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Aug. 9 2009 - 8:03 am | 210 views | 8 recommendations | 36 comments

Why was Goldman invited to the AIG bailout party?

During the week of the A.I.G. bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives.

On Sept. 17, the day Mr. Paulson secured his waivers, he and Mr. Blankfein spoke five times. Two of the calls occurred before Mr. Paulson’s waivers were granted.

via During Crisis, Paulson’s Calls to Goldman Posed Ethics Test – NYTimes.com.

I spoke with someone who was in the Fed offices the whole weekend prior to the AIG bailout, a government official, and he poses an interesting question. Aside from the Fed, the Treasury, and the New York State Department of Insurance, the main players involved in the AIG bailout that weekend were AIG (obviously), JP Morgan, Morgan Stanley, and Goldman Sachs. There were swarms of bankers from the latter three banks there that weekend, poring over AIG’s books, trying to figure out if AIG could be rescued without government help.

Now, we know why AIG was there, obviously. Morgan Stanley was there representing the Treasury (it had been hired to advise the Treasury on the bailouts by Paulson during the Fannie/Freddie mess, with the rumor being that it was the only bank willing to give up market positions that would have left it too conflicted to do the work). JP Morgan we know was there because AIG had hired them weeks before to come in and try to clean up its messes. Only Goldman Sachs did not have an official role at these proceedings.

So why was Goldman there? And why was Paulson calling Goldman two dozen times that week? This is one of the other problems with Gasparino’s account (“of course” Blankfein was there that weekend, he says, not telling us why this is so obvious). I’m not sure I’ve ever seen an official explanation for why Goldman was there that weekend; the ostensible explanation that most people seem to accept is that Goldman naturally was there because it was such a large counterparty to AIG.

But I suspect we’re going to find that Paulson was not on the phone two dozen times with executives from Deutsche Bank or Societe Generale or Barclays or Calyon, all of whom were significant counterparties to AIG as well. Goldman was not even AIG’s largest counterparty in the sec-lending wing of its business (Deutsche Bank was, and would eventually receive $7 billion via the bailout as a result), and yet as far as I know there were no Deutsche reps there that weekend at all. So what made Goldman special?

This is a good question, I think.


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  1. collapse expand

    So what made Goldman so special? Henry Paulson was only helping out his friends … with the emphasis on only.

  2. collapse expand

    Matt Taibbi is the only financial supporter not shilling for Goldman Sachs aka SilverScrotums, the biggest thieves on wall street.

  3. collapse expand

    I was just going to add this link to another post of yours. The last 5 paragraphs of the article have a pertinent “to be continued” air about them. There are important questions in there.

  4. collapse expand

    I think you need to look at GS’s past history in failing institutions (LTCM, REFCO and BS). They are always the guys that are in there to pick over the life support patient, but in reality are they just looking / downloading positions of the firms. Also why is Christopher Flowers always involved as he was in REFCO and BS? An ex-GS guy, wonder what type of info is shared between him and Lloyd? Also wasn’t his firm the one that had done the due-dilligence on the on ML / B of A deal? One less competitor for the boys at 85 Broad Street.

  5. collapse expand

    Man, what a bunch of morons. Her is what actually happened.

    Paulson was the person at Goldman who was responsible for the highly profitable Goldman/AIG relationship. This single relationship, over time, made him head of the firm. He was not going to let AIG or Goldman go down.

    Other firms were not so fortunate. Lehman was Goldman’s chief competitor, and Paulson wanted them out of the way. He had competed against Lehman over the years, specifically for business from AIG, and knew they were a threat: a small, highly profitable, aggressive partnership, just like Goldman. Bear Stearns, too, was small, highly profitable, and aggressive, in other words, a threat. When the time came to save these firms, Paulson knew that if he took them out, Goldman would profit greatly, assuming Goldman survived. He made sure Goldman survived by making them a bank holding company.

    All Treasury policy decisions made at the time based on these factors and assumptions. Simple.
    I know. I was there.

  6. collapse expand

    How to Engineer a Financial Crisis

    Authored by U.S Government Regulators: Ben Bernanke, Hank Paulson, Christopher Cox

    1) Allow financial institutions (Banks, Investment Banks, Insurance Companies) to grow large enough to threaten the financial system if they fail. Importantly, do not charge these institutions any regulatory fees to create a pool of reserves that could be used to prevent the “domino effect” when the inevitable failure of one of these goliaths occurs.

