A Wall Street Journal analysis of AIG’s trades, which were on pools of mortgage debt, shows that Goldman was a key player in many of them, even the ones involving other banks.
Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Société Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman, according an analysis of ratings-firm reports and an internal AIG document that details several financial firms’ roles in the transactions.
In Goldman’s biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner—AIG, according to the Journal’s analysis and people familiar with the trades.
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.
But, but, but… Matt Taibbi said fuck!
Gaffa
The best thing about John Cole writing “I have nothing to write about” means there’s going to be about ten posts in a row from him.
We loves ya, John!
Violet
@Gaffa:
Yep! I knew we’d get another post, and quickly.
Interesting that the WSJ is doing this kind of analysis and publishing it. Could it be a bit of a crack in GS’s armor?
MikeJ
So Goldman is evil because they bought insurance?
Llellorin
No, they’re evil because they’re now angrily declaring that they didn’t need any direct federal bailouts after taking a multibillion dollar indirect bailout.
Short Bus Bully
This is obviously because of an over regulated market! We needz Phil Gramm up in this bitch to help us really achieve our potential by letting the geniuses on Wall Street fight back against the economic destruction caused by darker hued poor people buying houses.
Also, the free market is self regulating.
Also, Reagan.
Also, Obama is black.
MikeJ
They bought insurance. Their insurance company paid them for their losses as they were supposed to.
I can understand being mad at AIG for insuring more than they could handle. Wasn’t GS being prudent by buying insurance? Isn’t preparing for potential downside what careful people do?
They weren’t bailed out, directly or indirectly. They bought a product and it was delivered after the gov bailed out their supplier.
What if they had bought a plane from Boeing, and Boeing had been about to go out of business? There’s no point in saving Boeing if they aren’t going to deliver planes that had already been payed for. Same thing here. GS bought something, AIG delivered what GS payed them for.
mk3872
Enough of the Taibbi baloney.
His pathic hit piece has nothing to do with his nastiness.
It has everything to do with blaming the problems on Obama and his terrible falsehood-laden “story”.
John Cole
@mk3872: ? I was talking about the critics who freaked out over his Goldman piece.
Jrod
Matt Taibbi will surely destroy the Democratic Party!
Too Big To Flail
Alas, if only we were in China – there would have been some executions by now.
http://www.postchronicle.com/cgi-bin/artman/exec/view.cgi?archive=171&num=269636
Punchy
I dont really understand a single thing explained in that blockquote.
/just a stupid scientist
YankeeApologist
I have to confess that I’m not sure what the big deal is concerning Taibbi in the first place.
I’ve seen a lot of virtual ink spilled here on whether his column was on the level or not, but as someone else stated earlier, he writes for a pretty successful MUSIC magazine.
Assume for a minute that us Sherlock-ian detectives here at BJ can prove beyond a shadow of a doubt that he is a terrible writer, ignores facts, listens to Hall and Oates, and is a Steelers fan. So what?
Someone else said in an earlier thread that his 26 trillion dollar number was a “weapon for the conservatives”. I am fairly sure they could have come up with something comparable on their own.
Why don’t us lefties get just as mad about . . . ya know . . the actual problem? Is Taibbi’s credibility really as important an issue as the Goldman-Sachs skullfucking we’ve been getting?
Comrade Kevin
@John Cole: People are just pissed off because Taibbi didn’t shut up, fold his tent and go home on January 21, 2009.
jeffreyw
A giant has died. Paul A. Samuelson, Groundbreaking Economist, Dies at 94
uila
Matt Taibbi is giving aid and comfort to the teabaggers! Ralph Nader will kill us all in our sleep!
Folderol and Ephemera
@uila: I think you are saying that Taibbi is “objectively pro-Republican.”
Brien Jackson
@John Cole:
I thought that argument was better, but by the same token the WSJ article undercuts the nefarious Goldman theories quite a bit. Basically, if you believe the WSJ article, people from Goldman were heavily involved in the AIG bailout because they were the only people outside of AIG with enough knowledge of the books to unravel the mess.
licensed to kill time
Play the Whack A Banker game!
Thank you for playing! That is all.
Robert Waldmann
The evidence you present has nothing the fuck to to with Matt Taibbi’s recent article about how liquidation means bailout and Christine Romer is an investment banker. The Bush administration bailed out AIG. What the fuck is going on. Forget who the fuck was President in 2008 ?
