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Janet Tavakoli: Goldman Sachs Responds To The New York Times

2009-11-24T10:06:38Z

Pulitzer Prize-winner Gretchen Morgenson of the New York Times wrote a must read article ("Revisiting a Fed Waltz with AIG," November 21, 2009) on Sunday in which she recaps salient points from the November 17, 2009 report of the Office of the Special Inspector General (Neil Barofsky) for the Troubled Asset Relief Programs, "Factors Affecting Efforts to Limit Payments to AIG Counterparties," and wrote:

On the question of whether this payout was what the report describes as a "backdoor bailout" of A.I.G.'s counterparties, Mr. Barofsky concluded: "The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.'s counterparties." [T]his was money the banks might not otherwise have received had A.I.G. gone belly-up.

Timothy Geithner's interaction with the New York Times, first in his role as President of the FRBNY and later as Treasury Secretary, seems to be that of a bailout enabler and a PR spin doctor for Goldman Sachs. Based on the Sunday article's revelations, I would not characterize his behavior as that of "a good man in a storm;" he seems a mere water-boy:

According to an e-mail message that Goldman sent to the New York Fed at the time
[September of '08], Mr. Geithner talked about the article with Mr. Viniar, Goldman's chief financial officer, before calling me. When Mr. Geithner called, he said that Goldman had no exposure to an A.I.G. collapse and that the article had left an incorrect impression about that. When I asked Mr. Geithner if he, as head of the regulatory agency overseeing Goldman, had closely examined the firm's hedges, he said he had not. Mr. Geithner told me on Friday that he spoke with Mr. Viniar that day to ensure that Goldman's hedges were adequate. And, notwithstanding the inspector general's findings, he said he still believes Goldman was hedged."

Prior to the article's publication, Goldman Sachs responded to Ms. Morgenson's questions about the Barofsky report via an email from its spokesman Lucas van Praag. The entire exchange can be found here "Goldman's Response to Questions About A.I.G.," November 22, 2009.

Did Goldman Sachs dissemble and equivocate in its responses to the New York Times?

Based on these responses answer is yes. Treasury Secretary Geithner may wish to keep that in mind the next time he looks to Goldman Sachs for his answers.

Mr. van Praag states "Starting in the mid-90s, we bought credit default swaps from AIG to protect our firm from the risk of a decline in the value of risk we had assumed on behalf some of our clients, (i.e. assets to which we had exposure)." Near the end of his email he again mentions "CDOs from our clients" (emphasis added).

His email never once mentions that the problematic CDOs requiring collateral calls from A.I.G. that precipitated its liquidity problems, the one's referenced in the report, seem to be chiefly 2004/5/6 vintage CDOs. Goldman underwrote the Abacus CDOs on its own list, and Goldman also underwrote CDOs that featured prominently and in large portion on the lists of French Banks SocGen and Calyon as well as Bank of Montreal and Wachovia that also hedged this risk using CDSs with AIG.

When responding about whether or not Goldman would have trouble collecting on its hedges in the event of an A.I.G. collapse as Barofsky's report indicates, Mr. van Praag wrote that Barofsky's report stated a collapse "'might have made it difficult for Goldman Sachs to collect on the credit protection it had purchased' (emphasis added by Mr. van Praag) -- however, it might not, and it is our belief that it ultimately would not have done so."

For a firm that trumpets its risk management, Goldman seemed to present only one scenario on September 16, 2008. Lehman had just gone bankrupt, Bank of America had just agreed to takeover Merrill Lynch, and banks were starved for liquidity just like A.I.G. The banks' TARP bailout had not yet occurred. I suggest that Goldman may be self-deluding with its claim to be stellar risk managers here: "I Retract My Apology and Call for More Regulation of Goldman Sachs."

Mr. van Praag notes that Barofsky's report said had AIG not been rescued, Goldman would have had to bear the risk of further declines in the CDOs that it transferred to Maiden Lane III. He retorts "This is accurate in concept; however, Goldman Sachs has significant experience in adeptly managing this form of market risk."

