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Why Was Goldman’s Structured Products Desk Trading Equities?

That question came up in the hearing earlier this week in reference to an email sent by Josh Birnbaum, a former MD in Goldman’s structured products group.

The email, sent in July 2007, sought authorization form senior management for the structured products desk to buy put options on a slew of competitors including Merrill Lynch, Bear Stearns and Lehman Brothers. The email also revealed that Birnbaum had bought put options on MBIA, Ambac and Countrywide.

Birnbaum denied he used information from another part of the firm as a basis for the short positions in various mortgage-related companies and broker dealers. He said at the hearing that trading in equities “was part of our macro-hedging strategy.” Birnbaum also said he couldn't remember the exact names he bought put options on.

That didn’t seem to satisfy Sen. Tom Coburn, who pressed Birnbaum on whether there was a connection between shorting the banks and mortgage companies like Bear Stearns and selling them “shitty” CDO deals like Timberwolf, a part of which was purchased by Ralph Cioffi’s infamous hedge fund at Bear. Birnbaum said there was “no connection.”

But Coburn forgot to ask whether Birnbaum received any intelligence that came from the investment banking side of Goldman, which was actively working on several capital markets deals for nearly all of the companies he wanted to short including Countrywide, National City and IndyMac. Indeed, just a few months after the email was sent, Countrywide was purchased in a fire sale by Bank of America and IndyMac filed for bankruptcy.

Here’s the email in question:

From: Birnbaum, Josh

To: Montag, Tom; Mullen, Donald; McMahon, Bill; Petersen, Bruce

Cc: Sparks, Daniel L; Gmelich, Justin; Swenson, Michael; Lehman, David A.; Birnbaum, Josh

Sent: Tue Jul 24 20:35:092007

Subject: Seeking Approval: Equities trading in SPG

Since 6/21, the SPG Trading group has paused in our equities trading while we work with management and market risk to come up with quantitative limits for these positions. It sounds like we are getting close to having something systematic in place, but in the meantime, we are looking for approval to opportunistically buy puts on certain mortgage originators, RMBS, CMBS insurers, mortgage REITs, broker-dealers, and other related namesexposed to.

Examples names include:

Indyrnac, Cap One, NatCity,Bear Stearns, Merrill, Lehman, Morgan Stanley, Overall stats on what we'd like to add:

Premium: up to $25mm $Delta :upto $200mm Max potential loss per name in +30% move for name: up to $15mm

In concert with these puts, we would like to buy back up to 50% of the $ delta (i.e. the beta) of these positions with S&P futures recognizing that even as we are bearish on these sectors, we are unlikely to hit our strikes if the broader market rallies.

YTD P&L is +$49mm for our equities portfolio.

Our current positions are below (excluding very small ones) :

Countrywide, MBIA,PMI, Ambac, JER Investors, Redwood Trust, etc .


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