AIG Bailout Saved Goldman From Major Loss

Gretchen Morgenson in the New York Times reports that Goldman and no other Wall Street firm was involved in the AIG rescue talks and an AIG failure would have created a hole as big as $20 billion in Goldman’s balance sheet.

This is special dealing, pure and simple. Even if AIG needed to be salvaged (there was considerable agreement on this point), having Goldman deeply involved in the process is cronyism. But that’s been a staple of this Administration.

From the New York Times:

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said…..

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.

If you believe that, I imagine you believe in the tooth fairy too. Goldman had $45 billion of equity as of its last balance sheet date. A loss, if it approached $20 billion, in this general environment of worries about financial firms, would have sent Goldman shares into a tailspin, and the rating agencies have started taking a dim view of overlevered financial firms that appear unable to raise equity on reasonable terms. This certainly would have lead to a downgrade, and that has put other firms on a slippery downward slope.

Note the article contains a recitation of denials later in the piece that the damage would have been as large as $20 billion or that Goldman’s exclusive role in the talks was self-interested.

The rest of the story focuses on how the credit default swaps operation, a small unit at AIG, was allowed to take on risks that brought a sizable and otherwise highly successful firm to its knees. It is a riveting read.

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37 comments

  1. Anonymous

    As I said in one of the previous threads Paulson has no interest in fair dealing even though he has ostensibly given up his private sector role. The guy should be forced to recuse himself from the process.

    I hope this article generates screams to Congress to take this guy out of play.

  2. tyaresun

    Will any clawbacks in the bailout bill under consideration require Paulson to pay back his bonuses from GS? If NO, they should.

    Paulson and Bernanke should be asked to resign right now.

  3. doc holiday

    Not a conflict of interest, not discretionary abuse, not corruption, not collusion, the odds of this happening zero and Paulson, remains a true American hero, who should be covered in cement and placed at the steps of The Lincoln Monument, as a place to hang your wet jackets when the weather gets shitty…

    I’m ok, really!

  4. Anonymous

    Paulson donated $100M of Goldman Sachs stock to a family foundation in April 2006, the Bobolink Foundation. The foundation may still owns GS stock, and Paulson or family members may draw income from it for managing the fund. Paulson may also have deferred compensation tied to Goldman Sachs.

    Congress should investigage whether Paulson benefited his family foundation, his family members, or himself by bailing out Goldman Sachs, in order to determine whether Paulson can be impeached and indicted. State law officials should also investigate to see if Paulson violated any state laws.

    Here is a link to a website that has all tax returns filed by Paulson's family foundation from 1998 through 2006. http://www.eri-nonprofit-salaries.com/index.cfm?FuseAction=NPO.Form990&EIN=942988627&Year=2008

    The foundation's tax ID number is 94-2988627. The foundation is a private non-operating foundation, which perhaps means it was formed to donate money to other organizations.

  5. Krakpotkin

    The Times article is excellent.

    But I regret the sense in passing early on — in the full article — that the Lehman bankruptcy was NOT a disaster of the sort that would befall the world if AIG fails.

    That’s wrong. The Lehman bankruptcy is probably the worst thing going on right now worldwide, along the very lines the Times piece discusses re AIG.

    And the fact that Paulson let it happen — then had some sort of change of heart when AIG a day later pulled Goldman to the edge …

    Well, the stuff of a Grisham thriller at least.

    There’a a discussion of Lehman rather parallel to the Times piece on AIG at:

    http://newcombat.net/Conversation/2008/09/27/derivative-obligations-oh-what-a-tangled-web-we-weave/

  6. doc holiday

    FYI: emocratic presidential candidate Barack Obama sought to score a quick post-debate advantage Saturday by traveling to two Republican-leaning states and accusing GOP rival John McCain of being out of touch with middle-class Americans.

    “We talked about the economy for 40 minutes and not once did Sen. McCain talk about the struggles middle-class families are having,” Obama told more than 26,000 people who stood out in the rain with him on the campus of the University of Mary Washington.

    Take that bitch (McCain)..

  7. Anonymous

    Paulson and his family may not have benefited financially from helping Goldman Sachs, solely due to its investment in Goldman. The 2006 tax return for the foundation says none of the Paulson family serving as trustees were paid salary, and discloses no manger as paid over $50k.

