Did Goldman Sachs Kill AIG ?
I have to take issue with William Cohan’s Op-Ed, How Goldman Killed A.I.G.
First off, let me start out by saying that these are two bad actors; there are no “good guys” here. Second, let me remind the reader that AIG under-wrote $3 trillion worth of derivatives, a massive high-risk exposure — and collected $3 billion (10 bps) in fees on their exposure.
Tom Savage, President, the head of AIG’s Financial Products, it free money: “The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy the money.”
Gee, how could that go bad?
Thus, looking at what was done, I think its more accurate to say that AIG committed suicide. Goldman was merely one of the many Brute(s) that thrust their daggers into Caesar.
Goldman became a counter-party of AIG by paying them $100 million to insure $23 billion of mortgage securities. The contract included several triggering events that required AIG to post more reserves. These included AIG’s loss of their Triple AAA ratings, as well as a drop in the value of the underlying securities. Both events occurred, forcing AIG to pony up billions.
The “dispute” between GS and AIG was over the timing and amount of the collateral call. I must emphasize that this was part of the contract between two very sophisticated financial firms — AIG was the world’s biggest insurer, and GS was one of the world’s biggest bankers.
As Cohan states “On July 27, 2007, Goldman sent a $1.81 billion collateral call to A.I.G. Financial Products.” But Cohan’s mention that: “Goldman — pretty much alone at that point — thought represented the decline in the value of the securities.”
But so what? That AIG gave GS the ability to demand increased collateral based on their own valuations is pretty astonishing — and dumb as hell. AIG ultimately negotiated down the $1.8B collateral call to “only” $450m; eventually, they ponied up an additional $1.55 billion in collateral. AIG also had to pay collateral to Merrill and Soc Gen.
So the question I ask: Is Goldman to blame for enforcing its legal rights against AIG?
>
Source:
How Goldman Killed A.I.G.
WILLIAM D. COHAN
NYT Opinionator, February 16, 2011, 9:00 pm
http://opinionator.blogs.nytimes.com/2011/02/16/how-goldman-killed-a-i-g-and-other-stories/
Previously:
AIG’s Financial Products Division (December 2008)
Revenge of the Black Swan (December 2008)
Why AIG Counter-Parties Recieved 100% on Derivatives (January 2010)
Solvent Insurer / Insolvent Insurer (March 2009)
Backdoor Bailouts for Goldman Sachs? (March 2009)
Myths of the AIG Collapse (September 2009)
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February 17th, 2011 at 12:18 pm
There is no honor among thieves. What do you do with a drug dealer who complains to the police that someone stole his stash?
February 17th, 2011 at 12:24 pm
So these two big dogs got into a bloodied fight over a juicy financial bone, then came limping, whining and whimpering to Uncle Sam when the bone turned out to be made of rubber? They both should have been shot, put out of our misery.
February 17th, 2011 at 12:27 pm
“Is Goldman to blame for enforcing its legal rights against AIG?”
Of course not. Next Question:
Is Goldman a bunch of slimy banksters that manipulated the Government to ensure that its legal rights against AIG were enforceable?
Indeed.
Has anything that’s happened, i.e., putative profits, etc., since the rescue of Goldman via AIG been real?
No. There is no such thing as legitimate risk management, and thereby profits, when tight-rope walking over a net. No need to be careful if Uncle Sam will cushion your fall. Stay tuned for Goldman/AIG rescue, phase II, in about mid-2012. But the net is already stretched full to its limits. Things could get ugly.
February 17th, 2011 at 12:27 pm
agreed
February 17th, 2011 at 12:31 pm
AIG committed suicide. Absolutely.
Did Goldman know that AIG was TBTF? If so they all committed treason.
February 17th, 2011 at 12:39 pm
So…if AIG’s notional derivitive exposure was this lethal….any comments on JPMorgan’s notional derivitive exposure. I believe it is excess of $100 trillion.
February 17th, 2011 at 1:01 pm
like you
i take issue with the title
goldman “killed” AIG?
like the boy who caused a panic about the emporers wardrobe
AIG and Cassano blew itself up
but when i read Cohen he factual, the FCIC paragraph quoted is also actually on target.
is it goldmans fault they were the only AIG counterpart who knew what they were doing?
