“Body Count From Goldman Actions Crosses Into Criminal Territory”

By Thomas Adams, at Paykin Krieg and Adams, LLP, and a former managing director at Ambac and FGIC.

Readers may have noticed Janet Tavakoli’s recent article at Huffington Post on Goldman Sachs and AIG. While much of it covers territory that Yves and I already wrote about previously, Ms. Tavakoli stops short of telling the whole story. While she is very knowledgeable of this market, perhaps she is unaware of the full extent of the wrongdoings Goldman committed by getting themselves paid on the AIG bailout. The Federal Reserve and the Treasury aided and abetted Goldman Sachs in committing financial and ethical crimes at an astounding level.

She notes, accurately, that Goldman used AIG to hedge its bet on CDO’s, either for itself with the Abacus deals, or for its clients, with the Davis Square deal. Had AIG failed, Goldman would have been on the hook for the losses: to execute the CDO with synthetic mortgage bonds, Goldman went “long” the CDS and then turned around and went “short” with AIG, effectively taking the risk of the mortgage bonds defaulting and then transferring it to AIG.

But Ms. Tavakoli fails to note that the collapse of the CDO bonds and the collapse of AIG were a deliberate strategy by Goldman. To realize on their bet against the housing market, Goldman needed the CDO bonds to collapse in value, which would cause AIG to be downgraded and lead to AIG posting collateral and Goldman getting paid for their bet. I am confident that Goldman Sachs did not reveal to AIG that they were betting on the housing market collapse.

To help hasten the housing market collapse, Goldman ran a huge mortgage lending and issuance program with low quality loans virtually designed to fail, including dozens of deals backed by completely toxic non-prime second lien loans (these loans help pump up the housing bubble and let borrower’s suck the equity out of their homes). In soliciting AIG’s insurance for the CDOs, Goldman was not disclosing that the transaction was highly speculative. Goldman was offering AAA, or even super AAA bonds. Goldman designed and sold these bonds and purchased a rating from the rating agencies that represented the risk to be AAA. In fact, the bonds did not provide real protection, despite their AAA rating, and when the housing market turned down, the AAA CDO bonds collapsed in value exactly as they were designed to do.

Goldman never wanted these CDOs to succeed – their bet depended on them failing. This is why they used AIG as their insurer – AIG posted collateral, which enabled Goldman to still get paid even when AIG inevitably got downgraded for taking on such toxic deals.

Goldman needed AIG’s insurance to complete this bet and get them off risk for the CDO they created. Hedge fund manager John Paulson and others used the same strategy. Goldman’s bet was risky because they depended on AIG being solvent in order to get paid. Other parties who made similar betters, but relied on the other bond insurers to pay them off ended up getting hurt when the bond insurers got downgraded and the trade did not pay off, as well.

Months before AIG received its bailout, Goldman was well aware of the risk that insurers would pay less the full amount of the CDOs – Goldman was advising FGIC in its restructuring efforts and FGIC negotiated a CDO commutation for ten cents on the dollar. Goldman mitigated the risk of downgrade by dealing exclusively with AIG, which was required to post collateral in the event of a downgrade.

Goldman also misled shareholders and investors by proclaiming that they were not exposed to toxic CDOs because they were hedged with AIG, even as the bond insurers (AIG’s direct competitors in the CDO market), were getting downgraded.

It is bad enough that the creators and sellers of the CDOs, such as Goldman, BlackRock and TCW, have not been held to account for selling worthless bonds while representing them to be of AAA quality. Most of these influential power brokers have succeeded in blaming the victim (investors and insurers who believed their lies about the quality of the bonds) for the financial crisis to distract from their own questionable activities.

Goldman goes quite a few steps further into despicable territory with their other actions and the body count from Goldman’s actions is so enormous that it crosses over into criminal territory, morally and legally, by getting taxpayer money for their predation.

Goldman made a huge bet that the housing market would collapse. They profited, on paper, from the tremendous pain suffered by homeowners, investors and taxpayers across the country, they helped make it worse. Their bet only succeeded because they were able to force the government into bailing out AIG.
In addition, the Federal Reserve and the Treasury, by helping Goldman Sachs to profit from homeowner and investor losses, conceal their misrepresentations to shareholders, destroy insurers by stuffing them with toxic bonds that they marketed as AAA, and escape from the consequences of making a risky bet, committed a grave injustice and, very likely, financial crimes. Since the bailout, they have actively concealed their actions and mislead the public. Goldman, the Fed and the Treasury should be investigated for fraud, securities law violations and misappropriation of taxpayer funds. Based on what I have laid out here, I am confident that they will find ample evidence.

Update 12/23, 1:00 PM: Yves here. Some readers in comments are dismissing this post as mere Goldman bashing, when its behavior was far more pernicious. I was remiss in not adding a critical bit of Tom’s argument, which he provided in a separate post:

While the subprime deals and CDOs were obviously going bad, an argument was made by many people at the time that the aggressive mark downs by AIG acelerated the death spiral for the market. It is pretty clear, here and elsewhere, that Goldman was the one that initiated the mark downs of collateral value. it would be interesting to explore this all the way through. Though not discussed in this article, Goldman shorted subprime through the Abacus deals, and perhaps elsewhere. this gave them an incentive to force mark downs. the intermediation deals described in the article, combined with AIG’s collateral posting, gave them another incentive to be agressive with mark downs. they were acting like they wanted to grab the money before anyone else could get their hands on it. this would have raised some issues in an AIGFP bankruptcy. (note – Hank Greenberg suggested that this was going on in his october 2008 testimony but there was a chorus of attacks on him for being a crook and unreliable, thanks to his problems with Spitzer.)

So here we have the pattern:

1. Goldman creates or sells $23 billion (or more) of CDOs and stuffs them into AIG.

2. Goldman proclaims to the world they have no exposure to CDOs and warns that banks and insurers with CDO exposure will get downgraded.

3. Goldman initiates the mark downs of CDOs with AIG and others, acelerating the market’s downward spiral.

4. Huge mark to market losses lead insurer and bank credit to freeze, short term markets to lock up, ABCP to collapse.

5. AIG posts as much collateral as it has to Goldman, who has more aggressively marked down the exposure.

6. Bond insurers are downgraded, banks begin commutations with them.

7. AIG fails, Fed steps in, Goldman gets bailed out at par.

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  1. attempter

    So to recap:

    1. GS infiltrates its cadres into high government positions to position itself to pull off crimes against humanity.

    2. In this case, it aggressively goosed the subprime bubble, intending all along that the bubble would collapse. (And extracting any rents it could along the way, profiting off intentionally inflicted misery any way it could.)

    3. Meanwhile the real action was to securitize these toxic mortgages and buy a AAA rating from the criminally corrupt ratings agencies.

    4. Then intentionally place all its hedging eggs in one AIG basket, thereby concentrating the imperative for the government to pay off the whole bet with money stolen from the taxpayer. (Bailing out just one AIG was easier than that plus several monolines.) [Of course I saw that the author of this piece is from the monolines. But the case still looks clear enough, based on other things I’ve read.]

    I think that’s clear enough.

    Is there any one website dedicated to assembling the evidence for this and other crimes, and drawing up what should be the indictments, for GS and the other big banks?

    1. jake chase

      Strip the outrage from this post and what is left: Goldman understood the ratings were bogus. What was AIG smoking? The crime in all this is governmental failure. A government not composed exclusively of corrupt ignoramuses could have allowed AIG to fail. Where would GS have been then?

      Experts have been warning about synthetic CDOs since at least 2002. All participants in this game should be locked up and stripped naked: bankers, regulators, rating agencies, insurers, Congressmen and Senators, Presidents and their henchmen. It would take a revolution to account properly for the corruption of this episode. You guys think GS should be held accountable for MISLEADING AIG? We have just spent 15 months emptying the Treasury and engorging the Fed with worthless trash to REWARD organized crime. To my knowledge, not one commentator has even whispered the word RICO the entire time.

      1. snarkman

        Kinda hard to be warning about synthetic CDOs since 2002 when the ISDA protocol for CDS on mortgages wasn’t even created till mid 2005. How many other phony facts do you have up your sleeve?

