Goldman Sachs Approached AIG To Scrap Contracts Months Before Being Paid In Full By NY Fed

Goldman Sachs Approached AIG To Scrap Contracts Months Before Being Paid In Full By NY Fed

This post has been updated with a quote from a senior Obama administration official.

Goldman Sachs approached AIG and expressed its willingness to cancel its insurance-like contracts with the troubled company three months before the Federal Reserve Bank of New York paid the bank in full, effectively funneling billions in taxpayer funds into Goldman's coffers, according to documents obtained by the Huffington Post.

Some of the biggest banks in the world had bought credit default swaps -- a form of insurance -- on their collateralized debt obligations -- bonds backed by home mortgages -- from AIG. As the bonds lost value precipitously, the insurer was facing pressure to pay up.

Goldman Sachs, however, was willing to dump the swaps and simply keep those assets, rather than expecting to be paid in full via its insurance policies, according to slides from a Nov. 5, 2008, presentation for the New York Fed by asset manager BlackRock Inc. Goldman held about $14.5 billion in credit default swaps guaranteed by AIG, representing 22 percent of AIG's total exposure.

But instead of bargaining with Goldman and AIG's other counterparties to resolve the billions of dollars in souring derivatives contracts, the regional Fed -- then led by current Treasury Secretary Timothy Geithner -- ended up paying 100 cents on the dollar for toxic assets -- "an amount far above their market value at the time," according to a scathing November 2009 report by the TARP watchdog, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).

In its presentation, BlackRock noted that Goldman, the nation's fifth-largest bank, was AIG's "least risk averse counterparty" and was willing to negotiate the terms for scrapping its credit default swap (CDS) contracts with AIG.

"Goldman approached AIG in August to discuss tearing up the CDS contracts," BlackRock noted in slide 8 of the presentation. The investment bank was "the only counterparty willing to tear up CDS with AIG at agreed-upon prices and retain CDO exposure," according to the presentation.

BlackRock had advised the firm to cancel nine contracts with Goldman worth $3 billion, according to the presentation. "Goldman has expressed a willingness to negotiate tear-ups on additional trades," the presentation noted. "Goldman would likely accept a small concession but may look to its funders to absorb the loss (or a portion of the loss)."

In September 2008, the Federal Reserve stepped in and rescued AIG, loaning it billions and creating an entity backed by taxpayer money that would essentially take the credit default swaps off AIG's books, potentially saving the firm from bankruptcy.

The New York Fed and Geithner have maintained that they were not in a position to negotiate with AIG's counterparties, noting legal constraints and arguing that they didn't want to abuse their authority (the Fed is a federal regulator). SIGTARP said that's nonsense.

Under Geithner's watch, $27.1 billion of public money was transferred to companies that did business with AIG in what many critics have termed a "backdoor bailout." Those banks also were allowed to keep $35 billion in collateral AIG had given them in the weeks leading up to the final payment. In all, banks like Goldman Sachs, Société Générale and Deutsche Bank received more than $62 billion. Goldman got $14 billion alone. Meanwhile, taxpayers are stuck with the underlying assets.

"Tearing up the contracts at the height of the panic and allowing banks to keep both the collateral and the CDOs would have had the perverse result of banks ending up with more than 100 cents on the dollar and increasing costs to the taxpayer," said a senior Obama administration official. "Instead, the government bought the CDOs at a distressed price and has gotten the benefit of the recovery in asset prices, lowering costs to the taxpayer."

The ultimate cost to taxpayers won't be known until those assets are sold. A government audit this month found that as of Sept. 30, 2009, the Treasury Department was expecting a $30 billion loss on its TARP-related AIG investment.

"It is clear that the financial elites at the Federal Reserve felt it was more important to take care of wealthy Wall Street firms than to protect the taxpayer investments," Rep. Darrell Issa (R-CA), the ranking member on the House Oversight and Government Reform committee, said in a statement Tuesday morning.

BlackRock declined to comment, citing its role as an adviser to the New York Fed. The regional Fed did not respond to an immediate request for comment. In a joint response to the SIGTARP report in November, the New York Fed and the Board of Governors of the Federal Reserve System maintained that they acted "appropriately" in their attempt to obtain concessions from AIG's counterparties.

READ the BlackRock presentation below:
(UPDATE: HuffPost obtained the document in this format. Please download it and magnify accordingly.)


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