Literally?
This tale embodies two of the three main features that blew us up
namely fake insurance of all kinds
and really bad– atrocious– accounting, two sides of the same deal claiming massively different amounts
February 17th, 2011 at 1:01 pm
The activities pursued by both companies should be illegal (and probably are, under some interpretation of RICO or some statute concerning fraud) for ANY publicly-owned corporations, and all involved should be wearing orange jumpsuits by this point in time.
February 17th, 2011 at 1:07 pm
“Is Goldman a bunch of slimy banksters that manipulated the Government to ensure that its legal rights against AIG were enforceable?”
More like: Is GS a bunch of slimy banksters that COLLUDED with the Gov’t to ensure that its legal right against AIG were enforceable ?
—–
During the FCIC testimony, GS said they had to make the collateral calls because they under-wrote CDS to GS counter parties that were backed by the AIG CDS (GS was effectively reselling the AIG CDS with a markup). In the oral testimony GS did not reveal who the counter parties were, but was asked to provide that information in writing. When that information later revealed it was the who’s who of the big 5, international banks, hedge and bond funds.
As the crisis unfolded through the summer of 2008, GS grew increasingly concerned and continued to demand more and more collateral from AIG, they also bought CDS against AIG for the delta of collateral received to collateral requested. The question is who was under writing CDS on AIG, and realistically who would have had the capital to cover an AIG failure at that time; This could have been part of the scheme to set up additional counter party risk to justify the gov’t bailout. The mantra from those that testified in the AIG case was “Too Interconnected To Fail”.
yes, GS was slimy and unethical fraudsters, but w/o the “virtual Chairman of the Board” H. Paulson orchestrating the transfer of AIG risk to the taxpayer then GS would have slid into the ‘abyss’.
After congress forced the release of the FED information showing how much the FED was infusing liquidity into the banks throughout 2008. These accumulated into multi-trillion dollar transactions well before the Lehman and AIG ‘emergencies’. This shines a little light on the insiders, both the Gov’t and Banksters, were engaged in secret operations. This makes it hard to believe anything but the largest cover-up of the transfer of wealth from society in history. I now see TARP as a literal definition – “we’ll just put a TARP over it”.
February 17th, 2011 at 1:22 pm
The facts are both the ‘robber’ and ‘victim/scam artist’ knew what was going on. Both parties knew that it was good be true and also TBTF!
The regulators were sleeping with the regulated. Police made sure no one interfered with the day light robbery. Taxpayers became the patsy in this game!
The question is would GS would buy the insurance with AIG, if they knew that their legal enforcement of the ‘rights’ result in BKCy and no back door bailout from Taxpayers aided by Geithner and Hank Paulson? Rest is intellectual masturbation!
February 17th, 2011 at 1:23 pm
Cohan already (accidentally?) recounted the rebuttal to this absurd “GS killed AIG story” in House of Cards:
Cohan, retelling a story by Goldman’s Gary Cohn, which is one of my favorites:
” “He (Cohn) then shared an anecdote about a conversation he’d had with Nino Fanlo, one of the founding partners of KKR Financial Holdings, a specialty finance company started by KKR, the private equity shop. After Goldman sent out the marks in the 50¢ to 55¢ range, Fanlo called Cohn and told him, “You’re way off market. Everyone else is at 80, 85.” Cohn then offered to sell Fanlo $10 billion of the paper at his 55¢ price and encouraged him to sell that in the market to all the other broker-dealers at the higher prices they claimed to be marking the paper at. In other words, Cohn was offering Fanlo a windfall: buy at 55 and sell at 80. “You can sell them to every one of those dealers,” Cohn told Fanlo. “Sell 80, sell 77, sell 76, sell 75. Sell them all the way down to 60. And I’ll sell them to you at my mark, at 55, because I was trying to get out. So if you can do that, you can make yourself $5 billion right now.”
Cohn had been trying to sell the securities at 55 for a period of time and people would just hang up on him. A few days later, Fanlo called Cohn back. “He came back and said, ‘I think your mark might be right,’” Cohn said. “And that mark went down to 30.”
