Basis Yield Alpha Fund bought Goldman's Timberwolf CDOs — and was insolvent in weeks

In April 2007, an executive at Goldman Sachs' Australian subsidiary contacted Sydney fund manager Basis Capital about Timberwolf, a new CDO of subprime mortgage derivatives. On 13 June 2007, the complaint alleged, Goldman's David Lehman told the fund on a conference call that Goldman was 'expecting price stability going forward'. Basis Yield Alpha Fund then entered US$80.8M of credit default swaps on AAA and AA-rated Timberwolf debt and bought $12.3M of BBB-rated notes in Goldman's Point Pleasant 2007-1 CDO.

Timberwolf lost 80% of its value within five months of issuance, according to the fund's complaint. Basis Yield lost $56.3M on the Timberwolf swaps in under six weeks and $10.8M on Point Pleasant in less than three months, Reuters reported, and the fund was liquidating within two months. Basis Capital, which managed about A$2bn, saw both its funds hit by the same subprime CDO downturn in July 2007.

The stricken fund sued Goldman for fraud in 2010; a federal judge threw the case out, so it refiled in New York state court seeking $67M in losses plus $1B in punitive damages. A state judge let the fraud claims proceed in 2012, and in January 2014 an appeals panel agreed, with Justice Dianne Renwick writing there was a 'vast gap' between the picture Goldman presented and what it knew.

Timberwolf had become the poster child of the crisis: an internal email by Goldman executive Thomas Montag calling it 'one shi--y deal' was released by US senators, and a 2011 Senate report said Goldman had tried to manipulate prices of subprime derivatives for its own benefit. In June 2016, with the case live, Goldman and the fund settled; terms were not disclosed.

US$56.3M lost on Timberwolf in under six weeks and $10.8M on Point Pleasant in under three; the A$2bn manager's funds froze and the fund sued for $1.07B.

A fund specialising in exactly this asset class still staked US$93M — its survival — on two new CDOs from a single counterparty, with no hedge against a correlated mark-to-market collapse.

The buy decision leaned on the seller's reassurance that prices had stabilised, rather than on independent marks of the underlying subprime mortgages.

Ratings layered on complexity: AAA and AA labels on tranches of subprime derivatives hid how quickly the positions could gap down.

Goldman was simultaneously reducing its own exposure; the fund's complaint framed the sales as offloading 'toxic securities off its books' — a conflict buyers had to price, not trust.

Never let a counterparty's reassurance substitute for independent pricing. If a fund cannot survive a mark-to-market collapse in its own specialty, position size is the real risk.

The settlement of June 2016 ended a six-year, two-court battle; the terms stayed confidential, so whether creditors recovered meaningfully was never made public. Goldman, which said Basis was 'one of the world's most experienced CDO investors' and that it too lost several hundred million dollars on Timberwolf, kept the case from trial. Timberwolf's 'shitty deal' email became a symbol of the crisis in Congressional hearings, and Basis Capital's funds never traded again after the 2007 freeze.