Quelle Surprise! Goldman Profited From AIG Bailout Via Abacus Trades (You Read It Here First)

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.

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  1. psychohistorian

    Thank you for your efforts. Will anyone go to jail over this?

    The pressure is building as increased amounts of perfidy become common knowledge.

    I was thinking that there are probably as many actual and associated perps in the nation now to totally replace the stupidly prosecuted pot smokers we have incarcerated over the years. One can only hope for poetic justice but it made me grin.

  2. Gubbmint Cheese

    sadly as damning as this information is, I doubt anything will come of it.

    Sign of the times.

  3. Tao Jonesing


    As much as I love giving you credit for being right when you’re right (as you are this time), what’s the point? The bad guys are still winning, and we (that includes you) are just on the sidelines sniping. While that may make us feel better about ourselves, it does not change the fact that NOTHING is being done to stop this ongoing crime.

    People like attempter/Russ, who has far less pull than you, are putting themselves out there trying to make a real difference by taking a leadership role and identifying, in their opinion, real changes that need to be made. We need you to take a leadership role, too, if only to identify a leader that can help us drive a reform movement that ensures a level playing field. How do we make positive change, and who should we work with to ensure that it happens?

    Like it or not, you are a leader now, at least in shaping thought and opinion. I know that’s not always a lot of fun, but you are the basis of the community you’ve built.

    Please help us understand what you think we can do to make things better. We’ll spot you all the disclaimers you can imagine.


    1. Francois T

      “what’s the point?”

      The point is that in a sea of spin, lies and obfuscations, a beacon of truth, fact-based discussion supported by deep expertise IS leadership.

      The first necessary step is trying to change things is to become aware.

      That is what Yves is doing; making anyone who bother to read her blog to become aware.

      It is not sufficient, but it is absolutely necessary in order to foster the much needed changes.

      1. craazyman

        Agreed totally.

        It’s some real heavy lifting and we all should be appreciative.

        Even the banksters, because their kids and grand-kids will live in a better world than the one they’ve looted — once the truth defeats their craven and stupendously malicious lies.

  4. Expat

    Blankfein say: “Neener neener!”

    Many people think I am a tad excessive when I half-jokingly suggest lining up most of Wall Street against the wall. I just went toe to toe with Ritholz about systemic versus isolated “evilness” on the Street. Barry blames the crisis on ” a few bad apples”.

    Ok, so we all knew GS was not doing God’s work (more like Satan’s chores, if you ask me), but what is your view on the naughty or nice list in banking and finance. Barry says only a few thousand…I say tens of thousands when you include complicit follower, timid would-be’s and self-deluders.

      1. Expat

        I know, and so am I, but based on his book and his blog I expected Barry to be more honest about the type of person who works in finance. While I agree that many Wall Street employees are honest or at least commit no crimes or do no evil, it’s like being a cook in (let’s pick on someone else today) in the Japanese army in Manchuria; sure, you’re not bayoneting babies, but you are aiding and comforting those who do. And you know damn well why there is blood on their boots!

        Same with Wall Street. They all know what goes on. I worked for Citi and I can tell you that all five hundred people on the trading floor in my distant corner of the world knew exactly what kind of stuff we did. Multiply that office by 20 for the different banks, then multiply that by two for the different market segments (fixed income, etc), then multiply that by eight for the major centers, and you start to get some pretty big numbers of people who were pro-active or complicit in all this shit. By the way, that multiplies out to 160 000 people in trading alone who know that the system is rotten.

        Now add in hedge funds, independent traders, and corporations with trading activity (oil companies, ag companies). Toss in the Realtors, the brokers, the mortgage lenders, the financial advisors, and the accountants. Don’t forget the rating agencies and the doofuses at the GSE’s. Egad, what about the insurance industry! Finally, add in 435 corrupt Congressmen and 100 warped Senators plus a handful of pwned Presidents and government appointees.

        I would say there are easily one million people in the financial services industry world wide who are corrupt or complicit.

        1. Parvaneh Ferhad

          That’s part of the problem, I think. There are lots of basically decent and well-meaning people working for an evil system which server the interests of a few psychopaths only. Too bad the decent people don’t see or don’t care to look a bit more intensely at the thing they are working for and thereby help to make look human to the outside.

          1. Moopheus

            “There are lots of basically decent and well-meaning people working for an evil system which server the interests of a few psychopaths only. ”

            That sort of describes the net results of pretty much every socio-economic system of history.

          2. francis

            That’s the opposite of what Expat said, looks like from here. The ‘nice people’ you talk of benefit just as much as the evil, who doubtless think they’re nice. What’s the difference anyway?

    1. Mannwich

      I’ve also challenged Ritholtz in the past on this front but he’s way too entrenched IN the system itself to see that it’s basically rotten to the very core. His way of life would likely be mightily upset (as would many others in the industry who poke a stick at it but only go so far) if true reform were to happen.