        1. jake chase

          This is Goldman’s crime as I understand it:

          1. It originated loans to borrowers with no chance of servicing them. Lets call those loans ‘Subprime’.

          2. It created synthetic CDOs based upon Subprime Loans it did not own. (Anyone could have done this. All you needed was a list and some computer software) It peddled these ‘securities’ to Yield Hogs who may or may not have understood they were writing insurance on one tranche or another of the synthetic portfolios. The YHs received a ‘premium’ which they thought of as a return. The value of the security would fluctuate depending upon events in the subprime market, all as spelled out in endless legalese which (presumably) somebody in the YH organization read, before saying. ‘Yup, sounds good to me.’

          3. To create yield enhancement for the YHs, they were allowed to borrow against these ‘securities’, just as an ordinary investor with a margin account borrows from his broker when he knows Yahoo can only go up.

          4. In this way, by selling securities (most of which were rated AAA by our illustrious rating agencies, whose pronouncements determine those ‘securities’ in which regulated institutions are permitted to speculate) exempt from SEC registration on account of the sophisticated character of the buyers, Goldman itself went ‘short’ the US subprime mortgage market.

          5. According to our guest author, Yves and others, this action by Goldman somehow amounts to criminal mischief.

          Was Goldman the only bank simultaneously originating subprime mortgages and selling CDOs which would depreciate with subprime deterioration?

          Did Goldman misrepresent the quality of the merchandise or is that chargeable to the rating agencies?

          Did Goldman lowball the buyers as a market maker when they woke up and attempted to unload these things which no one should have ever bought in the first place? What made the YHs think they would have a market when the $hit hit the fan?

          Did Goldman uniquely lose its right to buy credit insurance on securities it did not own? No, that Synthetic Credit Default game has been going on full bore since it was created by geniuses at J.P. Morgan during a previous incarnation.

          Where are the buyers of the CDOs in all this? In general, we are talking about institutions charged with managing other people’s money: pension funds, insurance companies, corporations, municipalities. Are these people complete idiots? Was none of them familiar with the literature dating back to the late nineties. Frank Partnoy, Satyajit Das, Charles Morris, many others, have been writing about derivative scams which date back at least to 1991. They are all the same. The risk is always magnified by leverage and the sell side is always a con. This is the ‘financial innovation’ about which Dr. Greekspeak and Larry Summers cannot wait to wax eloquent. (Incidentally, Larry, how is the Harvard endowment doing?)

          There are several major crimes in all this, notably:

          failure by the US Congress and bank regulators to rein in financial market gambling while hiding behind a bogus ideology;

          bailing out AIG for the benefit of Goldman and foreign banks;

          flooding the failing banks with money while preserving the privileges of bank executives and creditors and making no changes whatsoever in banking practices;

          disguising the engorgement of the Fed with worthless mortgage paper;

          refusing to initiate civil or criminal proceedings against any perpetrator;

          pretending that bailing out the bankers was done to support Main Street lending

          manipulating the stock market and claiming that rising stock prices presage a recovery in the real economy.

          All of these crimes are chargeable to elected and appointed officials of the last two Administrations. It seems to me that Goldman has only done what every other bank has tried to do. Game the system by taking advantage of corrupt and inept governmental supervision and oversight. Unless we solve that problem, coming down on Goldman will accomplish nothing, although I am not suggesting one should not enjoy the eventuality if it occurs. These days, one must enjoy what one can.

  2. maff

    What are the odds of them facing a jury? If you open up that can of worms you never know you will find eating dirt.

  3. Sarah

    You clearly do not understand how the structured market worked.

    The likes of AIG (and yes AMBAC as well) were fighting to source senior CDO risk… they loved it as it paid a higher return than other AAA risk available. Even though they had quants groups analyzing the risk… they never really wondered why?

    If they were allocated back on an investment, they would threaten to not deal with the investment bank anymore… this part of the story is never told.

    And please, do not hide behind the AAA rating. It is poor.

    Rating disclosures will always tell you that “a rating is not a recommendation to buy or sell” etc. If you (as an insurance company) are taking on say USD 500m in one transaction… pls do your homework first… rather than just looking at the spread and trying to get as much exposure as you can and then blame it on the rating agencies. (admittedly, the agencies completely underestimated the correlation but you should have done your own analysis as the investor!)

    1. Robespierre

      So what you are saying is that GS acted above board and legally? So all that lobbying money they spend buying (sorry supporting) elected officials, all that rotation into key government regulatory agencies they do because as the CEO said is all about “God’s work”. Pleazeeeee. All these “players” should be investigated by Homeland security for financial terrorism

    2. Richard Smith


      Very interesting points but I can’t quite see where you are going with them – it almost reads as if you agree with Tom in the end; that can’t be right. Could you spell it out a bit more?

      1. M

        Sarah is pointing out that an MD at Ambac does not understand the structured market. And that is worrying. As they were involved heavily. Luckily they have already proven her point, and the world survived. Same with AIG, they pretended to know what they were doing but they clearly did not.

        So her point is: the mistakes were made by Ambac and AIG, who thought they were scooping up the free money and had nothing to worry about. Any time they would have done their homework, would have looked slightly deeper into the matter, would have done even a very basic evaluation of their strategy, they could have stopped it all and nothing like this would have happened. AIG and Ambac had dollar signs in their eyes, and that was leading them. No conspiracy theory, as the above, can ever hide that.

        1. Richard Smith

          You seem to be agreeing with Tom Adams as well. Can you see how what you have written could give that impression?

          1. i on the ball patriot

            They don’t seem to be agreeing to me.

            Sarah and M are playing the ‘blame the mark homeowner game’. Where the mark homeowner, relying on trust of established and supposedly honest agencies, and urged on by the state propaganda machine, relaxes his/her guard and then buys a home without doing due diligence (next to impossible anyway), and thereby become the cause of the big con bubble and financial crisis. And so, similarly, it is AIG’s fault for not being bright enough to see through the scam.

            GS, FED, Treasury, Central banks, BIS, US GOV, etc., have all been hijacked through gross deception and corruption by the wealthy ruling elite. This very well planned and orchestrated global financial crisis has more to do with; consolidation of wealth, decimating the high resource consuming global middle class, creating perpetual conflict in the masses, and geopolitical gain, than it does with all of the deflective blaming bullshit. Control now trumps profit, vanilla greed has been trashed by pernicious greed.

            Deception is the strongest political force on the planet.

    3. Yves Smith Post author


      With all due respect, can you read? Tom has spent 20 years in the structured credit market and was running the structured credit business at FGIC. And you are wrong re AIG falling all over itself in 2006. It was pulling back, as were at least some of the monolines, and the derivatives salesmen were hugely aggressive, all over the various insurers. I suggest you not impugn someone who had a seat at the table when you clearly did not. Merrill, the biggest originator in 2006, wound up with $40 billion on CDOs on its balance sheet, many of which were NOT INSURED. Origination had outstripped the willingness to insure, and Merrill was clearly betting that this was temporary, they’d be able to get a guarantee.

      This is not as black and white as you suggest. While the monolines clearly misjudged the risk, badly, to say they were all keen in 2006 and 2007 is not correct. Similarly, you miss the critical bit, which is when Goldman went short, it not only started aggressively talking down CDOs and all the firms with exposures, it was the firm that initiated the markdowns for collateral posting purposes. They triggered the death spiral and did everything they could to intensify its amplitude.

      1. nivedita

        Yves, that’s a very poor response. Where does Sarah talk about 2006? AIG was definitely very aggressive in 2005, and that was the problem.

        In fact, the timing is clearly all wrong here. The vast majority of the CDS sold by AIG was through 2005, which was before GS started shorting the market. So one big peg of the argument in this post is simply wrong.

        1. Yves Smith Post author


          First, the claim that AIG quit insuring subprime appears to come only from Joe Cassano (I have seen no other source) who has told other lies to investors in conference calls. So his credibility is not high. Second. AIG DID insure 2006 CDOs, we have identified several (one an Abacus deal, BTW). Third, there was not enough monoline capacity to insure 2006 CDO issuance, which was double 2005 levels. even allowing for Merrill and some others holding some uninsured inventory, particularly with the monolines getting selectively fussy (which they did, but in retrospect, not fussy enough). These deals were 75-90% AAA, and getting that placed (or at most banks, getting the risk police to allow them to hold it) depended on third party guarantee. This was particularly true starting in 2005, when demand from traditional buyers of AAA CDOS like pension funds (who did NOT use monoline guarantees that much) started to fade as the structures got riskier.

        2. borker

          2006 is very germane. Before subprime went bad, many in the pool would refi quickly. You’d have collateral substitution. 2004-5 mortgages were replaced with 2006-7 paper.

