NYT: Testy Conflict With Goldman Helped Push A.I.G. to Edge

[WildspitzE]

Not that anybody here is surprised, but this line of inquiry must be made to continue!

http://www.nytimes.com/2010/02/07/bu...oldman.html?hp

"...

In just the year before the A.I.G. bailout, Goldman collected more than $7 billion from A.I.G. And Goldman received billions more after the rescue. Though other banks also benefited, Goldman received more taxpayer money, $12.9 billion, than any other firm.

In addition, according to two people with knowledge of the positions, a portion of the $11 billion in taxpayer money that went to Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman under a deal the two banks had struck.

Goldman stood to gain from the housing market’s implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured. The further mortgage securities’ prices fell, the greater were Goldman’s profits.

..."

[GRG55]

Re: NYT: Testy Conflict With Goldman Helped Push A.I.G. to Edge

Not that anybody here is surprised, but this line of inquiry must be made to continue!

http://www.nytimes.com/2010/02/07/bu...oldman.html?hp

"...

In just the year before the A.I.G. bailout, Goldman collected more than $7 billion from A.I.G. And Goldman received billions more after the rescue. Though other banks also benefited, Goldman received more taxpayer money, $12.9 billion, than any other firm.

In addition, according to two people with knowledge of the positions, a portion of the $11 billion in taxpayer money that went to Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman under a deal the two banks had struck.

Goldman stood to gain from the housing market’s implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured. The further mortgage securities’ prices fell, the greater were Goldman’s profits.

..."

From the article:

"...Mr. Habayeb, who testified before Congress last month that the payment demands were a major contributor to A.I.G.’s downfall..."

Talk about telling Congress what they want to hear...and conveniently trying to absolve oneself from any responsibility for the debacle.

Fact is THE MAJOR CONTRIBUTOR to the downfall of AIG was AIG itself...just how stupid is it to write more credit insurance policies than one could ever, ever, ever hope to make good on given the capitalization of the company?

The senior people at AIG responsible for this, and the public officials and politicians responsible for bailing out AIG, have found a convenient villian and are playing it for all its worth in an effort to deflect attention from their more central role in creating and perpetuating this disaster.

[GRG55]

Re: NYT: Testy Conflict With Goldman Helped Push A.I.G. to Edge

From the article:

"...Mr. Habayeb, who testified before Congress last month that the payment demands were a major contributor to A.I.G.’s downfall..."

Talk about telling Congress what they want to hear...and conveniently trying to absolve oneself from any responsibility for the debacle.

Fact is THE MAJOR CONTRIBUTOR to the downfall of AIG was AIG itself...just how stupid is it to write more credit insurance policies than one could ever, ever, ever hope to make good on given the capitalization of the company?

The senior people at AIG responsible for this, and the public officials and politicians responsible for bailing out AIG, have found a convenient villian and are playing it for all its worth in an effort to deflect attention from their more central role in creating and perpetuating this disaster.

I see Ritholtz thinks much the same way I do, based on his blog this morning. Excerpt:

"...Now, AIG’s claims that it was Goldman that forced them into collapse, that “the payment demands were a major contributor to A.I.G.’s downfall,” are sheer nonsense. AIG wrote 3 trillion dollars worth of derivatives with precisely ZERO held in reserve. A drunk driver who drives off the road might as well blame the guy who planted those trees 50 years earlier. Given AIG’s massive mortgage exposure, they were going down anyway. GS just happened to be the one who made the opposite bet. In this zero sum game, AIG’s losses were GS profits..."

[reallife]

Re: NYT: Testy Conflict With Goldman Helped Push A.I.G. to Edge

.....GS just happened to be the one who made the opposite bet. In this zero sum game, AIG’s losses were GS profits..."

Yes, and thanks to GS 'plants' throughout Bush's administration and Wall Street regulatory bodies, the profits were guaranteed by you and me, the taxpayers who actually pay taxes!! :rolleyes:

[WildspitzE]

Re: NYT: Testy Conflict With Goldman Helped Push A.I.G. to Edge

I see Ritholtz thinks much the same way I do, based on his blog this morning. Excerpt:

"...Now, AIG’s claims that it was Goldman that forced them into collapse, that “the payment demands were a major contributor to A.I.G.’s downfall,” are sheer nonsense. AIG wrote 3 trillion dollars worth of derivatives with precisely ZERO held in reserve. A drunk driver who drives off the road might as well blame the guy who planted those trees 50 years earlier. Given AIG’s massive mortgage exposure, they were going down anyway. GS just happened to be the one who made the opposite bet. In this zero sum game, AIG’s losses were GS profits..."

