Sunday, September 4, 2011


warehouse accounts. Goldman decided, in contrast, to accelerate completion of Timberwolf.2370
Timberwolf I closed on March 27, 2007, approximately six weeks ahead of schedule.2371
The final CDO had $1 billion in cash and synthetic assets, including $960 million in single name
CDS referencing CDO securities, and $56 million in cash CDO securities.
Selling Timberwolf. Selling Timberwolf securities became a high priority for Goldman.
Mr. Sparks worked with senior sales managers to review ideas, telling them: “I can’t over state the
importance to the business of selling these positions and new issues.”2372
During the spring and summer of 2007, the Goldman Syndicate2373 emailed the CDO sales
force a list of “Senior CDO Axes” or sales directives on a weekly and sometimes daily basis, many
of which placed a priority on selling Timberwolf securities.2374 As early as February, the Goldman
sales force developed “broader lists” of clients to target for Timberwolf sales.2375 After exhausting
3/21/2007 email from Robert Black, “Non-tradition 2376 Buyer Base for CDO AXES,” GS MBS-E-003296460,
Hearing Exhibit 4/27-78.
2377 3/2007 Goldman internal email chain, GS MBS-E-010643213, Hearing Exhibit 4/27-76.
2378 3/28/2007 Goldman email from the Syndicate, GS-MBS-E-000740958, Hearing Exhibit 4/27-100.
2379 See, e.g., 4/11/2007 email from Daniel Sparks, GS MBS-E-010533482, Hearing Exhibit 4/27-101.
2380 4/19/2007 email from Daniel Sparks to Bunty Bohra, GS MBS-E-010539324, Hearing Exhibit 4/27-102.
2381 3/8/2007 email from Harvey Schwartz, GS MBS-E-010643213, Hearing Exhibit 4/27-76.
2382 3/9/2007 email from Daniel Sparks, GS MBS-E-010643213, Hearing Exhibit 4/27-76.
2383 See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
2384 In fact, the decline had begun within a month after Timberwolf closed in late March. 9/17/2007 email from
Christopher Creed, “RE: Timberwolf,” GS MBS-E-000766370, Hearing Exhibit 4/27-106 (showing price for
Timberwolf securities carrying an AAA credit rating had fallen from $94 on 3/31/2007 to $87 on 4/30/2007).
those initial lists, Goldman sales personnel began to target “non-traditional” buyers2376 as well as
clients outside of the United States.2377 The sales force had some early successes. On March 28,
2007, for example, the Syndicate included a note in one of the axe sheets:
“Great job Cactus Raazi trading us out of our entire Timberwolf Single-A position –
$16mm. Sales - Good job over the last two weeks moving over $66mm of risk off the axe
sheet. Please stay focused on trading these axes.”2378
As sales began to flag in April, Mr. Sparks sent emails reminding Goldman sales personnel
that Timberwolf “is our priority.”2379 On one occasion, on April 19, 2007, Mr. Sparks suggested to
a sales manager offering “ginormous credits” as an incentive to sell Goldman’s CDO securities:
“for example, let’s double the current offering of credits for [T]imberwolf.”2380 Mr. Sparks was
informed in response: “[W]e have done that with timberwolf already.”
On March 9, 2007, Harvey Schwartz, a senior executive at Goldman Sachs, expressed
concern to Mr. Sparks and others about what Goldman sales personnel were telling clients: “Seems
to me ... one of our biggest issues is how we communicate our views of the market – consistently
with what the desk wants to execute.”2381 Mr. Sparks responded by outlining several concerns and
the need for the sales team and traders to work together.2382 He wrote:
“3 things to keep in mind:
(1) The market is so volatile and dislocated that priorities and relative value situations
change dramatically and constantly.
(2) Liquidity is so light that discretion with information is very important to allow execution
and avoid getting run over.
(3) The team is working incredibly hard and is stretched.”
He concluded: “Priority 1 – sell our new issues and our cash positions.”
Pricing Timberwolf Securities. Despite the urgency communicated by Goldman
management, Timberwolf sales slowed. By May 11, 2007, only one Timberwolf sale had taken
place in the previous several weeks.2383 Goldman personnel also knew that the value of the
Timberwolf securities, and the value of their underlying assets, were falling.2384
5/11/2007 email from Daniel Sparks to Richard Ruzika, GS MBS-E-019659221. 2385 Mr. Sparks also noted that he
had a meeting with David Viniar, Don Mullen, and Gary Cohn to discuss the issue.
2386 5/11/2007 email from David Lehman, GS MBS-E-003361238. For more information on this CDO valuation
project, see Section C(5)(a)(iii)BB, above.
2387 5/11/2007 email from Craig Broderick, “CDO’s - Mortgages,” GS MBS-E-009976918, Hearing Exhibit 4/27-
2388 5/11/2007 email from Harvey Schwartz to Daniel Sparks, Tom Montag, and others, GS MBS-E-010780864.
2389 5/11/2007 email from Donald Mullen to Daniel Sparks, GS MBS-E-010780849, Hearing Exhibit 4/27-103.
2390 Id. at GS MBS-E-010780848-49.
On May 11, 2007, Mr. Sparks notified Goldman senior executives that marking down the
value of the unsold CDO securities so that, internally, the firm understood their current market
value had become a “real issue”:
“Cdo positions and market liquidity and transparency have seized. I posted senior guys that
I felt there is a real issue. ... We are going to have a very large markdown – multiple
hundreds. Not good.”2385
That same evening, Mr. Lehman sent out a “Gameplan” to colleagues in the Mortgage Department
announcing that Goldman was going to undertake a detailed valuation of its CDO2 securities using
three different valuation methods, and would also take “a more detailed look” at the values of the
assets in the CDO warehouse accounts and in Goldman’s own inventory.2386
Also on May 11, Chief Credit Officer Craig Broderick sent an email to his team to set up a
survey of Goldman clients who might encounter financial difficulty if Goldman lowered the value
of the CDO securities they had purchased.2387 As explained earlier, some Goldman clients had
purchased their CDO securities with financing supplied by Goldman that required them to post
more cash margin if the financed securities lost value. Other clients had invested in the CDO
securities by taking the long side of a CDS contract with Goldman and also had to post more cash
collateral if the value of the CDO securities declined. All of these clients would also have to record
a loss on their books due to the lowered valuations.
With respect to the CDO securities that had yet to be sold, Goldman senior executive Harvey
Schwartz raised another issue related to lowering the values of the CDO securities Goldman was
selling to clients: “[D]on’t think we can trade this with our clients andf [sic] then mark them down
dramatically the next day. ... Needs to be a discussion if that risk exists.”2388 In an email to Mr.