      2. jake chase

        So, you are suggesting they are criminals for taking down the marks? Their obligation was to respect the fantasy? Is this your idea of how trading works? Anyone in this game must decide when the emperor has no clothes. The crime is that our elected and appointed politicians enabled the game until the outcome was a certainty. Are you suggesting CDS market would not have cratered in the absence of Goldman’s actions?

        1. Richard Smith

          jake, GS is just the starting point, and it’s a good one, but the ripples spread out in just the directions you want – towards regulators and politicians. Gotta start somewhere…

        2. borker

          GS and others were selling the trades they were shorting to customers. If this were regulated in any way, this would be fraud, either insurance fraud or an SEC violation. This makes selling crap dot com stocks look like choirboy stuff. Kinda amazing you don’t get it, or pretend to act like you don’t get it.

      3. Sarah

        It is not because s/o spends a long time (20 years) working in an industry that he / she becomes an expert unfortunately. I regularly meet very senior people at large institutional investors with multi-billion CDO exposures and they sadly do not understand the basics of their investments.

        One last comment on the article: Tom complains about aggressive marking down by GS. Unlike some investors, GS *were* doing their homework and understood the value of these positions. If other banks were marking the positions higher, they were just lagging. We know now that those positions are worth very little. How can you blame GS for marking positions at appropriate low values? Maybe because this was inconvenient for Tom at the time as the counterparty?

        And yes, of course they were managing their counterparty exposures and asking counterparties to post margin when appropriate. Again, nothing wrong with that. You somehow make it look as “unacceptable behaviour”… it is called “Risk management” … we would not be in this position if everyone had done more of this!!!

        (For the record… i do not work (or worked) at GS… I actually find them often arrogant but that’s besides the point… they work hard and know what they are talking about…)

        1. Richard Smith

          GS? No, not you. Tucked up next to BoA in Canary Wharf, perchance? Hope you stick around, plenty to listen to here.

        2. run75441


          I am the manufacturing and Six Sigma dude on this site so my understanding of finance is somewhat limited; although since W$ took us all cliff diving with the advent of CDO/MBS, CDS, and flawed ratings, I have read and learned quite a bit.

          Sachs with full knowledge creates a product that has a high risk to it. It creates it knowing it can achieve a substantial profit to it, get it rated as a lower risk product, and take out insurance (CDS?) on it (through AIG) transferring the risk if it fails. AIG on the other hand specializes in high risks and issues CDS for “pennies on the dollar” (which appeared to be common knowledge in the industry the same as the flawed ratings) insuring Sach’s CDOs (which were tranched and which appears to be an industry standard at the time).

          You have admitted that Sachs is highly intelligent and knows what they are doing. Sachs constructed CDOs of varying degrees of an extremely speculative product that in a more regulated period would “never’ have been created, secured a good rating, and then sold the risk with the knowledge that if the market collapsed they would be covered . . . covered in any event. Maybe it is not illegal to sell a “potentially” bad product; but, I would certainly question the ethics of it. I would also ask the question as to “why” Sachs deserves 100% on the dollar in payback for it’s bad product given it was insured for pennies on the dollar? Sachs knew what they were doing and they were aware, full more aware of the issues, then many others.

          1. Sarah

            @ run75441
            I see what you are saying. But let’s not forget that GS was not selling these investments to moms & pops in Florida. (unlike some of its competitors by the way)

            GS is a trading house and they dealt with the largest insurance companies in the WORLD who have large quantitative teams to analyse the risk. In addition, Yves mentions they have guys like Tom with 20 years of experience in the structured credit business (!).

            So expressions by Tom like “destroy insurers by stuffing them with toxic bonds” are disappointing. He was experienced and responsible at FGIC and AMBAC for taking on billions of this exposure.

            If the monolines did not understand the product, or did not like the risk… they should have passed on the investment. As “@M” puts it nicely above: “they had $ signs in their eyes…”.

        3. Tom

          In your earlier post you suggested that I did not know what I was talking about. Nice, and typical of the way bankers respond to anyone daring to question their behavior. As Yves kindly pointed out, I do have extensive experience in directly in this area. As I have admitted in prior posts, I made mistakes in the deals that I worked on that were costly. This was a painful realization. However, that is also how I learned much more about the actions and consequences of the transactions. I am willing to admit my mistakes and try to do something about them. Goldman has refused to concede that they made any mistakes and has probably engaged in a fair degree of covering up of the mistakes and the AIG bailout may be implicated in that work. Goldman employees would be better off redirecting their anger away from the people explaining what they did and focusing it on the people at their firm who have gotten them in this mess. Had the company admitted their mistakes and done something about them earlier, they probably would not be facing this PR disaster. There are plenty of people at Goldman who had nothing to do with this business. Why are they so mad at the people who expose what went on in a series of ugly transactions, rather than at the ones who executed the transactions?

          1. Sarah

            Tom, apologies, I’ve never read any of your prior posts where you admit your mistakes. I just came across this post through Twitter and it seemed like you were only pointing fingers at everyone involved except yourself (Banks / Rating agencies / Government / SEC).

            As I said above, expressions like “destroy insurers by stuffing them with toxic bonds” are disappointing and should be nuanced.


        4. run75441


          Thank you for your reply.

          The same logic you have applied to AIG should have been applied to Sachs for choosing AIG, an insurer who insured Sachs investments for pennies of the dollar then. If AIG can be faulted for having “dollars-in-the-sky-eyes” then Sachs should be forced to accept the consequences of selecting an insurer who did not have enough collateral in reserve to cover liabilities with the same “dollars-in-the sky-eyes.”. Sachs, Deuschte, etc. received 100% on the dollar for AIG CDS insured Sachs CDO. None of these investment firms were forced to face the consequences of selecting AIG as the insurer.

          I am going to “assume” W$ pretty much knows the financial standings of each other and who is doing what in the market place. One attorney for AIG once suggested to me that I might take a position with AIG as its position was guaranted by $trillions in assets and not much was going to happen to it. How does one measure liabilities on W$ against assets and miss the fact that most of it is just paper with no monetary backing? There is a component missing to all of this that is not coming across.

          While AIG was very willing to accept the risk and a continuing flow of income. Sachs was more than willing to continue to package more and higher risk investments into CDO and transfer the risk to AIG. Was there not a point where Sachs said; AIG is a taking on too much risk and we must go elsewhere? Why would Sachs continue to keep loading up AIG? (Here I am assuming Sachs is inteligent enough to know what AIG was doing.)

          It would “appear” that Sachs knew AIG would never be allowed to fail because of its size and the impact its failure would have globally. Maybe not illegal unless they forced the call for collateral and then whey would they do that if they didn’t know the gov would rescue AIG? Too many loose ends here in my dialogue and in unanswered questions Sarah.

          1. Sarah

            Good point but Blankfein at GS claims that their CPT exposure to AIG was entirely hedged.

            Doing “secondary wraps” was very common within top-tier banks / hedge funds in 2006-2007. So the “first layer” of insurance is the CDS with say AIG to hedge the CDO risk. Then, as you correctly point out, they still have the exposure to the counterparty so they “buy insurance on their insurer”… i.e. buy default protection on AIG or AMBAC.

            As these insurance companies had AAA ratings and were generally perceived as solid by the market, this protection was cheap and good value for money.

  4. The Telecrap Urinal

    Goldman Sachs and Hank Paulson are scum. They are Financial Terrorists. They have done more to hurt America than 10 9/11’s combined.

    What has been done to the US Economy is a Crime Against Humanity and these Financial Terrorists should be tried in The Hague.

    And Obama with his promises of change and hope has been a major bust. He, along with Geithner, have aided and abetted these Financial Terrorists, making them complicit in this crime.

    Unless the Citizens of the USA rise up and rid themselves of the status-quo political paradigm, there will be no more middle class and the USA will be well on its way to 3rd World Country Status.

  5. onwee

    The trouble with conspiracy theories is that they require far more intellect, control and discretion than exists in humans. Goldman had a giant plan to destroy the financial system, crush their stock, lose their status as an investment bank and go to the brink, knowing all along that they would be bailed out by whomever, whenever? Please. Hedging is not betting, and even GS is not that smart and coordinated.

    1. aet

      Yeah, Onwee: Goldman, Sachs was just lucky.
      Unlike every one else in the USA, who has to depend upon their own hard work, and the competence of their elected representatives.