    However, we still need to check whether Paulson has any deferred compensation from Goldman that would be vaporized if Goldman went bankrupt.

  8. Anonymous

    Aaron Sorkin couldn’t have come up with so perfect a ending himself (West Wing).

    The bill will pass, almost intact, the stinking rat will live, and life will go, forever changed, as it was, before…

    Chin up…onward and upward my friends…

    the revolution was not televised…(or was it?)

  9. Anonymous

    from the NYTimes…

    Officials said there were still more than a dozen points of disagreement, though the centerpiece of the rescue effort remained intact: a plan for the government to purchase up to $700 billion in troubled assets from financial firms as a way to free their balance sheets of bad debts and to help restore a healthy flow of credit through the economy. It could become the largest government bailout in the nation’s history.

  10. Anonymous

    “… It could become the largest government bailout in the nation’s history….”

    or at least for this month.

  11. Anonymous

    “If the legislation passes, Mish and other bloggers should press for Congressional hearings on the bailouts and on all financial institutions involved with the CDOs, leverage, and derivatives that caused this crisis.”

    Isn’t the likelihood of bloggers being investigated for “spreading rumors” and short sellers for helping to take down our highly profitable banking institutions much higher?

  12. Anonymous

    calling McCain a bitch. gee what a classy guy. There is no respect for anything anymore.

    And if I might ask, what exactly have you done for your country?

    from what I hear, McCain bolstered the congressional Republicans to try and STOP THE BAILOUT. And then took the high road in the debate, when clearly who could have called out Barry for siding with Paulson and Bush. That’s the high road, my friend. That’s, John McCain.

    Greg

  13. Anonymous

    “That’s the high road, my friend. That’s, John McCain.”

    Barry could have ripped McCain a new one for being a puppet of Phil Gramm. Now McCain is going to get tough on Wall St. once it is popular to do so. He also is in favor of limiting executive compensation, but wasn’t Carly Fiorina campaigning with him and didn’t she receive a golden parachute? Didn’t McCain preach how rock solid the U.S. economy was a few months ago. Hasn’t McCain admitted many times he is economic illiterate (not that Barry is literate).

    The way I see it, Barry took the high road.

    But I guess McCain has that porn star hiding behind designer glasses who is also a finance genius besides popping out kids left and right and having a career to come to the rescue and take the high road.

  14. Jojo

    However, we still need to check whether Paulson has any deferred compensation from Goldman that would be vaporized if Goldman went bankrupt.

    Paulson is too smart for anything like that to be found.

    What Paulson did was buy a “deferred” position as a “consultant” to GS after he leaves (or is kicked out of) Washington, D.C. Maybe he’ll start a “consulting” company like Greenspan did? These boys have the game figured out forwards, backwards and sideways…

  15. Jojo

    Didn’t McCain preach how rock solid the U.S. economy was a few months ago. Hasn’t McCain admitted many times he is economic illiterate?

    I’ll call your attention to this Flash comic which covers your points above nicely:
    Fundamentals

  16. Danny

    I would take with a huge grain of salt articles by a woman who can’t tell the difference between a bank’s assets and it’s liabilities….

  17. Anonymous

    I would take with a huge grain of salt a comment from someone who does not know the proper use of “it’s” versus “its”.

  18. Anonymous

    Granted this looks– and probably is– a very terrible case of insiders dealing ahead of others, at which point i will so flagrantly accuse GS of this being its typical M.O., but I’m sure that other firms would have had as substantial losses. What about Pimco, a firm on whose behalf the Treasury seized Frannie(ok, wild accuation #2)?

    To me, the losses number doesn’t shock as much as the report that Blankfein was the sole Wall Streeter involved in “negotiations.” Those aren’t negotiations, those are investment strategy meetings– which reminds me of another folksy insider, Warren Buffett.

    Does Buffet do a Jamie Dimon– take on(and, of course, assign to the govt) some risk to bail out some banks and brokers? No, he was no where to be found while AIG imploded. When he does resurface, where does he rear his head? At Goldmans, getting a protected deal that exceeds what other Goldman investors were shown. And why? Here’s his quote when being interviewed on CNBC about his investment in Goldman:

    BUFFETT: Well, I would say this. If I didn’t think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week. I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal.

