Posted on Friday, February 4, 2011
Goldman Sachs collected $2.9 billion from the American International Group as payout on a speculative trade it placed for the benefit of its own account, receiving the bulk of those funds after AIG received an enormous taxpayer rescue, according to the final report of an investigative panel appointed by Congress.
The fact that a significant slice of the proceeds secured by Goldman through the AIG bailout landed in its own account--as opposed to those of its clients or business partners-- has not been previously disclosed. These details about the workings of the controversial AIG bailout, which eventually swelled to $182 billion, are among the more eye-catching revelations in the report to be released Thursday by the bipartisan Financial Crisis Inquiry Commission.
The details underscore the degree to which Goldman--the most profitable securities firm in Wall Street history--benefited directly from the massive emergency bailout of the nation's financial system, a deal crafted on the watch of then-Treasury Secretary Henry Paulson, who had previously headed the bank.
"If these allegations are correct, it appears to have been a direct transfer of wealth from the Treasury to Goldman's shareholders," said Joshua Rosner, a bond analyst and managing director at independent research consultancy Graham Fisher & Co., after he was read the relevant section of the report. "The AIG counterparty bailout, which was spun as necessary to protect the public, seems to have protected the institution at the expense of the public."
Goldman and AIG both declined to comment.
When news first broke in 2009 that Goldman had been an indirect beneficiary of the AIG bailout, collecting the full value of some $14 billion in outstanding insurance polices it held with the firm, the officials who brokered the deal justified these terms as a necessary stabilizer for the broader financial system. As the world's largest insurance company, AIG's inability to cover its outstanding obligations could have threatened the solvency of the institutions holding its policies, asserted the Federal Reserve Bank of New York, which oversaw the deal.
Goldman fended off claims that the arrangement amounted to a backdoor bailout by asserting that none of the money from the AIG rescue landed in its own coffers. Rather, those funds went to compensate clients or institutions on the other side of its trades, Goldman said.
But the report from the financial crisis commission, obtained by The Huffington Post in advance of its release, appears to challenge that assertion: The report reveals another pot of money conveyed to Goldman--the $2.9 billion to cover trades the Wall Street investment house made for itself. That money went straight to the bank's bottom line, according to the report.
Over the last two years, Goldman has reported nearly $22 billion in profits, according to its official earnings statements. During those years, it has paid out $31.6 billion in compensation to its employees.
According to the report, the financial crisis commission first learned that the $2.9 billion in AIG funds landed in Goldman's account through an e-mail the bank sent to the panel on July 15, 2010 in response to questions.
Previously, Goldman executives had testified that the AIG bailout funds the bank collected went to compensate its clients and institutions that held the other side of its trades.
At a hearing on July 1, 2010--two weeks before Goldman sent the e-mail acknowledging how $2.9 billion in AIG funds wound up in its own account--the crisis panel questioned Goldman's chief financial officer, David A. Viniar and managing director David Lehman. Both said they knew nothing about AIG funds landing in the bank's private coffers, according to a transcript of the hearing.
The report concludes that Goldman collected the $2.9 billion as payment for so-called proprietary trades made for its own account--essentially successful bets on large pools of financial instruments.
"The total was for proprietary trades," the report asserts. "Unlike the $14 billion received from AIG on trades in which Goldman owed the money to its own counterparties, this $2.9 billion was retained by Goldman."
A spokesman for for the crisis commission said it would be premature to discuss the panel's findings.
"I have no comment on the commission's report until it is released on Thursday," said crisis commission spokesman Tucker Warren.
Goldman collected at least half the money at issue after AIG received the first round of a public bailout whose tab eventually swelled to $182 billion, according to the commission's report.
The winning bets that Goldman collected on through the AIG bailout are known as credit default swaps--essentially, a type of insurance, albeit one that operates in the shadows, beyond purview of regulators. The insurance giant wrote trillions of dollars worth of these policies during the real estate boom without setting aside sufficient cash to cover losing bets, positioning itself for potential catastrophic losses.
According to the crisis commission report, Goldman bought credit default swaps from AIG as a form of insurance on investments known as Abacus, which were pools of mortgage-linked securities. One such pool put Goldman cross-wise with federal regulators: Last year, Goldman agreed to pay $550 million in fines to settle securities fraud charges filed by the Securities and Exchange Commission.
According to the lawsuit, Goldman allegedly concealed the fact that it designed the basket of mortgage-linked securities to fail at the behest of another client who netted about $1 billion by betting against them. Goldman sold the same investments to other clients--mostly European banks--without disclosing their provenance, according to the SEC's lawsuit.
The crisis panel did not disclose whether this Abacus deal was among those on which Goldman collected a portion of the AIG bailout funds.
The AIG bailout, which paid holders of its insurance policies 100 cents on the dollar, was aggressively defended by federal regulators as a critical immunization against a potential financial pandemic as the insurance company teetered on the verge of collapse in the fall of 2008.
Treasury Secretary Timothy F. Geithner, who led the New York Fed at the time the AIG rescue was crafted, later told Congress that a collapse risked "large and unpredictable global losses with systemic consequences--destabilizing already weakened financial markets, further undermining confidence in the economy, and constricting the flow of credit." Both the New York Fed and Treasury declined to comment.
Analysts say such fears caused the officials who crafted the bailout to lean heavily toward speed and size, while failing to factor in fairness.
"At the time, the idea was the sucker could go down because there wasn't enough liquidity in the system, money wasn't moving, and you could see a domino effect,"
said Ann Rutledge, a principal at R&R Consulting in New York, which specializes in structured finance.
In reality, she contends, those fears were overblown: There was ample money in the financial system. Rather, individual institutions did not have enough cash on hand to survive their losses, she asserts. But the fear of a broader liquidity crisis was used as justification for what now appears to have been a backdoor means of bailing out Goldman, said Rutledge.
The details in the commission's report leave Goldman "naked," she added. "It doesn't have the fig leaf of a systemic risk argument. Normally what happens when you have a sophisticated institution that's doing stupid credit stuff is you let them eat it, but that didn't happen in the bailout."
Shahien Nasiripour is a business reporter for The Huffington Post.