Let’s take half a step back. The intent of my post, and comment for that matter, is that we need to explore the whole AIG debacle to the end. I should have linked to the other articles re: GS, the NY FED, and AIG (discussing haircuts and settlements). It was not meant to cast AIG as victims, because they are one of several parties to blame. It was also not meant to cast GS as the instigator of hell on earth. It is the NYT after all, so of course we should all know their bias by now. This is itulip for crying out loud, not isimpleton. But I offer my apologies if I inadvertently caused this confusion.

That said, let’s go over some of the things that you’ve raised – esp. Ritholz’s quote. I can’t be bothered to read his whole entry, as I don’t care for his general blog entries. I never have found them to be that insightful.

Yes, AIG is an idiot for going out over its skis re: capital. They were writing checks that their bodies couldn’t cash. GS was on the other side of this “zero sum game” (ha!).

So they’re (GS) cast as the smart ones in this trade? That’s laughable. Here’s why:

If you’re that smart, why would you “buy insurance” from someone who doesn’t have the capital to pay under it?

It’s either ignorance or laziness when it comes to credit (this is credit 101 btw), or not.

The “not” may not be that they were initially expecting to cash in on govt funds (bailout) as others have alluded to, but it may have been a gamble that went wrong (maybe they had other plans for these positions, e.g. to pawn them off to someone else as part of another trade once the timing was right, etc etc but were caught flat footed). That said, we must also investigate how these decisions were affected by govt-introduced asymmetries.

Why do I laugh at the “zero sum game” usage? A zero sum game usually refers to a situation that nets to zero, the gains of one party match the losses of the other. It’s how traders view the entire world, including wealth and the economy.

That is all well in good, when it’s backed by… credit. If the losing counterparty doesn’t have the credit to pay under a contract, then it’s not a zero sum game. They both MUST lose, as they should. One for being the loser, and one for not recognizing what kind of loser the loser is. The problem with the whole FIRE industry is that they do not understand credit, and it’s at the heart of everything that they do.

Some anecdotal stuff:

EVERYBODY WITH A BRAIN knew that these “insurers” were undercapitalized – all of them from AIG to the monolines. Personally I’ve invested tens of billions in securities that have (err had) “guarantees” and in zero of those investments did we (1) give credit to such insurance from an enhancement perspective, (2) gave credit to such insurance from a capital perspective. It’s not rocket science, and in all cases we performed enough due diligence on these entities that it would make them sick. I’m sure that GS knew the creditworthiness of its counterparties. I don’t think that they’re that stupid. However, I equally don’t believe that they set out from the get go to topple AIG as a way of making a quick buck.

My personal opinion is that they set out to do something with these positions (from trading to repackaging to who knows what else), and then once the situations caught them flat footed, they made decisions as the game changed – especially as the full faith and credit of the US entered the equation to back this “zero sum game”. And all of this must be investigated as comprehensively as one would have hoped that GS would've have investigated AIGs credit ;)

[raja]

Re: NYT: Testy Conflict With Goldman Helped Push A.I.G. to Edge

I've been busy with other stuff lately and haven't had time to do my iTulip homework, so I hope this is not duplicative . . . apologies if it is:

Warning: This is Not Another Wall Street Conspiracy Theory, These are the Facts

http://moneymorning.com/2010/02/02/aig-collapse/

By Shah Gilani, Contributing Editor, Money Morning

Just last week, the House Committee on Oversight and Government Reform held a hearing on the U.S. Federal Reserve's decision to directly pay billions of dollars to banks as part of its scheme to bail out insurance giant American International Group Inc. (NYSE: AIG).

According to committee Chairman Dennis Kucinich, D-Ohio, the testimony that congressmen heard just didn't "pass the smell test."

What really stinks about the whole mess is not only the cover-up of what really happened and why, but the inability of anybody in Congress to actually do their homework and be able to frame pointed questions and get to the truth.

It's not complicated, but it is convoluted. Here are the facts and some questions that Congress needs to ask - and that the American people deserve straight answers to.