Cohn said the market changed dramatically through the course of the year. “We marked our books where we thought we could transact because some of this stuff wasn’t transacting,” says Cohn. “We sold stuff at 98 and marked it at 55 a month later. People didn’t like that. Our clients didn’t like that. They were pissed.”
February 17th, 2011 at 1:53 pm
To paraphrase Moe Greene in The Godfather: “We got a business to run. We gotta kick asses sometimes to make it run right. We had a little argument, AIG and ourselves; so we had to straighten them out.”
February 17th, 2011 at 2:01 pm
“…You have created a progressive debt singularity so immense that no amount of fiat, no amount of taxation, no amount of austerity could ever satiate its hunger. You now have the perfect excuse to print the dollar with wild abandon until its withered, corpsified remains are six feet underground, leaving the door wide open for the tap dancing fast-talking SDR to take its place.
The issue is, how do you convince the general public that all is well until you are ready to unleash hyperinflation and fiscal Armageddon? How do you make them believe with all their hearts that they are not in the midst of a debt meltdown and the end of their financial sovereignty, but basking in a full-on economic recovery?!
You can’t stop wealth destruction now that the avalanche has been set in motion. You can’t stop inflation and dollar devaluation (nor would you want to. Hey, you’re evil incarnate, remember?). The effects on mainstreet are beyond your ability to hide, but, what you CAN manipulate, are the statistics and indices that Americans rely on for psychological comfort. You give everyone a blindfold and a cigarette and you do what you do best; lie!
Here is a step by step guide to fabricating an economic recovery out of thin air……”
http://neithercorp.us/npress/2011/02/how-to-fake-an-economic-recovery/
February 17th, 2011 at 2:03 pm
Derivatives are the thing of the future.
http://www.youtube.com/watch?v=KxM1nreZdYc
February 17th, 2011 at 2:05 pm
A good example of what I like to call the fallacy of “if Hitler said the sky was blue that doesn’t make it orange” thinking. Examples of bad actions by Goldman abound, let us not add silliness to the equation–it gives them an easy out.
February 17th, 2011 at 2:38 pm
Goldman should not be blamed for enforcing its legal right under their contracts with AIG.
However – when it comes to marking portfolios for margin purposes, there have been many examples of brokers marking extremely and overly aggressively and forcing firms out of business as a result (this happened in prior mortgage backed melt downs, in the early 1990s, and in stock melt-downs as well).
Not sure in this instance that you could say that GS was overly aggressive in this case, but we only now know in hindsight.
THE REAL QUESTION IS WHY THE FEDERAL RESERVE ALLOWED GS AND OTHER US AND NON-US BROKERS TO GET 100% OF THEIR MARKS BACK WHEN IT WAS CLEAR THAT AIG WAS DOOMED ! THEY SHOULD HAVE BEEN HAIRCUT BUT IT IS CLEAR – IN HINDSIGHT AGAIN – THAT THE FED PANICKED AND WOULD NOT ALLOW A NORMAL BANKRUPTCY PROCEDURE TO WORK FOR AIG.
This is why the portion of Dodd-Frank dealing with TBTF is really such a bad thing: it allows a few individuals to make these decisions without a real process such as you would have in bankruptcy…..the alternative is to NOT ALLOW DERIVATIVES BOOKS TO BE SO LARGE TO BEGIN WITH !
But alas, in the debt fueled, pump priming world we live in today the derivatives books will keep growing and when a firm goes “POP” next time, a few guys in a room will determine who wins and who loses….
February 17th, 2011 at 3:15 pm
@ KidDynamite – I’ve read similar anecdotes elsewhere. To make matters worse, both AIG and Goldman had the same audit firm. Thus, said auditor was allowing them to mark the same assets that far apart.
February 17th, 2011 at 3:23 pm
I agree with curmudgeon. Ritholtz again, apologist for the government/banksters/fraudsters. Taking an act, out of context and using it as an argument for a bogus position. Maybe there is a place for TBP in mainstream media after all. If Huffpo would just move a tiny bit further to the left…
February 17th, 2011 at 4:32 pm
“Bruteses that thrust their daggers into Cesear.”
