Goldman Maintains It Had No A.I.G. Exposure

By Dealbook
Goldman

Hoping to tamp down a swirl of speculation over its role in the bailout of American International Group, Goldman Sachs reiterated Friday that its direct losses would have been minimal if the vast insurance conglomerate had failed.

Goldman also described how, as early as July 2007, it began to have “collateral disputes” with A.I.G., as the two firms disagreed on the value of the mortgage-backed securities that were the basis of multibillion-dollar contracts between them.

David Viniar, Goldman’s financial officer, walked reporters through a thicket of numbers in a conference call Friday, which Goldman held to “clarify certain misperceptions” about its positions with A.I.G.

While he acknowledged that its relationship with A.I.G. raised a “complex set of issues,” Mr. Viniar was adamant that, because of the collateral it held and hedging trades with third parties, Goldman would not have taken a direct hit if A.I.G. had been allowed to collapse.

Since September, the government has set aside more than $180 billion to support American International Group, according to a report from the Government Accountability Office.

A significant part of those funds has flowed through A.I.G. to various trading counterparties, many of them major financial institutions, which A.I.G. at first refused to identify.

Under intense pressure from lawmakers, A.I.G. recently released a list of counterparties, and Goldman was among the largest. For some, this raised questions about the government’s motivations for not letting the insurance company go into bankruptcy protection.

Henry Paulson, the Treasury secretary at the time of the initial A.I.G. bailout, had previously been Goldman’s chief executive.

All along, Goldman has said that its exposure to A.I.G.’s troubles was “immaterial,” because of outside hedges that would have protected it.

On Friday’s conference call, Mr. Viniar described how Goldman entered into a large number of trading positions with A.I.G. in 2006 — a time when, he said, A.I.G. had a high credit rating and “appeared to be a sophisticated trading counterparty.”

But in 2007, Goldman began to mark down the the value of the super-senior collateralized debt obligations that were underlying the credit default swap agreements with A.I.G. He said Goldman and A.I.G. could not agree on how much additional collateral A.I.G. had to supply to reflect the risk.

During the negotiations, A.I.G. asked Goldman to accept less than full value for some of the contracts, but Goldman refused, Mr. Viniar said.

By the time of the A.I.G. bailout in mid-September, he said that Goldman held $7.5 billion in collateral from A.I.G., and had hedged the remaining $2.5 billion of its $10 billion net exposure using credit default swaps with other parties. (Goldman’s overall position with A.I.G., or the “notional” value of the contracts, was about $20 billion, he said.)

After the rescue, Goldman received an additional $2.6 billion in collateral from A.I.G.

In mid-November, Goldman also sold $5.6 billion in securities related to the swaps at par — or full value — to a government-backed vehicle that was created to help unwind A.I.G.’s ill-fated trades.

Asked why Goldman accepted full value for the securities, which were valued on the open market at far less, Mr. Viniar said his firm had entered into a commercial contract with A.I.G. and was “not in a position to take a loss.”

Accepting a loss it wasn’t required to take would have gone against Goldman’s duty to its shareholders — and, Mr. Viniar added, to taxpayers.

“Frankly,” he said, “we also had taxpayer money at Goldman Sachs.” That was a reference to Goldman’s participation in the Troubled Asset Relief Program, in which the government bought preferred shares in many large banks.

Mr. Viniar said he didn’t know how large a role that Goldman’s collateral calls had in A.I.G.’s near-collapse, but he rejected the suggestion that his firm might feel guilty about its demands.

“All we did is call for the collateral that was due to us under the contracts,” he said. “So I don’t think there’s any guilt whatsoever.”

Go to Goldman Sachs News Release

Comments are no longer being accepted.

Jay March 20, 2009 · 12:55 pm

Since government paid full to Goldman’s positions at AIG, then the net profit of Goldman’s trade with AIG is the hedge money it trades with other banks, which is not a small amount. That’s why Goldman has money to lend to its own employees and those big bonus.

Nat March 20, 2009 · 12:57 pm

I trust Goldman to have looked for their shareholders. Right or wrong.

Francois March 20, 2009 · 1:10 pm

This Goldman-AIG connection is by far the biggest story related to the AIG bailout — far more significant than the piddly bonuses that have garnered so much attention and outrage.

Goldman’s deception on this matter is so blatant as to be laughable. The idea that a $20 billion exposure could be called “immaterial” is hilarious. They claim they had collatoral in the amount of $7.5 billion, but what was that collatoral and what was its actual market value? And why have taxpayers been purchasing massively devalued securities at par from Goldman?

This is a scandal on the very highest order. Please keep reporting on this issue, and keep, as it were, following the money.