      1. M

        Not just lucky. They worked hard and worked out a strategy that made sure they could only loose a certain amount at maximum. That is proper diligence, that is what hedging is for, that is what a good business plan does. Unfortunately the folks of AIG and Ambac and thelike did not have a sound strategy, and piled up the risk as if it never could go wrong (and that is what they believed!) and that is what caused all the problems. Because as Sarah says, if they would ever have seen things coming and would have said: ehh, this is getting to one-sided, we cannot take on more, the whole thing would have stopped, regardless of whatever Goldman wanted to happen.
        Show me the email from Goldman to AIG that says, you should take on more risk as it is risk free anyway. That will prove your point. Not Goldmans strategy of hedging, because thank God at least some people had the sense to realize that the bubble had to blow up sometime.

        1. Robespierre

          So please do tell since as you said: “They worked hard and worked out a strategy that made sure they could only loose a certain amount at maximum” why did they needed to issue debt fully guarantied by tax payers $$$$? Why did they needed to become a bank in record time to get to the 0% all you can eat Fed window? Please explain

          1. M

            They definitely needed to do that, and it clearly shows that even their strategy was not 100% foolproof. However, show me any bank that did not do that, when it seemed there was no other option left. There were just a few banks in the world that could completely stay away from government intervention.

            However, on the specific issue of the housing market, they were hedged and that was smart. The fact that to many people were wrong, and therefore the whole system collapsed and was about to take them with them, had nothing to do with their strategy on the structured markets. Obviously in their strategy they did not count on the collapse of the whole system, so that was a missing point and that is why they had to issue under government protection, take TARP and use the zero funding. I have no issue if you criticize them on that. But to say they had planned it all ahead, collapse the american system to benefit from it, is well, ehm, far fetched to say the least.

        2. Yves Smith Post author


          See this comment from above, Goldman was NOT a neutral actor who merely made a good trading bet, they took aggressive action to make sure their bet worked out. What they did amounted to a bear raid, which is illegal when done in the stock market.

          While the monolines clearly misjudged the risk, badly, to say they were all keen in 2006 and 2007 is not correct. Similarly, you miss the critical bit, which is when Goldman went short, it not only started aggressively talking down CDOs and all the firms with exposures, it was the firm that initiated the markdowns for collateral posting purposes. They triggered the death spiral and did everything they could to intensify its amplitude.

  6. Michaelc

    Or maybe they were just too clever by half.
    GS dealt with AIG because the collateral agreements were favorable to GS. Goldman expected to have collected enough cash from AIG as their ratings declined in an orderly manner, that by the time bankruptcy was imminent GS would be covered.
    We find it hard to imagine GS could miscalculate, so the idea that this was a well constructed conspiracy from day one is appealing. The simpler, and I think more likely, scenario is that they did anticipate and abet the meltdown (through their control of the marks on the CDOs/CDS). But I think the initial plan was to bleed the fools at AIG slowly, not force them into bankruptcy. That would have been a stupid and exceedingly risky plan when the CDOs were put together and GS doesn’t do stupid or suicidal. They miscalculated and underestimated AIGs vulnerability and the speed of the collapse.
    They are also accomplished opportunists, so when it became apparent the Fed and Treasury had no stomach for dealing with a collapse of AIG, they exploited the Gov’ts weakness, and could claim that they had no significant exposure to AIG, since they had collected the cash and AIG was so completely screwed the gov’t would cover.
    If AIGs problems were limited to the CDS, it’s conceivable that GS could have gotten screwed. But AIGs sec lending disaster and plummeting value tipped the scales and forced the gov’ts hand, and GS jumped at the opportunity.
    We give GS too much credit for anticipating all cotingencies. They blew this one but were able to spin it as prudent risk management only because AIG was more more inept than even they realized.
    They should have to pay though. The collateral calls that they controlled should not have gone unchallenged by the govt and they should pay a penalty for that dirty dealing. At this point the gov’t should just admit that they were out played by GS (shame on the Govt, but they were out of their depth). Now is time to disclose how they were out played (shame on GS) and negotiate (or at least initiate) a settlement, ideally before GS pays their 09 bonuses.

    1. Yves Smith Post author


      I neglected to link back to or extract a section from Tom’s earlier post, where he sets forth the sequence of actions Goldman took to assure its short bet worked out.

      Goldman was NOT a neutral party who merely made a good trading bet, they took aggressive action to make sure their bet worked out. What they did amounted to a bear raid, which is illegal when done in the stock market.

      While the monolines clearly misjudged the risk, badly, to say they were all keen in 2006 and 2007 is not correct. Similarly, you miss the critical bit, which is when Goldman went short, it not only started aggressively talking down CDOs and all the firms with exposures, it was the firm that initiated the markdowns for collateral posting purposes. They triggered the death spiral and did everything they could to intensify its amplitude.

      1. Doug Terpstra

        Why has there been no official transparent post-mortem autopsy on the collapse at its pivotal hinge point AIG? Is it too recent to risk exposing legitimate business confidence(s) or proprietary trade secrets? It seems AIG as Spitzer, you, and others demanded should be subjected to an intrusive forensic audit on behalf of taxpayers. That would finally put to rest all this wild speculation about Government Sacks (or not).

    2. Richard Smith

      michaelc, read the post not the comments, (one of which is from a real bozo of a GS employee in London who usually works on puffing stocks to the buy side, and who doesn’t understand this Web thingie nearly well enough to be busting the company’s risk policy like that…and who will not get served up to the risk dept, as merited, because there are some big softies about).

      Tom isn’t claiming that GS lined the bailout up in advance, just that GS found a non-capital-intensive way to bet massively on CDO prices collapsing, largely by exploiting the idiocy of their not-exactly-best friends at AIG.

      You are right, it may indeed be that GS was being too clever by half, with AIG in the end going bust too quickly for GS’s hedges against that well anticipated eventuality to fucntion as intended.

      *That* is where the bailout and GS’s connections would come in – a spot of last minute improvisation to extricate GS from a pickle of their own making. Part cynical trading strategy, part cockup, not a conspiracy at all.

  7. LeeAnne

    I wanna be the first to predict here and now for the New Year that the word ‘bonus’ will be changed and mandated for general and official use by The New York Times Manual of Style and Usage.

    I’d try for some examples myself but haven’t nearly the imagination for anything as brilliant as the change from ‘toxic’ to ‘legacy’ assets, signaling IMHO that a new standard has arrived for changing words from their humanly evolved roots to the ‘politically correct,’ consistent with New York Times’ standards of course. Call it neo Orwellian; that is, to disappear the idea along with the word, the word must be changed in an unrecognizable way that is capable of making the its designate utterly ‘disappear.’

    1. Robert

      Did they actually change the semantical web by renaming “toxic” as “legacy”? That is pretty small minded, but I bet they go around thinking that they are above the crowd in intelligence and ethical discipline while really letting the important people (the young and the creative) down during this time.

      All crime catches up some day – the poor do say so, that the Divine will make the rich and the ones chosen to rule pay some day.

      At least that is what they say.


    2. Doug Terpstra

      Brilliant prediction, but sorry, a tad late. GS had already renamed bonuses as “discretionary compensation” last month according to NY Daily News.

      I suppose the following were tested and rejected as either too high brow and/or blue-collar: ‘special endowment’, ‘exceptional award’, ‘unique contribution’, ‘involuntary donation’, ‘fiscal option’, ‘gratuity’, …

      1. leeAnne

        Thank you Doug. OK, but will we be permitted to call it bonuses if we wish? Or will the language police correct us.

        How about ‘bubble;’ that looks about done, cooked, and ready for neoOrwellian treatment –lots of ordinary investors catching on and mindlessly repeating, ‘I’m afraid of another bubble’.

        On that note, on the #7 train the other night, practically empty, coming back to Manhattan I overheard two guys dressed as workers speaking Spanglish who, sitting and talking across the aisle, one explained to the other that the Federal Reserve isn’t a federal agency, it’s a private bank, and they rule the world -or want to rule it.

        They’re catching on.

  8. Dave

    Amen! That is to say, “for ever and ever” will Wall Street be looking for the next ponzi scheme.

    The difference between Madoff and Goldman? Legal vs illegal? I doubt it.

    Game plan for a banana republic: Create a legal way to rip off a country by paying off the right people to call “legal” was is in fact, not; pump; and dump; buy cover; take the money and run.


