Was the AIG Bailout a Goldman Bailout by Proxy? 49 comments
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Joe Hagan has a big story on Goldman Sachs (GS) in this week’s New York, and Moe Tkacik and Matt Taibbi both pick up on the way that Hagan deals with Goldman’s share of the AIG (AIG) bailout funds. It’s worth quoting at some length:
Goldman Sachs was AIG’s biggest banking client, having bought $20 billion in credit-default swaps from the insurer back in 2005…
By that weekend in September, Goldman Sachs had collected $7.5 billion from its AIG credit-default swaps but had an additional $13 billion at risk—money AIG could no longer pay. In an age in which we’ve become numb to such astronomical figures, it’s easy to forget that $13 billion was a loss that could have destroyed Goldman at that moment.
Hank Paulson and then–New York Fed chief Tim Geithner called an emergency meeting for the following Monday morning…
At the meeting, it was hard to discern where concerns over AIG’s collapse ended and concern for Goldman Sachs began: Among the 40 or so people in attendance, Goldman Sachs was on every side of the large conference table, with “triple” the number of representatives as other banks, says another person who was there. The entourage was led by the bank’s top brass: CEO Blankfein, co-chief operating officer Jon Winkelried, investment-banking head David Solomon, and its top merchant-banking executive Richard Friedman—all of whom had worked closely with Hank Paulson two years prior…
On the government side, Goldman was also well represented: Geithner himself had never worked for Goldman, but he was an acolyte of former Goldman co-chairman and Clinton Treasury secretary Robert Rubin. Former Goldman vice-president Dan Jester served as Paulson’s representative from the Treasury. And though Paulson himself wasn’t present, he didn’t need to be: He was intimately aware of Goldman’s historical relationship with AIG, since the original AIG swaps were acquired on his watch at Goldman.
The Goldman domination of the meetings might not have raised eyebrows if a private solution had been forthcoming. But on Tuesday, Paulson reversed course and announced that the government would step in and save AIG, spending $85 billion in government money to buy a majority stake…
Of the $52 billion paid to AIG’s counterparties, Goldman Sachs was the biggest recipient: $13 billion, the entire balance of its claim. The amount was surprising: Banks like Merrill Lynch that had bought credit-default swaps from failed insurers other than AIG were paid 13 cents on the dollar in deals moderated by New York’s insurance regulator. Eric Dinallo, the former New York State insurance commissioner, who was at the AIG meetings, characterizes the decision this way: AIG’s counterparties, Goldman being the most prominent, “got to collect on an insurance policy without having the loss.”
Over time, it would appear to many that Goldman Sachs had received a backdoor bailout from a Treasury Department run by the firm’s former CEO. Why did Paulson bail out the banks that did business with AIG, critics have demanded ever since, and not Lehman Brothers? Certainly executives at Lehman want to know. (As one former Lehman managing director there puts it, “The consensus is that we were deliberately fucked.”)
The first thing worth noting here, beyond Hagan’s clearly prosecutorial stance, is that he’s got Eric Dinallo on the record criticizing the AIG bailout on the grounds that it was a backdoor Goldman Sachs bailout. That’s an important development, I think. Dinallo knows what he’s talking about, and he’s clearly not scared of annoying Goldman.
As Hagan notes, Dinallo was the person who orchestrated the unwind of smaller monolines’ positions; I believe that the 13-cents-on-the-dollar deal with Merrill Lynch was over CDS sold by ACA. I believe that ACA was rare in that it never had a triple-A rating to start with; Merrill was buying insurance from a single-A-rated insurer, which means that it had every reason to assiduously hedge its counterparty risk there.
I don’t think, in all fairness, that ACA ever provided all that much of a precedent for AIG. ACA was small enough that it could fail without much in the way of systemic consequences; it also had no consumer-facing obligations which it might default on. Even Taibbi seems to concede that if AIG had been allowed to fail, the entire financial system would have come down with it:
I was on a radio show a few weeks back with a hedge-fund manager, a Goldman apologist, who insisted on the air that Goldman would actually have made more money if AIG hadn’t been rescued, because the bank was properly hedged against AIG’s collapse… it wasn’t until the show was over that I realized the proper response to that argument was just, “Bullshit!” Goldman has been making that argument ever since the AIG bailout, but it has never come out and identified that magical counterparty or counterparties who’d have been able to come up with $20 billion after a system-wide financial collapse.