I previously noted how "adeptly" Goldman Sachs manages its risk: "Goldman's Undisclosed Role in AIG's Distress". How did that work out for the global markets? Fed Chairman Ben Bernanke told Congress on March 24, 2009: "Conceivably, [AIG's] failure could have resulted in a 1930's-style global financial and economic meltdown, with catastrophic implications.

Mr. van Praag also wrote: "It is worth noting that we participated in the transfer of assets to the Maiden Lane III vehicle at the request of the New York Federal Reserve." I agree this is especially worth noting given that Stephen Friedman, a former Goldman Sachs co-chairman was Chairman of the New York Fed Board, and given the degree of capture Timothy Geithner, then President of the FRBNY demonstrated in his seeming lack of curiosity about Goldman's hedges as mentioned above.

Ms. Morgenson also asked for some perspective about Goldman CEO Lloyd Blankfein's apology for Goldman's practices and its contribution to the credit crisis. She asked why Blankfein said Goldman "participated in things that were clearly wrong and have reason to regret."

Mr. van Praag responded:

Lloyd has expressed regret in various different forums, including a speech to the Council of Institutional Investors in April and one at the Handelsblatt Conference in September. He has stated that the financial services industry collectively neglected to raise enough questions about whether some of the trends and practices that became commonplace really served the public's long-term interests. In particular, the industry let the growth and complexity in some new instruments outstrip their economic and social utility as well as the operational capacity to manage them.

Of special note is Goldman's admission that these products have outstripped "their economic and social utility and operational capacity to manage them." (emphasis added) That statement is apt for many subsequent trading activities as well. But as risk managers, Goldman is dodging its responsibility in its representation that these products merely outstripped management "operational capacity."

Goldman's risk management ability was not up to the task, and its ability is not up to the task of managing the systemic risk of its now gigantic CDS operations in the wake of the demise and hobbling of many of its competitors. Operational capacity is one part of the problem. The other problem is that in Goldman's responses to the New York Times, a bunch of operators tried to gaslight the press.

Spitzer: "Geithner's Disgrace"

2009-11-24T07:54:36Z

The issue has been festering for months: Why were AIG's counterparties -- including Goldman Sachs, JPMorgan Chase, and UBS -- paid 100 cents on the dollar when the feds rescued the insurance giant, helping raising the cost of the bailout to nearly $200 billion? A new report issued by Special Inspector General Neil Barofsky now reveals that government officials, notably then-New York Fed President and current Treasury Secretary Timothy Geithner, grievously damaged the nation and capitulated to the very banks they should have been supervising.

Cenk Uygur: Knocking Down The Biggest Excuse For The Bailout

2009-11-24T05:00:40Z

Everyone's heard it a hundred times by now. Joe Biden said it when he was on The Daily Show last week. Tim Geithner says it every time he's on television or in a congressional hearing or in the car talking to himself. "We had to do the bailout. We didn't have a choice. The economy would have collapsed. What else could we do? It was unpleasant, but we had to bailout the largest banks."

Now, some might disagree with that. I don't. I agree we had to do something, and if we hadn't the economy probably would have cratered. But that's not the question or the problem at hand. The problem is how they did the bailouts. Namely, by giving away the store.

The government's own inspector general of the TARP program says that we gave away $62 billion we probably shouldn't have - and will probably never get back. Anyone with any degree of sanity now realizes giving away this money to AIG counter-parties at hundred cents on the dollar was either crazy or complicitous. This was taxpayer money funneled to the largest banks in the world to cover their ill-conceived bets that would have never netted them their whole money back on the open market. If capitalism had prevailed, they would have gotten burned on most of that money. Instead cronyism reigned and they got every penny - from us.

To add insult to injury, Goldman Sachs says they didn't need that money from us, that they were covered no matter what because of other bets that they had out in the market. Great. Then give us our money back ($12.9 billion went to Goldman through AIG) and go collect on your other bets. Why the hell did we pay you if you claim you could have gotten that money from elsewhere? Tim Geithner told me we absolutely had to pay you otherwise the world was going to blow up.

The Obama team has burned a lot of goodwill doing this hideous giveaway to the same financial companies that caused this economic meltdown (at least for the rest of us since the bank executives are back to making huge bonuses). If they want to earn some of that goodwill back, they have to do better than the lame excuse of "we had to do it." You didn't have to do it this way. There were many other possibilities. You could have at least structured it so that if the banks went back to making money that we received a fair share for bailing them out - any rational investor would have. You wouldn't have covered up the biggest giveaway by funneling it through AIG (and not even letting us know in the beginning who you were giving the money, too).