Please at least pretend to consider the evidence. Bankers got rich ruining the economy and were bailed out and I’m pissed is not an original idea of Taibbi’s.
If you are prepared to argue that Taibbi and the Tea Baggers are partly right about some things, fine. If you assert there is a difference then it will not do to assume that Hank Paulson was appointed by Barack Obama.
burnspbesq
Somebody, anybody show me conclusive evidence that Goldman’s behavior in this mess violated one Federal statute – not beyond a reasonable doubt, but merely by a preponderance of the evidence – and I will buy pitchforks and torches for everyone.
Think you can?
JScott
In other banking news, “Drug money saved banks in global crisis, claims UN advisor” [Guardian UK]. Actually, that may not be news to anyone.
Bob Natas
Taibbi is getting a lot of attention from professional leftists, for obvious reasons. In fairness to his targets, I don’t think they did anything illegal. That is kind of the point, right? Taibbi is also fairly hung up on the personalities and names of the firms, which are probably not that important.
“If you assert there is a difference then it will not do to assume that Hank Paulson was appointed by Barack Obama.”
Let’s imagine that the financial collapse had happened in April of 2009 rather than in the Fall of 2008. Surely, you are not suggesting that Obama would have not bailed out the failing firms. Of course he would have. The delivery of the bad news would have been more carefully managed. I imagine the content would have been roughly the same, though I don’t think Obama would have been so stupid as to have his Treasury Secretary appear before Congress with nothing more than a 3 page memo in hand.
It may be that people are missing the point. What happened last Fall is as much a part of capitalism as is the production and distribution of the Apple Macintosh.
Nellcote
Did dope money save the banks?
http://www.guardian.co.uk/global/2009/dec/13/drug-money-banks-saved-un-cfief-claims
kay
Questioning Tabbai means you’re defending Goldman Sachs.
I thought the whole point of Tabbai’s genuis was he was bravely stating truths no one else dared to utter.
Except for this Wall Street Journal reporter.
No one’s allowed to question Tabbai?
kay
@YankeeApologist:
I’m not all that worried about it.
I just think it’s silly to defend Taibbi’s claim that taxpayers are on the hook for 23 trillion dollars, while simultaneously arguing for more domestic spending.
If taxpayers are really going to be paying out 23 trillion in debt guarantees for banks we can’t afford any domestic spending at all.
Big City Mary
That 23 trillion in debt guarantees should be be cross nullified and cancelled. In effect it is just one big circle jerk. You think Goldman did not know AIG would not be able to cover the hedges? They counted on their “friends” to make it right.
The fact that these bankers were bailed out by our US government is an utter and total disgrace!
There must be a way to express our disgust in a very tangible fashion. Any suggestions?
Osceola
No surprise that the WSJ published this. The straight news is excellent, until Rupert the Impaler gets to them. It’s the Editorial Page that needs disinfecting.
As for Goldman Sachs, they were gaming the system then and they are doing so now to their benefit. Yeah, it’s “capitalism” of a sort, but nothing that would meet the approval of any economist not prone to fluff them in hopes of some of the $$ falling their way.
Jasper
I don’t get what the big problem is with the $23 Trillion number. What if the total exposure was “only” $12 Trillion. Does anyone’s understanding of the extent of the bailout and the gigantic exposure of the U.S. taxpayer to losses on Wall Street change?
Does anyone go, well, hellfire, it’s only $12 trillion, what the heck is anyone worried about, that’s only three years of the entire U.S. Federal Budget at risk with a bunch of asshole bankers on Wall Street who are as we speak in serious negotiations about HOW to pay 10s of Billions in bonuses to their top people, the year after taxpayers saved just about every single one of them from extinction.
BTW, does anyone have a good number on what the total exposure actually is. We supposedly know it cannot be anywhere near 24 Trillion, so how many trillions is it? I’ve seen anywhere from 7 Trillion to the 24 depending on what is counted. Seems to me that is a feature of the bailout itself – keeping taxpayers utterly in the dark about exactly how large the assistance is and in fact who got it and what the terms are.
But hey, the REAL problem is Taibbi said a number that is the very worst case scenario and not that as we speak taxpayers have issued guarantees totaling trillions which the nations largest banks are using to print money that instead of funneling into the real economy is allowing the top folks in the behemoth firms to pay near all time record bonuses.