    REPLY TO, M, Robespierre AND ATTEMPTER
    You two must be insiders as you can be nothing other…Actuaries are paid to determine the odds hedged and it is not wonder Actuaries are in such high demand and have been for the past ten years and will be until our country is taken back from the ONE PARTY, that controls it, Corporate America. I guess you two plants think we are so stupid as to not know who owns the INSURANCE INDUSTRY……BBBBBBAAANNNKKKKSSSS so I thought…..HMMM Maybe you two know something other…..
    To assert the Golden Sachs over there at GS are not so golden is pure bs and propaganda and you two are just what this country is made of…so keep eating Ms. Smiths Apple Pie and watching Survivor while attempter and I can dedicate one website to assembling the evidence for this and other ilks crimes, say oh, CITI AND LEHMAN, and drawing up what should be the indictments, for GS and the other big banks!!!!!!!! Yes, and let there be piss on your parade and pooh on your door step!

  10. BigBadBank

    I don’t understand this post; it seems like rather confused Squid-bashing and attempted ass-covering by a ex-director of a monoline to me. For example:

    ‘Had AIG failed, Goldman would have been on the hook for the losses: to execute the CDO with synthetic mortgage bonds, Goldman went “long” the CDS and then turned around and went “short” with AIG, effectively taking the risk of the mortgage bonds defaulting and then transferring it to AIG.’

    That makes no sense: when AIG sold the CDS to GS the risk of the CDO defaulting went to AIG. Subsequently shorting AIG is hedging a different risk (ie that AIG won’t pay out on the risk it has acquired by issuing the CDS).

    Frankly the monolines and AIG were idiots who should never have relied on the ratings agencies.

  11. Jenahill


    This is the best present yet. My spouse quotes Balzac, “Behind every great forutne or is a great crime.”, I find the French to English translation even better, “The secret of a great success for which you are at a loss to account is a crime that has never been found out, because it was properly executed.”
    It is my feeling these crimes were properly executed, and the responsible parties may never be held to account. This is an ongoing theme in our culture,we scapegoat those with less power such as women, minorities and the poor while the privileged walk away unscathed. The powerful elite have learned to repeat the patterns of the vast wealth transfers in history. They are bright in that respect.
    I just love this blog and although I’m no financial expert, the accessible and accurate information available here has helped me understand just how badly we’ve been screwed. Yes as I’ve been saying for months, nay years, “When 10% of the people have 90% of the money, we are all workers.” (This is just the best way to demonstrate to regular folk who is really making the rules).
    Happy Holidays and all here’s to bringing down the perps!

  12. Gaucho

    I don’t really believe in conspiracy theories. GS took the right side of the bet and the insurers took the wrong one. nobody “forced” the insurers to take housing risk in the same way that nobody “forced” buyers of CDOs to do their silly transactions. People had a chance to perform their own due diligence and come to a conclusion about the transaction offered. I find appalling that everyone is blaming bankers but nobody is blaming all the silly institutional investors and hedge funds that recklessly bought these products seeking higher yields.
    that said, GS took a bet with the wrong insurer and they should have paid for their mistake. but what can you expect when the Chairman of the Fed, for sure one of the most powerful people on Earth, claims that he didn’t have any leverage to negotiate a better deal. Maybe what he should say is that he didn’t understand what was really happening and that he acted in panic.

    1. Yves Smith Post author


      See my comments above. Goldman was NOT a neutral party, it took VERY active steps to drive the market into a death spiral and intensify its amplitude.

  13. Jerry

    Take a look at this from a worldview instead of from the USA view….This year sovereign are beginning to default…Who is behind ALL of this…not just some big guys in the US…Things that are happening are astronomical! It is my theory that drug money has taken over the financials, politics, etc. If Afganistan produces 90% of the opium, where is the money going???? I think the terriorist are using the jhiadist to turn things into a world order in which populations will be easily controlled by a transaction based economy where there is no “money” and that if you don’t agree with the world order ideas, you simply will not be able to buy or sell and this will be your demise. We are getting set up for something really big. Time to start asking the real questions…who are you, what are you doing here, and where are you going???

    1. dr feelgod

      Dude, So what if the Haldol makes your tongue flick around? You gotta get back on it. Now it’s true that the banks slurped up some drug pelf to tide them over their little bankrupt patch (the UN, alone among institutions, says so, so I think they’re not in on it.) But why would drug lords, having successfully laundered many billions, want to do away with money? They have earned respectability now. Their kids can marry Bush kids like tobacco kingpins do.

      1. Jerry

        Your right they have all the money they need….now comes the POWER play and not just the US….it’s called world order where all decisions and control eminates from…so are you a person who says they love their family…if you are staving, what would you “sell” them for drugs, sex, food? You won’t get something for nothing when those guys take over….

        1. Jerry

          Sorry just wanted to add one other example, the other day a couple were told they were required to give up what they believed or their children would be hanged….they refused so their children were hung…then the couple was ran over by a roller that packs down asphalt….

          1. dr feelgood

            Hmm, let’s see: a pluralistic World Order of rivalrous rich and poor, developed and less developed, secular and theocratic independent, sovereign nations; or, a monolithic national oligarchy. I’ll take the frickin New World Order any day. It was the World Order that shamed your oligarchy into signing the ICCPR, so you’d have some genuine rights. But it was your national oligarchy that clammed up about it like it was a state secret. It was your national oligarchy that painstakingly eradicated all those ICCPR rights, like your right to privacy, or prohibition of war propaganda, or freedom from torture. Multilateral financial reform is happening abroad, even as your oligarchy stonewalls it at home. In the autocratic hellhole you’re stuck living in, the New world Order is your best goddam friend. Time to embrace it.

      2. Vinny G.

        dr feelgood,

        Would you kindly explain to me what is the difference between an American MD (psychiatrists in particular) and a gang banger thug pushing heroin to kids in the neighborhood? Or, perhaps you can explain to me what is the difference between an Afghan drug lord and the American pharmaceutical companies.

        Please enlighten me, because after having practiced psychiatry in the US for 15 years now, I still can’t figure out those two questions. Thank you for your wisdom.

        Vinny, MD, PhD

  14. leeAnne

    if by ‘terrorist’ you mean neo con financial terrorists, your theory is probably accurate, for there can be no other explanation for US troops in Afghan other than to control drug trafficking profits. Because the US, if they wanted to end drug trafficking all over the world, they could decriminalize drug use and lead the rest of the world to do so.

    In that case the illegal drug industry would collapse and, talk about the guys and gals swimming naked exposed when the tide goes out, this vast global criminal drug trafficking enterprise estimated conservatively by the UN at around $500 billion/yr would cease to be profitable and end. Like, alcohol, it would then be regulated and taxed legitimately.

    1. Vinny G.


      I have worked for many years with drug addicts in treatment centers. Drugs serve far more purposes than financial profits. They are also a very effective way to control the masses, to keep them sedated. Additionally, keeping drugs illegal maintains the high level of criminality (murder in particular), thus a genocidal type of population control among minorities.

      Illicit drugs are primarily targeting the segments of the American population that would otherwise present the greatest potential for rebellion against oppressors. I am referring to African-Americans. The reason drug-financed gangs are allowed to run black neighborhoods and the schools in those neighborhoods is to prevent riots and rebellions against the establishment. Law enforcement does not seem to get in the way, so I have to assume it is sanctioned at the highest levels in government.

      This is America.


      1. jeremiah black

        As someone who lives (and who lived most their life) in the ghetto in east Brooklyn (Crown Heights and Bed/Sty), I find it hard to believe your claim that poor, black neighborhoods such as mine would be “rising up” under drug-free (or any) circumstances. As nearly everyone here gets free welfare and does precious little all day, I can’t imagine what on earth they would be “rising up” against.

        Your romantic view of the ghetto seems to be some sort of uptown, manhattan, liberal, upper class, white fantasy. Come across the bridge and down to my hood sometime and see the reality. It’s just mostly idle people clamoring for taxpayer subsidies, and drugs are mostly done by people who don’t work for their own money. Not too many peeps here who possess a steady job and a decent work ethic mess with that stuff- they have too much to lose and can’t afford the trouble.

  15. Zap

    “Not just lucky. They worked hard and worked out a strategy that made sure they could only loose a certain amount at maximum. That is proper diligence, that is what hedging is for, that is what a good business plan does.”

    Why would they feel the overwhelming need to “hedge” triple AAA’s?

    Hedge against what….lightning?

    They knew they were shit the day they sold that junk, they are money junkie whores and criminal frauds.

  16. AP

    couldn’t agree more, but I’m constantly discouraged about the recourse the perpetrators manage to avoid consistently.