I think this is true. Yes, Goldman had as much counterparty hedging as it could, with respect to AIG, but counterparty hedging, like all hedging, is imperfect. For a detailed explanation of how Goldman hedged its counterparty risk, go here. But here’s the conclusion:
Ultimately, you try to hedge what you can hedge; what you can’t hedge, you try to quantify; what you can’t quantify, you try to understand; and what you can’t understand, you keep small enough not to sink the firm.
According to Hagan, Goldman failed on the last front: a loss of $13 billion on its AIG exposures would, he says, have sunk the firm. But then again, a loss of $13 billion on its AIG exposures would only have happened in the context of what Hagan calls “an overall collapse of the financial system” — and no investment bank is set up to survive that.
So yes, the AIG bailout was, to some degree, a Goldman bailout. But really the AIG bailout was a bailout of the entire financial system. Goldman was a beneficiary of that, to be sure, but so was every other financial company in existence.
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This article has 49 comments:
I believe for full understanding, you need to extend the final sentence with “OR you need to be the biggest political contributor on Wall Street and have your employees-on-sabbatical placed – sorry! ‘doing public service’ -- in all the right places.”
Like Goldman protégé Tim Geithner as Secretary of the Goldman Corporate Welfare Department, formerly known as the US Treasury. Or former Treasury boss Hank Paulson, ex-CEO of Goldman who, as Treasury chief, picked Ed Liddy, a former Goldman executive that worked for him, to become CEO of AIG. I’m sure this is all just coincidence, of course…
Only the big ones. Or put a better way, if a community bank fails and takes a small town down with it, does Felix hear a sound?
Based upon the fact that GS was made whole (100 cents on the dollar), I conclude that it was a bailout by proxy. GS should have suffered some penalty as a result of their AIG exposure and lost a portion of the $13 billion at risk.
When last I heard the super senior CDOs insured by AIG had 3% that were not paying.
A misstatement that needs correcting is that Paulson spent 85 billion buying AIG. The US Government loaned the money to AIG and recieved promises of repayment and heavy commitment fees, together with warrants at a nominal price for common shares equal to 80% of the company.
Basically Paulson destroyed AIG to recue Goldman Sachs and other counterparties.
Not sure if Lehman Bros. would agree with this assertion.....
seekingalpha.com/artic...
I don't know how much the international issues played in the discussions of the bailout. The bailout of AIG did effect London and the EC.
Even if not spoken of, it would have been the elephant in the room.
GS was "smart" emough to buy "insurance" in a situation that they guessed might explode. AIG was "greedy" enough to sell it.
The govt got caught in the middle.
On Jul 27 10:09 PM Common Cents wrote:
> I'm not sure it is worth making this into a "conspiracy" theory.
> My view
>
> GS was "smart" emough to buy "insurance" in a situation that they
> guessed might explode. AIG was "greedy" enough to sell it.
>
> The govt got caught in the middle.
All I remember was that after Freddie and Fannie collapsed, things started to come apart very, very fast. In the banks, the standing orders were to collect from all the other banks before paying out any money. In other words, make sure you got paid, first, before releasing any money.
Obviously, this led to things seizing up, and LIBOR spreads blew out.
From what I remember, the Bear Stearns came apart, then the GSEs, then the AIG bailout, and the final straw was Lehman, where they simply ran out of money and/or viable buyers.
That is when TARP was born, and although the initial rational, buying toxic assets, was poorly reasoned and driven by ideology more than anything else, the driving force was that they needed more funding.
I love these 20/20 hindsight criticisms of this and TARP. With the benefit of 20/20 hindsight, I could have been a billionaire.
From where I sit, Ben Bernanke and Hank Paulson should get the Freedom Medal for saving the world from a financial collapse.