Sparks, Mr. Montag, and Mr. Schwartz, Goldman senior executive Donald Mullen acknowledged
concerns “about the representations we may be making to clients as well as how we will price assets
once we sell them to clients.”2389 The executives also agreed, however, not to “slow or delay”
efforts to sell Timberwolf securities if they got “strong bids.”2390
The CDO valuation project generated many comments on how to price the firm’s unsold
CDO securities, including Timberwolf. One Goldman employee, who was applying Goldman’s
most common valuation method to Timberwolf, wrote that the price should be dramatically lower:
5/13/2007 email from Paul Bouchard to David Lehman, Daniel 2391 Sparks, and others, GS MBS-E-003361238.
2392 Id.
2393 5/20/2007 email from Paul Bouchard, “Materials for Meeting,” GS MBS-E-001863725.
2394 5/14/2007 email from Elisha Weisel, “Modeling Approaches for Cash ABS CDO/CDO^2,” GS MBS-E-
2395 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald Mullen, Lester Brafman, and Michael Kaprelian,
“Viniar Presentation - Updated,” GS MBS-E-010965211 (attached file “Mortgages V4.ppt,” “Mortgages
Department, May 2007,” GS MBS-E-010965212).
2396 Id. At least two drafts of the presentation also stated about Timberwolf and Point Pleasant that “the complexity
of the CDO^2 product and the poor demand for CDOs in general has made this risk difficult to sell and the desk
expects it to underperform.” This assessment was removed from the final version provided to senior executives. See
5/19/2007 email from Dan Sparks to Lee Alexander, and others, GS MBS-E-010973174 (attached file “Mortgages
V3.ppt,” GS MBS-E-010973175); 5/20/2007 9:52 a.m. draft presentation, “Mortgages V4.ppt,” GS MBS-E-
010952331; 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald Mullen, Lester Brafman, and Michael
Kaprelian, “Viniar Presentation - Updated,” GS MBS-E-010965211 (final version) (attached file, “Mortgages
Department,” GS MBS-E-010965212).
2397 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald Mullen, Lester Brafman, and Michael Kaprelian,
“Viniar Presentation - Updated,” GS MBS-E-010965211 (attached file “Mortgages V4.ppt,” “Mortgages
Department, May 2007,” GS MBS-E-010965212 at 14).
“Based on current single-A CDO marks, the A2 tranche of Timberwolf would have a price of 72
cents on the dollar.”2391 He also noted:
“Based on a small sample of single-A CDOs for which we have a complete underlier marks,
we believe that the risks of the RMBS underliers are frequently not fully reflected in the
marks on the CDOs. If the trends in this small sample are extrapolated, the fair spread on
the CDOs could even be double where they are marked now; if that were the case, the price
of the A2 tranche of Timberwolf would actually be 35-41 cents on the dollar, depending on
the correlation.”2392
Several days later, in preparation for a meeting with senior executives on the valuation issue, the
same Goldman employee calculated that, for the A2 tranche of Timberwolf, the “price based on
CDO marks” was 66 cents on the dollar, while the “price based on RMBS marks” was 24 cents on
the dollar.2393
Throughout the valuation process, senior management, including Co-President Gary Cohn,
was kept posted on how the Mortgage Department planned to value the firm’s CDO assets.2394 On
Sunday, May 20, 2007, the Mortgage Department presented its findings in a 9:00 p.m. conference
call with CFO David Viniar and others.2395 The presentation’s executive summary expressed
concern about valuing a range of CDO assets, including unsold securities from Goldman-originated
CDOs.2396 The presentation stated: “[T]he desk is most concerned about the CDO^2 positions,
comprised of the recent Timberwolf and Point Pleasant transactions. The lack of liquidity in this
space and the complexity of the product make these extremely difficult to value.”2397
The presentation recommended unwinding and selling the assets in the CDO warehouse
accounts and using “independent teams” to continue to value the unsold CDO securities from
Goldman originations. It also recommended switching to a targeted sales effort for the unsold
2398 Id. at 24.
2399 Polygon had already purchased Timberwolf securities prior to the drafting of the presentation, and was
apparently targeted for additional Timberwolf or Point Pleasant sales. See Goldman response to Subcommittee QFR
at PSI_QFR_GS0223 and PSI_QFR_GS0235. Goldman had an existing relationship with Basis Capital. Goldman
had engaged Basis Capital several months earlier as a collateral manager of a CDO Goldman was underwriting
called Fort Denison. Mr. Ostrem, head of the CDO Origination Desk, apparently had a low opinion of the firm,
describing the firm in an email to Mr. Bieber as “paranoid” and “not very sharp.” He told Mr. Bieber that Goldman
should “be nice and just sell them stuff going forward.” 1/15/2007 email from Peter Ostrem to Matthew Bieber, GS
2400 5/20/2007 email from Lee Alexander to Daniel Sparks, Donald Mullen, Lester Brafman, and Michael Kaprelian,
“Viniar Presentation - Updated,” GS MBS-E-010965211 (attached file “Mortgages V4.ppt,” “Mortgages
Department, May 2007,” GS MBS-E-010965212 at 31).
2401 See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
2402 5/14/2007 email from Daniel Sparks to Tom Montag and Donald Mullen, GS MBS-E-019642797.
2403 5/26/2007 email from Michael Swenson to others, GS MBS-E-012443166 (attached file, “ABS Sec_0525,” GS
2404 These prices indicate a percentage of security’s face (par) value. A price of $80 would be 80% of par or 80
cents on the dollar.
2405 See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235; 6/1/2007 email
from David Lehman to Daniel Sparks, GS MBS-E-001866889 (indicating Goldman sold Timberwolf securities to
Tokyo Star Bank for $83.90, when Goldman’s own mark was 80). Goldman took similar action with respect to its
other CDO2, Point Pleasant, marking down the internal value of its A2 securities to $82.50 on May 25, 2007, while
on May 24, 2007, selling $40 million of the A2 securities to a client at a price of $91.00, a difference in market value
of $3.4 million. See 5/26/2007 email from Michael Swenson to others, GS MBS-E-012443166 (attached file, “ABS
Sec_0525,” GS MBS-012443167).