    2) Allow these financial institutions to lever themselves at 40 to 1 leverage.

    3) Allow these financial institutions to manufacture fraudulent real-estate liar-loans to use as collateral for the 40 to 1 leverage.

    The bomb has now been created. Proper timing is important in striking the match.

    Wait patiently until one or more of the financial institutions gets into trouble and is about to explode.

    Once this occurs, to ensure maximum effect call a press conference and publicly announce that regulators will not act to prevent the impending explosion (example: announcement by Hank Paulson regarding Lehman and AIG, Monday September 15, 2008).

    After the explosion, rush to the scene with huge sums of taxpayer money. Dole the money out to political cronies such as Goldman Sachs (both directly and discreetly as opportunity presents itself) enabling them to reap grand profits at taxpayer expense.

    Proclaim financial regulators as the saviors of the financial system. Emphatically state that the crisis would have been far worse had regulators not acted so quickly to save the system.

    Point fingers at convenient scapegoats such as hedge funds and derivatives.

    As the savior of the financial system, request even more power and authority.

    Remember to keep a straight-face.

    • collapse expand

      Plan will work most effectively if it engages large banking firms on an international basis. Fraud on such a level is much harder to detect or prove, and even if it is detected, various international banking and criminal laws make it easy for the perpetrator to walk scott-free.

      In response to another comment. See in context »
  7. collapse expand

    I am sure you could not have foreseen the type of pressure that your brave expose would produce.

    You have two options…blink and back down…. or lead a group of RS readers and the folks that paid attention to this for the first time because of the forum you cam from into the reality of what is going on in our economy.

    I am a Republican…who is becoming a Libertarian because it is shameful what Bush and the leaders ofthe GOp have wrought and what they allowed folks like GS to get away with after they failed in the business they claimed they knew best.

    You and folks like Zero Hedge and Barry Rhinholze are at the beginning of the new journalism that can expose this treason.

    Obama is unformed in this area – I think he can be turned to the reality and dump Timmy and Larry and restore something like fairness to fail.

    Obama’s core group was economically ignorant…they knew they were being screwed …but they did not know ho….your voice and the article are good starts….keep it up….the pressure will only grow on you…in ways that you will never be able to prove or even write about.

    This is what Journalism is all about…your article was as seminal as Woodstock…start the revolution…everyone must help out.

  8. collapse expand

    I just want to add words of support for Matt Taibbi, who is a national hero. I am a business-driven Kiwi who lives in the US, and my admiration for the American dream and US Constitutional values have been severely damaged by the derailing and dishonest shenanigans of the US Government, and even more by the way the press have simply let it all happen without good investigation.

    Reporters like Mr. Taibbi are few and far between, and I support him and his efforts 100%.

  9. collapse expand

    Indeed, it is a good question. I know you are preoccupied with the health care piece but I am so happy to see you continuing to contribute thoughts on the unfolding financial scandal. Your two pieces in the Rolling Stone on this contributed greatly to keeping the story alive and your informed contributions will continue to do so.

    Within the MSM, GRETCHEN MORGENSON of the NYT, who co-wrote the story you reference in this entry, has been a careful, resourceful, dogged reporter and a courageous, prescient columnist – she deserves equal kudos. Joe Nocerra is a runner up.

  10. collapse expand

    I’m not at all surprised that Goldman, apparently, was present. I’m just surprised that those involved made it so easy for everyone to know this – seems like they believed themselves to be above the law or ethical standards to avoid the appearance of impropriety – they just don’t care because at each stage of the bailouts – Bush and O’Bama’s – they are backed by the political powers that be. They seem to be the Untouchables. Leave it to a baseball league manager, Buzzie Bavasi, to have made a quote that seems especially apropos now: “We live by the Golden Rule. Those who have the gold make the rules.” Apparently, he understood how the world of money, in the US, works.

    • collapse expand

      As nobody has ever looked into what they’ve done over the decades, particularly the past fifteen years, why would they have expected that to change? Plus, they were sure that they had made any and all of their actions perfectly legal during the Clinton years.

