Shahien Narisipour at Huffington Post revealed that the FCIC report, due to be released officially tomorrow, shows that contrary to its pious assertions to the contrary, Goldman received funds for its own account from the AIG bailout, to the tune of $2.9 billion.
Why is this significant? Because Goldman maintained that the monies it received from the rescue were for customer trades, not for its own account.
And while this may seem to be news, it isn’t, except for putting a firm dollar value on what Goldman received for its own account. We posted on Goldman’s AIG exposures both as principal and agent on February 7, 2010, and specifically flagged that the Abacus trades that Goldman insured with AIG were principal positions, not client trades. We caught some flack for it by the time from various commentators who seemed more persuaded by Goldman’s PR that the extensive work done by Tom Adams, which we presented in a series of posts in early 2010 (see here, here and here for some examples).
From the February 2010 post:
Possible Productive Lines of Inquiry That Get Short Shrift
The focus on Goldman’s marks with AIG largely bypasses what we think is a more serious issue: the role of all synthetic or heavily synthetic CDOs, which allowed Goldman to go net short. The usual vehicle for that was a “mezz” CDO, because the CDS would be on BBB subprime trances, the layer that would go “boom” first. The bulk of Goldman’s AIG-related CDOs were older vintage “high grade” CDOs, meaning the synthetic component was not large (on the deals we looked at, a maximum of 20%) and they would be on AA bonds, which were not the slice you’d be eager to use if your strategy was to go net short. So the fixation on the marks has the unfortunate effect of diverting attention away from what we think was the much more troubling activity: the use of heavily/all synthetic CDOs to establish a short position.
Even though the deal documents allowed for the possibility that Goldman would keep the short interest created by these deals, anyone who invested in them or acted as a guarantor would have thought very differently, and probably have asked for much higher returns if it had understood Goldman was acting as a principal rather than as a middleman (and how Goldman influenced the deal parameters to assure that its short position worked out). The story indicates that $5.5 billion of Abacus trades (a Goldman synthetic short program of 26 deals in total) were insured by AIG. Using the AIG Abacus trades as an entry point into the entire Abacus program would be a very useful exercise.
Note that the disclosure on the Abacus trades guaranteed by AIG continued to be sparse. The Abacus trades were pure synthetic CDOs, and pure synthetics were excluded from the Maiden Lane III portfolio (the special purpose entity established by the Fed to hold the non-synthetic CDOs that the Fed purchased from various dealers).
From Huffington Post:
Goldman Sachs collected $2.9 billion from the American International Group as payout on a speculative trade it placed for the benefit of its own account, receiving the bulk of those funds after AIG received an enormous taxpayer rescue…
At a hearing on July 1, 2010–two weeks before Goldman sent the e-mail acknowledging how $2.9 billion in AIG funds wound up in its own account–the crisis panel questioned Goldman’s chief financial officer, David A. Viniar and managing director David Lehman. Both said they knew nothing about AIG funds landing in the bank’s private coffers, according to a transcript of the hearing…
According to the crisis commission report, Goldman bought credit default swaps from AIG as a form of insurance on investments known as Abacus, which were pools of mortgage-linked securities.
It is separately a sign of the times that the Goldman CFO and a managing director in the CDO business could deny in sworn testimony that Goldman had received funds from its own account from the AIG rescue. As we stressed in our series of posts on the AIG exposures, the information we worked with was already in the public domain, even though few took the effort to piece together what it meant.