CDO2 securities, focused on four hedge fund clients: Basis Capital, Fortress, Polygon, and
Winchester Capital.2398 The Goldman sales force apparently felt those four hedge funds were the
clients most likely to buy the CDO2 securities, and two of them, Basis Capital and Polygon, did
subsequently purchase Timberwolf securities.2399 An appendix to the presentation identified another
35 clients for targeted sales efforts and provided an assessment of the CDO sales efforts for each.2400
Several of those clients later purchased Timberwolf securities.2401
Despite Goldman’s internal analysis that the value of the Timberwolf securities was in rapid
decline, the firm did not lower the prices at which it marketed the securities to clients. In a May 14
email, Mr. Sparks explained his Timberwolf pricing strategy to Mr. Mullen and Mr. Montag:
“I think we should take the write-down, but market at much higher levels. I’m a little
concerned we are overly negative and ahead of the market, and that we could end up leaving
some money on the table – but I’m not saying we shouldn’t find and hit some bids.”2402
As a result of the CDO valuation project, Goldman took substantial writedowns on the value
of its CDO inventory on May 25, 2007.2403 For example, Goldman marked down the AAA rated
Timberwolf A2 securities to a value of $80.2404 At the same time, Goldman continued to market
them at inflated prices, selling Timberwolf A2 securities to clients at $87.00 on May 24, at $83.90
on May 30, and at $84.50 on June 11.2405 On May 25, Goldman also marked the AA rated
Timberwolf B securities to an internal value of $65.00. Over a month later, Goldman sold $9
See 7/12/2007 “Goldman Warehouse SP CDO positions and hedges_7-12-07,” GS 2406 MBS-E-001866482; See also
Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235. In an interview with the
Subcommittee, David Lehman explained that the bid/offer spread (the difference between the price at which a
security is offered for sale [“offer price”] and the price at which a bank would buy the same security [“bid price”])
was the reason for the difference between Goldman’s internal valuation of the price of the AA rated securities and
price at which it sold them to Bank Hapoalim. However, in many instances during this period, it appeared as if
Goldman’s internal valuation price had no relationship to the bid and offer prices quoted to clients. For example, at
the end of June 2007, Goldman provided Timberwolf investor Moneygram with an offer price of $86 for Timberwolf
A2 securities and bid price of $83, indicating a bid/offer spread of 3 points. Meanwhile, Goldman had an internal
valuation of $75 for the same securities, far different from $83 and $86 quoted to Moneygram. See Moneygram
valuation, 7/5/2007 email from Goldman Sachs Operations, “MoneyGram Marks from GS as of 06/29/07,” GS
MBS-E-022023387; Goldman internal evaluations see “Warehouse SP CDO positions and hedges_6-29-07,” GS
MBS-E-010809241. See also 6/6/2007 email from Sheara Fredman, GS MBS-E-010795808 and attachment GS
MBS-E-010795809. Goldman’s pricing in such situations seemed consistent with the strategy articulated earlier by
Mr. Sparks, the head of the Mortgage Department, that Goldman should write down the value of the assets, “but
market [the CDO securities] at much higher levels,” because he was concerned that Goldman was “overly negative
and ahead of the market, and that [Goldman] could end up leaving some money on the table.” 5/14/2007 email from
Tom Montag to Daniel Sparks, GS MBS-E-019642797.
2407 5/14/2007 email from Edwin Chin, GS MBS-E-012553986.
2408 Mr. Birnbaum responded directly to Mr. Swenson: “what a beautiful quote.” Id.
million of those AA rated securities to Bank Hapoalim at a price of $78.25, but by then Goldman’s
internal valuation had fallen to $55, a difference of more than 30% of the market value.2406
In addition to marketing its CDOs at inflated prices compared to its internal valuations, the
Mortgage Department told some clients that the mortgage market was strengthening. On May 14,
2007, for example, Edwin Chin, a trader on the Mortgage Department’s ABS Desk, sent this upbeat
commentary to both Goldman traders and clients:
“Incredible as it may seem, the subprime mortgage slump is already [a] distant memory for
some. It’s been two months since the ABX market plunged amid worries about a housing
meltdown, and already investors (and some dealers) are beginning to get ‘complacent’ again.
Blame it on the CDO bids, but with subprime production projected down 40-60% from last
year’s level, appetite for spread products triumphs any risk concern in the marketplace right
now. ABX Index is trading higher as dealers short cover their single name positions after a
month of range-bound trading. Flows continue to weigh toward better seller of protection -
longs outpace shorts by 3 to 1 as CDO demand has been robust the last two weeks. While
warehouse activities might be slow, many CDOs are still looking to finish up their ramp
Daniel Sparks responded to Edwin Chin’s commentary by asking senior ABS traders, David
Lehman, Mike Swenson, and Joshua Birnbaum: “Is this a head fake or does this make you bullish
on all spread product?” Mr. Lehman responded: “[G]iven the sizable short interest in
ABS/subprime mkt it does not surprise me that short covering is pushing spds [spreads] tighter. Not
sure I would enter new longs here.” Mr. Swenson responded: “I would characterize this as a great
opportunity to be constructive on the market.”2408
2409 6/6/2007 email from David Lehman, GS MBS-E-001936955.
2410 6/6/2007 email from Daniel Sparks, GS MBS-E-001922156. Mr. Lehman further responded: “thk abt this - if
we establish a defined + healthy supply/demand dynamic in this product we can always create more CDO^2 at a
significant profit vs current levels,” meaning that since Goldman’s internal marks were so much lower than the bids it
was providing clients, if a client chose to buy additional securities at Goldman’s bid price, Goldman could sell the
securities by taking a short position on a CDS facing the client, and make money on the trade. 6/6/2007 email from
David Lehman, GS MBS-E-001936955.
2411 5/20/2007 email from George Maltezos, Goldman Australia sales, to David Lehman, “T/wolf and Basis,” GS
MBS-E-001863555 (“FYI – basis are back from their 2 week business trip on Monday. My focus will go to
timberwolf 100mm AAA and AA block trade with them. . . . Pls confirm you are willing to trade this at [then-current
marks] and that you are not marking these bonds any wider at moment for month end May.”).
2412 5/22/2007 email from George Maltezos to John Murphy of Basis Capital Management, JUL 000685.
A few weeks later, Mr. Lehman forwarded an email to Goldman executives informing them
“the market feels that GS is being more aggressive than other dealers moving CDO^2 paper,” and
marking down clients more than their competitors.2409 Don Mullen responded: “Does this give any
one pause about our selling prices?” Mr. Swenson responded to Mr. Mullen: “[N]o pause[.]
[E]veryone else is afraid to execute at these levels and they will be wishing for these prices by the
end of the summer.” Mr. Sparks added: “There is real market meltdown potential (although far
from certain).”2410
Timberwolf Sales to Basis Capital. At the conclusion of the CDO valuation project, which
found that Timberwolf and Goldman’s other CDO securities had lost significant value, the
Mortgage Department resumed its efforts to push Timberwolf sales.
On Sunday, May 20, 2007, the same day the Mortgage Department made its valuation
presentation to Mr. Viniar and recommended targeting Basis Capital for CDO sales, George
Maltezos, the Goldman sales representative responsible for Basis Capital, emailed Mr. Lehman
saying he would contact the Basis Capital principals immediately upon their return from a business
trip the following day.2411
Mr. Maltezos began pressing Basis Capital to buy the securities. On May 22, Mr. Maltezos
urged Basis Capital to consider buying the securities before the end of the quarter:
“I appreciate you are flat chat [busy] at the moment, but pls [please] keep in mind GS is an
aggressive seller of risk for QTR [quarter] end purposes (last day of quarter is this Friday).
