WASHINGTON — Reversing its oft-repeated position that it was acting
only on behalf of its clients in its exotic dealings with the American
International Group, Goldman Sachs now says that it also used its own
money to make secret wagers against the U.S. housing market.
A senior Goldman executive disclosed the "bilateral" wagers on subprime
mortgages in an interview with McClatchy, marking the first time that
the Wall Street titan has conceded that its dealings with troubled
insurer AIG went far beyond acting as an "intermediary" responding to
its clients' demands.
official, who Goldman made available to McClatchy on the condition he
remain anonymous, declined to reveal how much money Goldman reaped from
its trades with AIG.
the wagers were part of a package of deals that had a face value of $3
billion, and in a recent settlement, AIG agreed to pay Goldman between
$1.5 billion and $2 billion. AIG's losses on those deals, for which
Goldman is thought to have paid less than $10 million, were ultimately
borne by taxpayers as part of the government's bailout of the insurer.
proprietary trades with AIG in 2005 and 2006 are among those that many
members of Congress sought unsuccessfully to ban during recent
negotiations for tougher federal regulation of the financial industry.
McClatchy examination, including a review of public records and
interviews with present and former Wall Street executives, casts doubt
on several of Goldman's claims about its dealings with AIG, which at
the time was the world's largest insurer.
The latest disclosure undercuts Goldman's repeated insistence during
the past year that it acted merely on behalf of clients when it bought
$20 billion in exotic insurance from AIG.
_ Although Goldman has
steadfastly maintained that it had "no material exposure" to AIG if the
insurer had gone bankrupt, in fact the firm could have lost money if
the government hadn't allowed the insurer to pay $92 billion of
American taxpayers' money to U.S. and European financial institutions
whose risky business practices helped cause the global financial
_ Goldman took several aggressive steps — including
demanding billions in cash collateral — against AIG that suggest to
some experts that it had inside information about AIG's shaky financial
condition and therefore an edge over its competitors. While former Bush
administration officials said AIG was financially sound and merely
faced a cash squeeze at the time of the bailout, McClatchy has reported
that the insurer was swamped with massive liabilities and was a
candidate for bankruptcy.
A spokesman for Goldman, Michael
DuVally, said that the firm followed its "standard approach to risk
management" in its dealings with AIG.
"We had no special insight
into AIG's financial condition but, as we do with all exposure, we
acted prudently to protect our firm and its shareholders from the risk
of a loss. Most right-thinking people would surely believe that this
was an appropriate way for a bank to manage its affairs."
He said that Goldman didn't have "direct economic exposure to AIG."
relationship between Goldman and AIG has drawn intense scrutiny over
the past year because several Goldman alumni held senior Treasury
Department jobs when the Bush administration guaranteed as much as $182
billion to bail out AIG, $12.9 billion of which AIG paid to Goldman,
the most money it paid any U.S. bank.
On Wednesday and Thursday,
a congressional panel investigating the causes of the financial crisis
plans to question current and former senior Goldman and AIG officials,
including Joseph Cassano, the former head of the London-based AIG unit
that covered $72 billion in bets against risky home mortgages — wagers
that cost U.S. taxpayers tens of billions of dollars when the housing
The proprietary trades at issue were carried out
using private contracts known as credit-default swaps, essentially bets
on the performance of designated securities and traded in murky,
loosely regulated markets with little disclosure about who placed
wagers, who won and who lost.
Documents emerging from the AIG
bailout and a Senate investigation of Goldman's secret bets against the
housing market while it sold off tens of billions of dollars in
mortgage-backed securities — first reported by McClatchy in November —
have provided a window into some of these dealings.
however, Goldman has said that the insurance-like contracts it bought
from AIG from 2004 to 2006 — deals that have cost the insurer some $15
billion — were made to offset similar swaps the investment bank had
written for clients who wanted to bet on a housing downturn.
companies have revealed few details of some $6 billion in so-called
synthetic deals, in which the parties bet on the performance of
designated securities that neither side purchased.
familiar with the matter, who declined to be identified because of its
sensitivity, said that additional synthetic swap contracts between AIG
and Goldman with a face value of $3 billion have yet to be unwound by
the teams of specialists tasked with scaling down AIG's more than $2
trillion in exotic risks.
The proprietary trades occurred in the
same Abacus series of synthetic securities that Goldman bundled
offshore, according to the senior Goldman official. Another one of
those 16 deals prompted the government to sue Goldman on civil fraud
charges in April.
Goldman also has long asserted that it was
holding $10 billion in collateral and "hedges" and thus had "no
material exposure" in the event that the government had allowed AIG's
parent to go bankrupt in the fall of 2008, rather rescuing it.
The emerging details of Goldman's offshore dealings, however, also call that into question.
doled out tens of billions of dollars of the bailout money to pay off
mortgage-related swaps with U.S. and European financial institutions at
their full face value, a decision made by the Federal Reserve Bank of
New York that triggered a public furor.
The bailout enabled major
financial institutions to honor billions of dollars in swap bets that
they'd made with each other, especially in offshore deals that were
pegged to the performance of loans to homebuyers with shaky credit.
declined to say how much money Goldman had at stake if the value of
these securities sank further and the big banks couldn't make good on
their bets amid frozen credit markets.
According to court
documents and a person who's seen records of some of the offshore
deals, investment banks Morgan Stanley and Merrill Lynch, as well as
large European banks, wrote protection for Goldman on these deals
totaling hundreds of millions of dollars.