Gupta March 20, 2009 · 1:11 pm

I think this is complete fraud. SEC should investigate GS. When they say they have no exposure to AIG and then get money from AIG at the same – how can it be true. (Ofcourse they are saying we had a hedge on that ??).
Isn’t it something like the analogy:
SEC: Did you ever steal ?
GS: No, I never ever stole anything….
After few days, SEC shows police record (AIG laundary list)..and ask again:
SEC: What is this ?
GS: I said I never stole anything in the sense that I was caught stealing and I returned the stuff. So, I never really used anything stolen..So, you cannot say I ever stole..

I think this is legal fraud..

William O’Connor March 20, 2009 · 1:22 pm

Obviously Goldman did have exposure as a counter-party to AIG and other financial institution’s credit default swaps; as sharing risk is the whole intent behind credit derivatives. If Goldman had no exposure, it could have not received any monies from AIG. The amounts of monies that Goldman received were directly related to the decline in the credit worthiness of AIG, as that decline increased its exposure as a counter-party to the instruments. That’s the way that it works, and that’s the reason Goldman decided to become a retail bank holding company: to reduce that exposure.

Greg March 20, 2009 · 1:26 pm

More robbing of the taxpayer. Bernanke needs to resign. We would have been in a better position if AIG had failed and then these counterparties would have come to us for loans to stablize their balance sheets on which we could have made money. Instead, Bernanke in his infinite wisdom, has the taxpayer covering the losses of these institutions. This is ridiculous!

Brian March 20, 2009 · 1:28 pm

Goldman Sachs doesn’t do guilt , not when it comes to making money. And make no mistake, make money they did on the AIG disaster.

Here’s the scenario, enter into the credit default swaps contract with AIG on the collateralized debt obligations based on mortgages. Now, you know that everybody else on the street both buys and sells CDS, except AIG. So you know that they’re particularly exposed to a downturn in the housing markets. You’ve already boasted that you identified the problems in housing and mortgage backed securities earlier than everybody else. So as housing prices start to drop, and the value of the CDS falls, you make AIG put up collateral. You’re the first one to do this. You know this may cause the rating agencies to downgrade AIG, which will require them to put up even more collateral.

Meanwhile, you protect yourself by buying CDS on AIG’s own debt. And you short AIG stock, betting that it’s going to go down. A few well-placed words here and there, and all of a sudden the cost of credit default swaps on AIG debt start skyrocketing, and their stock tanks. You win on both counts.

Meanwhile, the rating agencies get wind of what’s going on, and start investigating, leading to the downgrade. Now you demand even more collateral. You’ve covered your short position, making a ton of money, and have sold an awful lot of the credit default swaps you bought, also for a huge profit. What to do now?

Here comes Henry to the rescue. The government steps in, and pays you 100 cents on the dollar for positions that are probably worth less than half of that. Of course there’s no guilt whatsoever. Like I said, Goldman doesn’t do guilt.

Ollie March 20, 2009 · 1:32 pm

Goldman Sachs feasted on the carcass of Bear Stearns, they feasted on the carcass of Lehman Brothers, and now they are eating off the carcass of AIG. Never was the Wall Street adage “You eat what you kill” more appropriate than one applied to Goldman Sachs. The difference now is, after they eat the AIG carcass, the government gives them food stamps.

KenC March 20, 2009 · 1:44 pm

They should have taken a haircut.

-Daniel Statnekov March 20, 2009 · 1:45 pm

Baloney!

Big D March 20, 2009 · 1:46 pm

Goldman Sachs is a very arrogant firm and always has been so the fact they feel the need to make a public statement such as this one means they are trying to get ahead of what they know to be a blatant conflict of interest since they were an advisor on the AIG bailout.

More importantly, Paulson should be indicted since he knew this money was going straight to Goldman and thus, he had a huge conflict of interest..

More evidence against Paulson would be the fact that the $700 Billion bailout was announced the same week that the stock prices of both Goldman and Morgan were collapsing and both looked to be insolvent within a week.

Bear and Lehman were allowed to fail but when it looked like the mighty Goldman could fail, Paulson got an earful from his old buddies and boom, rescue package announced.

Paulson is a criminal.

williambanzai7 March 20, 2009 · 1:47 pm

THE STENCH AT GOLDMAN SACHS GETS WORSE
I just re-read Grechen Morgenson’s (NYT) October 2008 Article (//www.nytimes.com/2008/09/28/business/28melt.html) from which the following is an excerpt:

“As the group, led by Treasury Secretary Henry M. Paulsen, pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

One of the Wall Street chief executives participating in the meeting was Lloyd C, Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.”