We would certainly appreciate your support, and equally help create something where the
return on invested capital for Basis is over 60%.”2412
At the same time Mr. Maltezos was claiming that a Timberwolf investment could provide over a
60% return on invested capital, Goldman’s internal marks were showing that Timberwolf was
continuing to fall in value.
Basis Capital indicated that it was interested in the Timberwolf securities, but had several
issues it needed to work through. First, Basis Capital indicated that Goldman would have to help it
See. e.g., 5/30/2007 email from George Maltezos to John Murphy a 2413 nd Stuart Fowler, JUL 002032.
2414 See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
2415 See 5/1/2007 email from Macdara Molloy to Phillipa Chen, GS MBS-E-002003102.
2416 Id.
2417 5/30/2007 email from George Maltezos to John Murphy and Stuart Fowler at Basis Capital, JUL 002032.
“From a pricing perspective, we have been trading Timberwolf AAA and AA bonds. 550 dm on AAAs and north of
700dm on AAs is considered too wide for Timberwolf. . . . To be constructive, however, I know the desk is
entertaining block size trades at the moment from real money accounts in the US and Asia at wide levels (much
wider than what they have traded before). To give you a sense, I think these represent 400-450dm and 650-700dm
respectively (for size) at the widest level of such enquiries.” The notation “dm” refers to “discount margin.” Higher
discount margins correspond to lower par prices on investments. See e.g. Timberwolf I, Price-DM Table 05-16-
2007.xls, GS MBS-E-001810225. Basis Capital eventually accepted the 450 and 650 prices suggested by Mr.
Maltezos. See 6/13/2007 email from David Lehman to Tom Montag, GS MBS-E-001914580.
2418 6/12/2007 email from Sahil Sachdev to George Maltezos, GS MBS-E-001912398.
2419 6/12/2007 email from George Maltezos, PSI-Basis_Capital_Group-03-0001. Mr. Maltezos emailed Mr.
Lehman and Mr. Egol about Point Pleasant pricing, asking them “does the 75 mark reflect actual trading or overall
softness in the market? I know you had indicated 70 was more like the number.” 6/12/2007 email from George
Maltezos to David Lehman, Jonathan Egol, and Omar Chaudhary, GS MBS-E-002002522. The Subcommittee was
unable to locate Goldman’s response to his question.
find financing for the purchase price.2413 Second, Basis Capital was concerned about the value of its
existing CDO2 investment with Goldman. On April 19, 2007, Basis Capital had purchased BBB
rated Point Pleasant securities at a price of $81.72.2414 Goldman had provided the financing for this
purchase. Two weeks later, Goldman had marked down the value of the securities to $76.72, and
asked Basis Capital to post additional cash collateral totaling $700,000.2415 When Basis Capital
asked how the value of the security had fallen $5 in just two weeks, Goldman responded that the
price had gone back up to $81.72, and no additional cash was required.2416
In May and June 2007, Mr. Maltezos worked to convince Basis Capital to purchase $100
million in Timberwolf securities. At one point Basis Capital pressed for a lower sales price, but
was told by Mr. Maltezos: “I don’t think the trading desk shares the sentiment with regard to such
spread levels [lower prices].”2417 During the negotiations over the Timberwolf sale, on June 12,
2007, Goldman again marked down the value of the Point Pleasant securities to $75, and again
asked Basis to post more cash collateral.2418 When Basis Capital asked Mr. Maltezos to justify the
lower value, Mr. Maltezos wrote:
“[T]here has been further softening in the market since the Point Pleasant trade was put on 8
weeks ago. We have infact [sic] traded some Point Pleasant BBBs at this level in the last 2
The most recent Point Pleasant sale had been $40 million worth of the AAA 2420 rated A2 securities, which sold on
May 24, 2007, for a price of $91. The next most recent sale had been $20 million worth of the A2 securities on
April 24, 2007, for a price of $91.30. See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and
2421 Internally, Goldman had marked down the value of the Point Pleasant securities to $50.00. The much higher bid
provided to Basis appears consistent with Goldman’s strategy to “market at much higher levels.” Goldman
consistently offered investors bid prices that were much higher than its internal marks during the months of May and
June as it attempted to sell its CDO inventory. See 5/26/2007 email from Michael Swenson to others, GS MBS-E-
012443166 (attached file, “ABS Sec_0525,” GS MBS-012443167).
2422 6/12/2007 email from Stuart Fowler to George Maltezos, GS MBS-E-001912398.
2423 Id.
2424 6/13/2007 email from Daniel Sparks to George Maltezos, David Lehman, and Jon Egol, GS MBS-E-002006149.
The reference to the “senior guys on 30” is to Goldman’s senior executives who had offices on the 30th floor of the
Goldman headquarters in New York.
2425 6/13/2007 email from George Maltezos to Stuart Fowler and John Murphy at Basis Capital and others, GS
2426 6/13/2007 email from George Maltezos, PSI-Basis_Capital_Group-02-0001.
In fact, no such sales had taken place, and the lower value could not be justified by any sales
transactions.2420 The lower mark was instead related to Goldman’s CDO valuation project in May,
which had concluded that its CDO2 securities had lost significant value.2421
Stuart Fowler at Basis Capital brought up the valuation issue in the context of the
Timberwolf securities, and asked Mr. Maltezos: “I need to be very clear on this and are we going to
see a similar problem on [T]imberwolf?”2422 Mr. Maltezos responded: “Stuart - I assure you no
foul here,” and offered to set up some “1-on-1 time with the trading desk” to discuss pricing.2423
Mr. Sparks was closely monitoring Mr. Maltezos’ ongoing effort to sell the Timberwolf
securities to Basis Capital and, on June 13, 2007, sent this email to Mr. Maltezos:
“Let me know if you need help tonight - or feel free to wake up [Mr. Lehman and Mr. Egol]
in [S]pain. I’d love to tell the senior guys on 30 at risk comm[ittee] Wednesday morning
that you moved 100mm [$100 million].”2424
In response, Mr. Maltezos coordinated a call between Basis Capital and Mr. Lehman to “clarify any
and all questions you have on the marking policy of Goldman, the actual marking of Point Pleasant,
and the overall trading that has been seen by the [Goldman] desk in the last 1-6 months.”2425 In that
telephone call with Basis Capital, Mr. Lehman apparently corrected Mr. Maltezos’ misstatement
about recent Timberwolf sales, and Mr. Maltezos followed up with an email to Basis Capital:
“[P]lease accept my sincerest apologies for the mis-information below. As David
mentioned, the 75 mark on Pt Pleasant BBB was more reflective of an interpretation of
softer AAA-AA rated CDO-sqd paper translating to BBB part of the curve.”2426
Later that same day, June 13, 2007, Mr. Lehman reported that Goldman had reached
agreement on $100 million in Timberwolf sales to Basis Capital. The sale consisted of the hedge
fund taking the long side of a CDS contract with Goldman, referencing $50 million in AAA rated
6/13/2007 email from D 2427 avid Lehman to Tom Montag, GS MBS-E-001914580.
