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Originally published Saturday, May 1, 2010 at 5:02 PM

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Senator sees betting against clients while Goldman trader sees hedging risk

Perhaps no one testifying April 27 to the Senate Permanent Subcommittee on Investigations embodied the communication gap between lawmakers and market-makers more than a 37-year-old Goldman Sachs trader.

Bloomberg News

U.S. Sen. Tom Coburn had what he thought was irrefutable evidence.

Goldman Sachs trader Josh Birnbaum had recommended betting against the stock of Bear Stearns in July 2007, just four months after his colleagues sold a $300 million piece of "one shitty deal" to hedge funds controlled by Bear Stearns, according to e-mails obtained by the Senate through a subpoena.

To Coburn, an Oklahoma Republican, that meant Goldman Sachs was wagering against its own clients using inside information — the poor quality of the deal it sold Bear Stearns.

To Birnbaum, who left the firm in 2008, it meant that he was a savior once again. "The only thing I was aware of is the firm asked me to be a good risk manager," he said.

Perhaps no one testifying April 27 to the Senate Permanent Subcommittee on Investigations embodied the communication gap between lawmakers and market-makers more than the 37-year-old Birnbaum. What senators referred to as betting against clients was "hedging" to Birnbaum.

"The next hearing on this topic should include a spin-to-English translator for both senators and witnesses," said John Hart, communications director for Coburn, a Muskogee, Okla., physician. "Dr. Coburn said he thought he had clear evidence of questionable activities. He found witnesses like Josh Birnbaum to be recalcitrant and eager to hide behind synthetic and selective reasoning."

Career marked by contradictions

Birnbaum didn't respond to e-mails seeking comment, and Richard Morvillo, a Washington, D.C., attorney representing Birnbaum, didn't return messages. Goldman spokesman Michael DuVally declined to comment on Birnbaum.

Birnbaum's Goldman career was marked by contradictions.

He was lionized by The Wall Street Journal in December 2007 for saving Goldman as much as $2 billion by urging the firm to bet against subprime mortgages; that was after he had sent an e-mail in August campaigning for the opposite trade. Seven months after writing in a performance self-evaluation that his goal in 2008 was to make partner, Birnbaum quit.

Senators led by Michigan Democrat Carl Levin and Coburn tried in vain to pry admissions from Birnbaum and Goldman colleagues including London-based executive director Fabrice Tourre, the only Goldman Sachs employee named in the U.S. Securities and Exchange Commission's fraud lawsuit against the New York bank. The firm and Tourre deny doing anything wrong.

So does Birnbaum. He told Coburn he wasn't aware that Goldman had sold Bear Stearns pieces of Timberwolf, a $1 billion collateralized debt obligation (CDO) that was liquidated in 2008.

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Thomas Montag, Birnbaum's former boss as head of Goldman Sachs' sales and trading in the Americas, labeled the CDO with the expletive repeated by lawmakers at the hearing.

Birnbaum didn't answer when Coburn asked whether his team bought put options on Bear Stearns stock to bet against the investment bank, which became part of JPMorgan Chase after its collapse in March 2008.

He didn't answer when Coburn asked him whether Goldman was committed to investing in the mortgage market. Nor did he answer when Coburn asked if the bank was committed to betting against the mortgage market.

"I'm not sure we've even established that there was a firmwide change in position," Birnbaum said of the bank's stance on home loans.

Coburn replied, "I'll give up on that."

Goldman sold Timberwolf to Bear Stearns-controlled hedge funds run by Ralph Cioffi and soon after the CDO's value declined, leading to losses for Cioffi's funds, said William Cohan, a former investment banker who wrote "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street" about the fall of Bear Stearns.

"That starts the whole thing spiraling down the tubes," Cohan said. "Bear Stearns would have collapsed anyway, but Goldman may have exacerbated the crisis, either wittingly or unwittingly."

Cioffi and an associate were acquitted in November of defrauding investors after the two hedge funds went belly-up. DuVally declined to comment about Timberwolf.

In settlement talks with hedge fund

Goldman is in settlement talks with hedge fund Basis Yield Alpha Fund, which went bankrupt after investing $100 million in Timberwolf, the Financial Times reported, citing people it didn't identify.

The London-based Daily Telegraph called Birnbaum the "Goldman guru" when he left the firm in April 2008 after 15 years. Birnbaum said at the time he wanted to start a $1 billion hedge fund.

He's now founder and chief investment officer of New York-based Tilden Park Capital Management. A Tilden Park Capital spokeswoman declined to comment.

A December 2007 Wall Street Journal story credited Birnbaum and two colleagues, Michael Swenson and former head of the mortgage department Dan Sparks, with predicting the decline of the subprime mortgage market and saving Goldman $1.5 billion to $2 billion.

Sparks, who has left the firm, and Swenson also were questioned at the Senate hearing.

Goldman's mortgage division earned about $500 million in 2007 through "residential mortgage activities" and was responsible for $1.7 billion in write-downs for the same activities a year later, said DuVally, the Goldman spokesman.

In his self-evaluation, dated Sept. 26, 2007, and released by the Senate panel, Birnbaum identified one of his "specific strengths" as persuading Goldman's mortgage traders to "not only get flat, but get VERY short" on subprime mortgages — meaning, to bet against them.

An Aug. 21, 2007, e-mail contradicts that assessment.

"The mortgage department thinks there is currently an extraordinary opportunity for those with dry powder to add AAA subprime risk in either cash or synthetic form," he wrote to colleagues, including Sparks and Montag.

By AAA subprime risk, he was referring to bundles of mortgages given top rankings by credit-rating companies.

One of Birnbaum's three goals for 2008 was making partner, according to the evaluation.

"I believe I will be a very compelling partner candidate in 2008," he wrote.

Seven months later, he was gone, and in October 2008, Swenson — Birnbaum's colleague on the mortgage desk — was named a Goldman partner.

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