      In response to another comment. See in context »
  11. collapse expand

    Goldman is eerily homogenous to that Maryanne character in True Blood. Be careful, Matt. Hopefully they don’t go looking to cut out your heart.

  12. collapse expand

    As the GS groupies would say…

    GS are just so smart and efficient! Are you kidding, why wouldn’t you want GS there to advise the government on such a large/important bailout?

    The above is said with sarcasm, of course!

    Great work Matt…keep it up!

  13. collapse expand

    Deutsche Bank acquired much of Goldman’s toxic mortgage loan assets through various trust agreements. There were other players as well, primarily JP Morgan, Wells, and HSBC, among others.

    Here is an excerpt from Form 425B, the Prospectus, filed 8-31-2007, for Goldman Sach’s GSAMP 2007-HSBC1 CIK#: 0001409233.

    “THE TRUSTEE
    Deutsche Bank National Trust Company (“DBNTC”) will act as trustee. DBNTC is a national banking association and has an office in Santa Ana, California. DBNTC has previously been appointed to the role of trustee for numerous
    mortgage-backed transactions in which residential mortgages comprised the asset
    pool and has significant experience in this area. DBNTC also will act as a custodian of the mortgage files pursuant to the pooling and servicing agreement. DBNTC has performed this custodial role in numerous mortgage-backed transactions since 1991” (p. S-50)

    Having studied many of the filings made under Goldman Sach’s various trust entities, such as GSAA, GSAMP, GSR, and GS Mortgage (which appears to be commercial, rather than residential loans), I can say that Deutsche Bank appears frequently in the capacity of Trustee, Custodian, or both.

    I’ve previously mentioned that these filings contain information that might be useful for your research. One interesting thing I’ve noticed in my reading is that I have found no mention of AIG or credit default swaps, anywhere.

    I do find reference to “credit enhancement”, via such exotic methods as “subordination” and “overcollateralization”; there’s even a few references to rate swaps. In fact, this particular issue mentioned contains a provision for an interest rate swap to be obtained from Goldman Sachs Mitsui Marine Derivative Products, LP., and they appear to have a complex set of Swap agreements associated with this rate swap. (p. S-71 – S-76)

    I’ve mentioned this to you in particular, because if you really want to know what went on with GS and AIG, you have to begin by understanding what didn’t happen.
    I hope this helps.

  14. collapse expand

    Matt, Can you use your experience in Russia to enlighten us? Are there any similarities between the way the Russian oligarchs secured their monopolies, with government leaders and bureaucrats picking winners and losers, and what is currently going on in this country? Wall Street oligopolies are now engaging in “monopolistic rent-seeking” by widening spreads and gouging their trading clients. This plutocratic behavior in Russia destroyed faith in capitalism and democracy, and brought Putin to power.

  15. collapse expand

    The game is pretty much up for my money. The Chinese have us by our private parts, and they’re INSISTING we start at least trying to look like we’re not a banana republic because they realize that all this regulatory capture BS makes our markets inherently unstable and they don’t want that kind of risk sitting on their books.
    Paulson is currently getting grilled over those phone calls he made before he was granted an exemption on the obvious conflict of interest. I believe they just chose Paulson to be the bagman for this nonsense. But that alone will probably not be enough to placate the Chinese. I think when Goldman’s end comes it will be public and bloody: they’ll need to show the Chinese they mean business if they want to keep running up these kinds of debts and deficits and clobbering one guy isn’t going to cut it.

  16. collapse expand

    Everyone throws around the $13 billion number as the amount that GS got from AIG *after* AIG failed. But collateral calls and CDS payments before or after this default-day are essentially fungible, and this day is thus an artificial divider. Does anyone know the total amount that GS got before AND after the default-day? In other words, what was GS’s total counter-party risk exposure to AIG in the months and years leading up to AIG’s failure?

    • collapse expand

      If GS was a preferred/shrewd counter-party/client of AIG, could GS have gotten much of their loot out before the default-day, thereby making the $13b number look artificially low, when compared to what other clients/creditors received after the AIG bailout, and compared to the total size of the AIG bailout, and compared to the total net windfall of GS’s gambles with AIG (ie, amount GS received from AIG minus the premiums GS paid for their contracts with AIG)?