2428 Id.
2429 Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
2430 7/4/2007 email exchange among David Lehman, George Maltezos, and others, GS MBS-E-001990127.
2431 Id.
2432 7/4/2007 email from David Lehman, GS MBS-E-001990127.
2433 7/12/2007 email from Jon Egol, GS MBS-E-001866391. On the same day, Goldman’s internal marks for the
securities were even lower, at $60 for the AAA securities and $55 for the AA securities. As Basis Capital’s financial
situation became worse, Goldman responded by marking Basis Capital’s securities to levels that were closer to
Goldman’s own internal evaluations.
2434 7/13/2007 email from David Lehman, “Re: Basis,” GS MBS-E-001866391 at 93.
2435 Id. at 91.
2436 7/16/2007 email from Jon Egol, “Re: Basis,” GS MBS-E-010169281. Goldman also marked down Basis
Capital’s Point Pleasant securities to $10, from an initial purchase price of $81.72.
2437 7/12/2007 Goldman datasheet, “Warehouse SP CDO positions and hedges_7-12-07,” GS MBS-E-001866482.
2438 7/24/2007 email from David Lehman to others, GS MBS-E-013449641.
2439 7/31/2007 letter from Goldman Sachs International to Basis Capital, “Event of Default Under ISDA Master
Agreement,” JUL 003958.
Timberwolf securities and $50 million in AA rated Timberwolf securities.2427 Mr. Lehman told Mr.
Montag that the CDS premiums that Basis Capital had agreed to accept implied a cash price of $84
for the AAA securities and $76 for the AA securities. Mr. Montag asked what Goldman’s internal
mark was for the Timberwolf AA securities, and Mr. Lehman responded: “$65.”2428
The Timberwolf sale to Basis Capital was finalized on June 18, 2007.2429 Goldman provided
the financing. Just two weeks later, Goldman informed Basis Capital that the Timberwolf securities
had lost value and required the hedge fund to post additional cash collateral.2430 Basis Capital
immediately questioned the new value and asked to see a “comparable market data point for the
Timberwolf marks.”2431 In response, Mr. Lehman complained internally: “I would like to know
what the precedent there is here - does GS need (outside of the client issue) to provide the below
info to justify our prices???”2432 After Goldman provided additional information, Basis Capital
appeared to agree to post the additional collateral.
Eight days later, on July 12, Goldman again marked down the value of the Timberwolf
securities to prices of $65 and $60, after having sold them to Basis Capital one month earlier at $84
and $76.2433 This repricing resulted in a $37.5 million movement in the value of the securities, and
required Basis Capital to post substantially more cash collateral with the firm.2434 On July 13, 2007,
Basis Capital told Goldman that one of its funds was “in real trouble.”2435 On July 16, Goldman
again marked down Basis Capital’s securities to prices of $55 for AAA and $45 for AA.2436 These
prices matched Goldman’s internal valuations.2437 By the end of July, Basis Capital was forced to
liquidate its hedge fund.2438 Goldman bought back the Timberwolf securities from Basis Capital on
July 31, at prices of $30 and $25.2439
Other Timberwolf Sales. Basis Capital was only one of several clients that Goldman
contacted in connection with Timberwolf. On May 24, 2007, a Goldman sales associate told Mr.
Lehman and Mr. Sparks that he wanted more information to send to a European hedge fund that was
“not experts in the space at all but [I] made them a lot of money in correlation dislocation and will
5/24/2007 email from Yusuf Aliredha to Mr. Sparks, Mr. Lehman, and others, 2440 “Priority Axes,” GS MBS-E-
2441 Id.
2442 6/5/2007 email from Benjamin Case to David Lehman, GS MBS-E-001919861.
2443 Id.
2444 Id.
2445 6/1/2007 email from Jay Lee to David Lehman, Matthew Bieber, and others, GS MBS-E-010958182.
2446 Id.
2447 Id.
do as I suggest. Would like to show stuff today if possible.”2440 Mr. Lehman told the sales associate
that he was available to get on the telephone with the clients, and forwarded him the Timberwolf
offering circular and marketing materials.2441
On June 5, 2007, Goldman trader Benjamin Case emailed Mr. Lehman with a “[g]ameplan
for distribution” or sales of Goldman’s remaining CDO2 securities.2442 The plan was to target
“institutional buyers that can take larger bite size than traditional CDO buyers ... for example Asian
banks and insurance companies.”2443 Mr. Case also noted that Goldman was shorting “51 CDO
names in the two portfolios [Timberwolf and Point Pleasant] and we have been aggressively
sourcing further protection in the CDS market on names in the two portfolios recently.”2444
In early June, Goldman targeted a Korean insurance company called Hungkuk Life for
Timberwolf sales. According to a Goldman employee in the Japan sales office, Jay Lee, “the largest
hurdle from the client perspective is whether or not they can get the mandate to buy something
backed by synthetically sourced CDO’s [sic], as they have never bought CDO^2 before.”2445 Mr.
Lee was also concerned that the value of the securities would drop soon after the office sold the
Timberwolf securities to the insurance company. Mr. Lee stated:
“[T]he largest hurdle from a sales’ perspective is MTM [mark to market]. It is an important
client, and if the mark widens out more than 1pt immediately after selling the asset to them,
sales cannot sell it. Understanding that it is a volatile asset, sales wants to know that where
we sell it to the client will not be more than 1pt less than where the mark would be, provided
no new market information.”2446
It is unclear how his valuation concern was addressed. Later the same day, on June 1, Mr. Lee
reported that Hungkuk Life had purchased $36 million in AAA rated Timberwolf securities. Mr.
Sparks responded “good job - keep going.”2447
Six days later, on June 7, 2007, the head of the Goldman Japan sales office, Omar
Chaudhary, contacted Mr. Sparks and Mr. Lehman about a possible additional sale of Timberwolf
securities to Hungkuk Life. Mr. Chaudhary wrote that the head of Goldman’s Korean sales office
was “pushing on our personal relationships” to make the sale and wanted to be assured he’d be paid
more if he “got it done”:
6/7/2007 email from Omar Chaudhary to Daniel Sparks, David Lehman, 2448 and Bunty Bohra, GS MBS-E-
001866450, Hearing Exhibit 4/27-104.
2449 6/7/2007 emails from Daniel Sparks and David Lehman, GS MBS-E-001866450, Hearing Exhibit 4/27-104.
2450 See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
2451 See Goldman response to Subcommittee QFR at PSI_QFR_GS0223.
2452 6/10/2007 email from Daniel Sparks to Omar Chaudary and Bunty Bohra, GS MBS-E-010971809.
2453 6/11/2007 email from Tom Montag, GS MBS-E-001866144.