    There’s no wonder why Paulson was down on one knee, begging Senate Leader Pelosi to get her people to pass the bill. He’s got Goldman and Buffet to answer to…. errrr… I mean the American people… errr… well some American people… uhhhh… ok, a select few American people!!!!

    This really stinks to high heaven, but when hasn’t Wall Street had such a smell? It never favors the little guy.

  19. Francois

    “when hasn’t Wall Street had such a smell? It never favors the little guy.”

    To paraphrase DeGaulle:

    Wall Street has no friends, just interests.

  20. Richard Kline

    Wall Street has no interests, only positions.

    Crony capitalism has been symptomatic of the entire Subcrime Bubble, and has been the only vector of it still expanding over the last fourteen months. Paulson cannot but act as a misfeasant bagman for the industry, he knows naught elese. What’s sad is that so many of Congress’s genitalia are sewn to his lips as well. We didn’t vote for Paulson, but we did vote for some of them, and not wisely it would appear.

  21. a

    As much as I would like to be my usual humble self (!), I remember this thread from 16 Sept:

    http://www.nakedcapitalism.com/2008/09/fed-considering-lending-to-aig.html

    where it was written:

    “Goldman has helped the Fed appreciate the effects that an AIG collapse would have on financial institutions.”

    And I wrote in comments:

    “Translation: We (Goldman) would go bust.”

    I could be wrong, but it seems likely that we now know how Goldman avoided making losses like its fellow IBs last year. When it saw the writing on the wall, it promptly stuffed AIG by buying CDSs on all its toxic stuff.

  22. Yves Smith

    a,

    I distinctly remember your comment, and had wanted to feature it in the post above, but there isn’t any easy way to search comments and I didn’t recall which post it was.

    But you assuredly read the tea leaves correctly. Congrats.

  23. Danny

    Sorry, didn’t realise calling a woman a woman was sexist. I guess demanding that someone understand the difference between assets and liabilities is sexist too. I knew I shouldn’t have skipped those “sexism in the workplace” classes….

    This JOURNALIST has regularly shown that she simply doesn’t understand the vaguest basics of modern finance. Want to bet money that the 20bnUSD is face value of the assets insured?( ie that the actual value at risk is nowhere near that ). To be clear I am not talking about any depreciation or “real value”, merely if you are buying insurance on 1bnUSD of bonds it doesn’t cost 1bnUSD and I will bet this journalist doesn’t understand the difference – despite the fact that in the article GS clearly tried to explain it to her. Certainly she hasn’t shown any insight so far, just like she clearly doesn’t understand CDOS – from the description in this article.

    I certainly do not believe that a bankruptcy of AIG would cost Goldmans anything like 20bnUSD but in today’s environment even a couple of billion – more likely – could have been fatal.

    As for reasonable terms, given what happened to Lehmans when it held out for “reasonable terms”, the current cost of borrowing in the market and given that the investment that Buffet made is callable, I think it is a fairly reasonable safe than sorry strategy.

  24. Timothy

    If this report is true the timing of Buffet's investment in Goldmans stinks given the long history of links between AIGFP & Berkshire. Did Buffet's knowledge of Goldmans positions with AIGFP & the consequences of the rescue influence his decision. It at least deserves investigation.

  25. Richard Smith

    Danny,

    We know that GS hedged their subprime ABS via CDS (see their financial reports from Q4 last year, IIRC). We also know that by Q4 last year, that hedge was worth $10Bn. We can guess that AIG would have been a big writer of CDS for GS (what other counterparties would a big IB have chosen, back in early ’07?). We can also guess that GS still have a chunk of that ABS on their books. So yes, it’s not impossible that GS exposure to AIG was/is in the tens of billions of dollars.

    Note that no step in this chain of speculation obliges me to deny your claim that Gretchen M. can be something of an idiot sometimes.

  26. Anonymous

    You know what Congress needs to do? They need to give ALL the AIG executives nothing. Zero, Zilch, Nana. However you what to put, these criminal, unethical bastards need to suffer. Greed and consumption, that’s the token for the new capitalist system.

    Fuck ’em all. I’d let the company go down hard and let the “chips fall where they may”. Depression or not.
    We need a total economic collapse to straighten out this jaded system we have. Then maybe some of these sorry bastards will commit suicide so we won’t have to deal with their greed and glut any longer.