      In response to another comment. See in context »
      • collapse expand

        First of all, what day do you consider “default day”?

        Then, don’t you think a better question is how was Goldman the “only” shrewd/lucky counterparty to AIG’s unfortunate business decision to issue CDSs; and furthermore, if AIG was making so much money selling these things (as per Michael Lewis, in ““The Man Who Sank the World’s Economy”, published in last month’s Vanity Fair), then why didn’t they expand their marketplace to include all the Wall Street subprime mortgage securitizes?

        Seriously, these guys are whores, and if they’ve got something to sell, and there’s money to be made, they’re not going to be too particular who they work with .. . are they?

        Read this argument in light of my own predisposition to reject that AIG ever “SOLD” any such thing. I’m not denying they engaged in credit default swaps, but I believe they were negotiated market positions, rather than transactions bought or sold, and I suspect they were established in relation to municipal bond issuances; possibly corporate grade debt. I also believe they sold interest swaps, currency swaps, swaptions, equity and commodity swaps, as stated per their 10-K Annual Reports. But I do not believe they “sold” credit default swaps for mortgage backed securities issuances, and if they did, I would love to have someone explain to me how they priced the risk and established acceptable capitalization rates.

        You need to realize that AIG owns United Guaranty, a private mortgage insurance company. If there’s anything AIG knows, its all about risk. The same can be said for United Guaranty, which would have decades’ worth of mortgage loan performance data informing their decision to insure, or not insure, any particular loan.

        The loans that AIG was supposedly selling credit default swaps for were loans of such marginal quality that they couldn’t possibly obtain mortgage insurance to insure payment in case of default, because they loans seemed virtually certain to default.

        So really, there could have been no question of whether the loan would default. Rather, the question would have been “when” it would default.

        In response to another comment. See in context »
  17. collapse expand

    Congratulations on the Sidney Award from the Hillman Foundation for your Goldman piece; well deserved. You are willing to take the heat while others duck for cover. I am glad to see more mainstream press start to get interested in the Goldman rip off of the taxpayers. I wonder if “The Boyz” will sue Sidney Hillman now for shining more light on their dirty deeds.

  18. collapse expand

    @Serena
    My point was that what I call “default-day” shouldn’t matter (let’s assume it’s the day after which all AIG payments came from the govt…err…the taxpayers). If GS has not taken $7.5b (per NYMagazine) from AIG before default-day, then would they have received $7.5b+$13b=$20.5b AFTER default-day? And if GS had received $20.5b BEFORE default-day, would we even be having this discussion? To me, the dollars are fungible (across time and across creditors), and so we should be discussing the TOTAL amount that GS received from AIG (and thus the taxpayers), not just the $13b after default-day. This $20.5b is the number CDS contracts. Were there other counter-party payments made from AIG to GS in the months and years leading up to default-day that the taxpayers ultimately paid? Part of GS’s revenues/profits are compensation for taking counter-party risk, and they should pay the penalty. There’s no free lunch in finance.

    Nassim Taleb is right: “We have a very strange situation in which it’s the worst of capitalism and socialism, a situation in which profits were privatized and losses were socialized. We taxpayers have the worst.”

  19. collapse expand

    I just got attacked by a conservative blog!!!

    I can’t believe this… (well, I can actually):

    http://www.moonbattery.com/archives/2009/08/a...

    All the bloggers themselves really did was quote me and call me crazy, the real insanity was left to the first person to comment, and check out the comments on that page BTW, these people are NUTS!!! Anyway, here’s what the guy (Air2air) said:

    but AIG’s PsyOps labs have used TARP money (quotes me – ed)

    Actually your side bailed out AIG and is behind TARP (his words -ed)

    Uhhh, yeah… last time I checked, Paulson was the one who engineered TARP and he worked for Bush… And it happened back in September when Bush was still in office…

    It seems the Republicans and their supporters aren’t even TRYING TO LOOK LIKE they are telling the truth anymore. You can see my response here:

    http://www.econocataclysm.com/dr-william-black-explains-bush-era-regulatory-capture-video/

    It includes a big, fat link to this article. Thanks for the writing, Matt. Keep it up! We’ll shut these people down eventually, we just have to keep hammering away at them. And everyone remember to support Ron Paul’s HR 1207 to audit the Fed!!!

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