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"1. Two multinational corporations staffed by highly sophisticated investors came up with a contract. One corporation then enforced the terms of the contract.

"1. Two multinational corporations staffed by highly sophisticated investors came up with a contract. One corporation then enforced the terms of the contract. How evil." Yes. Goldman knew the contract was fraudulent. They signed it to create a bogus asset that they could list on their balance sheet, allowing them to speculate using what should have been reserves. If AIG could not pay, they would simply write it off and lose a pittance (the few percent they paid AIG), small compared to the returns they could get on the speculations. If by some miracle AIG did pay, Goldman would throw a party where it rained money and cocaine. "On the other hand, Goldman (and everyone else) did not expect gigantic AAA counterparties to go bankrupt." First, a proper financial investigation ("due diligence") looks into the risk that the counterparty will spend all the money on fast cars and hookers. Second, if Goldman did not expect bankruptcies, then why did they buy insurance for bonds they did not own? Buying a derivative by itself is not a hedge, it is speculation.

yummyfajitas 17y ago
Yes. Goldman knew the contract was fraudulent. Do you have any evidence for this? Also, expecting an AAA rated multinational corporation to pay their debts is hardly a "miracle". Second, if Goldman did not expect bankruptcies, then why did they buy insurance for bonds they did not own? Home "owners" defaulting on mortgages is not the same thing as AIG going bankrupt. Goldman expected the former, not the latter (at least according to the article).
- Daniel_Newby 17y ago
  The evidence is that they made a one-way bet with an insurance company, rather than a hedge with a derivatives trader. That's like buying fire insurance for a smoking building that somebody else owns. They knew anybody with a few $100k could buy a AAA rating -- they were buying them themselves.
  - yummyfajitas 17y ago
    The evidence is that they made a one-way bet with an insurance company, rather than a hedge with a derivatives trader. That's like buying fire insurance for a smoking building that somebody else owns. You are accusing Goldman of speculation, not fraud. Incidentally, insurance is a derivatives contract. Any insurance company is a derivatives trader, AIG Financial Products in particular.

yummyfajitas 17y ago

Yes. Goldman knew the contract was fraudulent. Do you have any evidence for this? Also, expecting an AAA rated multinational corporation to pay their debts is hardly a "miracle". Second, if Goldman did not expect bankruptcies, then why did they buy insurance for bonds they did not own? Home "owners" defaulting on mortgages is not the same thing as AIG going bankrupt. Goldman expected the former, not the latter (at least according to the article).

Daniel_Newby 17y ago
The evidence is that they made a one-way bet with an insurance company, rather than a hedge with a derivatives trader. That's like buying fire insurance for a smoking building that somebody else owns. They knew anybody with a few $100k could buy a AAA rating -- they were buying them themselves.
- yummyfajitas 17y ago
  The evidence is that they made a one-way bet with an insurance company, rather than a hedge with a derivatives trader. That's like buying fire insurance for a smoking building that somebody else owns. You are accusing Goldman of speculation, not fraud. Incidentally, insurance is a derivatives contract. Any insurance company is a derivatives trader, AIG Financial Products in particular.