I hadn't realized there was controversy over the idea that Goldman Sachs (NYSE:GS) might have failed had the government not bailed out AIG (NYSE:AIG). As I understand it, that's the reason AIG was bailed out—that if it hadn't been the whole financial world would have faced collapse. But Joe Hagan's piece spelling out Goldman's vulnerability seems to be raising some eyebrows all the same. A sample:
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...
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.”
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.
This is true but somewhat beside the point. Had AIG not been saved, then Goldman would not have gotten its claims paid off in full, because AIG would be gone and so would all the other institutions through which Goldman had hedged its AIG bets. But once the government saves AIG and averts system-wide financial catastrophe those other counterparties are able to pay up. At that point, it doesn't matter whether the full payout is made by AIG or someone else; the bank gets its money.
Does the fact that Goldman—along with everyone else—needed an AIG bail-out to survive mean that it has some obligation to the government? Well, yes, I think so; if you're going to get systemic risk insurance from the government, you ought to pay for it. But does this mean that Goldman didn't really "deserve" the profit figures it recently reported, because without that bail-out they'd have tanked? That seems off; a similar argument could be made about any firm or household dependent on a functioning financial system.
This article originally appeared on The Economist.com