During that same time frame from March onward, Paulson oversaw and participated in the virtual elimination of Bear Sterns, one of Goldman's biggest competitors, and at the same time Goldman got access to the Fed Discount window... ca-ching... billions of taxpayer "liquidity" which they no doubt used to trade the markets with, rather aggressively and I will "guess" rather successfully in the post Bear rally to 13K +/-.
September, 2008. AIG. Enuff said.
Sept 2008 - Paulson oversaw the destruction of Lehman, another of Goldman's biggest competitors. We know how that turned out (for Main Street not so hot... but for Goldman... TARP money and bonuses anyone?).
Sept 2008 - Paulson oversees the forced marriage of Merrill to BAC, ANOTHER major competitor of Goldman... in a marriage that basically emasculates Merrill and causes a paralyzing clash of corprorate cultures with BAC.
3 of your biggest competitors dead or crippled in 6 months. You were involved right up to your eyeballs in the decisions leading up to these outcomes. Many of your Goldman colleagues were major players or at least "in the room" during these events.
Now Goldman sits virtually alone at the top of the pile of survivors, making vast profits, handing out vast bonuses, holding total, monopolistic control over key pieces of the market infrastructures such as the NYSE Supplemental Liquidity Provider (SLP) program, virtually admitting that it possesses programs designed to front-run the markets (but of course they would never actually use them for that purpose, right?).
You never even considered recusing yourself from these critical decisions despite clear conflicts of interest from a public policy standpoint.
Does anybody besides me see a pattern of behavior, a pattern that led to identical outcomes time after time after time, all centered around one man, a man who's immediately previous position had been CEO of the company that has benefitted more than any other company in the world by this chain of events?
I believe that there should be a full investigation of this entire period, and that it should be conducted at and by the highest levels of government immediately... US AG, Congress, SEC, state AG's and insurance regulators, I don't give a fuck who gets involved, just DO IT.
The alternative: La Guillotine (not so pretty).
At this point only a wonded MS and BAC are left along with JPM. And GS has issued billions in bonds backed by the taxpayers, so they can take home fat bonuses.
GS needs to be destroyed, it cannot be allowed to live. The longer it is allowed to survive the worse we will become. There I said it.
The "insurance" GS bought was the government. I'm told it is the best government money can buy.
Of course predatory adjustable rate mortgages would have had to be rewritten from 13 percent to 4 or 5 percent. Some of these would still go under, but not as many.
The government would have had to step in as an overseer of the financial system for check clearing, deposts etc., but the middle managers in the financial system would have kept operating as usual while the managers of all the failed institutions found out they are as expendable as all the factory workers whose jobs were callously outsourced to China, India and Mexico. Unpaid bonuses could be retained to raise capital or offset losses.
We would not be still muddling along toward a still unseeable bottom as we are now.
Banks could have been turned loose back into the dog eat dog arena of capitalism as they proved solvency or were transferred to a new bank company with a fresh balance sheet.
The government should have always had an emergency plan like this in place to offset allowing such huge institutions to aggregate in the first place. Knowing this plan was pre-approved would have probably stopped some of the excessive risk taking in the first place.
Too big to fail has turned in to so big the entire system is ruined.
By the way, I have read AIG insured the Congressional and Senate pension system, which operates outside the safety net of Social Security. If this is true, the real instigator of the bailout was not Goldman Sachs but Congress, fearing loss of its lavish pension program.
Disclosure: position in AIB, the irish bank, not a typo.
I suggest that if anybody wants to get to the bottom of this freaking mess, they consider doing likewise.
It would be about a 5 minute exercise in walking our talk. If you think you're too busy, copy and paste mine.
On Jul 27 10:09 PM Common Cents wrote:
> I'm not sure it is worth making this into a "conspiracy" theory.
> My view
>
> GS was "smart" emough to buy "insurance" in a situation that they
> guessed might explode. AIG was "greedy" enough to sell it.
>
> The govt got caught in the middle.
The only thing that no one is reporting properly is the grossly unethical conduct of Goldman of underwriting CDO's et al and going short with AIG like it was the end of time.
They used fear tactics about the government seizing everything while directing and profiting from the "seizure".
Geithner should be fired and Herny Paulson should be in jail with Alan Greenspan. If we had the spirit that the citizens used to have it would be happening, Now we just play nice and get taken by thugs over and over.