It's about time they explain why they chose to do it this way - where the banks got every penny they wanted and we got left holding the bill. If Tim Geithner doesn't have a reasonable answer for that soon, the populist anger calling for his job is going to be perfectly justified.

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Revisiting The Fed's Bailout Of AIG And The Benefits For Goldman Sachs

2009-11-22T02:12:22Z

A RAY of sunlight broke through the Washington fog last week when Neil M. Barofsky, special inspector general for the Troubled Asset Relief Program, published his office's report on the government bailout last year of the American International Group.

Paul Krugman: Government Squandered Our Trust In Wall St. Bailout

2009-11-20T11:24:28Z

Earlier this week, the inspector general for the Troubled Asset Relief Program, a k a, the bank bailout fund, released his report on the 2008 rescue of the American International Group, the insurer. The gist of the report is that government officials made no serious attempt to extract concessions from bankers, even though these bankers received huge benefits from the rescue. And more than money was lost. By making what was in effect a multibillion-dollar gift to Wall Street, policy makers undermined their own credibility -- and put the broader economy at risk.

Raymond J. Learsy: The Key Question No One Asked About Goldman's Role In The AIG Bailout

2009-11-20T09:37:48Z

A key and fundamental question was not broached during the fierce interrogation of Treasury Secretary Geithner during Thursday's hearings before Congress's Joint Economic Committee. The contentious subject at hand was the Fed and Treasury's role on the issue of the American International Group's multi-billion dollar bailout. The key question neither asked
nor answered was:

What was the nature of the myriad discussions at the height of the crisis in September 2008 between Treasury Secretary and former Goldman Sachs Chairman Hank Paulson and Goldman Sachs Chairman Lloyd Blankfein?

It is hard to imagine that the issue of AIG was not broached, and information exchanged. Most tellingly, Geithners's testimony yesterday reiterated the fact that the Fed and Treasury viewed the prospect of AIG's failure as posing a highly significant risk to the economy, and after Lehman, AIG's failure was not going to be permitted to happen. That morsel of information, had it been made available to Goldman Sachs in September of 2008, would have been worth tens of billions of dollars to them.

Goldman Sachs was AIG's largest counterparty and its holdings, directly or indirectly, through Credit Default Obligations and Credit Default Swaps, made up one third of the $62 billion counterparty trades on AIG's books. Given Goldman's know-how and connections it would seem probable that they also played a leading role as enabler in what Fed Chairman Ben Bernanke described to a Congressional Committee in March of this year as the following:
"AIG exploited a huge gap in the regulatory system; there was no oversight of the financial products division. This was a hedge fund basically attached to a large and stable insurance company, made huge numbers of irresponsible bets, took huge losses."

During the subsequent rescue of AIG, a game of high stakes poker evolved, perhaps with a touch of outright extortion. The New York Fed, which Geithner headed at the time, was charged with negotiating with AIG's trading partners to try to modify their counterparty contracts with AIG to levels more closely approaching their real time value, at the time hugely less than their face amounts. Discussions had taken place at one stage between the trading partners and AIG toward writing down the AIG obligations to some 40 cents on the dollar without success, as Goldman et al refused to budge.

And here the crunch, and key to the question: Did Goldman and the other banks know for certain that the bankruptcy of AIG was no longer a risk for them? That the Fed and Treasury were now irrevocably committed to saving AIG? With that foreknowledge all along that Goldman and the other banks were empowered to take, risk free, the inflexible position that "it would be improper and perhaps even criminal to force AIG's partners to bear losses outside of bankruptcy court." Thus Goldman, et al would have been playing poker with a clear view of the Fed's hand.

It raises the serious question of what Goldman knew and when did it know it and whether Goldman played the AIG derivatives card with "inside information" about the Fed's intentions. And, if so, what might be the legal ramifications?

