Goldman Primed to Benefit from AIG's Woes -- Again, William Cohan Says

When 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].”