Friday, November 20, 2009

Goldman, AIG, Geithner & The Repaid Collateral

Wednesday's Wall Street Journal featured a very damning article concerning Treasury Secretary Tim Geithner's mishandling of the payment of collateral to Goldman Sachs for its AIG positions last year, as head of the New York Federal Reserve Bank.

In article entitled "Report Rebuts Goldman Claim," following only days after the Journal published Goldman's assertions that it never needed those payments, and was completely and safely hedged on its AIG exposures, the piece states,

"A government report throws cold water on that claim."

It continues,

"Goldman was among the largest beneficiaries of a decision by the Federal Reserve Bank of New York to bail out insurance giant AIG in September 2008 at the height of the financial crisis. A revamped rescue package in November led to Goldman and 15 other banks being paid in full for $62 billion worth of insurance contracts they had with AIG to protect against losses tied to mortgage assets."

At the time, Geithner, as head of the New York Fed, was responsible for determining what to do regarding the various failing investment and commercial banks in the city, as well as administering the AIG situation.

According to the Journal article,

"The government auditor's report broadly found that the New York Fed left itself little room in negotiating with the banks for a better deal for taxpayers."

Hard to improve on that succinct finding, it is?

No wonder two Republican Representatives spoke out bluntly at yesterday's hearing in Washington related to the TARP, demanding Geithner's resignation. Well, that's not strictly true. One asked Geithner to resign, the other reiterated his opposition for Geithner to have ever been confirmed as Treasury Secretary.

Regarding the specifics of the report, the Journal piece notes,

"Goldman's trading position with AIG centered on $22.1 billion of such insurance the firm had purchased from AIG. In a separate series of trades, Goldman itself had sold protection against losses on the same securities to other trading firms.

The problem for Goldman: If AIG collapsed and markets continued to swoon, Goldman would have had to make payments to the other trading firms and been unable to collect on protection it had bought from AIG.

Underlying many of these credit bets was a mass of mortgage debt, securities backed by pools of subprime home loans and commercial real-estate debt, and then more complicated securities also linked to mortgages. The packaging of all those securities helped fuel the U.S. housing boom and subsequently sparked the credit crisis.

Goldman was among the largest beneficiaries of a decision by the Federal Reserve Bank of New York to bail out insurer AIG in September 2008 at the height of the financial crisis. Above, the headquarters of Goldman Sachs in New York.

Goldman has said it was insulated against a material loss by an AIG default. And the audit pointed out that Goldman in fact was protected against some losses. For example, the firm had collected $8.4 billion of collateral, cash or a liquid equivalent, from AIG. Separately, Goldman took steps to try to buy insurance against insurance by purchasing protection against an AIG default.

But the audit raised questions about Goldman's calculations. Goldman believed that it controlled $4.3 billion in assets, pools of fixed-income securities that require complex computer modeling to design and understand, that would have been used to counter an AIG default. The securities are called collateralized debt obligations, or CDOs.

The audit said, however, that given the fact that the market for those securities had tanked in November 2008, and that an AIG default would have sparked a rout, Goldman would have had a difficult time obtaining value for those assets.

"It is far from certain that the underlying CDOs could have easily been liquidated, even at the discounted price of $4.3 billion, the audit found.

The audit also said Goldman would have faced the same problem of declining market value for another pool of assets valued at $5.5 billion had AIG defaulted. The bottom line: The audit said those assets that Goldman held would have been worth a lot less had AIG failed."

This directly contradicts information which Goldman has been dispensing for some time alleging that it could have realized the roughly $10B of value in the two pools of AIG-related assets.

As if to highlight the lack of transparency surrounding the TARP's implementation and, then, later accounting for those actions, the Journal reported,

"A spokeswoman for the special inspector overseeing the Troubled Asset Relief Program wasn't available for comment. The New York Fed said it "acted appropriately" in its dealings with AIG trading partners."

No surprises there, eh? The New York Fed is in deep damage control mode, covering Geithner's and it's own asses. The TARP special inspector knows a good, long civil service job when s/he sees it, and isn't talking, either.

It seems that many people are now choosing to recall last year's events radically differently than they actually occurred. Now Geithner's former employer clams up about the AIG disbursements and Goldman contends it was never in dire straits, but, evidently, exchanged its investment banking license for a commercial bank one, just for kicks.

And the taxpayers aren't being clearly told how Geithner's fumbling resulted in their paying Goldman $10B to cover the investment bank's own errors in judgement.
Despite the clear evidence from the government's own inspectors that Goldman badly needed those troubled, AIG-related assets to be made good, the firm continues to dissemble.

It's pretty clear that Geithner was vastly out-maneuvered and out-muscled by Goldman. Now, both the administration and the Fed want to cover this up. This is why it is folly to allow government to become deeply involved in business, whether successful or failed. Instead, the Constitution provided for bankruptcy, and it remains the best option for sorting out this sort of mess and dissovling failed enterprises.

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