    I doubt there would be any public discourse to taking the blood sucking vampire squid down, in fact, quite the opposite. Maybe it will happen when the debt is so far out of whack (not saying it isn’t currently – it is), when – not if – the system comes crashing down. Will that look like the French Revolution? The introduction of the Amero? Somewhere in between?

    We all know at some point the other shoe has to drop. It has to. The real question here is when.

  17. Hambone

    So if you’re Merrill or Lehman or Wachovia and you want to ignore declines in your assets’ values, you’re “marking to fantasy” or “extending and pretending”. But if you’re Goldman and you hedge and mark to market you’re being “aggressive” and engaging in a “bear raid”? I’m not sure how it’s supposed to be some sort of damning observation that Goldman “initiated” the markdowns of their CDOs. Who else was going to do this? The markdown fairy? As for GS analysts commenting negatively on Citigroup et al… say what you will about the inherent conflicting interests of bank-employed analysts of banks, but clearly they were right, and they can’t very well just not comment on the industry they cover.

    I’m not saying that I believe Goldman was acting innocently here. But please show where their actions differed from those of a party who was simply cautious and proactively insisted on being paid when the value of their insured assets declined, because I don’t see it yet.

    1. Vinny G.


      You fail to notice that GS also infiltrated and corrupted our government at the highest possible levels. Don’t you think that goes beyond just making a clever bet one way or another?

      GS is a massive threat to democracy (if you can still call this country that) and against rule of law.


          1. Zap

            Yes that’s another point that seems to be lost on the hacks and wannabes who are always gushing about how smart they are down at Goldman


            They bankrupt the firm and they would be dead and gone if Geithner had not ripped off the tax payer and made them whole on their AIG positions.

            They are serial bust outs just like all the rest of these losers on Wall Street.

            They lever up and stuff their pockets with a percentage of the phantom profits until they eventually bust out due to the leverage and then the government bails them out.

            You have to remain solvent to be a successful trader, you don’t get any awards for all the money you sort of kind of made before you went bankrupt.

  18. Matt

    This post descends to the level of the simply silly. It posits a trading strategy with a hundred moving parts, all of which had to go exactly as planned. No one is that smart, at Goldman or anyplace else. In short, the post has all the classic markers of a conspiracy theory.

    You know you can stop reading when you get to the fourth paragraph: “To help hasten the housing market collapse …” I see. Goldman had a deliberate strategy of inflating the housing bubble, and then deflating it, profiting on both sides. And the ability, all by it’s lonesome, to make that happen! Bow before the power and prescience of Goldman!

    Actually, you know you can stop reading earlier: “…the collapse of AIG [was] a deliberate strategy by Goldman.” A world in which AIG fails–the one we lived in–in a world in which anything can happen, risk is unknowable and unmeasureable, and no trading strategy has a predictable payout. One of the “anythings” that almost did happen, by the way, was the failure of Goldman itself.

    I would suggest that you collaborate with Dan Brown on your next post, but at least his books have a patina of plausibility.

    1. Yves Smith Post author


      With all due respect, do you know anything about the markets in question? Do you know, for instance, what a synthetic CDO is, what the Abacus program is, how mortgage warehousing worked, the impact of Goldman initiating the markdowns on CDOs to the market as a whole AFTER THEY HAD GONE SHORT?

      It does not take “a hundred moving parts”, the very fact you suggest that says either a) you do not understand the terrain at all or b) you do and are a party who has a vested interest in discrediting inquiry into Goldman and AIG.

      I have spoken independently to experts in this space, none connected to Tom Adams, and they confirm not simply the details of the argument, but agree with the general thesis. Adams is not alone among industry participants in thinking Goldman set out aggressively to make sure its short position was profitable, consequences be damned; he is simply one of the few to be in a position to be open about those views.

      1. nivedita

        Yves, frankly, your responses to comments here simply show you’re becoming hysterical. No rational responses to the arguments at all, just a shrill “GS was evil”. This blog has become quite useless.

        1. Yves Smith Post author


          I suggest you go back and reread the thread, starting with the sequence that Tom set forth in the post. Please not that not a single one of the critics has either 1. disputed the fact set or the sequence 1-7 that Tom sets forth or 2. presented a credible alternative scenario or argument. Instead, we have an attack on a bit that may sound like hyperbole (the charge that these actions made the housing crisis worse, which actually is accurate, the use of CDS, which was integral to all these strategies, made the exposures a multiple of that of the actual subprime loans and they also via arbitrage, made subprime loans cheaper). The charge that GS set out to drive down CDO prices once it was short is credible and consistent with the fact pattern, and this would be a massively destructive action. So the only part of Tom’s post that anyone has attacked that looks to have some foundation is his bit “To help hasten the housing market collapse, Goldman ran a huge mortgage lending and issuance program with low quality loans virtually designed to fail, including dozens of deals backed by completely toxic non-prime second lien loans “To help hasten the housing market collapse, Goldman ran a huge mortgage lending and issuance program with low quality loans virtually designed to fail, including dozens of deals backed by completely toxic non-prime second lien loans”. Goldman WAS a subprime originator, it both a “combat servicer” (Litton) late in the game, one that specialized in the worst dreck. You might argue with how big a role GS played, but it was a large player and was originating toxic product.

          I note some readers have merely chose to complain about what Tom wrote, YET NO ONE HAS OFFERED A SHRED OF EVIDENCE to support a contrary view. Therefore, Tom’s original argument stands.

          Bear raids were commonplace in the stock market pre the 1933 and 1934 securities acts. Why is it so hard to believe they would not be highly profitable, and as actively pursued, in unregulated markets? I find the knee-jerk opposition curious.

          I have spend a good deal of time digging into both CDS and CDOs and the practices in both markets were remarkably predatory.

    2. Vinny G.


      As I assume you are a GS employee, I was curious if you were already notified about what your 2009 bonus might be. Just curious…


    3. attempter

      How ridiculous. This didn’t require “a hundred moving parts” or being all that bright (which GS is not).

      It required being in the ballpark and having their guy in charge at Treasury.

  19. craazyman

    These are a bunch of financial drug addicts making deals with each other. And they paid to have the system rigged to sustain their habit, with adademics and regulators on the take.

    It is hard to call something illegal if the laws were written specifically to foster and protect it — as morally odious as that may be.

    Contemporary psychology is familiar with the addict’s rationalitions, denials, self-justifications, evasions, narcissism and tortured theoretical logic that defies all emprical evidence. Breaking an addiction is a painful and prolonged ordeal that comes close to breaking the soul of many people. It is not surprising that events played out the way they did. And the reliance on the word “talent” to describe these actions by Goldman and others is itself a symptom of the underlying pathology.

    Sadly, despite the lessons of history, prudence, fairness and ethics — our politicians and regulators allowed a system to develop that was a little more than a Credit Counterfeiting operation. Had AIG, Goldman, etc. simply printed money and taken it home as bonuses, they would have been guilty of a criminal offense.

    Instead, they counterfeited credit and took the transaction fees home as bonuses, justifying it — through the tortured logic of an addict — as “pursuit of shareholder value.”

    It is hard to argue with a psychopath, and it is especially hard when the entire system is structured to encourage psychopathic behavior.

    Whether laws were broken is unclear. Securities law is frustratingly fuzzy and subject to the definitional zeal of the prosecutors.

    I am not a fan of lynch mobs, or of looters. I don’t know where the legal truth lies. But the fact that the same crowd is still in charge and raking it in — yet again — at our expense is a social crisis that has the potential to foster civic unrest and rebellion that reduces “shareholder value” across the entire economy for years to come.

    1. Vinny G.


      I am not sure I would be so kind and call these criminals “addicts”. However, I do agree that they are psychopaths, and they fit enough diagnostic criteria.

      I’ve worked for years as a clinician with both, addicts, as well as psychopaths. While I have compassion for addicts and many do manage to change their lives, on the other hand psychopaths do not change. Psychopaths cannot change because their psychological structures are different form those of the rest of us. They lack a conscience, remorse, ability to feel empathy. They are simply not human beings except that anatomically they resemble us. In fact, psychotherapy or counseling with psychopaths is discouraged because it would only make them better criminals by teaching them new ways to manipulate and expose to them even more human weaknesses they can exploit.

      Key points:
      1. With addicts you do treatment, and sometimes it works.
      2. With psychopaths you do containment (also known as prisons).


  20. John

    This is INSURANCE fraud, right?

    It’s not a financial matter. It’s an insurance matter.

