Goldman Accused Of Selling Junk And Betting Against It

In yet another case of a Wall Street firm being accused of selling mortgage backed securities (MBS) it knew to be junk and then betting against the same securities as the financial crisis unfolded, Goldman Sachs has been sued for over $1 billion by Basis Yield Alpha fund, according to Bloomberg and other sources. The Australian hedge fund has alleged that Goldman overcharged them on two different MBS deals, in addition to misrepresenting the securities anticipated performance, failing to disclose the securities real value and failing to disclose that Goldman was betting that the securities it had sold would fail.

This is not the first time that the Basis Fund has sued Goldman. They previously sued Goldman in 2010 but it was dismissed on a technicality regarding where the purchases were made. Allegations are that the hedge fund lost $67 million in Goldman deals in 2007. The breakdown was a whopping 92% loss from an investment in Point Pleasant or, $11 million lost out of a $12 million investment. Likewise, the Basis Fund lost 69% of its $81 million investment in Timberwolf, or $56 million. According to the lawsuit, Basis is seeking $1 billion in exemplary damages for “systemic fraud” by peddling the securities on unsuspecting investors.

Eric Lewis, the lead attorney for the Basis Fund, said this about Goldman, “They were lying to clients in order to get junk off their books.” He continued by saying, “They were basically selling a time bomb….and what they sold blew up in our face, but what they couldn’t sell blew up in their face.” Lewis said that he intends to look into Goldman’s dealings with Greywolf, the firm that helped Goldman pick the underlying assets of Timberwolf. It is thought that this can be developed through obtaining documents regarding the relationship between the two, in addition to sensitive emails and internal communications. According to the Senate Subcommittee Investigation Report, Goldman was short on nearly 35% of Timberwolf, a move that would result in huge gains for the firm. Furthermore, the Senate report alluded to the fact that Goldman had been shorting the housing market prior to peddling Timberwolf and Point Pleasant MBS to the Basis Fund. In fact, they had a $10 billion net short position on the housing market in February 2007 and a Goldman executive was said to have called the Timberwolf MBS “one shitty deal”, according to the Senate report. Although Goldman did lose money on Timberwolf securities, the Basis Fund says the only reason they would have lost money is the fact that they couldn’t find anyone to unload the securities on.

Other findings by the Senate Subcommittee were that Goldman sold the Timberwolf mortgage backed securities (MBS) at inflated prices above the price they were internally valued and failed to disclose how badly Point Pleasant was performing, among other things.

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