On Jul 27 10:09 PM Common Cents wrote:
> I'm not sure it is worth making this into a "conspiracy" theory.
> My view
>
> GS was "smart" emough to buy "insurance" in a situation that they
> guessed might explode. AIG was "greedy" enough to sell it.
>
> The govt got caught in the middle.
Great post!
It seems to me that, now that we have finally gotten to the truth -- that the Goldman Sachs and all the others that got the backdoor bailouts from AIG to allegedly "save the financial system", they and the others should now be required to pay it ALL back, before distributing obscene bonuses and salary to their executives.
But, then, being a banker at, I suspect, Goldman Sachs, steeped in the idea that you are a privileged person to whom the world owe a living, you probably disagree, and think bonuses paid, essentially, with government bailout funds, are just fine and dandy. That is the real truth, isn't it?
GS got a $80 Billion of US Tax Paper money thru the Back door of AIG as they covered GS s Worthless CDS s . Dilan Radagen was kicked off CNBC as he was about to expose this last April , they gave him his own show Morning Meeting a month ago , its stupid well be cancelled by Fall and then he'll be gone , out of job cause he spoke the Truth to Power !
Keep Up the Great Work , The World needs to know the TRUTH About GS !
led to "the collapse of the global financial system". The essential communication has beenlimited to: "We have to avert disaster, we are at the edge of a cliff" Is an elementary, lucid roadmap of the likely consequences, detailed for the average layman, that expected to occur with AIG's failure to pay off its policyholders too much for the taxpayer to ask for? That it has not been forthcoming is an indication that no one really understood exactly what was happening during the fall of 2008, and that a small group of private and public bankers, were able to ram a policy through an intimidated uninformed Congress. A wholesale frighten and plunder of the American public done with speed that surely arouses the envy of Bush, Cheney, Rumsfeld, and thier "war on terror" henchmen.
and rightfully so.
GS' ( JPM's ) Oil market manipulation of 2008 and even this spring..needs investigating too...!
Had a chance of buying GS at 50, but I am so pissed off at them because they make money not because they are smart, but because of nepotism which lets them front-run. Long time ago, I was on the right side of the trade in the futures market when Volcker became the Fed-chief, but got screwed and lost a big bundle because of the same nepotism and front running by GS and JP Morgan, Chase and CITI which had to bailed out before the interest rates could go up. Sad story man, just like today. So, where is O'Bummer: BO or BM!
1. Has Goldman Sachs replaced the press as being the "Fourth Estate" of America?
2. Should there be a section in the US Constitution to accommodate Goldman Sachs and, indeed, all of Wall Street?
3. Has the capital of the United States of America been shifted from Washington DC to Wall St., NY, NY? (was it ever in Wash. DC?)
4.Should a newly enlisted soldier swear his or her allegiance to "preserve and protect" the Federal Reserve and the Harvard Business School from their enemies instead of the US Constitution?
5. Should the fact that these questions have some relevance beyond being being mere rhetorical satire be disturbing?
No sharing, then why...just another inside deal from my perspective.
On Jul 27 04:05 PM markfl wrote:
> "Of the $52 billion paid to AIG’s counterparties, Goldman Sachs was
> the biggest recipient: $13 billion, the entire balance of its claim.
> The amount was surprising: Banks like Merrill Lynch that had bought
> credit-default swaps from failed insurers other than AIG were paid
> 13 cents on the dollar in deals moderated by New York’s insurance
> regulator."
>
> Based upon the fact that GS was made whole (100 cents on the dollar),
> I conclude that it was a bailout by proxy. GS should have suffered
> some penalty as a result of their AIG exposure and lost a portion
> of the $13 billion at risk.
If there was any doubt that GS is a front for organized crime at the highest level it has all been removed in the last 12 months. No one I know believes that the monster can be contained. The only questions is will there ever be enough for these guys? It's just a game anymore. How many friggin' jets, yachts, and mansions does one man really need?
