Goldman Pressed for CDO Loss Settlement

Goldman Sachs is in talks over a potential settlement with an investor that claims that it lost money and went out of business after buying into a $1 billion mortgage-backed security that was later privately criticized by a senior executive at the bank.

LLoyd Blankfein testifying before House Financial Services Committee
LLoyd Blankfein testifying before House Financial Services Committee

Basis Yield Alpha Fund, a hedge fund, is seeking compensation over its $100 million investment in Timberwolf, a complex security, say several people familiar with the matter.

Timberwolf plummeted in value months after it was launched in March 2007, at a time when Goldman had already decided to cut its exposure to the housing market.

The talks are at a preliminary stage and there is no certainty they will lead to a settlement.

But the news will compound pressure on Goldman after a grilling of former and current executives by a Senate panel and scrutiny of its activities in the mortgage market in the run-up to the financial crisis.


Earlier this month, the US Securities and Exchange Commission filed civil fraud charges against Goldman and one of its bankers, accusing them of misleading investors in a mortgage-backed collateralized debt obligation known as Abacus. Goldman and the banker, Fabrice Tourre, deny the charges.

Goldman declined to comment on Timberwolf, a CDO that contained some of the assets reflected in the Abacus deal and other subprime mortgages.

Timberwolf is one of the securities at the centre of a probe into Goldman by the influential Senate sub-committee on investigations. Documents released by the committee ahead of Tuesday’s hearing included an e-mail by Tom Montag, then co-head of Goldman’s trading division, which read: “Boy that timeberwof [sic] was one shitty deal”.

The recipient of the e-mail, Daniel Sparks – former head of Goldman’s mortgage unit – told the committee Mr Montag referred to the bank’s losses on that deal rather than its performance or composition.

Mr Sparks did not contest the committee’s assertion that Goldman had both a long and a short position on Timberwolf but said he “would be surprised” if it made money on the Timberwolf deal once the positions were netted out. Mr Montag, now a senior executive at Bank of America, declined to comment.

Another e-mail released by the committee showed one senior Goldman executive saying the day the deal was issued “will live in infamy”.

The documents could boost Basis’s case for a settlement with Goldman. Basis was forced to liquidate after it claimed it suffered losses of $56 million as the value of Timberwolf sank, people close to the situation said.