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Goldman Primed to Benefit from AIG's Woes -- Again, William Cohan Says
Posted Jul 02, 2009 10:28am EDT by Aaron Task in Newsmakers, BankingWhen Wall Street imploded last year, the Fed and Treasury took "some of the right moves" in order to revive the financial system, says William Cohan, author of House of Cards. But the government blew at least one crucial act of the saga, Cohan says: The backdoor bailout of AIG’s counterparties, notably Goldman Sachs, which received $13 billion of TARP funds via the AIG conduit last fall.
Adding insult to taxpayer injury, Goldman Sachs is primed to benefit should AIG ultimately file for bankruptcy and default on its debt, Cohan reports, having invested about $200 million in related credit default swaps.
Goldman spokesman Michael DuVally confirms the firm spent “over $100 million” on credit default swaps to hedge a $2.5 billion difference between the amount of collateral AIG had posted on certain trades and the amount Goldman thought it was due.
But DuVally says the trades were “wound down because we received the collateral owed,” a reference to the $13 billion the firm received via the AIG conduit last fall.
“They’re gone,” he says. “There will not be a credit event because the government decided to bail AIG out.”To be sure, there's no evidence an AIG default is imminent - or even likely given the government's seemingly endless support.
Still, Cohan disputes DuVally's characterization and AIG's 1-for-20 reverse stock split Wednesday did little to instill confidence in the firm.
Goldman “paid for credit default swaps from third parties to ensure them against a default in AIG debt,” he says in a phone conversation subsequent to the accompanying video. “ If AIG debt does [go into] default they get paid off.”
Furthermore, “it makes no sense to unwind” the trade, Cohan says, comparing it to a homeowner who pays for flood insurance and then says “I paid the premium but don’t want the insurance.”
According to Goldman, the firm used CDS to hedge its exposure to AIG, as any smart counterparty should, but then unwound the trade once the government stepped in. If that’s the case, then the firm is not positioned to directly profit from an AIG default.
But if Cohan is right, Goldman is set up to potentially double-dip from the AIG debacle, having already profited from the government’s bailout last fall. Actually, this might be a triple-dip for Goldman if you count the $10 billion of TARP funds the firm received -- and recently repaid.
“Why didn’t we just take stakes in Goldman and Morgan Stanley?,” wonders Cohan, a former investment banker. “We’re never going to get that $180 billion back from AIG.”
The AIG bailout, and the alphabet soup of programs -- TALF, PPIP, TARP – are part of what Cohan calls a “morphine drip” of programs the Fed has put the economy and Wall Street on. The programs are “designed to make us all feel good and artificially prop up various aspects of the capital market system that might otherwise not be operating properly,” Cohan says. “At some point that’s not good anymore. Buyers and sellers have to find themselves around real prices…not morphine-drip initiated [prices].”
101 Comments
Thomas - Thursday July 02, 2009 10:56AM EDT
THIS IS THE MOST REDICULOUS STORY THAT i HAVE READ IN AT LEAST A WEEK. AIG WON'T DEFAULT. IT HAS $27BIL AVAILABLE ON IT'S LINE OF CREDIT WITH THE US TREASURY THAT WAS SET UP SPECIFULLY TO STAND AS CASH COLLATERAL, IF IN THE EVENT IT IS NEEDED.
Dean - Thursday July 02, 2009 10:59AM EDT
GS = evil empire. They should all go to jail. A den of thieves.
Yahoo! Finance User - Thursday July 02, 2009 10:59AM EDT
Omama has made things alot worse, BUT the 700 Billion Tarp money that went to Goldman Sachs and AIG came from their long lost friend PAULSON under the Bush administration. This all took place only 9 months ago. People here have short memories, get your facts straight. PAULSON got TARP pushed through with a plan. After he got the money he changed the rules on how our Tax money would be spent. (thrown away) PAULSON should be hung by the neck on Wall Street for all to see.
Yahoo! Finance User - Thursday July 02, 2009 11:01AM EDT
Since Government is guaranteeing Goldman Sachs loan; when Goldeman makes money, they takes home a huge money in various names. When Goldman is not capable, we taxpapers have to bail them out again. Goldman Sachs is very smart, all right. Just wondering in what other subtle ways they are taking advantage of us ...
Yahoo! Finance User - Thursday July 02, 2009 11:02AM EDT
GOLDMAN SACHS FOR RACKETERING??? Some of these posts keep getting more entertaining and illogical everyday. Heaven forbid, an actual capitalist organization continues to try to make money in the marketplace within the current rules and regulations.
Richard - Thursday July 02, 2009 11:02AM EDT
Who was the Genius who made GS a Bank Hold-Up Company? Whatever happened to Investigative Reporting by the News Media? Why is Cramer still on TV? Who was Cramer's Room mate in College? Answer: Spitzer Was Kudlow a Cocaine & Alchol Abuser? Where is Secretary Paulson today? Do You Think The Stock Market is Fixed?
Richard - Thursday July 02, 2009 11:03AM EDT
Who was the Genius who made GS a Bank Hold-Up Company? Whatever happened to Investigative Reporting by the News Media? Why is Cramer still on TV? Who was Cramer's Room mate in College? Answer: Spitzer Was Kudlow a Cocaine & Alchol Abuser? Where is Secretary Paulson today? Do You Think The Stock Market is Fixed?
alice - Thursday July 02, 2009 11:03AM EDT
BANKRUPCY FOR THE BANKRUPT HAS ALWAYS BEEN THE ANSWER, EVEN FOR STATES LIKE CALIFORNIA.
James - Thursday July 02, 2009 11:04AM EDT
Check this month's Rolling Stone magazine for an eye opening story about Goldman Sachs, that always seems to profit under any circumstances. And yes, this financial disaster began under the Bush presidency
Wayne - Thursday July 02, 2009 11:07AM EDT
JUST RIP,OFF AFTER RIP OFF - WHAT,S NEXT I CAN TELL YOU - RIP RIP RIP REST IN PEACE
Paul - Thursday July 02, 2009 11:07AM EDT
Aaron you are one of the few people in America that I have enormous respect for. Under huge pressure from the powers that be, you at least try and try to reveal the truth and that is "AMERICA IS RUN BY AND FOR GOLDMAN SACHS' End of story. Keep on trying, Aaron because without people like you, America has no hope,
Yahoo! Finance User - Thursday July 02, 2009 11:08AM EDT
It's fairly obvious that all of the Goldman alumni who worked or are working for the government have created a situation for Goldman to profit and collect government bailout money through conduits like AIG.
Larry43 - Thursday July 02, 2009 11:08AM EDT
Y2K was a scam, the banks disaster was just as much a scam, with its poster boy Roubini.
Dennis - Thursday July 02, 2009 11:12AM EDT
It is GW Bush's fault for capitalizing on our thousands of people who died in 9/11, diverting our attention from domestic issues as this, and focusing our public attention on his personal Iraq war.
Thomas - Thursday July 02, 2009 11:17AM EDT
I hope this mess burns in the memory of.......................... those who gave the keys of the white house to: George....."retarded".....Bush.
Dennis - Thursday July 02, 2009 11:17AM EDT
I also think Obama can divert this and top GW Bush by hurling a couple nukes in to North Korea starting and winning WWIII, and be a hero president.
Yahoo! Finance User - Thursday July 02, 2009 11:18AM EDT
Well at least everyone is finally catching on to them
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Jason - Thursday July 02, 2009 10:38AM EDT
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