AIG Considering Suing Goldman Over Abacus CDOs

Other shoes are starting to drop on the Goldman CDO front.

The Abacus program spawned 25 CDOs, and it was logical to expect other investors and insurers of Abacus CDOs to consider litigation now that the SEC has started down that path.

As we pointed out in previous posts, AIG had provided guarantees on some Goldman Abacus trades as part of its multi-sector CDO portfolio. Those transactions did not go over to Maiden Lane III, but instead were unwound at AIG. AIG is now pondering whether to take action against Goldman. From the Financial Times:

AIG, the US government-controlled insurer, is considering pursuing Goldman Sachs over losses incurred on $6bn of insurance deals on mortgage-backed securities similar to the one that led to fraud charges against the US bank….

Under a deal struck by AIG and Goldman last year, the bank agreed to cancel the insurance on some $3bn-worth of CDOs in exchange for keeping collateral worth about $2bn, according to people close to the situation. AIG is believed to have recorded a loss of about $2bn. The CDOs being reviewed by AIG are part of a family of securities known as Abacus. The SEC’s complaint is focusing on one of the Abacus deals that is not among the securities insured by AIG.

Yves here. As we indicated, there is perilous little in the way of precedent as far as structured credit transactions are concerned, where the standards of investor protection are lower than in other types of securities litigation. Thus, even if AIG does not decide to move forward now, it may choose to wait and see how some of the recent lawsuits evolve before it files a suit.

Print Friendly, PDF & Email


  1. Jefferson

    Soon there will be an avalanche of civil lawsuits alleging fraud against Goldman. The SEC opened the floodgates.

    The fact the SEC did not notify Goldman prior to filing suit and/or give Goldman an opportunity to settle indicates all out war is coming. Obama and the near term future of the Democrats depends upon the SEC successfully prosecuting this lawsuit.

    The only question now is when will the criminal indictments be handed out. I have a feeling that sometime over the next few months we are going to hear about a plea bargain between Fabulous Fab and DOJ.

  2. Mike

    AIG sure has balls. They didn’t seem to have a problem making huge profits selling the insurance on this garbage, now they want to sue because they didn’t do their due diligence and either price the insurance better or refuse to insure? Some professionals they turned out to be.

  3. Sam

    This from the Goldman Wells response is hilarious:

    “Mr. Tourre‟s reference to “[0] – [9]%: pre-committed first loss” did not state that Paulson would be purchasing a long
    position, and the record contains no evidence indicating what Mr. Tourre meant by this statement. Indeed, Mr. Tourre himself testified that he had no recollection of its meaning”

    Really Tourre? A smart guy like you didn’t realize this meant the equity tranche? And a “sponsor” is a loose concept? Even a 5-year old can define the term.

  4. Blurtman


    The question has to be asked. When US taxpayers bailed out Goldman Sachs by bailing out AIG, were they bailing out fraud?

    1. Justicia

      “It also leaves open the question of laying off that risk on an insurance company (whether in a regulated subsidiary or not) without similarly disclosing the above to them up front! That is, is it fair, just (or even legal) to buy fire insurance on a property when you have been told that someone expects a fire in that structure based on what they believe is credible analysis (e.g. a look at the wiring plan), without telling the insurance company about what you were told?”

      — The Audacity of Synthetics

  5. Gary Anderson

    Yves, as my website points out, we are likely talking about investigations that go beyond fiduciary responsibility. I hope that agencies investigate insurance fraud, and repeated insurance fraud, could be a charge. Repeated insurance fraud could trigger Rico racketeering laws. That would probably do in Goldman.

  6. Jefferson

    Goldman’s defense that it lost money on the Abacus CDO fails to mention the fact that Goldman tried to offload its remaining long exposure on the toxic CDO sludge but simply could not find any remaining suckers. Apparently the Fabulous Fab couldn’t make it out of the building before it collapsed after all.

  7. VenusVictrix

    AIG is going to sue Goldman – and then what? Refund the US taxpayers? Ask their AIG-FP employees to return the “Retention Bonuses” paid out in order to cover-up this fraud? How about demanding further explanation from Paulson, Bernanke, Geithner, et al, for their assertion that the “contracts” were “legally binding” and thus had to be paid in full?

    This story is even more bizarre than any we’ve heard so far about this unholy alliance between GS and AIG (and the Treasury and Fed).

    How did the SEC manage to find the one CDO deal that GS didn’t “insure” via AIG-FP? And if this wasn’t the only deal GS did without AIG as a backstop, then GS obviously lied by overstating their efforts to obtain “reinsurance” through AIG to hedge their subprime exposure.

    How many times can they change their story before they lose all credibility whatsoever?

  8. Francois T

    AIG may want to use your book Yves; at least, this is what Rolfe Winkler suggest to those who want to understand the CDO stuff. :-D

    The most valuable part of her book may be the second appendix. In it she breaks down in minute detail the strategy that a hedge fund might employ to short subprime in large quantities via CDS. It’s a veritable roadmap to understanding other, similar malfeasance that may have happened in this market. The appendix, along with the lengthy discussion of Magnetar in Chapter 9, together make a powerful argument that Goldman may not be the only firm that should face charges for securities fraud.

    He He!

  9. Vangel

    The AIG people need to be put in jail for fraud. They pretended to know much more than they did, ignored reality, and concentrated on their quarterly bonuses rather than pay attention to the big picture.

  10. Fausto Lucignani

    The “smart alecks” were able to survive the congressional panel….now, I want to see them how they react under cross examination by expert criminal lawyers….

Comments are closed.