Must Read: Treasury Cover-Up of Goldman's Role in AIG Crisis?

[girl gone mad]

Tavakoli is almost always a must read, and here's a story that's just been begging for this kind of incisive, coherent analysis. I don't have time to add the hyperlinks, but you should go to the site and read the whole piece, anyhow.

http://www.huffingtonpost.com/janet-tavakoli/treasury-cover-up-of-gold_b_400300.html">Treasury Cover-Up of Goldman's Role in AIG Crisis?
Janet Tavakoli, Huffington Post

In November 2009, I wrote the Huffington Post that Goldman Sachs Group nearly bankrupted AIG. In December, the Wall Street Journal explained to the general public that Goldman fueled AIG's gambling and played a much bigger role in the mortgage bets that nearly felled American Insurance Group (AIG) than the Treasury, the Fed, or Goldman itself publicly disclosed.

The TARP Inspector General's November 17 report missed the most damaging facts. Intentionally or otherwise, it was evasive action or just plain whitewash. The report failed to clarify Goldman's role in AIG's near collapse, and that of all the settlement deals, the U.S. taxpayers' was by far the worst.

Goldman originated or bought protection from AIG on about $33 billion of the problematic $80 billion of U.S. mortgage assets that AIG "insured" with credit derivatives, about twice as much as the next two largest banks involved.

Goldman acted as middle-man on $14 billion of that amount, after it took the risk of mortgage assets originated by other banks and insured all of it with AIG. Goldman may wish to claim it "was only following orders," but since Goldman also originated many of the mortgage assets ultimately protected by AIG, it should have been well aware of the risk posted to itself and to AIG. The risk was then Goldman's. If AIG failed, Goldman Sachs would have had to make good on those trades. Goldman stuffed so much risk into A.I.G., that Goldman nearly killed its own "hedge."

In November 2008, the New York Fed paid 100 cents on the dollar for the $14 billion of mortgage assets related to Goldman's trades. Goldman estimated the assets had lost $9.6 billion or around two-thirds of their market value. Overall, the government's bailout out of AIG allowed Goldman to avoided losses on its trades covering $22 billion in assets.

The U.S. taxpayer deserved a much better deal. In late July 2008, SCA, another bond insurer, settled similar contracts for only around thirteen cents on the dollar. In August 2008, Calyon, a French bank also involved in AIG's transactions, settled disputed financial guarantees with FGIC, a bond insurer facing bankruptcy, for only ten cents on the dollar. Ambac, another bond insurer in need of capital, recently canceled similar trades for ten cents on the dollar.

http://www.huffingtonpost.com/janet-tavakoli/treasury-cover-up-of-gold_b_400300.html">More..

[DCKit]

1. Kick, 'cause nobody else did. n/t

[girl gone mad]

2. Thomas Adams, LLP, exposes even more of the sordid details..

behind Goldman's financial engineering (with apologies to real engineers).

From http://www.nakedcapitalism.com/2009/12/body-count-from-goldman-actions-crosses-into-criminal-territory.html">Naked Capitalizm:

Readers may have noticed Janet Tavakoli’s recent article at Huffington Post on Goldman Sachs and AIG. While much of it covers territory that Yves and I already wrote about previously, Ms. Tavakoli stops short of telling the whole story. While she is very knowledgeable of this market, perhaps she is unaware of the full extent of the wrongdoings Goldman committed by getting themselves paid on the AIG bailout. The Federal Reserve and the Treasury aided and abetted Goldman Sachs in committing financial and ethical crimes at an astounding level.

She notes, accurately, that Goldman used AIG to hedge its bet on CDO’s, either for itself with the Abacus deals, or for its clients, with the Davis Square deal. Had AIG failed, Goldman would have been on the hook for the losses: to execute the CDO with synthetic mortgage bonds, Goldman went “long” the CDS and then turned around and went “short” with AIG, effectively taking the risk of the mortgage bonds defaulting and then transferring it to AIG.

But Ms. Tavakoli fails to note that the collapse of the CDO bonds and the collapse of AIG were a deliberate strategy by Goldman. To realize on their bet against the housing market, Goldman needed the CDO bonds to collapse in value, which would cause AIG to be downgraded and lead to AIG posting collateral and Goldman getting paid for their bet. I am confident that Goldman Sachs did not reveal to AIG that they were betting on the housing market collapse.

To help hasten the housing market collapse, Goldman ran a huge mortgage lending and issuance program with low quality loans virtually designed to fail, including dozens of deals backed by completely toxic non-prime second lien loans (these loans help pump up the housing bubble and let borrower’s suck the equity out of their homes). In soliciting AIG’s insurance for the CDOs, Goldman was not disclosing that the transaction was highly speculative. Goldman was offering AAA, or even super AAA bonds. Goldman designed and sold these bonds and purchased a rating from the rating agencies that represented the risk to be AAA. In fact, the bonds did not provide real protection, despite their AAA rating, and when the housing market turned down, the AAA CDO bonds collapsed in value exactly as they were designed to do.

http://www.nakedcapitalism.com/2009/12/body-count-from-goldman-actions-crosses-into-criminal-territory.html">continued

[snot]

3. This should have made Greatest; sorry I'm too late to help.

[DemReadingDU]

4. morning kick