      1. Transor Z

        I have a different take on Barry. I agree only so far as I believe that BR is married to the capitalist model, which doesn’t seem to be true of many in Yves’ audience. The recent inter-blog dialogue (here, FDL, elsewhere) about whether The Left is welcome in the blogosphere was interesting, as much as I personally believe we’re post-left/right.

        If we’re drawing the old “you’re-either-part-of-the-solution-or-part-of-the-problem” line, I would definitely put Barry in the former category.

        Yves has intellectual integrity and intellectual bona fides, but I doubt she can point to any coherent articulation of a competing paradigm any better than anyone else can, because I’m not sure one exists at the moment.

        The frustrating thing is that Yves will never appeal to the mainstream because thoughtful people don’t present in marketable sound bytes; they just plod through the facts, taking them as they are, and apply their brains to the problems at hand. When the established interests through bad-faith bullshit around, the people with integrity plod through and demonstrate that it is bullshit, Q.E.D.

        Integrity isn’t glamorous. The devil ALWAYS has the better stories.

  5. anon

    “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.”

    not sure how this assertion can be proven true, effectively, without seeing a Goldman risk report

    how do you know they were net short in their risk?

    (as opposed to net short in X hedged by net long in Y?)

    or maybe you did see the relevant risk report?

    1. rd

      It doesn’t matter what their risk report says. They received $2.9B in cash from an entity that would have been bankrupt without government intervention. Without that they would have a) not received that cash at all; or b) would have needed to wait quite a while to get any money until a bankruptcy trustee decided how much of their claim would be honored.

      Both of these scearios would have been much more adverse to Goldman Sachs financial position regardless of how the total accounting of their positions in that trade works out.

      1. anon

        they claim they hedged their AIG risk with somebody else, and would have been paid even without government intervention

        i’m not sure how the “own account” aspect is particularly relevant to anything

        1. Yves Smith Post author

          You are engaging in classic “wrong way risk” fallacy. These were “wrong way risk” hedges. That means if the event hedged against occurs, the hedge fails.

          The CDS would not pay out unless there was an event of default at AIG. As we know, the officialdom believed (and I believe they were correct) that an unmanaged AIG failure would have done catastrophic damage to the financial system.

          So if AIG failed, the counterparties on the hedges would be bust too. CDS were backed to backed, if one counterparty fails, you get cascading failures.

          You are running standard Goldman party line. SIGTARP rejected the Goldman argument on the idea that it was hedged in its report on the NY Fed paying out 100% on the AIG CDS. So an independent investigator concurs with our reading.

    2. Yves Smith Post author

      The entire Abacus program (26 trades) were designed to establish short positions. It was inherent to the program. The Paulson trade that was the focus of the SEC investigation was a bit of a departure in that Paulson (who was keen to do synthetic subprime CDOs as a way to put on short bets more cheaply than via shorting using the ABX index) approached Goldman because he had heard about Abacus (it had been in existence for several years by then) and wanted to do a trade himself under their existing program.

      Six of those trades were insured with AIG. This is all pretty non-controversial stuff.

    3. anon2

      anon says: “not sure how this assertion can be proven true, effectively, without seeing a Goldman risk report
      how do you know they were net short in their risk?
      (as opposed to net short in X hedged by net long in Y?)
      or maybe you did see the relevant risk report?”

      What a load of crap.

      Ironic quote of the 2010, from Kazakhstan, via Wikileaks:

      The Ambassador asked if the corruption and infighting are worse now than before in Kazakhstan. Idenov paused, thought, and then replied, “No, not really. It’s business as usual.

      They’re confused by the corrupt excesses of capitalism. “If Goldman Sachs executives can make $50 million a year and then run America’s economy in Washington, what’s so different about what we do?’ they ask.”


      Anon, even people in Kazakhstan understand that Goldman Sachs are nothing but criminal scum, and I doubt they needed to read “the relevant risk report” in order to figure this out.

  6. craazyman

    I wish I could make $2.9 billion dollars without knowing how I did it. It just happened! :)

    That would be quite an immaculate conception.

    You wake up in the morning and $2.9 billion is in your checking account. And it’s all yours! No strings attached! LOL

    Honestly, I think it would really freak me out. I guess I’m not made for this kind of business. I might wonder where it came from.

  7. needsbeer

    Assuming fraud was committed, or some type of securities law violations occurred (I’m not really sure that’s the case, since it appears they have effectively made what was once fraud legal), I think by the time the public really learns what happened and a critical mass of anger has accumulated, the statute of limitations will have run out. Besides, these bastards will all be indulging in champagne and caviar, walled up in their heavily guarded (protected by Blackwater thugs perhaps) compounds in Uruguay or on their own Caribbean island by the time the mobs with pitchforks and torches come looking for them, assuming of course Americans ever emerge from their permanently anesthetized state.