BTW, I think we all understand that Obama was handed a very difficult, or impossible, situation, and there was no good answer. But I think the reaction should be compared to how an environmentalist would react to Obama appointing coal miners and former Exxon executives to ALL the key positions in EPA.
kay
@Jasper:
Jasper, it’s not the “totally worst scenario”. It includes programs that were never initiated. It’s fictional. The oversight chair who used the number called it “vastly overblown”. The current exposure is around 2 trillion.
If someone you disagree with had used a number that was ten times the actual number that person would be the subject of complete derision.
The health care bill.
If Sarah Palin came out and said it would eventually cost 10 trillion, would you say she had gotten to the essential truth of the matter?
It is, after all, expensive, and no one really knows what it will cost.
Or would you jeer at her and say she used a made-up number to make a political point?
J. Michael Neal
@Jasper:
If it doesn’t make such a difference, what’s the problem with using the truth? I can see several possibilities:
1) It does make a difference, because Taibbi’s purpose isn’t to inform his readers, it’s to scare them. In the service of scaring them, he wants to use really, really big numbers, and the truth doesn’t do that as well as a lie.
2) It doesn’t make a difference, and Taibbi used the $23.7 trillion figure because he could attribute it to a source. It doesn’t matter to him whether the number is accurate, because he’s making an appeal to authority, and most of his readers have no idea that the his source doesn’t know what he’s talking about.
3) It either does or doesn’t make a difference, and Taibbi really doesn’t know which it is, because he has no idea what he’s talking about, and can’t recognize whether the figure makes sense.
None of these three options recommend Taibbi as someone we should pay attention to.
J. Michael Neal
@Brien Jackson:
There’s this, but it’s more complicated. This article helps to put what Goldman was doing in the first place into perspective. It paints a rather different picture of what was going on than the popular perception, albeit one that doesn’t do much to improve my opinion of Goldman.
The typical view of Goldman is that they were making billions of dollars by being big risk takers, albeit with at least a suspicion that the government was providing a backstop. They looted AIG, the Treasury, and the Fed by taking big bets and then leaning on the government to pay them off.
For the most part, as this article makes clear, that wasn’t what happened. There were a few instances of this, but more often, Goldman sold insurance to some other bank, and then took advantage of the fact that Cassano was shoveling credit default swaps out the door as fast as he could by buying the same insurance from him for a little bit less than they had sold it. They weren’t making billions by setting the market, they were making millions by picking up table scraps and taking on no risk as they did so.
This is another way that the market needs to be cleaned up, in a big way, but it also points out that it wasn’t really Goldman being bailed out by the government, it was all of their counterparties, and the system. While it would do my heart good to see Goldman lose billions of dollars by trying to be second rate wholesalers, they weren’t the ultimate holders of the risk. Those were people who had no idea that all of it was ending up in the bag of AIG; if they had, they could have cut Goldman out of the deal and just bought direct from the source.
Someone asked me last night what changes I would make if I could. Another one of them, which would be partially accomplished by requiring exchange trading, is a fuckload more transparency. Make the definition of what constitutes a material contract that requires disclosure in your SEC filings much broader. Again, this would require Congressional action, as it would be a material change of the 1934 Act to include positions held by banks, since those are contracts that are a part of normal operations. It’s also more complicated than that, because there are good reasons why complete transparency of derivative positions is problematic. If we sit down and think about it, though, we can come up with something.
J. Michael Neal
@Bob Natas:
Sure, because it would have been insane not to. In addition to everything else, I will again point out that two of the largest AIG counterparties were Deutsche Bank and Societe General. (I have no idea how to put the accent marks in, and, if you tell me, I’ll undoubtedly forget by the next time I need to.) That’s why Tim Geithner was getting phone calls from European governments telling him he needed to make sure the contracts were covered.
It’s worth pointing out that, amid all of the wailing about how Wall Street has taken over the US government and controls everything and just about wrecked the economy, the European banks were (and still are) in worse shape than their American counterparts. Clearly, it’s not just the US Senate or Goldman Sachs that’s the problem, because the dirty fucking socialists on the other side of the Pond landed in it just as deep. They still have to figure out what to do with Greece, Ireland, Spain, and Portugal.
