Goldman Sachs "made a profit as AIG used some of its federal bailout money to cover its debt"

[ProSense]

Goldman Maintains It Had No A.I.G. Exposure

March 20, 2009, 12:21 pm

Hoping to tamp down a swirl of speculation over its role in the bailout of American International Group, Goldman Sachs reiterated Friday that its direct losses would have been minimal if the vast insurance conglomerate had failed.

Goldman also described how, as early as July 2007, it began to have “collateral disputes” with A.I.G., as the two firms disagreed on the value of the mortgage-backed securities that were the basis of multibillion-dollar contracts between them.

David Viniar, Goldman’s financial officer, walked reporters through a thicket of numbers in a conference call Friday, which Goldman held to “clarify certain misperceptions” about its positions with A.I.G.

While he acknowledged that its relationship with A.I.G. raised a “complex set of issues,” Mr. Viniar was adamant that, because of the collateral it held and hedging trades with third parties, Goldman would not have taken a direct hit if A.I.G. had been allowed to fail.

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In the end, Goldman got every dollar it was owed by AIG without having to call on any of its offsetting derivatives contracts. It even made a profit as AIG used some of its federal bailout money to cover its debt while collateral Goldman had gotten from AIG covered the rest.

In the conference call, Viniar argued that the company was too sophisticated a trader to allow itself to be materially exposed to one institution, even then triple-A-rated AIG.

Goldman had purchased around $10 billion in credit protection from AIG to cover potential losses in mortgage-backed securities called collateralized debt obligations, or CDOs. These original deals were written to offset Goldman's own exposure to CDO losses through contracts it had written with other counterparties.

By late 2007, Goldman began to get into "disputes" with AIG over the value of the CDOs, which neither Goldman nor AIG owned. Goldman Sachs wanted AIG to post collateral based on the falling value, but they couldn't come to an agreement on the amount.

This began to create concern for Goldman, said Viniar, and it sought offsetting credit default swaps, some with E.U. banks, to cover the risk that AIG might default.

But Goldman Sachs CEO Lloyd Blankfein never discussed the matter with then-Treasury Secretary Henry Paulson, despite the fact that Paulson had once run Goldman Sachs.

"We assume they were getting collateral calls from others at the same time," Viniar said in a conference call with journalists. "As far as I know, there were no meetings between Lloyd and Hank Paulson. As far as alerting people, we meet with our regulators regularly."

Goldman Sachs, which was AIG's biggest trading partner, has come under attack after receiving about $12.9 billion of AIG's bailout money. Goldman had about $10 billion worth of trading exposure with AIG, of which $7.5 billion was backed by collateral and the balance through hedges. The collateral calls by trading partners, including Goldman, contributed to the insurer's collapse and subsequent federal bailout.

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Goldman Sachs Made BILLIONS Shorting AIG (GS, AIG)

Tangled web: "Goldman to respond to ('misperceptions') coverage of AIG bailout"

[TomClash]

1. Why is that surprising? nt

[Supersedeas]

7. about as surprising as the Corp Media obfuscation

[AngryAmish]

2. Thank God there are no former Goldman Sachs people in high places of the Obama administration

That would be bad.

[grantcart]

3. I am not quite sure what you think is newsworthy here.

ALL of the money that is being injected to AIG will be used to cover failed deritive trunches that AIG insured, that is the whole point.


While some of those payments may be going to banks with a smaller exposure than others (like Wells Fargo, Goldman Sachs), the reality is that a very large portion of the banking business - 70% includes banks that would become technically insolvent if their subprime derivatives were to fail and bring down more of their assets.

[ProSense]

4. Not really sure what's newsworthy. I do know that Goldman Sachs held a press conference today

because a lot of people have questions. Here are Eliot Spitzer's:

So here are several questions that should be answered, in public, under oath, to clear the air:

What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?

Was it already known who the counterparties were and what the exposure was for each of the counterparties?

What did Goldman, and all the other counterparties, know about AIG's financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn't they bear a percentage of the risk of failure of their own counterparty?

What is the deeper relationship between Goldman and AIG? Didn't they almost merge a few years ago but did not because Goldman couldn't get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG's business model was not to pay on insurance it had issued.

Why weren't the counterparties immediately and fully disclosed?

At the very least, I can understand the questions.

Goldman CFO feels no guilt over AIG payments

[brentspeak]

5. The point is that Paulson, and now Geithner, have refused to nationalize AIG

More to the point, it means that Bush, and now Obama, have refused to nationalize AIG. Had AIG been nationalized, the government would be able to reimburse AIG's counter-parties on an at-need basis. Goldman Sachs -- among many other AIG counter-parties -- clearly don't need a penny. Giving Goldman Sachs billions of taxpayer dollars is like taking up a charity drive for Bill Gates - it's insane and criminal.

[ProSense]

6. This press conference may have been preemptive

In a wide-ranging discussion, Spitzer told CNN's "Fareed Zakaria GPS" that he thinks he still has a duty to speak about issues like million-dollar bonuses to American International Group executives, but that he comments on the issues "with full awareness and heaviness of heart about what I did."

"I would say to (critics) that I never held myself out as being anything other than human," he said in the interview, which airs Sunday at 1 p.m. ET. "I have flaws as we all do, arguably. I failed in a very important way in my personal life. And I have paid a price for that."

<...>

Spitzer told CNN that executive bonuses may grab headlines, but the insurance company's payouts on complicated financial instruments deserve closer examination.

Spitzer said that AIG was at the "center of the web" of transactions that have forced a massive bailout of the U.S. financial system, and that the insurer's woes stem from financial practices he first investigated as New York's attorney general.

"Back then I said to people, 'AIG is the center of the web.' The financial tentacles of this company stretched to every major investment bank," he said. Watch Spitzer say AIG has larger problems »

AIG's collapse stemmed largely from its array of exotic financial products such as credit-default swaps, which went sour when the U.S. housing market turned south after 2006.

"Bonus is a real issue. It touches us viscerally," Spitzer said. But he added, "The real money and the real structural issue is the dynamic between AIG and the counterparties."

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