2454 6/11/2007 email exchange between Syndicate and David Lehman, GS MBS-E-001914921-24.
2455 6/13/2007 email from Japan sales office, GS MBS-E-011212260.
2456 6/22/2007 email exchange between Tom Montag and Daniel Sparks, “Few Trade posts,” Hearing Exhibit 4/27-
2457 Id.
2458 6/25/2007 email from Daniel Sparks to Tom Montag, and others, GS MBS-E-010952698.
“Jay and I spoke to the head of Korea Sales today. He said that he feels we can push for
H[ungkuk] Life to increase their size from the 36mm of AAA’s and wanted to see if we
would pay more GC’s [sales credits] if he got it done. Told him that if we sell ~45-50mm+
[$45-50 million more] that we would honor the 7.0% even if we trade at the 84.5 dollar px
[expected price]. Trust you will support this as we are pushing on our personal relationships
to get this done.”2448
Mr. Lehman and Mr. Sparks told Mr. Chaudhary to “go for it” and “[g]et ‘er done.”2449 The Korean
office did get it done, and Goldman sold another $56 million in Timberwolf securities to Hungkuk
Life at a price of $84.50.2450 The sales representative was awarded the 7% sales credit.2451 Mr.
Sparks wrote to the sales office: “you boys are awesome and many people are noticing.”2452 Mr.
Montag, a senior Goldman executive monitoring the Timberwolf sales, told the mortgage team it
had done an “incredible job – just incredible.”2453
On June 11, 2007, Mr. Lehman received an email from the Goldman Syndicate asking
whether the CDO axe sheet, which included directives to sell Timberwolf securities, could be sent
to the Japan sales office for re-distribution to sales representatives across Asia. Mr. Lehman agreed:
“let’s send to all Japan sales.”2454 Two days later, on June 13, 2007, the Japan sales office reported
over $250 million in new sales of Goldman’s CDO securities, including Timberwolf.2455
Mr. Montag continued to monitor the sales of Timberwolf as well as other CDO securities in
Goldman’s inventory and warehouse accounts. On June 22, 2007, Mr. Sparks reported to him on
the completion of a number of sales of CDO and RMBS securities that Goldman had purchased
from the two failed Bear Stearns hedge funds. Mr. Montag asked Mr. Sparks to provide him with a
“complete rundown” on “what[’]s left.”2456 Mr. Sparks responded that the “main thing left” was
$300 million in Timberwolf securities. Mr. Montag responded: “boy that timeberwo[l]f was one
shitty deal.”2457
Despite Mr. Montag’s assessment of Timberwolf, he continued to press for the sale of
Timberwolf securities to Goldman clients. On June 25, 2007, Mr. Sparks emailed Mr. Montag and
others with another update on selling Goldman’s remaining CDO assets.2458 Mr. Sparks informed
the group that Goldman would probably have to lower the values of the CDO assets over the next
6/26/2007 email from Deeb Sa 2459 lem to Michael Swenson, GS MBS-E-012371112.
2460 Id.
2461 Goldman’s internal price was then $55, 23% less. See 7/12/2007 Goldman datasheet, “Warehouse SP CDO
positions and hedges_7-12-07,” GS MBS-E-001866482; see Goldman response to Subcommittee QFR at
PSI_QFR_GS0223 and PSI_QFR_GS0235.
2462 7/6/2007 email from Mitchell Resnick to David Lehman, GS MBS-E-001866752.
2463 See Goldman response to Subcommittee QFR at PSI_QFR_GS0223 and PSI_QFR_GS0235.
2464 5/7/2007 Goldman email chain between Elisha Wiesel and others, “RE: Timeberwolf Analysis,” GS
MBS-E-003334218. Elisha Wiesel worked with Goldman’s legal department on issues related to disseminating
information to potential investors. On May 20, 2007, the same day the Mortgage Department presented the
conclusions of its CDO valuation project to Mr. Viniar and others, Mr. Wiesel sent an email to Mr. Bieber
underscoring concerns about its valuation process: “[G]iven how complex the data is for a CDO^2, there’s little
chance we’ll ever get fully ‘comfortable’ beyond a shadow of a doubt that there’s nothing materially misleading in
the data cuts we provide. Is best outcome in this situation to just get a big-boy letter drafted?” 5/20/2007 email from
Elisha Wiesel, GS MBS-E-001980637.
2465 7/16/2007 email to David Lehman, “Carlyle,” GS MBS-E-011050254.
few days, but that the net effect for Goldman would be positive, since its short position was larger
than its long. In fact, the Mortgage Department made $42.5 million that day.2459 Mr. Montag
remained focused on Timberwolf, responding: “[h]ow are twolf sales doing?”2460
On July 12, 2007, another Goldman sales representative, Leor Ceder, reported selling $9
million in Timberwolf securities to Bank Hapoalim at a price of $78.25.2461 Goldman trader
Mitchell Resnick asked Mr. Lehman “to pay him well on this.”2462 Mr. Ceder was paid an 8% sales
credit.2463 That was Goldman’s last Timberwolf sale, even though its Syndicate continued to list the
CDO as a top sales priority for months afterward.
Goldman ultimately sold about $853 million of the $1 billion in Timberwolf securities to
about 12 investors. The unsold securities, with a face value of about $150 million, remained on
Goldman’s books.
Limited Disclosures. Despite their aggressive sales efforts, Goldman sales personnel
typically did not help potential investors analyze the Timberwolf securities and the 4,500 unique
assets underlying the CDO. One Goldman employee told his colleagues: “In terms of telling
customers. I prefer to give them the general idea of the trade. Then give them the excel spread sheet
with our info on ref obs [reference obligations] and let them draw their own conclusions.”2464
Another Goldman employee, discussing a potential buyer of Timberwolf, warned:
“[H]e is going to want to look at the TWOLF trade on a fundamental basis with a lot of
supporting runs to back up any additional mark downs we have - telling him we are busy
when it comes to month end and we can’t run that analysis because we are resourceconstrained
will not be good enough.”2465
5/7/2007 email from Elisha 2466 Wiesel, GS MBS-E-004735378.
2467 7/7/2007 email from Stuart Fowler, GS MBS-E-011183045.
2468 7/31/2007 email from Matthew Bieber to David Lehman, “FW: Requesting Compliance Approval,” GS MBS-E-
2469 8/7/2007 email from Jay Lee to others, GS MBS-E-001927858.
2470 8/7/2007 email from David Lehman to others, GS MBS-E-001927858.
2471 See 6/6/2007 email from David Lehman, GS MBS-E-001936955. Mr. Lehman stated: “thk abt this - if we
establish a defined + healthy supply/demand dynamic in this product we can always create more CDO^2 at a
significant profit vs current levels.”
