Collapsed Hedge Fund, Morgan Stanley In CDO Arbitration

May 13 2010 | 9:55am ET

A third Wall Street bank has entered negotiations with a collapsed Australian hedge fund over its losses in collateralized debt obligations.

Morgan Stanley and Basis Capital Management have entered into arbitration in London, the Financial Times reports. Basis accuses Morgan Stanley of selling off its CDOs at artificially low prices, helping push its Yield Alpha Fund into bankruptcy.

Morgan Stanley liquidated the fund’s CDOs—which it posted as collateral—after the hedge fund missed a margin call in 2007. But an expert witness for Basis said Morgan valued the CDOs at US$10 million to US$12 million less than they were worth.

Basis accused Citigroup of similarly undervaluing the CDOs it posted as collateral, eventually leading to a settlement that cut the amount Basis owed the bank by several million dollars, according to the FT. The hedge fund is also in settlement talks with Goldman Sachs, which structured a CDO that Basis lost US$56 million.

In an internal e-mail, a Goldman executive referred to the Timberwolf CDO in which Basis invested as “one shitty deal.”


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