On Jul 28 09:03 AM ain't no fortunate son wrote:
> Take a look at the bigger picture... the actions that Paulson was
> involved in which led up to the meltdown in Fall 2008:
>
> During that same time frame from March onward, Paulson oversaw and
> participated in the virtual elimination of Bear Sterns, one of Goldman's
> biggest competitors, and at the same time Goldman got access to the
> Fed Discount window... ca-ching... billions of taxpayer "liquidity"
> which they no doubt used to trade the markets with, rather aggressively
> and I will "guess" rather successfully in the post Bear rally to
> 13K +/-.
>
> September, 2008. AIG. Enuff said.
>
> Sept 2008 - Paulson oversaw the destruction of Lehman, another of
> Goldman's biggest competitors. We know how that turned out (for Main
> Street not so hot... but for Goldman... TARP money and bonuses anyone?).
>
>
> Sept 2008 - Paulson oversees the forced marriage of Merrill to BAC,
> ANOTHER major competitor of Goldman... in a marriage that basically
> emasculates Merrill and causes a paralyzing clash of corprorate cultures
> with BAC.
>
> 3 of your biggest competitors dead or crippled in 6 months. You were
> involved right up to your eyeballs in the decisions leading up to
> these outcomes. Many of your Goldman colleagues were major players
> or at least "in the room" during these events.
>
> Now Goldman sits virtually alone at the top of the pile of survivors,
> making vast profits, handing out vast bonuses, holding total, monopolistic
> control over key pieces of the market infrastructures such as the
> NYSE Supplemental Liquidity Provider (seekingalpha.com/symbo...)
> program, virtually admitting that it possesses programs designed
> to front-run the markets (but of course they would never actually
> use them for that purpose, right?).
>
> You never even considered recusing yourself from these critical decisions
> despite clear conflicts of interest from a public policy standpoint.
>
>
> Does anybody besides me see a pattern of behavior, a pattern that
> led to identical outcomes time after time after time, all centered
> around one man, a man who's immediately previous position had been
> CEO of the company that has benefitted more than any other company
> in the world by this chain of events?
>
> I believe that there should be a full investigation of this entire
> period, and that it should be conducted at and by the highest levels
> of government immediately... US AG, Congress, SEC, state AG's and
> insurance regulators, I don't give a fuck who gets involved, just
> DO IT.
Secondly, remember that CDS are a form of insurance. Normally, insurance is purchased for property owned by the insured. These CDS were "naked," however, which means that GS never owned the underlying mortgages that were being insured. When an insurer pays off a loss, they have the right to take the impaired assets in exchange for the payoff. (For example, a car insurer owns the totalled vehicle after it pays off the owner.) GS should have been forced to go into the market and buy mortgages, which it would have then had to turn over to AIG when the payoff was made. (After all, the mortgages were only impaired, not worthless.) By buying mortgages in the open market, this would have created demand, which would have increased the mortgages value and reduced the loss exposure. So, AIG would have ended up with mortgages that it could have later sold, and those mortgages would have had a clearer, higher market value, as they would have recently traded in the market. Instead, AIG and the government simply paid GS off with 100 cents on the dollar (the $13 billion). This was the greatest ripoff of all time. No wonder GS was able to set aside $11 billion in bonus money in the recent quarter! The $13 billion AIG payoff was virtually pure profit!
It's clear that our government is in GS's pocket. The only reason this isn't a huge scandal is because the public doesn't understand the complexity of these transactions. Geithner said repeatedly that we (the people) have to honor these contracts, yet they didn't make GS honor the typical collateral provisions of CDS as mentioned above, and they turned around and nullified contract after contract in the GM and Chrysler matters. There has been absolutely no logic or consistency throughout this entire bailout process.
GS should have had to take a full loss on these CDS. They made a speculative bet with a casino that didn't know how to compute the odds. What happened to "let the buyer beware?" I thought the GS guys were the smartest guys on Wall St., but they should have thought harder about the credit quality of their counterparty. Barring this approach, the CDS should have been nullified and GS should have had its original investment returned to it; i.e., the $700 million or less discussed above. Frankly, though, why pay them off at all. If you want to dampen the casino mentality on Wall Street, then people need to know that they've got to absorb their own losses.
We should all be horribly outraged over this, and we should never let our politicians forget it. This must not happen again.