According to the WSJ live blog of the call which can be viewed here (//blogs.wsj.com/deals/2009/03/20/live-blogging-the-goldman-sachs-aig-call/ ), a Goldman representative today said: “We [WSJ] ask if GS alerted the Treasury about the potential systemic risk in AIG’s fall. There were no meetings between Lloyd and Hank Paulson. Alerting people — we meet with our regulators regularly, and all through our big exposures, and our regulators were posted.”

First off, this is inconsistent with what Morgenson was told last Fall. Morgenson is not a sloppy reporter. Second, I don’t believe that Blankfein, who was apparently Paulsen’s youger protege at Goldman, did not have any conversations about the big picture with his former boss. I just don’t believe it.

Perhaps Barney Rubble and his cadre of Capital Hill financial experts should subpeona Blankfein and Paulsen to find out exactly what conversations occurred and when.

Why I am harping about this. Well the problem our beloved financial system is facing is a crisis of confidence first and foremost. The cronyism that allowed Goldman to avoid destruction last September is one of the many glaring imperfections that will have to be exorcised before anyone (but Wall Street itself) will once again believe that Wall Street is something other than a rigged game.

Nelson Alexander March 20, 2009 · 1:51 pm

I am sure it is true that Goldman Sachs’ positions were “fully hedged.” They were fully hedged by the position of their former chief at the Treasury Department.

Eagle March 20, 2009 · 1:52 pm

The fury over this is ridiculous. Of course the AIG bailout money went to financial institutions. Where else would it go? Groceries? The phone bill? What is AIG going to do with $170 billion other than to meet its obligations to other financial institutions? Why do we think it needed it?

And of course Goldman, as a leading player in AIG’s markets, got a big dose of the money. Who else would get it? A hardware store? The dry cleaner?

The reason that Goldman can say that it had no exposure is PRECISELY BECAUSE its exposure was collateralized or hedged with others. The fact that it was collateralized with bailout money (note: this was the point of the AIG bailout) doesn’t make the reduction of Goldman’s exposure any less real.

Up until now, I had thought that the administrationand its predecessors had done a B-/C+ job in handling a difficult crisis, but that the damage seemed contained. We’d have a bad year or two, and things would start to improve. Now, thanks to Congress and a lot of populist angst and anger, it looks like we won’t be able to fix the financial system and Great Depression II looms.

We have to get used to the idea that we’re fixing system-wide problems, and there may be injustices along the way. People at failing companies will still be paid to show up for work, and in industries where their pay is bonus-driven, they will still get bonuses (or they’ll stop working until the smoke clears–they can afford it). People who made stupid decisions about how much of a mortgage to take on will be bailed out, while suckers like me who didn’t borrow more than we could handle will feel like we got the shaft. We need a banking system that works, though, and we need a housing market that isn’t in a downward spiral.

We need to decide which we prefer: Do we want a return to a healthy economy sooner, while we swallow our anger along the way as we watch others make out better than we do? Or would we rather stop the bonuses and bailouts so that we can all sink together? These days, it looks like we’re choosing the latter, over an amount of money that won’t get you seven years of Alex Rodriguez. History will laugh at us if we don’t pull it together and make decisions with our brains instead of our emotions.

Andrew March 20, 2009 · 1:56 pm

Damage control, GS at its finest. Everyone now knows whole point of the AIG bailout was to help GS. They are the most connected firm, a bunch of blue blood “geniuses” who managed to escape relatively unscathed (if you call a couple billion in losses minor).

Now consider that they are “loaning” their own partners anywhere from 100K to a few Million to invest in their internal hedge funds (which are tanking), then US TAXPAYERS are giving them money (much MORE than AIG).

Andrew March 20, 2009 · 1:58 pm

One more point, since Congress is now in the business of creative legislation, why not pass a new law that bans any former Goldman exec from running (read: ruining) the FED or Treasury?

Can anyone say conflict of interest?

CK Check March 20, 2009 · 2:09 pm

to quote the times

//www.nytimes.com/2009/03/03/opinion/03tue1.html?ref=opinion

“Lloyd Blankfein, Goldman’s chief executive, was the only Wall Street executive at a September meeting at the New York Federal Reserve to discuss the initial A.I.G. bailout.”

I assume that Mr. Blankfein is a pretty smart guy, so he must have been cognizant of the acidic public reaction to his being in attendance at this meeting. Does Goldman really expect us to believe that he would take such a risk if the reward was not extremely material to the bank?

Until we get a satisfactory answer as to why he was at that meeting how can we belive tghat the AIG bailout was not done principally to save Goldman?

ted March 20, 2009 · 2:12 pm

If I understand correctly, Goldman is claiming “that its exposure to A.I.G.’s troubles was ‘immaterial,’ because of outside hedges that would have protected it.”

Who are the outside hedges with, and, in turn, how well capitalized are they? Are they huge institutions / foreign governments, or are they hedge funds themselves?