  8. Duncan

    I am bewildered by the economic discussions for lack of education in that arena. As well my anger grows at the apparent paralysis of our legal system to bring forth the truth in the financial fan dancing that has occured and hold what appear to be criminals accountable. Correct me if my analogy fails. I purchase a very damaged vehicle of question value. Then with pictures of the vehicle as it appeared when new take out an insurance policy to cover loss and damages. The vehicle then becomes exposed to be a wreck, but I still am able to recover the insured value. Miraculously I am not convicted and jailed for any number of obvious crimes. Where do I sign up for this program? Hey, maybe I could buy the car on borrowed money as well

  9. TC

    Poor Goldman … all set up to reap the harvest the firm has sown over recent decades. And now the attempt to make Facebook appear a valuable property (when in fact it is another MySpace in waiting): just a pathetic display of how terribly thin are the pickings for firms whose de-leveraging barely has begun.

  10. Johnny Lunch Box

    Wh Wha Wh Why do you think Hank Paulson was stuttering so bad when he was asking for the billions of dollars in bail out money for AIG while at the same time demanding that no one would be held liable or accountable.

    Where is Hank these days? Where is Ken Lewis? Seems like all the big boys are hiding in their closets these days. Cheney and Bush seem to Hiding too albeit Cheney comes out now and then to Snipe on Obbama. Wasn’t it Cheney that said Deficits don’t matter.

    TC. Most of the Deleveraging that has been done so far is by way of Bankruptcies. I read where we are down to 18 to one on the lever but most was done by having so much debt go by the way of bankruptcy that wiped out shareholders. Imagine where we will be on a Mark to Market basis. Now I hear that banks are acrueing interest on properties and claiming it as income when in fact the property is in foreclousure and no payments are being made.

    Bernie Ebbers was a Saint compared to these Banksters.


    1. craazyman

      “Bernie Ebbers was a Saint compared to these Banksters.”

      That’s the quote of the day! So true.



  11. cd

    What is interesting is when Anon’s come here and blog bash factual findings as hyperbole…one thing that wall street does well is plant as many moles in the blog/media landscape as possible..

    Paid shills get their milk from the pigmens nipple..

  12. Michael H

    Expecting Goldman to be anything other than criminals and parasites on society would be like expecting Nazis to stop their gas chambers.

  13. skippy

    The larger majority of Americans are incapable of revolting or examining the inner workings of their demise. They are to over whelmed by chasing inflation, to pay off their debts, so they can acquirer larger, harder, longer to pay off debts, with the promise that if you live long enough, played the game set before them, you will be looked after before you pass.

    Skippy…control fraud my ass, it is a clear case of *narcissistic debt capture* it has NO ethos, it serves only its masters, it is self sacrifice dressed up in many guises, patriotism, religion, ideology, individualism, free markets…it is one thing to join a cult…and another to be born into one…eh…Mother to us…

    The world is flat and no matter of science can change this belief if ones entire life (sanity) is *dependent* on this observation.

  14. Pablo

    Didn’t GS buy CDS from some monolines on AIG debt? If so then didn’t GS make a significant sum off of AIG from that? Since GS was AIG’s primary banker then would it not be reasonable to assume that GS knew about the other weakness at AIG by way of its securities lending business? So then might GS have figured that between the payouts AIG was going to have to make on its mezz CDO business and the liquidity train wreck that would happen when its securities lending business couldn’t liquidate the CDOs it had invested in with the collateral that clients’ posted to borrow securities that AIG was going down for sure and thus it took out the CDS from the monolines to double dip?

      1. Pablo

        It took me a while to remember where I had read that and then I remembered it was in the McLean-Nocera book “All the Devils Are Here.” Unfortunately there is no direct citation in the book but the passage I refer to starts on the bottom of pg. 325 and continues to the next page.

  15. decora

    to me the whole ‘news cycle’ about AIG / GS / “backdoor bailout” sounds like some kind of media circus with political people pulling the levers. its not about AIG, its not about Goldman Sachs, its about some political calculus amongst the corridors of power. what exactly, i have no idea. perhaps Tim Geithner will write us a book some day.

    “All we have left is the internet, where information is still freely available” — Anna Politkovskaya

  16. Debra Steidel

    I remember back in 2009 there was a Bloomberg story that reported senior Goldman people were loading up on firearms, preparing to defend themselves in case there was a populist uprising against the bank.

    I never believed there would be any populist uprising, but was hoping nevertheless maybe the Goldman partners would get into an argument over how to divide up all those billions they had stolen from the American people. And in my fantasy day dream, everyone would end up shooting each other just like they did in the final scene of Quentin Tarantino’s “Reservoir Dogs”. And that would be the end of the Goldman Sachs crime saga.

    It would have been a very appropriate ending for this particular American crime saga, but of course real life is not like the movies, in real life there are no happy endings.

    In real life we can expect that Goldman Sachs will keep on stealing from the American people, and from our children, and if there’s anything left, from our grand-children as well, until there literally is nothing left to steal.

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