    There was an interesting precursor, at Lloyds of London, which ran from the mid 1980’s to early this century. If you look closely at the dynamics of the “LMX Spiral” you will find a pretty good template for what happened with derivatives.

    Time Magazine had an extensive expose in March 2000. Which was subsequently buried.

    The story of this decade is of how the insurance crooks broke into and pillaged the banking industry.

  21. Fed Fred

    Wow, what a ridiculous, paranoid, financially illiterate article. Time to take that tinfoil hat off and emerge from your mom’s basement.

    1. Yves Smith Post author

      Fed Fred,

      Your comment is entirely an ad hominem attack. You have not offered a single substantive argument against the post.

      Irving Fisher came up with the theory of debt deflation, which is now widely regarded as a central explanation of why the Great Depression was as severe as it turned out to be. Fisher came up with it because he had been one of the big bulls of the 1920s, its most visible and respected economist, and had also become hugely wealthy, and lost it all up in the Crash (he had to move in with a spinster aunt, I believe). He devoted a good deal of time to thinking why he had been so wrong, and came up with an analysis that is now seen as fundamentally important, and correct, yet in his day, few economists would give Fisher much consideration because his reputation had been tarnished by the crash.

      You presume that no one who was on the wrong side of a trade can have any insight, when in fact, they are often precisely the ones in a position after the fact to see the larger pattern of what went amiss. You further assume that any suggestion by someone on the wrong side of a trade that they were misled, or the person on the other side of the trade took aggressive action to assure their bet would work out, is “tinfoil hat”.

      Have you ever worked in a real market? In every single market I have been actively or peripherally involved in (equity, and FX derivatives, FX trading, art, real estate, M&A, private equity, distressed debt), I have seen a great deal of predatory behavior, even in areas that were heavily regulated.

      Being charitable, I suggest you are suffering from a bad case of halo effect.

      1. jake chase

        Predatory behavior in markets? I’m shocked, shocked. Financial markets are NOTHING but predatory behavior. Trading is ZERO SUM. All these people were exchanging tulip bulbs. You are saying that some of them thought this shit was real? Do you know the name Satyajit Das?

  22. Nothanks

    I have a personal theory that GS infiltrated AIG (just like they have the Treasury and other key offices) to get them to sell insurance on stupidly risky instruments. Wouldn’t that make sense? Because apparently AIG had been managing risk fairly carefully before Greenberg got jacked.

  23. Hillary

    Yves –

    I’m asking this question sincerely. I’m having trouble with some of the motivations. Why do you (and the reporters from Huffington Post and NY Times) think that the different groups of GS knew what other groups were doing?

    I looked at this and immediately thought about the corporation I currently work for. I’m at a small division that was acquired within the last five years, we’re not even a footnote on the quarterly filing. If I talk to someone from corporate, I usually have to explain what business line we’re in and what we make.


    1. Yves Smith Post author


      These groups would all be under the same umbrella (whatever Goldman calls its fixed income division these days) and investment banks have a culture of cooperating (with scrapping over profit allocation) across business lines on profit opportunities. This is even more true at Goldman than anywhere in the industry, which goes to great lengths to instill a culture of teamwork and communications. These firms in general also have flat hierarchies and substantial delegation of authority compared to most businesses.

    1. Jim in MN

      …which I suppose is just more hysteria….the kind of hysteria that can put people in jail for a long, long time…I just hope the White House knows where the firewall switch is and takes out the GS cronies at Fed and Treasury before it’s too late.

  24. Diane

    I have a personal theory — every time business or government condenses what is really happening using alphabet caps to describe ‘instruments’ or agencies or whatever, the ‘system’ ends by collapsing on itself. The financialization of the US economy particularly since the 70s .. the UK has done the same, was a HUGE mistake. Instead of building the next great productive capacity or widget or whatever, the US and UK decided to become a mega Switzerland with more than a touch of Vegas and Monaco thrown into the mix..for the world. A ‘pretty thought’ but full of traps, corruption, cronyism, and an addiction to inventing ways to make money that had nothing to do with creating a REAL economy or a REAL business that made REAL things or provided honest and REAL services. The US economy is going to go down, GS and the gummint notwithstanding, you can’t keep a house of paper standing in the middle of a hurricane. Instead of maintaining a four pillar economic structure the way any nation that wants to thrive and survive will do, the BRIC countries come to mind as do Germany and Japan, the US became a nation that promotes a litigious society in cahoots with a Byzantine financial and tax system wherine politicians are bought and paid for regardless of which side to the political spectrum they are on. We are a nation that is going the way of Rome. UNTIL we understand you can’t create lasting ‘wealth’ through inventing the next great ‘financial instrument’ at the same time adding a massive regulatory and taxation system that punishes the small and rewards the BIG even when the BIG FAILS, we are in deep doo. Unless and until we start making ‘stuff’ again or find a way to encourage innovation and production outside the financial or services – government framework while keeping at least SOME of it in the US…we will fail.GS or JP or mergers and acquistions or being a subset of China, Inc. is not the road to success its the road to depending on the ‘kindness of strangers’ as we attempt to keep up a front that eventually WILL end badly in decline and dissolution.

    1. i on the ball patriot

      “UNTIL we understand you can’t create lasting ‘wealth’ through inventing the next great ‘financial instrument’ at the same time adding a massive regulatory and taxation system that punishes the small and rewards the BIG even when the BIG FAILS, we are in deep doo.”

      I have a personal theory — I think we are in deep doo because most everyone assumes that lasting ‘wealth’ is the goal of the wealthy ruling elite when in reality lasting ‘control’, decline, and disolution, are their real goals. Old fashioned vanilla greed values profit, pernicious elite greed values control.

      Unless and until we organize to get them out of power we will never start making ’stuff’ again or find a way to encourage innovation and production … we will fail.

      Deception is the strongest political force on the planet.

      1. LeeAnne

        I so agree with you on this; your point bears repeating because the use of the word ‘greed’ in the context of this crises has become the convenient meme for obscuring the big power issue you point out.

        Greed is one of the deadly sins, so designated because it is one of a list of intrinsically human traits that must be contained (hold or keep within limits) for any civilized society. In other words, it is normal in all of us; just as the impulse to kill is -which has, so far, been successfully limited to rare occasions.

        The capitalistic system has evolved as the best system for channeling that energy of greed for useful and creative purposes through competitive activities, but never without rules. Without rules, these activities useful to the society as a whole, through the law of gravity, are games that will consist of nothing but brutality and end in death. The very definition of a civil society is one with rules; rules that all members are aware of and agree to play by, but with penalties when they, as they inevitably will, fail to follow those rules.

        In civil society, the destruction of its rules is the destruction of the society. But calling those who have destroyed the society greed heads, although sometimes satisfying as a slur, is only that, a curse, available to the powerlessness, permitted and indeed encouraged by the powerful.

        Their response is to go laughing all the way to their own banks and giving you the middle finger, their lobbyists, in your face.

        But even “lobbyists” is a kind of meme that obscures the other mercenary army of international ‘think tank’ type organizations that meet all over the world in small groups and conferences signing on to agreements that affects all our lives and circumvent the democratic process. (Elvins, Martin, 2003, “Anti-Drugs Policies of the European Union: Transnational
        Decision-Making and the Politics of Expertise”)

  25. michael

    Thomas and Yves:
    I see your point.
    In effect you are saying GS found an insurer for CDOs who, with the tweak of early ‘collateral postings’, would pay off (most of) the high risk bets they were taking, even if (and before) AIG ultimately went bankrupt by doing so.
    It seems the quants at AIG didn’t think that scenario through…

    In a full-blown AIG bankruptcy, would the collateral have been reclaimed and distributed evenly among the (first lien, who?) title holders, or would GS have been allowed to keep it?

    Can you post a table, on what percentage of insured notional had collateral to be posted, per which AIG downgrade and/or CDO downgrade?

    1. Richard Smith

      You have got the idea. And those are good questions, and it may be that it wasn’t just the AIG quants that screwed up, but in the end, GS’s risk management too.

    1. Richard Smith

      If one’s been obsessing about this story, it’s very easy to forget that others don’t have all the context at their fingertips.

      As you can see, either the NYT has joined NC in the wingnut fraternity, or there’s something here well worth a dig.

  26. Sechel

    The story about Goldman and CDS would not be complete without discussing Litton. By owning a subprime servicer Goldman had unique perspective in the declining housing market owning an excellent early warning indicator.