J. Michael Neal
Woo hoo! I’m in moderation because I called the Europeans a bunch of Marxists in need of, uhm, how to phrase this so *it* doesn’t end up in moderation, a couple of middle aged folks bathtubs staring into the sunset.
rs
@burnspbesq: Would GS have been in violation of any federal statutes prior to the deregulation of the commodities market, for which Rubin, Summers, et al. (you know, the people Taibbi wrote about) are largely responsible?
J. Michael Neal
@J. Michael Neal: Responding to myself, but, yeah. A few more parts of Goldman’s role, from the article:
This is one of the problems that required a bailout. AIG assets were getting stripped by the CDS counterparties. Thanks to Phil Gramm*, they stood at the front of the line, to the extent that there was contracted collateral, since they could continue to seize it even in the event of a Chapter 11 filing by AIG. They were not the ones who would have been worst hit by a default; that would have been everyone that were owed money by AIG in some other form. That may have included everyone with a life insurance policy with AIG. The Fed and the Treasury had three days in September, 2008 to decide whether to step in and save AIG, and how to do it. They didn’t have the time to figure out what the consequences of a default would have been. Allowing it to happen would have been a leap into the unknown. We still haven’t figured that out.
There’s another way in which it wasn’t really Goldman getting bailed out:
Nice hedge. They passed the risk of the government not bailing AIG out off to other parties. The article doesn’t tell us *which* other banks they bought this protection from, but I’d bet that it wasn’t from the ones that had lots of their own protection from AIG, and thus had some idea that it wasn’t a good risk. Again, some transparency would have done a lot of good. It’s tough to even pin this one on the ratings agencies, because I’m not sure how they would have had enough information to piece it together.
*There are some arguments for privileging swap agreements in a bankruptcy. In retrospect, I don’t find them at all persuasive, but I can’t tell you what I thought about them at the time, because I didn’t know that this little provision was in the bill. If you read through it, this gem is pretty obscure. As much as I think that Gramm is completely and totally corrupt, and would sell his grandmother if he could make a couple of bucks, I’d bet that even he had no idea what the consequences of this would, or even could, be. I’m not saying that he wouldn’t have done it anyway, but it’s easy to see how it slipped under the radar.
J. Michael Neal
@rs: Rubin, Summers, and others weren’t responsible for the particular changes in the derivatives (not commodities) markets that really blew up this particular corner of the financial industry. The passage of the Commodity Futures Modernization Act was very confused, occurring after the 2000 election, and Phil Gramm slipped in this particular provision.
Royce
It seems to me that if someone is fighting my enemy, I should not spend time criticizing that person. Let my enemy deal with it. So I’ll nod at Taibbi and stay focused on the cause of the trouble.
I want questions asked of those in power. I think this “yeah-but-he-ain’t perfect” crossfire interferes.
J. Michael Neal
@Royce: Either accuracy is important for journalists, or it isn’t. We can’t criticize the rest of the media for getting things wrong and then tolerate it from Taibbi.
rs
@J. Michael Neal: Sorry, I realized I wrote commodities instead of derivatives after I posted.
However, isn’t it true that Rubin and Summers and their cronies lobbied for deregulation inside the Clinton administration, ultimately resulting in repeal of Glass-Steagall, as well as the Commodities Futures Modernization Act? And isn’t the essential point of Taibbi’s article that Obama has positioned many of the same characters to fuck us over again?
Jasper
@kay:
I think the problem is no one actually knows the total. Barry Ritholtz is a respected, non-teabagger financial blogger with a huge audience. He published a list here:
http://www.ritholtz.com/blog/2009/09/bailout-costs-to-date/
It lists the total cost/commitment to date at 11.5 Trillion.
Federal Reserve – 5.9
Treasury – 2.9
FDIC – 2.5
HUD – 0.3
Ritholtz has used a number as high as 14 Trillion. I’ve seen other variations with other different totals, but all of them are at least approaching $10,000 Billion. many variations on this list, I suspect because getting a handle on the actual total is almost impossible since the Fed in particular refuses to disclose the details of their programs.
Mike G
As much as I think that Gramm is completely and totally corrupt, and would sell his grandmother if he could make a couple of bucks, I’d bet that even he had no idea what the consequences of this would, or even could, be.
I’d bet that, being a corrupt tool, he didn’t care or give it much thought. His paymasters wanted the legislation, so he delivered it, and who gives a shit about burning down the whole economy if we can scalp some profit out of it?