What the House Committee heard, overwhelmingly, on Wednesday was that AIG had to be bailed out because if it wasn't, the financial implosion that would result would send unemployment to 25% and America into the tailspin of another Great Depression.

U.S. Treasury Secretary Timothy Geithner and former Treasury Secretary Henry M. "Hank" Paulson Jr. both testified that the systemic risk resulting from the bankruptcy of AIG would destroy the company's insurance businesses, devastating millions of Americans and resulting in economic ruin.

Let's start there. The reality is that at the time of the government's initial $85 billion infusion into AIG on Sept. 16, 2008, for which it received a 79.9% ownership interest, there was no mention of AIG's endangered insurance subsidiaries. In fact, New York Insurance Superintendent Eric Dinello, who oversaw AIG's insurance businesses, was confident enough in the subsidiaries to consider transferring $20 billion in excess reserves from the insurance subsidiaries to their AIG parent.

What was really sucking the life out of AIG were collateral demands - in other words, margin calls. A wholly owned, London-based financial-products subsidiary of AIG had written hundreds of billions of dollars of credit-default-swap contracts on exotic collateralized debt obligations (CDOs).

The derivative swaps on the CDOs were insurance policies that would protect the buyers of those CDOs against losses on underlying subprime mortgage pools. As losses on subprime mortgages mounted, the insured parties demanded more collateral from AIG.

AIG ran out of cash to make the collateral calls.

At the time of AIG's crisis, the Fed and the Treasury Department were terrified that if the "counterparties" to AIG's credit default swaps weren't paid, the ripple effect would threaten all counterparties - not to mention the entire financial system.

So here's what the Fed did. It formed two Delaware-based, limited-liability companies, Maiden Lane II and Maiden Lane III (Maiden Lane I had already been set up and funded by $29 billion of taxpayer money to buy and hold the bad assets from the failure of The Bear Stearns Cos., so that JPMorgan Chase & Co. (NYSE: JPM) could take over whatever remained of Bear's carcass).

Maiden Lane II borrowed $19.5 billion from the Federal Reserve Bank of New York to buy $39.3 billion of residential mortgage backed securities from AIGs solvent insurance subsidiaries for $20.8 billion, or about 50 cents on the dollar. Maiden Lane III borrowed $24.3 billion from the New York Fed to buy an asset portfolio of CDOs, whose "fair value" was estimated to be $29.6 billion.

The CDOs were purchased from AIG's counterparties. Between the $29.6 billion the counterparties received, and the cash they got from the collateral calls provided by taxpayers when AIG didn't have the cash to make good on its obligations, those counterparties were made 100% whole on more than $62 billion in par value of toxic-derivative CDOs.

Here's the rationale behind this egregious maneuver: Government officials believed that the counterparties would sell their toxic junk, and would then cancel their CDS insurance contracts with AIG - which would then end the margin calls.

In the public hearings, House Committee members focused on why the Fed paid out 100 cents on the dollar to the counterparty banks and why those involved in the payout scheme then tried to hide who got that taxpayer money.

But the real story was unfolding behind the scenes. Congress doesn't know about it, and the American people don't know about it. But it will prove to be nightmare of massive proportions.

Although there were many U.S. banks that received inordinate amounts of money in this pay-off scheme, an equally sickening amount was paid to a handful of foreign banks.

But the biggest recipient of the cash siphoned from taxpayers was Goldman Sachs Group Inc. (NYSE: GS).

A Conspiracy Theory You Can't Laugh Off

The same day that AIG received the $85 billion taxpayer infusion back in September 2008, Goldman Sachs Chief Financial Officer David A.Viniar said he "would expect the direct input of our credit exposure to both of them [referring also to bankrupt Lehman Brothers Holdings (OTC: LEHMQ)] to be immaterial."

Goldman officials had been telling every analyst or journalist who would listen that the investment bank was hedged against any counterparty risk. But what Goldman officials weren't saying at the time was that the company was also hedged against AIG going bust. How? The company had purchased credit-default-swap insurance on AIG's demise.

We know that is true because Stephen Friedman - the former Goldman CEO and onetime New York Fed chairman who was called to testify at the hearing - said so.

