key members of the Obama administration have ties to Goldman Sachs. But, perhaps the most interesting member of the President’s staff who has a direct connection to the whole mortgage bubble and shady derivatives market is none other than his Chief of Staff, Rahm Emanuel. As we shall see, Rahm is not the sort who would let a good crisis go to waste, even if it must be created?

A number of articles have appeared recently from such sources as Jane Tavakoli of the Huffington Post and Naked Capitalism which deal with a Chicago-based hedge fund company called Magnetar. Some of the articles base their information from a piece at Pro Publica. While their article does provide many useful details on Magnetar and it’s involvement in the housing-derivative bubble, one does need to keep in mind that Pro Publica is sponsored by Herbert and Marion Sandler, those crazy ‘kids’ who once owned Golden West Financial before dumping their company to Wachovia in 2006, along with some $122 Billion is subprime mortgage trash, walking away smiling with over $24 Billion in their pockets. So, for them to solely blame Magnetar for everything is a bit of a stretch, but Magnetar certainly did play a key role.

In 2005, Alec Litowitz, formerly of Citadel hedge fund, started his own firm, Magnetar. An astronomy buff, most of the products he sold were named after constellations. By 2005, the housing bubble was bad enough that most banks and hedge funds were winding down their sales of mortgage-backed CDO (collateral debt obligations). Magnetar entered the market with a flurry of CDO deals. In two short years, they jumped from about $1.7 Billion to over $17 Billion dollars worth of them, accounting for between 1/3 to more than half of all mortgage-backed CDO products created. One could argue that without Magnetar, the subprime bubble might have popped sooner and with less ‘pop’.

Litowitz was a major contributor to Democrats, including John Kerry’s 2004 presidential run. From 2006 forward, the Magnetar CEO contributed ONLY to PACs that Rahm Emanuel was involved with. Tens of thousands of dollars flowed from Litowitz to Emanuel during that period. Rahm, as it turned out, had many supporters in the financial industry. One report places Rahm at the top of the list for contributions from hedge funds and investment banks, even beating out many Senators and the top 11 Republican Congressman combined! Rahm, himself, did quite nicely during his years at Freddie Mac following his stint in the Clinton administration.

So, if President Obama really wants to reform the financial markets and Wall Street, he might want to start with his own Chief of Staff. As it is, the Obama administration has already blocked a Freedom of Information Act request for Rahm Emanuel’s activities while at Freddie Mac. Obama might even want to direct the SEC or Justice Department to take a look at Magnetar? But then, that might not go over too well with his pals back in Chicago, will it? The mortgage bubble and the financial crisis it caused has many fingerprints on it. Let’s just make sure we get them all and not just those of one scapegoat.