Still another Goldman employee stated with respect to Timberwolf and Point Pleasant: “The
trickiest part about sharing this [pricing] analysis with custies [customers] is that it shows just how
rudimentary our own understanding of these positions actually is.”2466
Goldman also in many instances refused to provide investors with its pricing methodology
or specific prices or values for the CDO securities it was selling. After its securities began to lose
value, Basis Capital emailed George Maltezos, David Lehman, and others asking: “How many
times do we have to request data points and scenarios by email. These were read out to us on the
call and it was agreed that GS would send them through. I am getting weary of continually hearing
about transparency and yet an obvious avoidance of ‘putting things to paper.’”2467
Similarly, when Hungkuk Life requested additional information about the underlying
Timberwolf assets, Goldman sent an asset report, but only after removing all of its pricing and
valuing information related to those assets.2468 In August 2007, Jay Lee from Goldman’s Japan
sales office told a sales associate who was seeking information about Goldman’s marks for Tokyo
Star Bank:
“[U]nder no circumstances are we going to be able to provide materials specific to
Timberwolf ... or even use the word ‘mark’ in written materials. ... Everything will be
described in general terms, and if what we provide is too vague or general, the medium for
further clarification must be oral, not written.”2469
Mr. Lehman added: “[W]e should be clear that the information we are providing is not our pricing
methodology but rather some tho[ugh]ts on the current market.”2470
In an interview with the Subcommittee, Mr. Lehman defended Goldman’s aggressive
markdowns by noting that Goldman would buy or sell at the prices it quoted to a customer. He
explained that if a client thought Goldman’s mark was too low, the client could buy more of the
securities from Goldman at the low price, then resell them for a profit. Since Goldman’s internal
valuations were much lower than the price quoted to clients, however, such sales would still
produce a profit for the firm.2471 Furthermore, as Goldman marked down the values in the summer
of 2007, it began to decrease the volume of the securities it was willing to buy or sell at the prices it
quoted to clients. Goldman was initially willing to buy or sell CDO securities in blocks of $10
million, but by July, it lowered the maximum size to $3 million for some securities and $1 million
for others: “Given current market environment, we would like our bid for size for CDO valuations
7/11/2007 email from David Lehman, “CDO Marks,” GS MBS-E 2472 -013427046 [emphasis in original].
2473 7/16/2007 email from David Lehman to Matthew Bieber, GS MBS-E-001913775.
2474 See 7/17/2007 email from David Lehman to Daniel Sparks, GS MBS-E-010857643 (with attachment GS MBSE-
2475 9/17/2007 email from Tom Montag, GS MBS-E-000766371, Hearing Exhibit 4/27-106.
2476 9/17/2007 email from Christopher Creed, GS MBS-E-000766370, Hearing Exhibit 4/27-106.
2477 Id.
to be MAX $3mm for AAA to AA and $1mm for A and below. No valuations should go out with a
bid for $10mm.”2472
“A Day That Will Live In Infamy.” The Timberwolf securities issued by Goldman
steadily lost money from the day they were issued. Less than four months after they were issued, on
July 16, 2007, Mr. Lehman instructed the Timberwolf deal captain, Mr. Bieber, to “create an
‘unwind’ spreadsheet ... where we can input CDS spds [spreads]/prices and liability prices so we
can determine if unwinding these deals makes sense.”2473 The analysis appeared to show that it
would cost Goldman $140 million to unwind Timberwolf, and the conclusion was to “Hold Off.”2474
Instead of unwinding, Goldman continued its sales push.
In September 2007, Mr. Montag asked for data tracking the drop in prices for a Goldman
CDO that experienced a dramatic fall in value, such as Timberwolf.2475 In response, a Goldman
employee provided prices for the A2 tranche of the Timberwolf securities using a combination of
Goldman’s internal marks and the bids provided to investors, from the issuance of the CDO on
March 27, 2007 through September. The data showed that, in six months, prices for Timberwolf’s
AAA rated A2 security had fallen from $94 per security to $15, a drop of almost 80%:
“3/31/07 94-12
4/30/07 87-25
5/31/07 83-16
6/29/07 75-00
7/31/07 30-00
8/31/07 15-00
Current 15-00.”2476
After receiving this pricing history, Mr. Bieber, the Timberwolf deal captain, described March 27,
the Timberwolf issuance date, as “a day that will live in infamy.”2477
The chart on the next page shows how, between mid-June 2007 and early August 2007, the
value of Timberwolf securities dropped precipitously, and that Goldman personnel were aware of its
falling value while selling the securities to clients.
[SEE CHART NEXT PAGE: Timberwolf Marks, Axes, and Sales,
prepared by the Permanent Subcommittee on Investigations.]
3/1/2007 3/31/2007 4/30/2007 5/30/2007 6/29/2007 7/29/2007 8/28/2007 9/27/2007 10/27/2007 11/26/2007 12/26/2007
Price Timberwolf Marks, Axes, and Sales
Sales of
A1A‐ $99.45
A1B‐ $100
A1C‐ $99.71
A1D‐ $100
INC‐ $100
Axes (Sales
Prepared by the U.S. Senate Permanent Subcommittee on Investigations, February 2011.
Derived from Goldman Sachs document, GS MBS-E-000779366.
3/1/2007 3/31/2007 4/30/2007 5/30/2007 6/29/2007 7/29/2007 8/28/2007 9/27/2007 10/27/2007 11/26/2007 12/26/2007
Performance Review for Joshua Birnbaum, GS-PSI-01972, Hearing Exhibit 4/27-5 2478 5c. See also 6/26/2007 email
from Deeb Salem to Michael Swenson, GS MBS-E-012371112.
2479 See Goldman response to Subcommittee QFR at PSI_QFR_GS0030.
2480 Id. at PSI_QFR_GS0239.
2481 Id. at PSI_QFR_GS0030.
Goldman profited in part from Timberwolf’s decline in value due to its 36% short interest in the
CDO. In addition, June was the month that Goldman built its $13.9 billion big short, which meant
that the decline in most mortgage related assets translated into increasing profits for Goldman.2478
Timberwolf experienced its first credit rating downgrades in November 2007, just eight
months after the CDO closed and issued its securities. The downgrades included the AAA rated
securities. In March 2008, one year after Timberwolf was issued, its AAA securities were
downgraded to junk status. In June 2008, a controlling class of debt investors voted to liquidate
Timberwolf, and the deal was terminated in October 2008.2479
Goldman’s 36% short position in Timberwolf produced about $330 million in revenues at
the direct expense of the clients to whom Goldman had sold the Timberwolf securities. Goldman
also made $3 million in interest while the Timberwolf assets were in Goldman’s warehouse
account. At the same time, because Goldman was unable to sell about a third of the Timberwolf
securities and had to keep the unsold securities on its books, it ended up losing $562 million from
them. Goldman also lost $226 million from the decline in the value of the collateral securities
securing the CDO. When offset by the profits from its Timberwolf short, Goldman ended up with a
total loss of about $455 million.2480
Timberwolf’s investors lost virtually their entire investments. Basis Capital ended up
declaring bankruptcy and has filed suit against Goldman.2481
Analysis. Goldman constructed Timberwolf using CDO assets that began to fall in value
almost as soon as the Timberwolf securities were issued, yet solicited clients to buy the securities.
