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Goldman Trader Birnbaum to Form Hedge Fund After Subprime Gains

Date: Thursday, April 17, 2008
Author: Jody Shenn, Bloomberg

Josh Birnbaum, one of the traders who led Goldman Sachs Group Inc.'s push into bets against subprime-mortgage bonds, has left the world's biggest securities firm and plans to form a $1 billion hedge fund.

Birnbaum, 35, confirmed his departure and declined to elaborate on his plans. He has told colleagues he expects his new fund will invest in mortgage assets, according to two people familiar with his thinking who declined to be identified.

At least 70 funds have been established during the past year by firms such as New York-based Goldman, Blackstone Group LP and Pacific Investment Management Co. to snap up cheap home-loan debt amid the steepest drop in U.S. home values since the Great Depression. Birnbaum helped Goldman offset losses on mortgage holdings and earn a record $11.6 billion last year.

``The question is really, `What's his encore?''' said Geoff Bobroff, a consultant in East Greenwich, Rhode Island, who advises asset managers.

Birnbaum and Michael Swenson, another structured-products trader, pushed for New York-based Goldman's bets on a subprime collapse with backing from Dan Sparks, its mortgage-department head, the Wall Street Journal reported in December. Michael Duvally, a company spokesman, declined to comment.

Birnbaum, a native of Oakland, California, joined Goldman in 1993 after completing the undergraduate program at the Wharton School of the University of Pennsylvania in Philadelphia. He was listed among the top bachelors in the wealthy beach communities on the East End of Long Island, New York in Hamptons magazine's ``Blackbook: Wall Streeters Edition'' in 2006.

ABX Contracts

Borrowers with poor or limited credit records or high debt used subprime mortgages to buy properties or tap home equity by refinancing. Some of Goldman's bets against the loans involved so-called ABX contracts used to speculate on whether pools of 20 mortgage securities will be repaid as scheduled, Chief Financial Officer David Viniar said in September.

Hedge funds including Paulson & Co. and Harbinger Capital Partners also profited by wagering against subprime-tied debt with ABX index contracts and similar derivatives, as did Deutsche Bank AG. Morgan Stanley traders' bets against the bonds went awry because the collapse was more severe than they anticipated, causing net losses, the New York-based company said last year.

Birnbaum, Swenson and Sparks were to be paid between $5 million and $15 million apiece last year, the Journal reported in December, citing people familiar with the matter. Birnbaum was a managing director at the company, the largest securities firm by market value.

`The Next Subprime'

``Some people believe, and probably rightfully so, that there's a lot of opportunity in all these distressed products out there,'' Bobroff, the consultant, said. If Birnbaum intends to again bet against securities, rather than look for underpriced bonds, ``the question is whether he's capable of identifying what's the next subprime.''

The world's largest banks and securities firms have reported more than $245 billion of writedowns and credit losses since the start of last year. Bear Stearns Cos. last month collapsed after losing the confidence of lenders and clients amid the spreading crisis, leading to a planned purchase by JPMorgan Chase & Co. backed by $29 billion of Federal Reserve loans.

The credit-market slump caught up to Goldman this year, as first-quarter income fell 53 percent, the most since 1999, to $1.51 billion. The company last quarter wrote down about $1 billion from mortgages and related bonds, mostly because of declines among higher-quality residential debt known as prime or Alt-A, and lost about $1 billion on high-yield company loans.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.