CDO in Goldman Case Cut to 'D' by S&P in May 2009

The collateralized debt obligation at the center of the fraud case against Goldman Sachs is known as ABACUS 2007-AC1, and a class of its debt was cut to "D" from "CCC-" by Standard and Poor’s in May 2009.

That cut to "D" may have been the most recent rating action taken on this specific transaction, which had two classes of debt, or tranches. The ABACUS deal had a Class A1 and a Class A2.

ABACUS was the name of a shelf used by Goldman Sachs for a series of collateralized debt obligations. The performance of all of these deals was tied to residential mortgage backed securities. In 2007, Goldman was sixth ranked underwriter of CDOs in the U.S. and worldwide, according to Thomson Reuters.

The Goldman structured product correlation desk that assembled the CDOs was created in late 2004 and early 2005.

IDD obtained a copy of S&P's downgrade report on Friday. In that report, which was published on May 13, 2009, S&P said the downgrade of the transaction’s Class A-1 “follows a number of recent write-downs of underlying entities that caused the class A-1 notes to incur a partial principal loss.”

In February 2009, S&P cut the deal’s Class A-2 to "D" from "CCC-" after write-downs of reference entities in the underlying collateral pool that caused the A-2 note to incur a partial principal loss.

Fitch Ratings, meanwhile, said through a spokesman it did not rate that specific deal, and a Moody’s Investors Service spokesman said Moody's had initially rated the two classes of the ABACUS deal AAA. Moody's cut these classes to Baa2 and Baa3 in November 2007, and in April 2008 they were rated Ca, a rating notch above default.

The Securities And Exchange Commission charged Goldman with fraud when it sold a collateralized debt obligation whose value hinged on the performance of subprime mortgage-backed securities. According to regulators, Goldman structured and marketed the synthetic CDO without disclosing to investors that a major hedge fund played a role in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

ABACUS 2007-AC1 closed on April 26, 2007.

By October 2007, 83% of the residential mortgage-backed debt in the portfolio had been downgraded, and 17% was on negative watch, according to the SEC. By January 2008, 99% of the portfolio had been downgraded.