Timberwolf contained or referenced CDO assets with more than 4,500 unique mortgage related
securities, but Goldman offered potential investors little help in understanding those securities, and
targeted clients with limited or no experience in CDO investments. When marketing Timberwolf,
Goldman withheld its internal marks showing the securities losing value and did not mention its
short position. Senior Goldman executives knew the firm was selling poor quality assets at inflated
prices. Within six months of issuance, AAA Timberwolf securities lost almost 80% of their value.
Due to its short position, Goldman profited at the expense of the clients to whom it sold the
Timberwolf securities, but it lost money overall because Goldman was forced to retain so many of
the unsold Timberwolf securities on its books.
See 3/23/2007 Goldman document, “Abacus 2007-AC1,” at 2482 11, GS MBS-E-002807082, Hearing Exhibit 4/27-
120; Securities and Exchange Commission v. Goldman Sachs, Case No. 10-CV-3229 (S.D.N.Y.), Complaint (April
16, 2010), at 1, 6 (hereinafter “SEC Complaint against Goldman Sachs”).
2483 4/2/2007 email from Fabrice Tourre, “ABACUS 07-AC1,” GS MBS-E-002011152 (Abacus 2007-AC1 assets
are “fully-identified, with no reinvestment, removals, substitutions or discretionary trading”).
2484 Goldman internal documents sometimes describe it as the underwriter for Abacus 2007-AC1, and sometimes as
the placement agent. Compare 2/18/2008 Goldman document, “CDO Transactions (July 1, 2006 - December 31,
2007) in which Goldman Sachs acted as underwriter,” GS MBS 0000004337, to 3/12/2007 Goldman memorandum
to Mortgage Capital Committee, “ABACUS Transaction sponsored by ACA,” at 2, GS MBS-E-002406025, Hearing
Exhibit 4/27-118 (“Goldman is solely working as agent but retains the option to underwrite the risk as principal.”).
2485 2/27/2007 email from Curtis Willing, “ABACUS 2007 AC1, Ltd. -- New Issue Announcement (144a/RegS),”
GS MBS-E-009209654.
2486 3/12/2007 Goldman memorandum to Mortgage Capital Committee, “ABACUS Transaction sponsored by
ACA,” at 6, GS MBS-E-002406025, Hearing Exhibit 4/27-118 (“Goldman is acting as principal as a protection
buyer . . . as well as taking other principal roles.”).
2487 Goldman’s additional roles included acting as the basis swap counterparty, the basis swap calculation agent, the
collateral put provider, the collateral put calculation agent, the collateral disposal agent, the credit default swap
calculation agent, and the initial purchaser. 2/18/2008 Goldman document, “CDO Transactions (July 1, 2006 -
December 31, 2007) in which Goldman Sachs acted as underwriter,” GS MBS 0000004337; 3/12/2007 Goldman
Sachs memorandum to Mortgage Capital Committee, “ABACUS Transaction sponsored by ACA,” GS MBS-E-
002406025, Hearing Exhibit 4/27-118.
2488 3/12/2007 Goldman memorandum to Mortgage Capital Committee, “ABACUS Transaction sponsored by
ACA,” GS MBS-E-002406025, Hearing Exhibit 4/27-118; April 27, 2010 Subcommittee Hearing at 421.
2489 Goldman considered its Abacus platform, which commenced in 2004, to be “market-leading.” 4/2/2007 email
from Fabrice Tourre, “ABACUS 07-AC1,” GS MBS-E-002011152; 2/27/2007 Goldman email, “ABACUS-2007-
AC1 – Marketing Points (INTERNAL ONLY) [T-Mail],” GS MBS-E-008042545, Hearing Exhibit 4/27-116. See
also 6/2007 Goldman document, “CDO Platform Overview,” at 31, GS MBS-E-001918722 (“ABACUS is the
Goldman brand name for single-tranche CLN [credit linked note] issuances referencing portfolios comprised entirely
of structured products.”); 4/2006 Goldman presentation “Overview of Structured Products,” GS MBS-E-016067482.
DD. Abacus 2007-AC1
Abacus 2007-AC1 was a $2 billion synthetic CDO whose reference obligations were BBB
rated mid and subprime RMBS securities issued in 2006 and early 2007.2482 It was a static CDO,
meaning once selected, its reference obligations did not change.2483 It was the last in a series of 16
Abacus CDOs referencing RMBS securities designed by Goldman. Goldman served as the
underwriter or placement agent,2484 the lead manager,2485 and the protection buyer,2486 and also acted
in other roles related to the CDO.2487 Unlike previous Abacus CDOs, Abacus 2007-AC1 used a
third party to select its assets, referring to it as the portfolio selection agent.2488
Designing Single Tranche CDOs. Abacus CDOs were known as single tranche CDOs, a
structure pioneered by Goldman through its Abacus platform.2489 Goldman used this structure to
design customized CDOs for clients interested in assuming a specific type and amount of
investment risk. An Abacus CDO could be issued with a single tranche, designed in coordination
with a client who could select the assets the client wished to reference, the size of the investment,
and the amount of subordination or cushion before the single tranche of securities would be exposed
“Subordination” is “[t]he measure of losses that must occur within a portfolio bef 2490 ore a tranche is at risk to loss.”
Tranche size “[r]eflects the notional (value-at-risk) of a structured credit investment” and “is also a measure of
leverage.” 7/2006 Goldman presentation, “Structured Credit Investments,” at 54, GS MBS-E-002055378; 4/2006
Goldman presentation, “Overview of Structured Products,” GS MBS-E-016067482. Goldman contended that, in a
single-tranche CDO, investors could customize the tranche risk/return profile by specifying the tranche subordination
and tranche size, and that investors could create “credit enhanced” credit exposure through the use of subordination.
4/2006 Goldman presentation, “Overview of Structured Products,” at 52, GS MBS-E-016067482. “Combined with
tranche size, varying levels of subordination enable investors to tailor both the structural leverage and the risk/return
profile of their investment.” “Investors are “[n]ot limited by new issuance calendar and bond allocations,” are “[n]ot
limited by cash bonds in dealer inventory,” can “customize[] by sector (e.g. RMBS, CMBS, ABS), rating, vintage,
servicer, etc.,” and can “meet various investment objectives via structure.” 7/2006 Goldman presentation,
“Structured Credit Investments,” at 54, GS MBS-E-002055378.
2491 3/12/2007 Goldman memorandum to Mortgage Capital Committee, “ABACUS Transaction sponsored by
ACA,” GS MBS-E-002406025, Hearing Exhibit 4/27-118.

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