Attached to Friedman's "Factors Affecting Effects to Limit Payments to AIG Counterparties: Prepared Testimony of Stephen Freidman Jan. 27, 2010," was a "Chronology of Selected Events and Disclosures."

That chronology included a reference to an Oct. 31, 2008 Wall Street Journal article that Friedman specifically chose to illustrate that it was common knowledge that Goldman was not in need of any government assistance, and wouldn't be in any danger if AIG were to fail. This Journal excerpt included by Friedman contained the statement: "Goldman hedged its exposure by making a bearish bet on AIG, buying credit-default swaps on AIG's own debt, according to one person knowledgeable about this move."

Friedman was called to testify for one very key reason: At the time of the payments to the counterparties, he was chairman of the board of the New York Fed, which authorized those payments. But that's not all. As a member of the board of directors and a former CEO of Goldman Sachs, Friedman would no doubt have had an excellent idea of the investment bank's exposure to AIG - as well as what it stood to gain from those payments.

Freidman subsequently resigned from his post at the New York Fed on May 7, 2009, in response to criticism of his December 2008 purchase of $3 million of Goldman stock, which added to his substantial holdings - a purchase made only after he had ushered through Goldman's approval to become a bank-holding company, enabling the firm to feed at the Fed's generous liquidity trough.

Friedman continues to serve on Goldman's board. But that's another story.

Another Way to Print Money

Congress and the public have forgotten what was happening in the fall of 2008. Mortgage-backed securities (MBS) were not trading. There were no buyers. It was impossible to accurately price mortgage securities and even harder to price CDOs. The only "price discovery" mechanism was the London-based Markit Indices. These indices were supposed to represent various pools of mortgage securities and CDOs.

Unfortunately, it is possible to make bets on the direction of the indexes. In order to hedge what holders of these complex and toxic assets couldn't sell - or for pure speculation or "other" purposes - traders sold short and drove down the indexes.

It didn't matter that mortgage pools really weren't defaulting and that they were still paying out cash flow, they were judged to be worth pennies on the dollar simply because the only "active" price-discovery mechanism against which they could be valued were the indexes. And it was these indexes - which were being shorted by "interested parties" - that drove down prices and triggered collateral payments on credit default swaps to AIG's counterparties.

Goldman was paid 100 cents on the dollar - or some $12.9 billion - for the CDOs it had AIG write credit default swaps on. All the counterparties got 100 cents on the dollar. Why is that an issue? Because the CDOs that were insured hadn't actually defaulted and were still - according to what Maiden Lane III paid - worth about 50 cents on the dollar. So why would the Fed assume the CDOs were never going to recover and that the insured parties were entitled to get paid as if the collateralized securities were totally worthless?

Even more suspicious is the fact that there was a more elegant and simple solution to the problem. And that solution was already available. Why was it not used?

The problem at the time was that rating-agency downgrades were about to trigger more margin calls against AIG. By then, however, the U.S. government already owned 79.9% of AIG. Surely it would have been cheaper for the government to make any margin calls than to pay off all of the counterparties. Even more sickening: If that solution was implemented as the value of the CDOs increased (which some have), collateral that was given to the counterparties would actually have to be returned to AIG - now 80% owned by U.S. taxpayers.

This whole affair raises scores of questions. Last week's hearing before Congress drove that point home. In fact, as I watched the testimony, I realized that our elected representatives didn't even know the correct questions to ask. That's why it's time to write your congressmen and tell them to ask:

• Why didn't the Treasury Department make the required margin calls - if they were needed - and stand to get collateral back if the insured CDOs rose in value?
• Why did the New York Fed buy paper at 50 cents on the dollar and pay banks 100 cents, when they had no idea what the intrinsic value of those securities was at the time?
• Who really leaned on the New York Fed to not disclose who got our taxpayer money?
• What did Stephen Friedman know about the payments to Goldman?
• What records exist of correspondence between Friedman and Timothy Geithner, who was then president of the New York Fed?
• What records exist of correspondence between Friedman and Henry M. Paulson, Geithner's predecessor as Treasury secretary and a former Goldman CEO himself.
• If Goldman was really hedged as Friedman appeared to claim, then why did taxpayers pay the investment bank 100 cents on the dollar?
• Did Goldman (and others) drive down the value of securities to collect cash, demand to be made whole and at the same time buy credit-default-swap insurance on AIG, which they were helping to sink?
• Can we see the trade blotters of Goldman's trading desks to determine what trading strategy those traders employed during this period and later when making record profits?
• Why are so many Goldman Sachs people in so many powerful government positions?
• Why has the United States government allowed a cabal of financial interests to hijack America?

