Ex-Goldman Sachs pair start shadow bank as rules curtail lending

[NEW YORK] Two former Goldman Sachs Group Inc bankers are starting a hedge fund to profit from a void in bank lending.

Jonathan Egol and Robert Allard, who both worked with structured products at Goldman Sachs, will start Firebreak Capital this year to provide loans that banks are largely unable to make because of rules put in place since the 2008 financial crisis, according to a statement released today.

"We're really trying to do a lot of the business that banks can't do anymore," Allard, the firm's chief executive officer, said in an interview.

Mr Egol, 45, will be Firebreak's chief investment officer. He's best known for running the trading desk that created a synthetic collateralised debt obligation dubbed Abacus 2007-AC1, a failed US$1 billion investment tied to the housing collapse that spurred a US Securities and Exchange Commission lawsuit against Goldman Sachs and Fabrice Tourre, a former vice president of the bank.

Marathon Asset Management, Oaktree Capital Group LLC and KKR & Co are among investment firms that have sought to fill the banking void, seeking to lend to companies that can't get loans from banks.

Mr Allard said Firebreak, which is targeting US$150 million for its debut fund, will be able to profit from deals that are too small to attract such firms. The firm is working on two private debt trades, according to the statement.

Mr Allard, 39, who left Goldman in 2014, was head of structured product origination and distribution. He previously worked in structured product sales at Deutsche Bank AG.

Mr Egol, who wasn't accused of any wrongdoing in the Abacus matter, testified at Mr Tourre's trial in 2013. Mr Tourre was found liable for failing to disclose to investors in the security that hedge fund Paulson & Co helped select the mortgage-backed assets underlying it. Egol, who earned an MBA in finance from the University of Chicago, worked at Goldman from 1998 until early last year.

The Firebreak team also includes Jerry Chang as chief financial officer. Chang had previously worked in the same role at Prosiris Capital Management, a credit hedge fund firm led by Reza Ali.

The shadow banking system is a term coined by Paul McCulley, former chief economist at Pacific Investment Management Co, to refer to financial networks outside of traditional banks.

BLOOMBERG