  27. Matt

    To Yves Smith–Yes, I know what all those things are. (Do I know what a “synthetic CDO” is? Pleeze!)

    All you’ve got is this. People at the origination desk created AAA CDOs and sold them to willing buyers. They may have believed the CDOs didn’t really deserve a triple A rating, but absent inside knowledge about the quality of the underlying credits, that belief is irrelevant to any question of fraud or misdealing. (A belief that the housing market is overbought, and that firms long in it should be shorted, is several light years away from inside knowledge.) People at the prop. desk shorted some of the same firms buying those CDOs–because they though the housing market was overbought, and that firms exposed to it should be shorted. Maybe the people at the origination desk knew the people at the prop. dest, maybe not. So what? Views on a market, again, are several light years from insider dealing. This post goes much further than that, though. It says that Goldman had a plan to inflate and then deflate a given market; a plan to cause AIG to fail to boost its shorts; and a plan to have the government come in to bail AIG out, so that the shorts could be redeemed at par. “Simply silly” doesn’t even capture how ridiculous that is. “Here’s the beauty part. Eighteen months from now, under my devilish plan, the housing market will be in free-fall, AIG, now rated AAA, will be at the brink of bankruptcy, and the government will be forced to step in to save it. Oh, and Goldman will survive the financial chaos envisioned–and partly caused–by my trading strategy.” People like you have a charming and naive belief in agency: that someone made these bad things happen on purpose. No, no and no. No one’s in control of the markets. Some people got lucky, others didn’t.

    1. Richard Smith

      “This post goes much further than that, though. It says that Goldman had a plan to inflate and then deflate a given market; a plan to cause AIG to fail to boost its shorts; and a plan to have the government come in to bail AIG out, so that the shorts could be redeemed at par.”

      Nope. Straw man. Reread the post, more carefully.

      Either GS had a grip of the risks, or they did not. Pick one.

  28. JTFaraday

    “Obviously in their strategy they did not count on the collapse of the whole system, so that was a missing point and that is why they had to issue under government protection, take TARP and use the zero funding. I have no issue if you criticize them on that. But to say they had planned it all ahead, collapse the american system to benefit from it, is well, ehm, far fetched to say the least.”

    I’m not so sure about that. I think access to Fed benefits–without having to actually be a bank– is *precisely* what Goldman Sachs has been after. They just paid out their biggest bonaz payout *ever*!!

    I also think that people associated with GS have worked on government and IMF bailouts, and know how that works. Basically, they just did to the US what they’ve been doing around the world for years, pace Simon Johnson.

    It’s not at all “far fetched.”

  29. Matt

    The origination desk was generating free money. The prop. desk was making ex post obvious bets (but if obvious to everyone at the time, there would have been no bet to make).

    Straw man? I hold no brief for Goldman. For all I know, some of their dealing involved malfeasance. But the post here offers no evidence of such. What is does offer is a health dose of conspiracy mongering. “The collapse of the CDO bonds and the collapse of AIG were a deliberate strategy by Goldman…” and “To help hasten the housing market collapse, Goldman ran a huge mortgage lending and issuance program with low quality loans virtually designed to fail…”. Goldman is filling in here for SMERSH or SPECTRE, all-powerful and all-knowing. They’re just traders and originators like everyone else, some of them not that smart. I don’t attribute this view to you or any particular commentor, but one has to wonder if Goldman’s jewish roots lie behind the resonance of the myth that it is a secret (and always successful!) master-manipulator of the markets.

    1. jake chase


      I pretty much agree with you, and I would add that much the intellectualized outrage reflected in comments to this post is coming from individuals who remain proud of their own participation in this institutionalized insanity called banking and remain convinced that these toxic credit structures which they and their ilk labored so ingeniously to create and manipulate would have turned out just fine had it not been for the evil folks at Goldman who engineered those synthetic CDSs on subprime CDOs, stuffed them down the gullets of bewildered county treasurers and fund managers and bewitched the morons at AIG into writing insurance giving Goldman the right to drain collateral by shrinking the marks at will, thus tanking the market.

      The truth is that leverage and greed and arrogant misunderstanding of market relationships papered over with mathematical idiocy and regulatory somnolence and Congressional corruption conspired to make the collapse an accident waiting to happen with certainty, but if you want to jail every single Goldman banker and confiscate all his toys that is absolutely okay by me since it may offer a small discouragement to other predators licking their chops over what is left of our financial system.

      Incidentally, does anyone know anything about the theory that much of AIGs CDS insurance was voided by side letters in a continuation of the old reinsurance scam? Is it possible that Goldman was unique among AIG counterparties in having the right to demand additional collateral, and that the real scandal of the AIG bailout was that the foreign banks really were not insured at all but just gaming the regulatory system? Just asking.

    2. Richard Smith

      “Goldman is filling in here for SMERSH or SPECTRE, all-powerful and all-knowing.”

      All they need to know is a) the quality of the underlying credits (e.g. via Litton) b) the rating c) the gearing available via the structures. Some short trades had the unusual characteristic of neutral or even positive carry, which made them pretty painless to put on….amd it wasn’t just GS…they may nor even have been the biggest players.

      The collapse of AIG may have happened faster than GS reckoned with. $10Bn of CDS says they did reckon with it though. They’d have had a very clear idea of the scale of AIG’s exposure, since it largely mirrored their own, or exceeded it. Not necessarily any master manipulation there. The trades would have worked very nicely on less apocalyptic scenarios.

      “one has to wonder if Goldman’s jewish roots lie behind the resonance of the myth that it is a secret (and always successful!) master-manipulator of the markets.” Oh there’s plenty of that garbage about in GS bashing, you are right. You are also right not to attribute that motivation to me.

      Question (serious, not rhetorical): what would convince you that there had been something dodgy going on?

  30. JTFaraday

    “This is the best present yet. My spouse quotes Balzac, “Behind every great forutne or is a great crime.”, I find the French to English translation even better”

    Isn’t that Tom Paine? No, maybe not–I think TP said “at the root of every *government* is a great crime.”

    I am not down with this particular coup.

  31. Dean Stockman

    It just amazes me how Goldman used AIG almost as a tool to cover itself like a hedge fund in stock terms… People sure could use some good role models in the corporate world for true inspiration.

    Many stock investors could use some and I have found that inspiration for myself, and hopefully for other readers at http://invetrics.com/
    It is a great website with free stock trading signals, that has already earned me a few thousand dollars. Make sure you check it out!

  32. Troy Ounce

    There is no political, economical or social movement in the US to counter the illegal trading of your Master called GS.

    In fact, nudge, nudge, wink, wink, everybody just loves the big money and the winner takes it all.

    The middle class will be ripped apart, but hey, that’s the consequence when living in a casino society. You either win or lose.

    Compassion has never been an American word and with morality out of the door completely, the waiting is for the s&i# to hit the proverbial fan.

    Great blog, but change your isp to another country.

  33. Paul Jones

    I have been reading these posts with great interest. Obviously the specifics and guesswork of how all these instruments work and interact with not only underlying risk, but counter party risk is hard to follow. When you take a step back and look at the big picture, it is easier to see a couple of basic facts. GS will continue to look to “liquidate” or collateralize against a weak or over leveraged entity. It is very similar to what Jon Corzine orchestrated against LTCM in 1998. They have seemed to perfected “inside” information by not emplying internal chinese walls and having the former Chairman as Secretary of the Treasury doesn’t hurt. GS has these kinds of contacts globally though.
    I think there is very little defense that GS has used “inside” information for many years at the expense of counterparties, clients, taxpayers, shareholders, etc. They average 28% ROE with only one negative standard deviation in its history. They make about 80% of their profits from their FIC division, which is really a giant hedge fund. Their VAR (Value at Risk) is a farce. No one can get funded any better in the world than what GS gets funded.

    I’m afraid the only answer is to force them out of one of there fiefdoms. Either they are a commercial bank. (probably Not!). They are a broker dealer exclusively and commission based only, shutting down all company prop desks and direct funded hedge funds.

  34. Tiger

    Potentially stoopid question here.

    I don’t get why Goldman would deliberately push AIG to go bust by marking down their positions, even if they knew Hank would order a bailout.

    Firstly – Why go to the trouble of marking down assets more aggresively than you ‘believe’ the price to be. Yes, you get more collateral but if the ‘real’ market price is above what you’re calling for then you don’t need the extra collateral.

    Secondly – If you do make them go bust then you could lose out on your outstanding exposures?

    Grateful if someone could enlighten a novice…

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