That's a start. I urge you add to the list and forward it to President Barack Obama and to your elected representatives in Congress. It's our money, our future and our financial freedom being held hostage.

[Editor's Note: Retired hedge fund manager R. Shah Gilani is one of the leading experts on the global financial crisis, and the credit crunch that it spawned. His opinion pieces and economic analyses have been read by millions across the Internet. Gilani last wrote about how Wall Street's shenanigans are choking the American economy. To read that story, please click here.]

[GRG55]

Re: NYT: Testy Conflict With Goldman Helped Push A.I.G. to Edge

Let’s take half a step back. The intent of my post, and comment for that matter, is that we need to explore the whole AIG debacle to the end. I should have linked to the other articles re: GS, the NY FED, and AIG (discussing haircuts and settlements). It was not meant to cast AIG as victims, because they are one of several parties to blame. It was also not meant to cast GS as the instigator of hell on earth. It is the NYT after all, so of course we should all know their bias by now. This is itulip for crying out loud, not isimpleton. But I offer my apologies if I inadvertently caused this confusion.

That said, let’s go over some of the things that you’ve raised – esp. Ritholz’s quote. I can’t be bothered to read his whole entry, as I don’t care for his general blog entries. I never have found them to be that insightful.

Yes, AIG is an idiot for going out over its skis re: capital. They were writing checks that their bodies couldn’t cash. GS was on the other side of this “zero sum game” (ha!).

So they’re (GS) cast as the smart ones in this trade? That’s laughable. Here’s why:

If you’re that smart, why would you “buy insurance” from someone who doesn’t have the capital to pay under it?

It’s either ignorance or laziness when it comes to credit (this is credit 101 btw), or not.

The “not” may not be that they were initially expecting to cash in on govt funds (bailout) as others have alluded to, but it may have been a gamble that went wrong (maybe they had other plans for these positions, e.g. to pawn them off to someone else as part of another trade once the timing was right, etc etc but were caught flat footed). That said, we must also investigate how these decisions were affected by govt-introduced asymmetries.

Why do I laugh at the “zero sum game” usage? A zero sum game usually refers to a situation that nets to zero, the gains of one party match the losses of the other. It’s how traders view the entire world, including wealth and the economy.

That is all well in good, when it’s backed by… credit. If the losing counterparty doesn’t have the credit to pay under a contract, then it’s not a zero sum game. They both MUST lose, as they should. One for being the loser, and one for not recognizing what kind of loser the loser is. The problem with the whole FIRE industry is that they do not understand credit, and it’s at the heart of everything that they do.

Some anecdotal stuff:

EVERYBODY WITH A BRAIN knew that these “insurers” were undercapitalized – all of them from AIG to the monolines. Personally I’ve invested tens of billions in securities that have (err had) “guarantees” and in zero of those investments did we (1) give credit to such insurance from an enhancement perspective, (2) gave credit to such insurance from a capital perspective. It’s not rocket science, and in all cases we performed enough due diligence on these entities that it would make them sick. I’m sure that GS knew the creditworthiness of its counterparties. I don’t think that they’re that stupid. However, I equally don’t believe that they set out from the get go to topple AIG as a way of making a quick buck.

My personal opinion is that they set out to do something with these positions (from trading to repackaging to who knows what else), and then once the situations caught them flat footed, they made decisions as the game changed – especially as the full faith and credit of the US entered the equation to back this “zero sum game”. And all of this must be investigated as comprehensively as one would have hoped that GS would've have investigated AIGs credit ;)

Just to be clear my post was strictly about the asinine and infantile ["Mommy, GS hit me..."] position that AIG is trying to take, and not at all
intended to be any criticism of your posting the item...and I apologize if I left that impression.

I completely agree that the whole sordid mess needs to be properly investigated...especially the part about bailing them out with taxpayer money...and hopefully some valuable lessons are learned from that exercise. But I am not hopeful...instead the cynic in me thinks the whole thing will be a whitewash, with everyone, including elected officials, trying to make the mud stick to someone else.