Clearly Goldman has preferred to have a USG-backed AIG covering its collateral (100 cents on the dollar), instead of their other, inevitably-smaller-and-less-well-capitalized counterparties.

It’s a good position for Goldman to be in, one they got to because of their foresight and connections. That said, for them to claim that they had immaterial exposure to AIG just doesn’t seem believable to me.

John March 20, 2009 · 2:15 pm

After watching Kieth Olberman’s special comment last evening I just sat back and wondered where all of this went so wrong. As Olberman said throughout the piece, ” Enough”! The country has been brought to its knees by both a banking system built on greed and avarice as well as a government not of, by and for the people but for those with access to the highest bidder.
if we are going to fix this financial train wreck, it is not going to be with the very people that have brought us to the edge of the abyss. We will have no recovery until the system is reformed and brought back into a sustainable balance. To achieve this end, the banks must be returned to business of banking again, with the reinstatement of Glass-Steagall. The hedge funds must be restrained through fundamental regulatory reform.

A private agency like the Fed is not capable of performing these tasks. The Fed, for all the rhetoric that surrounds it, is a private enterprise owned by the banks. The effectiveness of self-regulation and the rational efficiency of markets are the great myths that have led us to our current crisis.
The Fed as the great regulator for multiple markets is an attractive choice for the government, because when it fails the government may point the finger of blame, and absolve itself of all responsibility for our ruin as they are attempting to do now. The mantra from the American people should be shut the Fed and in turn go back to a US Treasury banking system that the founders had entrusted to the people. Not to a private banking cartel whose only interest is the industry which they serve.

Kim March 20, 2009 · 2:20 pm

Your right Ollie they eating everything they kill and more. Not only are we giving them food stamps but they are eating us bite by bite. Nothing like giving AIG money who funnels it out the back door to their brothers but then our government gives them operating capital too!! Food stamps are the bonus money they all take – the eating at the US government is what will kill us

Jim in Manhattan March 20, 2009 · 2:30 pm

Brian hits it on the nose. Congress must stop behaving like it is an election year with its populist pandering vis a’ vis AIG bonuses and take a look at where real money went – billions, not millions.

We elect congress to advance and protect our interests. Instead we get primping and posturing.

We need a third party, and quickly!

Kim March 20, 2009 · 2:41 pm

Interesting piece of information I found in the 1990’s J P Morgan Chase pioneered the theory and use of credit swaps and by 2007 – 2008 the begining of the destruction was being revealed for what it was. AND it was bigger than the stock market hence the failure and massive drop as more and more of the public started to panic not on the information provided because they didnt understand but the emotion and earnings (E E of investing) kicked in. Can one imagine if all the 401 – pension fund people had been able to control their personal investment the market and financials would have truly crashed in spite of the governments help. The losses are truly staggering to the investor. But I think more so for those 401’s and pension fundls. The stock market is run by the powerful and the rich if only to sustain their standard of living. Money is power! Who can blame the anger and frustration of working and thinking all is good with the world only to find that debt you accumalated was nothing more than the rich mans desire to trick you into thinking you could be like them. Of course, they had debt but they can somehow make it disappear and earn more. No matter what laws are broken the job is secure, the money is secure the world is right for them. Thats the problem there is them then there is us. Maybe we won’t so easily misled the next time!!

John March 20, 2009 · 2:41 pm

It is totally ridiculous for Goldman to claim that their exposure to AIG is “immaterial”. AIG released the number a few days ago, claiming that it gave about 12billion to Goldman. That was the largest single recipient of bailout money from AIG. Now it claimed that its exposure is ONLY 20billion. It is just unbelievably that there are even people buy into this from the bunch of thieves.

Of course, all these boil down to money to their own pockets – not just the shareholders of Goldman. A mere few days after Obama announced the $500k “guideline” of salary for executives, Goldman was among the first to say that they don’t need the TARP money anymore. And there was just a few months after Hank Paulson said that the 700b TARP is urgently needed.

Unbelievable March 20, 2009 · 2:49 pm

Goldman didn’t have much real exposure because they didn’t stand to lose a lot.

The contracts they had with AIG are probably like home insurance with a slight twist. Its like buying insurance for a house you don’t own. If the house burns down, and the insurance underwriter is unable to pay you, you will only lose the premium you paid.

My guess is Goldman had similar contracts with AIG and GS is not going to lose much if AIG fails to honor them. This is a much bigger deal than the small piddly bonus scandal. The government should have instructed AIG to payback the premium plus a little more and have the contracts voided.

Shame on this administration for not doing that. The problem is the administration is still looking at investments banks as partners in finding the solution. They are the problem and less they are involved in devising the solution, the better.