Goldman Faces Allegations that It Pushed A.I.G. Over the Cliff
According to a recent New York Times article by Gretchen Morgenson and Louise Story titled “Documents Show Goldman Pressure on A.I.G,” Goldman Sachs made a huge bet against AIG in 2008 by purchasing $3 billion of credit default swaps insuring against a possible default by AIG, at the very same time that Goldman was driving AIG to default on its obligations by aggressively demanding cash collateral from AIG pursuant to credit default swaps insuring risky pools of subprime mortgages that Goldman had purchased from AIG.
This titanic struggle between giants Goldman Sachs and AIG came to light during hearings before a federal commission investigating the financial crisis. The central issue between Goldman and AIG was the valuation of the mortgage pools held by Goldman and insured through credit default swap contracts by AIG. These instruments are very difficult, if not impossible, to value.
Goldman’s valuations and collateral demands were way out of line with what others in their position vis a vis AIG were doing, according to the commission and many others. Goldman officials denied that, testifying that Goldman had no nefarious purpose and “We simply stuck to our risk management protocols.” Others – the article cites Societe General – valued them in line with AIG’s values.
AIG’s former CEO, Joseph Cassano, was defiant in his testimony before the commission, arguing that during his tenure he had successfully pushed back against Goldman’s “low-ball” valuations and negotiated reductions in the amount of collateral AIG was required to post. Cassano testified that tax payers would have been better off if he had been allowed to stay on instead of having the government cave in and pay up according to Goldman’s aggressively low pricing.
The commission released 500 pages of documents showing how Goldman’s repeated and aggressive demands for billions in cash collateral from AIG pushed AIG to the brink of default. Of the $182 billion in tax payer funds spent to prop up AIG, $46 billion went to the Wall Street Banks that were the counterparties on AIG’s credit default swaps, and Goldman, at one point, received half the cash given to the counterparties.
In a similar article by Fawn Johnson in the Wall Street Journal (“Goldman, AIG Face Off in Congress Over Swap Values”), Clarence Lee, the former managing director for complex and international organizations at the Office of Thrift Supervision, was quoted as saying: “Derivative products must be better regulated and transparent in order to ensure regulators, market participants and firms themselves can better recognize stealth concentrations like the exposure to housing that built up on AIG’s balance sheet.”
