Business – Economics – News

The AIG & Goldman Sachs saga is getting more interesting by the week with more information coming to light for analysis.  Here is a Wall Street Journal article about how Goldman Sachs was the middleman in many of these credit-default swaps (CDS) and in the transaction where it took the liabilities on their own books they used AIG to insure against the risk of default.

What is even more interesting is when they insure against AIG defaulting when they had such a large amount of risk with a single counter-party.  It makes one wonder if they knew that AIG was in over its head and that because of the amount of liabilities this is why the government bailed out AIG CDS bets with Goldman Sachs being the largest recipient.  So is it true the Goldman Sachs was actually insolvent until they got bailed out?

The trades yielded Goldman less than $50 million in profits, which were mostly booked from 2004 to 2006, according to a person familiar with the matter. But they piled risks onto AIG’s books, which later came to haunt the insurer and Goldman. The trades also gave Goldman a unique window into AIG’s exposure to losses on securities linked to mortgages.

When the federal government bailed out the insurer, Goldman avoided losses on its trades with AIG covering a total of $22 billion in assets.

A Goldman spokesman says that up until AIG was rescued by the government, the insurer “was viewed as one of the most sophisticated financial counterparties in the world. It wasn’t until the government intervened in September 2008 that the full extent of AIG’s problems became apparent.”

“What is lost in the discussion is that AIG assumed billions of dollars in risk it was unable to manage,” the Goldman spokesman added.

Analysis: This is more and more started to smell like a cover-up of a much larger fraud that needs to be investigated further.  The WSJ has taken it this far and now its time for the FBI and DOJ to take the ball in run.  It is very unlikely that our entire financial meltdown was caused entirely because of incompetence and lack of knowledge over the risks of these new “financial innovations”.

Before the commentary on the contents of this most interesting  piece of journalism, I wanted to address this is why having professional journalists that have the independence to report on critical issues in our society to assist in our self-governance is so important. Support good journalism buy purchasing papers that do real journalistic endeavors and sending them tips on important issues so they can make the news.

McClatchy’s D.C. bureau did a 5-month investigation on Goldman Sachs activities in the CDO (collateralized debt obligations) and how it sold those bonds as investment grade financial products (I believe AAA to Baa is the rating range for investment-grade), while at the same time they took out financial bets or “hedges” against them at the same time.  In Goldman’s defence, they maintain in the article that these departments had no knowledge of the activities that happened in the other.  In though this my the material fact, I find it hard believe that the senior management at Goldman didn’t have the “big picture” and in my opinion should of changed policy and disclosed their knowledge of the risks in these financial products.  The big question is, “was there fraud committed”?

McClatchy investigation has found that Goldman’s failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

“The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion,” said Laurence Kotlikoff, a Boston University economics professor who’s proposed a massive overhaul of the nation’s banks. “This is fraud and should be prosecuted.”

Analysis: If the bets were truly a “hedge” against risk, how much of these investments did they actually keep on their books (balance-sheet) during the time of the “hedges”.  Also, if they had much more exposure to the “hedging” products or insurance products than the amount of risk Goldman was protecting itself from, then I would say that is was more likely they had more foreknowledge then they are admitting too and at that point a crime was committed and needs to be investigated and prosecuted.

This Bloomberg article could be a bombshell in the whole AIG crisis in which many questions have been asked while not many answers have been given.  There are many questions on why AIG was bailed out with $85 billion dollars to keep them solvent.  Goldman Sachs was a large domestic recipient of this money from AIG.  They were paid the full face value on these contracts.  At the same time, Goldman Sachs repaid their TARP money and paid huge bonuses that are at least in part were paid by the U.S. taxpayers.

American International Group Inc.’s payments to banks face closer congressional scrutiny after a House Republican requested records to review whether the Federal Reserve Bank of New York quashed the insurer’s effort to pay less than 100 percent on derivative contracts.

The New York Fed and AIG were asked by Representative Darrell Issa to provide documents tied to the decision to settle $62 billion in credit-default swaps without imposing a “haircut” on the banks. Issa, the ranking member of the House Oversight and Government Reform Committee, requested e-mails, phone logs and term sheets in letters today.

Banks may have been overpaid by $13 billion last year because the Fed scuttled attempts by AIG to secure discounts, people familiar with the matter have said. AIG, once the world’s largest insurer, was bailed out in September 2008 after running short of cash because of swaps it sold that required the insurer to compensate banks for declines in mortgage-linked assets.

Analysis: If others took “haircuts” on their dealings with AIG and Goldman Sachs got full value on those contracts and were allowed to payout massive bonuses.  It looks like the public outrage on those payouts were not misplaced after all?