Brutes and Cesear?
(My spelling is bad too, except nobody reads it.)
~~~
BR: I thought it looked wrong — Fixed
February 17th, 2011 at 4:34 pm
” … I think its more accurate to say that AIG committed suicide. Goldman was merely one of the many Bruteses that thrust their daggers into Cesear.”
Huh? So what happened to AIG was what – suicide, murder or both suicide & murder? Bad analogy. Julius Caesar was assaulted & assassinated (i.e. murdered). He didn’t start to commit suicide & then was helped along further by his friends.
February 17th, 2011 at 4:52 pm
AIG was a big boy in this.
A trade is a trade, as long as both parties are grown ups. BR is correct.
February 17th, 2011 at 6:31 pm
While there is no doubt that AIG-FP was absolutely reckless and that AIG had a non-existent risk management structure in place, I believe there is something missing in this analysis that would provide credibility to the theory of Goldman Sachs helping this demise:
GS saw the writing on the wall with mortgages and was ahead of the game. Once values started moving south, they were going short the ABX, and took more short positions. Around the same time they started making collateral calls to AIG, they started going short on AIG buying insurance against an AIG collapse. As the situation worsened, it seems to me (and I might be wrong) but it seems at that point, GS would benefit more from a complete collapse of AIG. I have no problem with them making collateral calls and it was in their right to do so, however according to All the Devils are Here (McLean, Nocera):
GS was SETTING CRITERIA for the CDO managers (non AIG employees) to boost the yield by putting subprime bonds from the 2006/2007 vintages and kicking out many of the bonds that had been in the CDO when AIG originally insured it. AND…AIG didn’t even have to be informed that collateral was being swapped out.
So, this might be a stretch, but if it were the case that GS was to benefit from the demise of AIG, when they were stuffing CDO’s with shit, without AIG’s knowledge, were they in fact trying to implode the CDO’s from within? I think it’s a fair question to ask, and if the answer is yes, then I do think they played more of a role in the demise of AIG.
Sidenote: Although not proven, Societe Generale is a big client of GS and SG also made collateral calls on AIG, which appears to be at the suggestion of GS (not proven). SG backed off on the call, and it was totally in their right to ask, but if GS made the suggestion, then I would just say it’s more anecodtal evidence that GS wanted AIG to fail and was trying to impact it. A much weaker case on this one, but it’s the behavior that leads me to believe they were in a position to benefit more at the demise of AIG and makes the CDO vintage replacement that more scumbaggish.
February 17th, 2011 at 10:24 pm
“but if it were the case that GS was to benefit from the demise of AIG” .. why I hate the concept of disaster capitalism and your industry INSTRUMENTS
and since you brought up “Societe Generale” .. this is not my industry so I could be off on this .. but .. imo our “financial weapons of mass destruction” by WBuf .. we had to do what we did to keep world peace .. now return to line 1 and wash rinse repeat repeat repeat repeat ……
February 17th, 2011 at 11:04 pm
AIG’s risk management was so bad, you’d almost have to ask was it run by a mole, for the benefit of their Counter-parties. Were the AIG shareholders the biggest suckers of all time?
Was AIG “Played” by All of Wall Street?
February 18th, 2011 at 3:23 am
The point is not whether Goldman is guilty of killing AIG. The point is that the thought of Lloyd Blankfein being pounded in the ass, then traded to another prison gang for a pack of smokes just makes me giggle like a little girl. Heh, heh. Who’s your daddy now, Bitchfein!
February 18th, 2011 at 4:41 am
It’s not a question of if they killed AIG, it’s a question of GS betting more than the casino could pay out. The only reason they were made whole on the bet was because the USG stepped in.
How can GS even admit they did this without loosing an enormous amount of credibility?
I too can walk down to the 3 card monte game on the side walk and put down 100 million. Getting the dealer to pay out if I win might be a problem. How is they any different than what GS did with AIG?
As has also been pointed out by others, GS had a better picture of AIG’s financial condition than AIG had, and they still made the bet.