Goldman Helped Push A.I.G. to Precipice

[cal04]

http://www.nytimes.com/2010/02/07/business/07goldman.html?hp


Billions of dollars were at stake when 21 executives of Goldman Sachs and the American International Group convened a conference call on Jan. 28, 2008, to try to resolve a rancorous dispute that had been escalating for months.

A.I.G. had long insured complex mortgage securities owned by Goldman and other firms against possible defaults. With the housing crisis deepening, A.I.G., once the world’s biggest insurer, had already paid Goldman $2 billion to cover losses the bank said it might suffer.

A.I.G. executives wanted some of its money back, insisting that Goldman — like a homeowner overestimating the damages in a storm to get a bigger insurance payment — had inflated the potential losses. Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities.

After more than an hour of debate, the two sides on the call signed off with nothing settled, according to internal A.I.G. documents and an audio recording reviewed by The New York Times.

Behind-the-scenes disputes over huge sums are common in banking, but the standoff between A.I.G. and Goldman would become one of the most momentous in Wall Street history. Well before the federal government bailed out A.I.G. in September 2008, Goldman’s demands for billions of dollars from the insurer helped put it in a precarious financial position by bleeding much-needed cash. That ultimately provoked the government to step in.

[Cassandra]

1. Perhaps GS should have known they weren't getting...

insurance (with cash reserves to back it up) when what they were buying was called swaps.

[slipslidingaway]

2. Exactly! n/t

[slipslidingaway]

3. knr - also ... Memo to Investigators: Dig Deep

Thread and post here
http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=6769019&mesg_id=6770149


http://www.thenation.com/doc/20091026/greider/2

By William Greider

"...Here are some promising targets for investigators:

Collusion in High Places. Some Wall Street players suspect that certain bailouts engineered by the Treasury and the Federal Reserve (including Treasury Secretary Timothy Geithner, former head of the New York Fed) were motivated by a logic never revealed to the public. The suspicion goes like this: the strange and costly rescue of AIG, an insurance company facing bankruptcy, was really intended to save Goldman Sachs, the premier investment house. If AIG went down, it would threaten Goldman and other big holders of AIG's collapsing derivative contracts. Goldman CEO Lloyd Blankfein participated in the pre-bailout discussions, an oddity revealed by Gretchen Morgenson of the New York Times. Afterward, Goldman got paid off in full with the public's money--$12.9 billion to erase its exposure.

Something similar is suspected about the Bear Stearns bailout. The intention may have been to protect JPMorgan Chase, the commercial bank with the largest holdings of vulnerable derivatives. Morgan Chase demanded and got full federal financing for any losses it might suffer by taking over Bear Stearns (in effect, the bank was reimbursed for its own rescue). Did Washington decline to rescue Lehman Brothers because the firm was not sponsored by an important club member that felt threatened by Lehman's demise?"