As pointed out here, knowing Mr. Paulson conveyed a penchant for being showered with gold dust. Pimco pocketed $1.7 billion (Pimco's single largest payday was the proud boast) in taking positions in underwater Fannie Mae and Freddie Mac paper that were then surprisingly redeemed at full value piggybacking on the taxpayers $100 billion plus bailout of those institutions.

And when the big guys were in trouble because of the public's perception of greed and funny games, there was Hank Paulson telling us while flying on his way to Saudi Arabia, with oil on its way to $147 a barrel, that it was all about "supply and demand," thereby making us all feel better paying $4.00+/gallon at the pump and watching our economy go down the pipeline.

What Did TARP Accomplish? Simon Johnson In The NYT

2009-11-19T08:05:28Z

Here is my assessment.

In late September 2008, Treasury Secretary Henry S. Paulson asked Congress for $700 billion to buy toxic assets from banks, as well as unconditional authority and freedom from judicial review. Many economists and commentators suspected that the purpose was to overpay for those assets and thereby take the problem off the banks' hands. Indeed, that is the only way that buying toxic assets would have helped anything.

Audit The Fed Effort Wins Support From An Unusual Coalition

2009-11-19T07:38:04Z

An unusual coalition of progressive economists, labor leaders, and bloggers has decided to fight back against a congressional amendment that would allow the Federal Reserve to continue operating in secrecy.

In a Thursday letter to the House Financial Services Committee, economists like Dean Baker and Rob Johnson, author Naomi Klein, and such labor luminaries as the AFL-CIO's Richard Trumka and the SEIU's Andy Stern, urged committee members to shoot down an amendment by Rep. Mel Watt (D-N.C.) that would essentially allow the Fed to keep the lights off while it throws money around.

Watt's amendment, which could see a House vote today, is a direct attack against a separate measure by Reps. Ron Paul (R-Texas) and Alan Grayson (D-Fla.). That measure, known as the "Audit the Fed" bill, has been gaining momentum in Congress for months.

"A vote for the Watt amendment is a vote for more secret bailouts," the letter says.

The letter notes that during the financial crisis of the past two years, the Fed's role has shifted from simply setting monetary policy via interest rates to rapidly acquiring "a wide variety of private assets and extend[ing] massive secret bailouts to major financial institutions."

Among those bailouts, critics argue, was the Fed's funneling of cash to AIG counterparties. Earlier this week, a government watchdog issued a blistering report that blamed the Federal Reserve for withholding details of its massive rescue of AIG last fall. In particular, the report blamed the Federal Reserve for paying for botching its private negotiations regarding the price AIG's rapidly souring derivatives investments, a secret move that cost taxpayers at least $13 billion.

Watt's office on Wednesday circulated a letter from what it called a "political cross section of prominent economists" who supported the amendment. All but one of those economists are currently or have previously been on the Fed payroll.

The committee will take up the Watt amendment on Thursday.

Here's the letter:

November 18, 2009

House Financial Services Committee
2129 Rayburn House Office Building
Washington, D.C. 20515

Dear Chairman Frank, Ranking Member Bachus, and Members of the Committee,

During the past two years, the Federal Reserve dramatically changed its operating procedures. Instead of simply setting interest rates to influence macroeconomic conditions, it rapidly acquired a wide variety of private assets and extended massive secret bailouts to major financial institutions.

There are still many questions about the Fed's behavior in these new activities, including potential cronyism and favoritism in its distribution of many trillions of dollars. As the Special Inspector General for the Troubled Assets Relief Program recently wrote about their bailout of AIG, the Fed's "strategy to pursue concessions from counterparties offered little opportunity for success, even in light of the willingness of one counterparty to agree to concessions."

The Federal Reserve balance sheet expanded to more than $2 trillion, along with implied and explicit backstops to Wall Street firms that could cost even more. Who received the money? Against what collateral? On what terms and conditions? The only way to find out is through a complete audit of the Federal Reserve. That's why we support the Paul-Grayson amendment requiring a complete audit.

The Watt amendment does not repeal the existing provisions that prohibit a GAO audit of the Federal Reserve. In fact, it adds entirely new additional categories of restrictions. Instead of opening up the Fed's secretive activities to public inspection, the Watt amendment cloaks it in further secrecy.