Phil Gramm belongs on a glue trap in the sun, along with his equally corrupt wife. To this day, neither one of them accepts any culpability for the destruction they enabled.
Jasper
@J. Michael Neal:
I don’t think it’s fair to say Gramm just did this all by himself without getting a sign off by Summers. The end result Gramm obtained was consistent with what Rubin and Summers and others had fought for for years, including by completely undercutting Born. I’ve never seen any mention that Gramm’s efforts were opposed by Treasury or Greenspan – just the opposite.
kay
@Jasper:
Jasper, we’re going to have to agree to disagree on Taibbi I’m afraid.
As it stands now, the three entities that aren’t going to be able to pay back the bail out funds are the two auto companies and AIG.
I supported the auto bailouts. UAW are accustomed to negotiating on wages (unlike our entitled and coddled finance sector worker-class) and they took a hit. I supported that. They wanted to survive, and I didn’t see any benefit to putting three million people on the street.
I can’t find any law that says Treasury had the legal authority to force AIG to accept a reduction in payments on contracts. Again, they could have let AIG go down, I guess, but I think it’s pretty fucking cavalier for the American Left to wave their hands and announce punishing AIG is a higher priority than propping up the world economy. It was US economic policy and practice that caused this mess. The US has a responsibility to mitigate the damage the we caused, and not bring the whole world down with us. Walking away after blowing up the system isn’t a responsible option. They had three days to decide on AIG. They weren’t in a great negotiating position.
Objecting to the federal reserve keeping interest rates at zero seems irrational to me, if we’re counting that as a “cost”.
The federal reserve sets interest rates, and they manipulate interest rates. I don’t see any upside to regular people if we jack up interest rates to punish bankers. I know bankers are borrowing at zero and lending at whatever the hell they feel like.
Finally, I am no fan of Wall Street. I have a retirement account in a mutual fund. That’s my sum total of interest in Wall Street”. I’d put it somewhere else if I could, just because I find this whole sector repugnant at this point. HOWEVER, stock funds are up, and regular people hold these accounts. Completely dismissing that and insisting that pensions and retirement accounts don’t matter to regular people is just incorrect. They do matter to regular people, and they’re gaining ground that they lost, and they care about that.
Jasper
@kay:
Just a couple of points. Since ZIRP effectively means that the big boy banks get their “raw materials” at zero cost, sure, they’re all able to pay back the loans by running a business at zero cost. Imagine if GM got steel at zero cost or even if the Feds paid 30% or whatever of the raw materials cost of a Chevy Tahoe or so for a couple of years. I’d guess GM could repay their loans quite a bit easier than if they pay the same price as everyone else who is buying steel at the moment.
The other nice benefit is the privileged few who remain got their biggest competitors liquidated. Nice.
And sure there isn’t any law that required Geithner to negotiate a deal less than 100%, but if the U.S. negotiators said to the counterparties, “You have two options, accept less than 100% or we do like Ayn Rand and let the free market take its course” then do you believe the Randian disciples opt for free markets? Maybe we needed to funnel 13 billion at 100% on the money to GS just because we’re a fair country and it’s only fair to repay the gambling bets of a failed institution at 100 cents, but maybe that’s an unnecessary giveaway to rich asshole “best and brightest” bankers who faced no consequence for putting a huge amount of bets with a firm who had no ability to pay back the damn bets when they lost.
BTW, there was a wingnut republican on CNBC this morning congratulating Obama on his bank policies but scolkding him the “real” problem was bailing out the automakers. That is exactly why Taibbi’s stories are so important, and why complaining about whether the 24 trillion is wrong and it’s ‘only’ 10 trillion or even 6 trillion is so misguided IMO. I would wager not one voter in 10 can articulate any of the many ways except the direct Treasury program that we are as we speak STILL subsidizing banks. And so they think the banks just solved their problems and voila, the geniuses are back on the job! Makes me sick that this impression has been created and it’s being pushed by democrats. It’s the biggest socialism for the rich program ever in world history and it is ongoing, in a dozen different ways. If only this socialism would trickle down to the rest of us, like with healthcare…..
licensed to kill time
ohhh every day, yeah every day
need my reply arrow every day, hey hey
listen what I say
oh every day hey hey hey