A lot of people are talking about this report about how Goldman Sachs got an additional, undisclosed $2.9 billion from AIG that it promptly deposited into its own account. This is significant because previously, Goldman’s line was that they took billions in counterparty payments from AIG on behalf of its clients. But this reveals something quite different, what Joshua Rosner calls “a direct transfer of wealth from the Treasury to Goldman’s shareholders.”
Let’s go to the revelant section of the FCIC report. It starts on page 376. As Matt Taibbi lays out in Griftopia, AIG actually had two problems – the counterparty payments on credit default swaps, and massive debts in its securities lending business. Securities lending is where one party, in this case AIG, lends out securities that they have stored to short sellers, who then use it to make profit on the decrease in a stock. They pay a small fee to the lender. Here, AIG used the money it got from securities lending to purchase crappy mortgage-backed securities, and now were getting calls from investors to pay back the securities that were being turned in, on money they didn’t have. Taibbi notes that Goldman Sachs in particular was calling in securities, unlike any other competitor, and basically destroying AIG through the securities lending business as a way to force a payout on their counterparty payments. That’s a simplistic summary, but it’s generally what happened.
Because AIG couldn’t handle the strain of payments on both its problems even with the initial $85 billion from the government, the New York Fed created Maiden Lane II and Maiden Lane III, two off-balance-sheet entities that enabled AIG to pay off counterparties, both in securities lending and credit default swaps. Maiden Lane II dealt with securities lending and Maiden Lane III with CDS. Crucially, as a condition for Maiden Lane III, AIG had to waive any legal claims against counterparties.
Here’s the key section:
Goldman Sachs received $14 billion in payments from Maiden Lane III related to the CDS it had purchased from AIG. During the FCIC’s January 13, 2010, hearing, Goldman CEO Lloyd Blankfein testified that Goldman Sachs would not have lost any money if AIG had failed, because his firm had purchased credit protection to cover the difference between the amount of collateral it demanded from AIG and the amount of collateral paid by AIG. Documents submitted to the FCIC by Goldman after the hearing do show that the firm owned $2.4 billion of credit protection in the form of CDS on AIG, although much of that protection came from financially unstable companies, including Citibank ($402.3 million), which itself had to be propped up by the government, and Lehman ($172.4 million), which was bankrupt by the time AIG was rescued. In an FCIC hearing, Goldman CFO David Viniar said that those counterparties had posted collateral.
Goldman also argued that the $14 billion of CDS protection that it purchased from AIG was part of Goldman’s “matched book,” meaning that Goldman sold $14 billion in offsetting protection to its own clients; it provided information to the FCIC indicating that the $14 billion received from Maiden Lane III was entirely paid to its clients. Without the federal assistance, Goldman would have had to find the $14 billion some other way.
Goldman also produced documents to the FCIC that showed it received $3.4 billion from AIG related to credit default swaps on CDOs that were not part of Maiden Lane III. Of that $3.4 billion, $1.9 billion was received after, and thus made possible by, the federal bailout of AIG. And most—$2.9 billion—of the total was for proprietary trades (that is, trades made solely for Goldman’s benefit rather than on behalf of a client) largely relating to Goldman’s Abacus CDOs. Thus, unlike the $14 billion received from AIG on trades in which Goldman owed the money to its own counterparties, this $2.9 billion was retained by Goldman.
If this all makes you feel a bit underwater, join the club. But what we actually have is Goldman Sachs caught in a lie. They justify the $14 billion they got from Maiden Lane III by saying they merely had to pay off clients – as the report cannily says, that’s not really a justification, because in the course of doing business, failure from AIG would have rebounded on Goldman’s bottom line. But they basically failed to disclose $2.9 billion in counterparty payments on their own trades. This was a subsidy not for clients and investors, but right into the hands of
AIG Goldman Sachs. And well over half of it came after AIG was bailed out by the government.
What more can you say about this? The federal government, using AIG as a conduit, gave tax dollars totaling $2.9 billion directly to one of the largest and most powerful investment banks in the world, one which has made that money several times over in the past two years. They just handed it to them. This is of course just a fraction of the overall bailout money, which if you include emergency support from the Fed reaches into the trillions. But defenders of the government’s actions try to comfort themselves by saying that the money was paid back over time. This is not in that category. It’s a stick-up, engineered by Goldman Sachs and presided over by Treasury, the Federal Reserve and the NY Fed, authorized by many of the same figures you see in positions of power today.
And we’ll never see that money again.
According to Yves Smith, this is not news. But it does have a wider platform now.
…incidentally, this payout was directly for the Abacus trades of mortgage-backed securities, for which Goldman has already gotten in trouble and had to pay a $550 million fine to the SEC. As you see with the numbers, crime pays.
UPDATE: Goldman most certainly did lie about this in public.