    And that would be just the beginning.

  27. Anonymous

    Paulson’s Great Depression:

    It is difficult to believe that Paulson is not intentionally destroying the world economy, since his company, Goldman Sachs has been so intimately involved in setting the stage for this fiasco.

    Goldman Sachs was involved in many sub-prime securitizations, and then was instrumental in setting up the ABX index, which Goldman then shorted to death after selling the index to its clients. By shorting the ABX index, Goldman not only made huge profits, but also eliminated all financing for real estate securities by spreading the notion that they had no resale value, because the value “indicated” by the ABX index was so low. The notion of “toxic securities” was sold to the world by Goldman and their confederates. Once new real estate lending was substantially restricted, a broad decline in real estate prices was a certainty, and recently adopted “mark-to-market” accounting rules forced lenders to report balance sheet losses even for loans that were current.

    Goldman also helped develop and sell complex securities, that have magnified the extent of the damage done. Collateralized debt obligations and credit default swaps can magnify any actual loss, since there are many more credit default swaps sold than actual loans made. A $1 actual loan loss can become $10 or more of losses to one side of the swap transaction, and $10 or more of gain to the other side of the transaction.

    Paulson has made the financial crisis much worse by his publicly stated intention to “punish” some companies. While Bear Stearns was “bailed out”, Lehman was allowed to fail. Fannie and Freddie were “rescued” in a way that arbitrarily removed $10 to $15 billion of capital from banks that had invested in the preferred stock, which then reduced those banks’ lending capacity by $100 billion, making the “credit crisis” much more severe than it was before the “rescue”. Instead of stopping a run on Washington Mutual by providing cash loans, Washington Mutual was unnecessarily liquidated, to demonstrate the urgency to authorize $700 billion to Paulson’s Treasury.

    Of course because of credit default swaps sold around the world, financial institutions’ losses on the Washington Mutual liquidation are vastly larger than the cost of keeping Washington Mutual open as an independent entity.

    Now we come to the $700 billion. If this is used SOLELY to purchase whole loans, then the institutions now holding those loans do not experience losses that get magnified by credit default securities, and the government is in a position to rework the loans with affordable payment terms, so that people keep their homes, and the government recovers its entire investment. If this money is used to purchase “downstream securities”, such as securitization interests, CDOs, and credit default swaps, then vastly more money is required, and homeowners still lose their homes.

    Why would Paulson seek the authority to buy “downstream securities”? Could it be that Goldman and its confederates hold these securities, and make vastly more money at taxpayer expense by selling these securities than by allowing people to remain in their homes, eliminating the defaults that make these credit default swaps so valuable to one side of the contract, and so costly to the other side of the contract, the US taxpayer, if Paulson gets his way.

  28. Ping

    Could someone PLEASE provide opinion…I read on Financial Sense site that hidden in the AIG rescue bill is a provision that a brokerage can ‘raid’ or borrow stocks from an individual’s account and in their name in order to alleviate brokerage’s liquidity pressures.

    Then if the firm collapses, your account becomes part of a bankrupcy.

    Any information on this?

    Thanks in advance.

  29. Raf

    Just out on the wires:

    Goldman Sachs to spend up to $50bln to acquire assets for failing banks. It plans to speak to US regulators to identify assets they could purchase.

    Wow.

    This could make Enron look like a tea party.

  30. Anonymous

    Yves, CNBC’s Michele Caruso-Cabrera reported Sunday night that she asked GS CEO Blankfein about the NYT article alleging $20B in AIG exposure. Blankfein replied that the figure was wrong.

    Of course, what can we believe from these execs anymore? On Friday, Fortis CEO said liquidity was fine. On Sunday, at 49% stake is seized by regulators.

  31. Yves Smith

    Boy, is that an interesting denial. Technically, all that means is the number wasn’t $20 billion. It could have been $19 billion or $21 billion or pick any other number and the statement would be true.

  32. Anonymous

    If GS is bankrupt, why is it hiring new people, like Paul Collins, who is making enough to purchase a new home in Greenwich for millions of $s? He was let go from Lehmans and now with GS? Does this make any sense? I thought the government aid was going to help the company, not hire new execs….

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