A stunning and disturbingly informative front page Sunday New York Times article was written by the Time's Business Page columnist Gretchen Morgenson and Louise Story, "Testy Conflict With Goldman Helped Push A.I.G. to Precipice". It quotes Bill Brown, a Duke University Law Professor and former Goldman and A.I.G. employee saying that the dispute between the two companies "was the tip of the iceberg of this whole crisis".
The article details the demand for billions of dollars made against A.I.G. 's complex insurance derivatives (Credit Default Swaps and Obligations) by Goldman, claiming that pay downs were triggered as the housing mortgage market collapsed. All the while Goldman was taking proprietary positions, in effect shorting the housing backed mortgage instruments, allegedly pushing their values down, thereby setting the stage for a rancorous dispute with AIG. The dispute centered around establishing the values being assigned to the underlying instruments and in consequence the level of pay down owed to Goldman.
According to the article, Goldman resisted letting third parties value these securities even though third party price determination was required according to the contract documents. Nonetheless, with the housing market melting away, billions were transferred by A.I.G. to trading partners -- especially Goldman -- before September 2008 when A.I.G. was on the verge of collapse. In the year before the A.I.G. bailout, Goldman had already collected $7 billion from A.I.G. and of course many billions more after the bailout. This in spite of a determination by Black Rock, one of the nation's leading asset management firms, that Goldman's valuations on the A.I.G. derivatives were "consistently lower than third party prices," thereby making the pay downs from A.I.G. to Goldman greater than they needed to be. Further, according to the NYTimes, the SEC is investigating whether any of Goldman's demands improperly distressed the mortgage market, in that Goldman would stand to gain handsomely from the implosion of the housing market and the crash in value of housing backed mortgages.
In 2006 Hank Paulson left Goldman Sachs to become Secretary of the Treasury in the Bush Administration. That same year Goldman Sachs began to "make huge trades that would pay off if the mortgage market soured. The further mortgage securities fell, the greater were Goldman's profits." Consider, you own your home and here was a financial behemoth, through its trading strategies, doing all in its power to make your home worth as little as possible. Ah, the wonders of creative finance!
This post on November 20th, 2009, after the conclusion of hearings by the Congress' Joint Economic Committee, posed "The Key Question No One Asked About Goldman's Role In The AIG Bailout", specifically raising the unasked/unanswered question:
"What was the nature of the myriad discussions at the height of the crisis between Treasury Secretary and former Goldman Chairman Hank Paulson and Goldman Sachs Chairman Lloyd Blankfein?"
In the hope that this key question would be touched upon during the hearings of the House Oversight and Government Reform Committee on January 27th 2010, I brought the issue up again with this post on January 16th:
"The House Oversight Committee Sets Its Focus Where The Senate Financial Crisis Inquiry Commission Feared to Tread"
Yet again, to the best of my knowledge, even with Blankfein and Paulson testifying to the panel, along with the current Treasury Secretary Tim Geithner, the nature of the direct interchange between Paulson and Blankfein, the gist of their telephone calls and whether AIG was discussed between them then or before, was not touched upon specifically by the committee other than some muted questions on staff contacts.
Clearly with the information we now have from the NY Times' in depth reporting, the contact and the content of the communication between the two Goldman Chairmen becomes ever more significant. More specifically:
- Was A.I.G. brought up during their discussions in September?
- Given that Goldman's trading strategy of betting against the mortgage market dated back to 2006, was AIG discussed between the two prior to September 2008?
- Was the nature of AIG's exposure to Goldman known to Paulson or anyone on his staff.
- Given a statement made in a Goldman report in August 18, 2008 quoted in the NYTimes article that if a trading partner "is not in a position of weakness why would it accept anything less than the full amount of protection for which it had paid," as though the condition of the insurer who covered these speculative bets was of no merit. Was Goldman already aware that a badly damaged and bleeding A.I.G. would be resurrected by the government and they would be paid in full permitting them to be as unbending in their negotiations with A.I.G. as they were, in the knowledge that the government would backstop them?
- If so, was that information, which was worth billions to Goldman, a point of conversation, or winks and nods, between Paulson and Blankfein?
- Might Blankfein have known that Paulson, as events proved out, considered A.I.G. too big to fail, and that it was not a decision arrived at at the penultimate moment but a decision held all along, or worse and hopefully not the case, that Paulson found Goldman too intertwined with A.I.G. to permit it to happen?
- Was the Treasury and the Fed aware that the French Bank, Societe Generale's exposure to A.I.G. was largely at Goldman's behest and that A.I.G paying down its counterparty obligations to Societe Generale's after receiving its own government bailout was putting additional money into Goldman's pocket?
I realize that is all more than one question, but they all stem from the first question and now the NYTimes expose. Basically, what was the exchange of information between Paulson and Blankfein and/or their staffs, and what impact might it have had on Goldman's intransigence vis a vis A.I.G.? And if inside information may have, advertently or inadvertently been exchanged, what redress is there to the public that footed these many billions?