I'm glad to see that there are concerned individuals that will keep digging into the relationship that Goldman Sachs has to the US government, especially the Treasury. This is a nice follow up piece to several posts on this subject that I've made here over the last year. My thanks to Jonathan Weil and to Bloomberg.com. / GB
Commentary by Jonathan Weil
Oct. 29 (Bloomberg) -- How did so much taxpayer money end up in the coffers of American International Group Inc.’s too- big-to-fail customers? The more we find out, the more it becomes obvious we still don’t know the half of it.
It’s the story that won’t go away: Was last year’s federal rescue of AIG a back-door bailout for the likes of Goldman Sachs Group Inc., Societe Generale SA, Deutsche Bank AG, Merrill Lynch & Co. and other large banks? And who exactly were the regulators trying to protect when they seized control of the insurance giant in September 2008? The banks? Or the rest of us?
To believe AIG’s disclosures, you’d have thought its executives decided on their own last year to pay 100 cents on the dollar to the various banks that had bought $62 billion of credit-default swaps from the company. Now, thanks to an Oct. 27 story by Bloomberg News reporters Richard Teitelbaum and Hugh Son, we know otherwise.
It turns out the decision to make the banks whole wasn’t AIG’s. It was made by the Federal Reserve Bank of New York, back when its president was the current U.S. Treasury secretary, Timothy Geithner, and its chairman was Goldman Sachs director Stephen Friedman. (Friedman resigned from the New York Fed in May, after the Wall Street Journal reported he had bought more than 50,000 shares of Goldman stock following AIG’s takeover.)
Before AIG was seized, its executives had been negotiating for months with the banks, trying to get them to accept discounts of as much as 40 cents on the dollar, Bloomberg reported, citing people familiar with the matter.
Taking Over
Then, late in the week of Nov. 3, the New York Fed took over the negotiations with the banks from AIG, together with the Treasury Department (at the time run by former Goldman boss Henry Paulson) and Chairman Ben Bernanke’s Federal Reserve Board. Less than a week later, the New York Fed instructed AIG to pay the counterparties in full, Bloomberg reported.
Judging by the result, you might think Geithner’s team was on the banks’ side, rather than AIG’s.
AIG wound up paying $32.5 billion to retire the swaps, $13 billion more than if it had paid, say, 60 cents on the dollar. The New York Fed also arranged to pay the banks $29.6 billion for collateralized-debt obligations backed by subprime mortgages and other loans, a tad less than half their face value. (The swaps were side bets by the banks that rose in value as the CDOs fell.)
It probably made sense for the counterparties to reject AIG’s initial settlement offers. They had their own investors to look after. And once the government took control of AIG, it couldn’t credibly threaten to force the company into bankruptcy proceedings. The premise of the government’s seizure, after all, was that AIG was too big to fail.
Rush to Pay
But why the rush to pay the banks in full once Geithner’s team took over the talks? The public has never gotten satisfactory answers, notwithstanding that the government’s commitment to AIG now stands at about $182 billion.
In a story published yesterday in response to Bloomberg’s scoop, the New York Fed’s general counsel, Thomas Baxter, told the Washington Post that officials were racing to prevent AIG’s collapse and didn’t have time for protracted negotiations with each creditor. That won’t put to rest suspicions that regulators used AIG as a slush fund to shield some of the banks from losses, using taxpayer money.
Nor has anyone from AIG or the government explained why there was such a hurry to buy the CDOs. While the banks supposedly received market prices, that deal has since turned sour for taxpayers. The value of the securities, now held by a Fed-run entity called Maiden Lane III, was down by about $7 billion as of June 30, according to the New York Fed.
The public might get some answers soon. Next month, the inspector general for the government’s Troubled Asset Relief Program, Neil Barofsky, is scheduled to release a report on whether AIG overpaid the banks, and the extent to which the counterparties’ own financial problems may have been at issue.
Goldman Sachs Untouched
Goldman, for one, has long said it wouldn’t have incurred any material losses even if AIG had gone under.
“We limited our overall credit exposure to AIG through a combination of collateral and market hedges,” Goldman’s chief financial officer, David Viniar, said in March. “There would have been no credit losses if AIG had failed.”
Then again, Viniar is the same guy who this month made the ridiculous claim that Goldman doesn’t have a too-big-to-fail guarantee from the government. Goldman has refused to identify who the counterparties were on the other side of its hedges, rendering Viniar’s statement in March unverifiable.
Even if Goldman was fully hedged, it’s reasonable to assume that not all the other banks were. We shouldn’t have to guess anymore, though. It’s long past time for the government to start telling us the whole truth about what happened at AIG.
We’ve had too many secrets in this financial crisis already.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
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To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net
Last Updated: October 28, 2009 21:00 EDT
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