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I really don't understand this continued suspicion of the AIG/Goldman flowthrough. What they did was a textbook case of how to protect yourself against a count

by op12 17y ago

I really don't understand this continued suspicion of the AIG/Goldman flowthrough. What they did was a textbook case of how to protect yourself against a counterparty going bankrupt. It will be used as a case study one day of how to exercise prudence. Direct from the conference call that explained their exposure: "When AIG was rescued, Goldman Sachs had $10 billion of exposure to the insurance company that was offset with $7.5 billion of collateral as well as credit-default swaps that would have paid off in the event of an AIG bankruptcy, Viniar said on the March 20 call." So Goldman had $10 billion of insurance with AIG. As the insurance started going in their favor, as is common banking practice, they demanded collateral be pledged (treasury securities) that they could seize in the event of bankrupty. This was 7.5 billion worth of collateral in extremely safe treasury bonds. So in the event of default, Goldman would have kept the securities in lieu of getting the cash settlement. Because they did not default, AIG had the securities returned to them and they paid out cash instead (this is the 10 billion number that "went from tax payers to goldman" that everyone keeps saying). The remainder 2.5 billion was the disagreement between the parties as to where the insurance should actually be marked. So to be prudent, they bought CDS protection that would pay 2.5 billion in the event of default. What is the problem here?

anamax 17y ago
> This was 7.5 billion worth of collateral in extremely safe treasury bonds. > this is the 10 billion number that "went from tax payers to goldman" that everyone keeps saying Goldman Sachs was owed $10B. 7.5B was available in pledged securities. Goldman got $10B in cash because of govt flow-through via AIG. > So to be prudent, they bought CDS protection that would pay 2.5 billion in the event of default. Shouldn't the insurer be paying off, if solvent, and not the US govt? And, if the insurer is not solvent, why shouldn't Goldman take the hit? > What is the problem here? The claim is that Goldman is not taking a hit from their transactions with AIG while other parties are. The above documents that Goldman is, in fact, not taking a hit from their transactions with AIG. The only remaining question is whether other parties are taking a hit for their transactions with AIG. If they are, the question is Goldman Sachs is being treated differently.
- op12 17y ago
  > Goldman Sachs was owed $10B. 7.5B was available in pledged securities. Goldman got $10B in cash because of govt flow-through via AIG. If someone has pledged the majority of what is owed to me in collateral, it is wrong for people to imply that the 10 billion flowing through the government was just some windfall flowthrough. They got what they were owed, and the taxpayers got their 7.5 billion in collateral back. If the taxpayers did not pay the 10 billion, then they wouldn't have gotten 7.5 billion worth in treasuries returned to them--Goldman would have had the right to keep it, and this is the whole point of having collateral pledged to them in the first place. > Shouldn't the insurer be paying off, if solvent, and not the US govt? And, if the insurer is not solvent, why shouldn't Goldman take the hit? Are you talking about the CDS insurer? The insurance only needs to be paid if AIG defaults. If AIG defaults then the US govt doesn't have to pay anything, the insurer does. Since AIG was bailed out, no credit event was triggered and the CDS insurance becomes worthless. The upside is of course they actually get their money. In either case, whether AIG was allowed to fail or not, they would have been made whole. Goldman was not treated differently in this case. Many other banks were treated the exact same way. Yes, Goldman was paid out in their insurance. So is any individual who took out insurance with AIG--they will actually get paid what is owed to them as well now.
  - gills 17y ago
    If what you say is true, and Goldman hedged their hedge by purchasing CDS on AIG and/or outright shorting them, it should be trivial for a prosecutor to show that they entered a contract with AIG knowing fully that it could never be satisfied (who knows, there may even be a side letter to be found somewhere to that effect...) -- making the contract void and requiring a clawback of any payment made through AIG by Treasury.
    - op12 17y ago
      How does purchasing CDS insurance on a counterparty imply that they knew full well it could never be satisfied? If I purchase hurricane insurance on my home do I know full well a hurricane is going to destroy my house? It was a precautionary measure for an amount that was the difference between what they were owed and how much collateral was pledged. It indicates nothing of the sort that they knew full well the world was going to blow up and AIG would default And what I say is true, there are many many public disclosures on exactly what their positions were.

by op12 17y ago

anamax 17y ago

> This was 7.5 billion worth of collateral in extremely safe treasury bonds. > this is the 10 billion number that "went from tax payers to goldman" that everyone keeps saying Goldman Sachs was owed $10B. 7.5B was available in pledged securities. Goldman got $10B in cash because of govt flow-through via AIG. > So to be prudent, they bought CDS protection that would pay 2.5 billion in the event of default. Shouldn't the insurer be paying off, if solvent, and not the US govt? And, if the insurer is not solvent, why shouldn't Goldman take the hit? > What is the problem here? The claim is that Goldman is not taking a hit from their transactions with AIG while other parties are. The above documents that Goldman is, in fact, not taking a hit from their transactions with AIG. The only remaining question is whether other parties are taking a hit for their transactions with AIG. If they are, the question is Goldman Sachs is being treated differently.

op12 17y ago
> Goldman Sachs was owed $10B. 7.5B was available in pledged securities. Goldman got $10B in cash because of govt flow-through via AIG. If someone has pledged the majority of what is owed to me in collateral, it is wrong for people to imply that the 10 billion flowing through the government was just some windfall flowthrough. They got what they were owed, and the taxpayers got their 7.5 billion in collateral back. If the taxpayers did not pay the 10 billion, then they wouldn't have gotten 7.5 billion worth in treasuries returned to them--Goldman would have had the right to keep it, and this is the whole point of having collateral pledged to them in the first place. > Shouldn't the insurer be paying off, if solvent, and not the US govt? And, if the insurer is not solvent, why shouldn't Goldman take the hit? Are you talking about the CDS insurer? The insurance only needs to be paid if AIG defaults. If AIG defaults then the US govt doesn't have to pay anything, the insurer does. Since AIG was bailed out, no credit event was triggered and the CDS insurance becomes worthless. The upside is of course they actually get their money. In either case, whether AIG was allowed to fail or not, they would have been made whole. Goldman was not treated differently in this case. Many other banks were treated the exact same way. Yes, Goldman was paid out in their insurance. So is any individual who took out insurance with AIG--they will actually get paid what is owed to them as well now.
- gills 17y ago
  If what you say is true, and Goldman hedged their hedge by purchasing CDS on AIG and/or outright shorting them, it should be trivial for a prosecutor to show that they entered a contract with AIG knowing fully that it could never be satisfied (who knows, there may even be a side letter to be found somewhere to that effect...) -- making the contract void and requiring a clawback of any payment made through AIG by Treasury.
  - op12 17y ago
    How does purchasing CDS insurance on a counterparty imply that they knew full well it could never be satisfied? If I purchase hurricane insurance on my home do I know full well a hurricane is going to destroy my house? It was a precautionary measure for an amount that was the difference between what they were owed and how much collateral was pledged. It indicates nothing of the sort that they knew full well the world was going to blow up and AIG would default And what I say is true, there are many many public disclosures on exactly what their positions were.