THE BLOG

The House Oversight Committee Sets Its Focus Where The Senate Financial Crisis Inquiry Commission Feared to Tread

03/18/2010 05:12 am ET | Updated May 25, 2011

Perhaps the key issue sticking in the craw of the public and Congress is under whose auspices were some $62.1 billion in derivatives positions reimbursed in full to AIG's counterparties virtually all with money made available by the government? These derivatives, in large measure credit default swaps, had no core rationale other than pure speculation -- a bit like buying Yen futures even though you have no business need for yen nor exposure to yen receivables. Pure speculation writ large. And in this case, speculative bets that had gone seriously sour. As Mr. Blankfein was quick to add later in his Senate testimony when it suited him, that by bundling mortgages, selling them to Retirement Funds and State Institutions and then betting against these instruments by positioning into credit default swaps, etc. Goldman was acting as a 'principal.' That usually means that the house (in this case Goldman) is taking title to the speculative position at its own risk and expense. And here it is the risk part of the trade that went badly off track. By having loaded up on CDS's and CDO's through a counterparty (AIG) that was about to fall into insolvency thereby risking leaving Goldman et al high and dry with billions of worthless derivatives.

During the Senate hearings many questions were asked, but not the question that would have been most revealing. Phil Angelides, Chairman of the Senate Commission, asked the Goldman Chairman whether either he or his staff had discussed with Treasury the dramatic counterparty exposure at risk with AIG. Blankfein looking straight into Angelides' eyes and said he had not, but that someone on staff might have have, but he couldn't recall all the details, insinuating that it had not been a key issue.

Now it seems it will be up to the House Committee to ask the core questions. Edolphus Towns, Chairman of the House Oversight and Government Reform Committee, seems undeterred by the softball questions posed by the Senate Commission. He has asked Former Treasury Secretary Hank Paulson to testify along with his successor Timothy Geithner before the Committee on January 27.

Geithner will certainly be asked hard questions as to why he is alleged to have tried assiduously to keep everyone in the dark about the recipients and the amounts of AIG's counterparty payments.

Even more significant will be Paulson's testimony. The key question is not, as in the Senate interrogatories, whether Blankfein discussed the counterparty payments with anyone at Treasury. The many telephone conversations Blankfein had with Paulson at the heart of the crisis were not even queried during the Senate hearings.

And thus a key point was missed. Was there any discussion at any time between Paulson and Blankfein, fundamental to the issue at hand; namely the status of AIG and its viability as a going concern? Sometimes certain things are best left unsaid and any mention between these two Goldman Chairmen about counterparty payments would have been flying a red flag screaming alleged collusion, were it to become public. And there was no need to go that far in their conversations. Paulson, as Blankfein's predecessor at Goldman, certainly knew Goldman's book as clearly as Blankfein. There was no need to go into detail over the AIG counterparty billions. They were well known to both players. The question unasked is what was the nature of the discussions between Paulson and Blankfein? Did AIG come up in the discussions and in what context? What an AIG bankruptcy would have meant to Goldman was as well known to Paulson as to Blankfein. Did they work together (possibly collude?) to minimize Goldman's damage, with the taxpayers being left to hold the bag? If there was even a semblance of collusion, can the recipients of AIG's/Government's largesse be made to buy back their counterparty derivatives at the price AIG paid for them?

As I have said before, scores of billions is a great deal of money and funny things can happen (please see: "Wall Street Triage: Was Lehman Sacrificed So That AIG Had To Be Bailed Out?"1.10.10).

Chairman Edolphus Brown, i'ts up to you now. The country has already been waiting far too long for answers.