A vote for the Watt amendment is a vote for more secret bailouts. We urge you to support Paul-Grayson instead.

Sincerely,

Dean Baker, Economist, Center for Economic Policy Research
William Black, Professor of Economics and Law
Tyler Durden, Blogger, Zero Hedge
Thomas Ferguson, Professor of Political Science, University of Massachusetts, Boston
James K. Galbraith, Economist, University of Texas
Leo Gerard, President, United Steelworkers Union
Jane Hamsher, Blogger, Firedoglake.com
Rob Johnson, Economist
Naomi Klein, Author, No Logo and The Shock Doctrine
Yves Smith, Blogger, Naked Capitalism
Andrew Stern, President, SEIU
Richard Trumka, President, AFL-CIO
L. Randall Wray, Professor of Economics, Center for Full Employment and Price Stability

Katya Wachtel: Morgan Stanley CEO Calls for More Regulation of Wall Street at Vanity Fair -Bloomberg Event

2009-11-18T22:22:56Z

At a Vanity Fair and Bloomberg event in Manhattan on Wednesday night, audience members were delighted by an impromptu ( and slightly coerced) appearance by Morgan Stanley CEO, John Mack, who called for far more stringent policing of Wall Street.

Mack, sitting inconspicuously amongst a crowd of business journos and financiers, was cheekily ambushed by Bloomberg's Margaret Brennan during the 'additional questions' portion of the evening, after a stellar panel of business reporters (and one historian) speculated on the causes of the financial crisis and analyzed how governmental and news institutions have handled the event.

After a quasi-joke that he was hiding from the camera, Mack grudgingly stood up and answered questions from Brennan and the panel. Mack, who will step down as CEO of Morgan Stanley next January, thought press coverage of the crisis had been, "overall, fair," and honed in on the urgent need for greater regulation of the finance industry.

"Regulators have to be much more involved," Mack said. "We cannot control ourselves -- [regulators] have to step in and control the Street." He added that some positive changes have been made, pointing to the fact that in the halls of Morgan Stanley, ten or fifteen federal regulators now roam daily.

"I love it," Mack said. "It forces firms to invest in risk management."

The 'Covering the Crisis' panel consisted of Vanity Fair's Bryan Burrough (formerly an investigative reporter for the Wall Street Journal), Niall Ferguson (a professor of history and business at Harvard and contributing editor for the Financial Times), Bethany McLean (a contributing editor at Vanity Fair and the reporter often credited with having brought down Enron) and Andrew Ross Sorkin (the NYT's chief mergers and acquisitions reporter and columnist). The discussion was moderated by a pithy and tongue-in-cheek Michael Lewis, who left Portfolio in February to join the ranks of Graydon Carter's mag (the man at the helm of Vanity Fair was in attendance, as was the Bloomberg group's multimedia CEO, Andrew Lack).

Some highlights from the conversation...

Lewis: Should Lehman have been allowed to fall? Sorkin ummed and ahhed and then said yes; Ferguson said no; so did Burrough: "Lehman was losable. They were isolatable. You could put them on an island. If you had lost AIG, I'm not sure it was isolatable."

Lewis: What caused the crisis? Sorkin said deregulation, monetary policy and leverage; McLean blamed the political emphasis and encouragement of universal homeownership; Ferguson listed all the above and then proclaimed that we have all missed one important factor: China.

Brennan to Mack on media coverage of Morgan Stanley and the crisis in general: Mack described the coverage as generally fair, but then declared that coverage of the Stanley/Mitsubishi deal was "bullshit."

Brennan (host of cable TV news show, InBusiness): Did cable news coverage affect the crisis? Sorkin said it may have upped the panic ante, because even neutral, realistic reflection of the panic reverberates and thus intensifies alarm; Burrough was more condemnatory: " TV journos have too much time to fill. Your job is not to reflect passions, it's to report facts"; Ferguson argued that major financial meltdowns happened long before cable news.

Lewis to Sorkin: Is there anything you didn't uncover in your book? (Sorkin's new book, Too Big to Fail, looks at the collapse and bailout of Wall Street. Lewis had implied earlier in the evening that Sorkin's source list and the information he extrapolated during the reportage, was quite impressive): Sorkin said he wished he had access to the confidential notes taken during that 5 hour meeting on what to do about AIG, on that fateful Tuesday last September...

