Questions Remain on Goldman Sachs / AIG Bailout

 |  Includes: AIG, GS
by: Craig Pirrong

Several sites on the web (EG) have linked to my recent post on the AIG bailout, and included a hattip to Jim Chanos. Just curious if that is the “noted short seller” (and billionaire) Jim Chanos (a hedge fund manager noted for his very prescient call on Enron). If so, it would be a hoot.

The sites mentioned have quoted the part of the post which notes that unlike the other banks that received payments via the Maiden Lane III SPV, Goldman Sachs (NYSE:GS) had sold protection on CDOs to its customers, and thus was potentially exposed to collateral calls from them. This means that with no cash flows from AIG (NYSE:AIG) (or Uncle Sugar), Goldman would have needed to find a few spare billion lying around to meet its obligations–at a time of a market meltdown. (Think of how the market would have responded had Goldman not met the calls, or been observed scrambling around to do so.)

There is an indirect, oblique, and very understated confirmation that this cash flow mismatch issue was a real one for Goldman in its reply to (”Wretched”) Gretchen Moregenson’s most recent article on the AIG bailout:

Did we benefit from Maiden Lane III then? In one sense, yes – there a was a timing benefit in terms of money received sooner than might otherwise have been the case.

“Timing benefit in terms of money received sooner.” How benign it seems, worded that way. But in the chaotic conditions of mid-September, 2008, when cash was not king–because it was God–that timing benefit could have been the difference between life and death for Goldman.

As I said in the original post, the story is incomplete, and questions remain. For instance: Why go through the subterfuge of providing a cash injection to Goldman via a bailout of AIG rather than providing support directly to GS? I can think of at least one reason: in those panicked days, even the suggestion that Goldman needed government support would have unleashed Armageddon. Or at least, it was reasonable for Paulson, Bernanke, and Geithner to fear that it would have unleashed Armageddon. But we–I–don’t know based on the record whether that was a decisive consideration.

I would say, though, that based on the same record we can’t say that it wasn’t. I would say further that additional inquiries on this issue are likely to be far more probative than continued flogging of the “the Fed should have forced the banks to take a haircut” angle.

Despite the efforts of Goldman and its defenders to say “move along, nothing to see here,” there are still loose ends. The most notable of which is the one that distinguished Goldman from the other banks that received Maiden Lane funds–the fact that it was in the middle of a contractual chain.

Anyways, it would be interesting to know if Jim Chanos has been touting SWP. Just between us, Jim