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Feb. 6 2010 - 6:19 pm | 312 views | 0 recommendations | 0 comments

AIG: Dumber than I thought. Goldman Sachs: Smarter


Image by Mike Licht, NotionsCapital.com via Flickr

Let me stem the barrage of hate mail before it starts: I said smarter, not better, or sweeter, or kindlier, or more ethical. (I don’t imagine I have to forestall any anger at calling AIG dumb)

Gretchen Morgenson and Louise Story have done a fascinating recap of how the relationship between AIG and Goldman led to Goldman’s coming out richer than ever as AIG went sailing down the tubes. I felt my eyes widen as I read.

Sure, I knew the basics — Goldman had taken insurance against losing money on securitized mortgage. But then one word in this graf started my eyebrows on their upward trajectory:

A.I.G. executives wanted some of its money back, insisting that Goldman — like a homeowner overestimating the damages in a storm to get a bigger insurance payment — had inflated the potential losses. Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities.

That word, of course, is “potential.” Homeowners, after all, don’t get to collect because the local weatherman said a hurricane is coming and they project they’ll lose their homes. But AIG agreed to pay off on potential losses?

The plot sickens.

In its dispute with A.I.G., Goldman invariably argued that the securities in dispute were worth less than A.I.G. estimated — and in many cases, less than the prices at which other dealers valued the securities.

There’s an argument over what those losses would be? No mention of value of security on day of claim?

I’m still trying to figure this out. If my 401K tanks on paper. but I never sell anything, do I get to claim the losses on my tax return anyway? And what if the stocks rebound and I sell? Do I get to deduct the on-paper loss I claimed in January from the actual profit I realized in March? The logic of the AIG policies dictates all of the above. My mind is boggling.

I have to digress for a moment, because I do feel a moral obligation to give the Goldman/Deutsch bashers something to rant about: I don’t fault Goldman for playing hardball on this. And I find it silly that there’s a whole investigation going on as to whether the insistence of Goldman and other policyholders on getting paid led to AIG’s downfall, and the need for a taxpayer bailout (yeah, I know, when they all got paid even more).

The reason we take insurance is so that if there’s a problem, we get paid; I have never worried whether Allstate can afford to pay my claim for car damage, or if Empire Blue Cross could afford my hip replacement. That’s why I pay insurance premiums; if the companies have written more policies than they can cover in a debacle, that’s their problem. That, apparently is what AIG did — so don’t blame Goldman for insisting on collecting.

Okay, back to the issue at hand. Apparently, AIG’s insurance policies started off relatively sane, in that they didn’t have to pay off when investments were starting to sour. But that apparently changed in 2003 — my guess is, so they could hike up the premiums. Goldman, ever the aggressive negotiator, actually got policies that said AIG would have to start paying off if the value of mortgage bonds fell by just 4%.

Ya gotta hand it to the Goldman guys: They give the concept of risk management a new dimension of meaning. And the AIG guys? What kind of imbeciles are they? Greed, I can understand. But this kind of stupidity? Nope.

Washington, AIG isn’t too big to fail. It’s too dumb to exist. Put it out of its misery as soon as possible.

But the final irony, which I won’t even comment on — but I’ll bet you can picture me grinning — is this:

On Aug. 18, 2008, Goldman’s equity research department published an in-depth report on A.I.G. The analysts advised the firm’s clients to avoid the stock because of a “downward spiral which is likely to ensue as more actual cash losses emanate” from the insurer’s financial products unit.


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    About Me

    I graduated from Cornell with a degree in child psychology, enough years ago so that all you needed to break into journalism was willingness to starve. I went into business journalism because, in the 60s, the business press was the crusading press, the ones that wrote about environment, race relations, etc. Since then I have worked for Business Week, Chemical Week and, from 1984 through May 2008, BizDay at the New York Times. I remain bored by and ignorant of esoteric financial instruments; I remain fascinated and pretty knowledgeable about management, marketing, environment, all the non-financial aspects of business. But my true passions? Tennis, both playing and watching, and food, both cooking and eating.

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