Last April, Goldman Sachs CFO David Viniar said he was "mystified" by concerns that the government bailout of AIG may have disproportionately favored Goldman.
The derivatives bets Goldman Sachs placed with AIG, bank officials said, were adequately hedged with other investments.
As Goldman Sachs put it in a press release last March, the bank had "no material direct economic exposure" to AIG.
Well, it depends on what you mean by "material direct economic exposure."
In a report issued earlier this week, TARP special inspector general Neil Barofsky took a shot at Goldman's claim that it was insulated against AIG's demise. While, the report's language is arcane, the message is simple: if AIG had gone under, Goldman Sachs would have had significant difficulty trying to collect on the the derivatives bets it placed with other banks in order to offset potential AIG losses.
In total, Goldman had $22.1 billion in credit default swaps contracts with AIG. Here's the report, which refers below to the $20 billion of underlying CDOs (credit default obligations) that Goldman Sachs had with AIG:
"...in light of the illiquid state of the market in November 2008 (an illiquidity that likely would have been exacerbated by AIG's failure), it is far from certain that the underlying CDOs could have easily been liquidated, even at the discounted price of $4.3 billion. Second, had AIG collapsed, the systemic implications on other market participants might have made it difficult for Goldman Sachs to collect on the credit protection it had purchased against an AIG default, although Goldman Sachs stated that it had received collateral from its counterparties in those transactions. Finally, if AIG had defaulted, Goldman Sachs would have been forced to bear the risk of further declines in the market value of the approximately $4.3 billion in CDOs that it transferred to the Maiden Lane III portfolio as well as approximately $5.5 billion for its credit default swaps that were not part of the Maiden Lane III portfolio; Maiden Lane III removed any risk for the $4.3 billion within that portfolio, and continued Government backing of AIG provided Goldman Sachs with ongoing protection against an AIG default on the remaining $5.5 billion."
Of course, this web of hedges and financial side bets is all maddeningly complicated. But it's worth noting that Goldman Sachs was, at the very least, exposed to the possible downgrade of billions in derivatives assets if AIG had not been rescued -- which, to many, may sound suspiciously like "material direct economic exposure."
In a statement to the Wall Street Journal, a bank spokesman said: "Goldman Sachs has consistently said its exposure with AIG was collateralized and hedged and therefore we had no direct credit exposure. Given the hedges, collateral and government backing as a result of the bailout, the additional risks of declining market values in the event of an AIG default are a moot point."
Read more about the report here.