In addition, The New
York Times reported earlier this year that Goldman cut a deal with the
Societe Generale in which the French bank paid Goldman a portion of the
$11 billion it collected from the AIG bailout.
that Societe Generale and Goldman had a deal regarding the French
bank's payout from AIG, but he declined to say whether Goldman
collected a large sum from the French bank.
Because Goldman was
holding $7.5 billion in collateral from AIG and had placed $2.5 billion
in other hedges, DuVally said, it "did not have direct economic
exposure to AIG" in the event that the insurer's parent had been left
"That said, we have always acknowledged that if a
failure of AIG had resulted in the collapse of the financial system, we
would have suffered just like every other financial institution," he
DuVally declined to say who selected the securities for Goldman's Abacus deals with AIG.
chief executive, Robert Benmosche, was asked at the company's recent
annual meeting whether it would seek to sue any banks for loading swap
deals with securities on junk mortgages likely to default.
said that the firm is reviewing "all activities from that period" and,
"to the extent we find something wrong that harmed AIG inappropriately,
our legal staff will take appropriate action."
It's unclear when
Goldman first suspected that AIG was at risk of a colossal meltdown,
but the storied investment bank moved more nimbly than any other
financial institution to shield itself.
As the home mortgage
securities lost value over a 14-month period beginning in the summer of
2007, Goldman's huge swap portfolio gained value. Under the terms of
the contracts, Goldman began in July 2007 to demand that AIG post
billions of dollars in cash as collateral.
DuVally said that
Goldman had no inside information about AIG's finances, and merely
protected itself by enforcing contract language that required the
insurer to post cash whenever the mortgage securities underlying the
bets lost value.
"Our direct knowledge of AIG's financial condition was limited to the company's public disclosures," DuVally said.
some experts are skeptical of that, especially because Goldman
responded to AIG's refusal to meet all its demands for $10 billion in
collateral by placing $2.5 billion in hedges — most of them bets on an
Sylvain Raynes, an expert on structured
securities of the types that AIG insured, said it's "implausible that
Goldman can say 'I had no idea that AIG was in dire straits or in weak
Raynes, a co-author of the newly published
book "Elements of Structured Finance" and a former Goldman employee,
said that a standard clause in the swaps contracts left open to
discussion whether the company writing protection must post collateral.
The buyer of coverage typically could demand to see financial
information, including the number of similar positions held, he said.
you see the (company) has entered into 150 credit-default swaps
totaling $65 billion, and that all of them are the same type as your
credit-default swaps, you know that they have taken huge amounts of
risk and have very little capital to back that up," Raynes said.
you really want to close your eyes, you have to know what their
condition is. If you don't know, then you're not doing your job, and I
have too much respect for Goldman to say they are not doing their job."
said, however, that Goldman wasn't told about other swaps that AIG had
written and didn't have access to AIG's internal financial information.
had served as an investment adviser for the insurer since as far back
as 1987 and as recently as 2006, setting up offshore companies
affiliated with AIG that served as loosely regulated reinsurers.
insurance subsidiaries shined up their balance sheets by shifting
hundreds of millions of dollars in liabilities to reinsurers, including
some of those formed with Goldman's assistance.
prosecutors and state regulators eventually nailed AIG for falsifying
its financial statements and for using so-called "sidecar" companies to
help Pittsburgh-based PNC Financial Corp. and an Indiana firm,
Brightpoint Inc., hide liabilities. AIG paid more than $1.7 billion on
to settle those and other charges in 2004 and 2006. Goldman wasn't
For years, Goldman and AIG have shared the same
auditor, PricewaterhouseCoopers, a firm that AIG retained even after
the SEC in 2006 directed it to find "an independent auditor."
also represented by the same New York law firm, Sullivan &
Cromwell, which boasted on its website of its "significant experience
in offshore reinsurance matters." The firm's senior chairman, Rodgin
Cohen, is known as one of Wall Street's most formidable attorneys.
August 2008, weeks before the rescue, AIG's newly installed chief
executive, Robert Willumstad, invited senior officials of several major
banks, including Goldman, Deutsche Bank, Lehman Brothers and Credit
Suisse, to a meeting to see whether there was any way to reduce the
insurer's huge portfolio of mortgage-related swaps.
from Blackrock, a financial services firm that was assisting the
Federal Reserve Bank of New York with the bailout, show that Goldman
offered to negotiate a settlement on some of the swaps, but the two
sides were too far apart on valuation of the securities to cut a deal.
said that Goldman offered only to settle for payment of its estimate of
the market value of the swaps, which had appreciated sharply due to the
securities' decline in value. To do so would have required AIG to book
a massive loss.
On Aug. 18, 2008, Goldman's equity research
department delivered another blow to AIG, issuing a sharply negative
report on the insurer and lowering its target price for AIG shares to
$23 from $30. The Goldman report heightened concerns among credit
ratings agencies about AIG's condition, Willumstad said in an interview.
September 2008, AIG was besieged with a chorus of collateral demands
from other banks and a threat from credit ratings agencies to downgrade
the insurer, an action that triggered more collateral calls and
prompted Treasury Secretary Henry Paulson, a former Goldman chief
executive, and Federal Reserve Chairman Ben Bernanke to initiate a
bailout to prevent a meltdown of the global financial markets.