To watch a replay of 'Covering the Crisis,' visit Vanity Fair.com

Goldman Sachs's Drop In The Bucket

2009-11-18T18:50:20Z

On Tuesday, Goldman Sachs announced it would commit $500 million to help small businesses, garnering the financial giant headlines and buzz for its altruism.

But that's just a small fraction of the money the company has reaped thanks to taxpayer-supported government programs since last September.

* It's barely a fifth of the $2.3 billion the company has saved thanks to a Federal Deposit Insurance Corporation guarantee to help banks raise money, according to a Wall Street Journal estimate. Goldman Sachs had $22.6 billion in outstanding debt issued through this program as of Sept. 30, according to its most recent regulatory filing.

* It's about four percent of the $12.9 billion the firm received through the government's bailout of insurance giant AIG. This backdoor bailout helped Goldman Sachs rid itself of toxic assets. A government watchdog report released this week argues that the government team -- led by current Treasury Secretary Timothy Geithner -- overpaid and, generally speaking, failed nearly every step of the way in its negotiations.

And the new charity is only three percent of the $16.7 billion the company has set aside for employee salaries and bonuses.

Goldman Sachs Would Have Been Damaged By AIG Failure: SIGTARP Report

2009-11-18T11:56:31Z

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.

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Janet Tavakoli: Goldman Sachs Nearly Bankrupted AIG

2009-11-17T18:00:27Z

Goldman wasn't the only contributor to the systemic risk that nearly toppled the global financial markets, but it was the key contributor to the systemic risk posed by American International Group, Inc.'s (AIG) near bankruptcy in September 2008.

When it came to the credit derivatives AIG was required to mark-to-market, Goldman was the 800-pound gorilla. Calls for billions of dollars in collateral pushed AIG to the edge of disaster. The entire financial system was imperiled, and Goldman Sachs would have been exposed to billions in devastating losses.

A Goldman spokesman told me its involvement in AIG's trades was only as an "intermediary," but Goldman underwrote some of the collateralized debt obligations (CDOs) comprising the underlying risk of the protection Goldman bought from AIG. Goldman also underwrote many of the (tranches of) CDOs owned by some of AIG's other trading counterparties.

Goldman was AIG's largest counterparty, and its trades made up one-third of AIG's approximately $62.1 billion in transactions requiring market prices. Societe Generale (SocGen) was AIG's next largest counterparty with $18.7 billion. SocGen, Calyon, Bank of Montreal, and Wachovia bought several (tranches) of Goldman's CDOs and hedged them with AIG.

On November 27, 2007, Joe Cassano, the former head of AIG's Financial Products unit, wrote a memo about the collateral AIG owed to its counterparties. Goldman, Soc Gen, Calyon and others required more than $4 billion. Goldman asked AIG for $3 billion of the $4 billion required in collateral calls. (Click here to view the nine-page memo uncovered by CBS News in June 2009.) By September 2008, Goldman had called $7.5 billion in collateral from AIG.

SocGen bought protection from AIG on two tranches of Davis Square VI, a deal Goldman underwrote. According to AIG's documentation, SocGen got its prices for marking purposes for Goldman's deals from Goldman. As of November 2007, Goldman marked down these originally "AAA-rated" tranches to 67.5%, down by almost one-third. SocGen's list includes other deals underwritten by Goldman: Altius I, Davis Square II, Davis Square IV, the previously mentioned Davis Square VI, Putnam 2002-1, Sierra Madre, and possibly more. SocGen hedged this risk by purchasing protection from AIG.

Calyon had $4.5 billion of transactions with AIG. Calyon and Goldman were co-lead on at least two deals: Davis Square II and Davis Square V. According to AIG's memo, Calyon got its prices for these deals from Goldman.

Bank of Montreal had $1.6 billion in negative basis trades with AIG, and at least two Goldman transactions (Davis Square I and Putman 2002-1) made up 6 of its 9 positions with AIG. Wachovia had 6 trades with AIG, all related to Davis Square II, a deal that Goldman underwrote.

Goldman was right to question the prices, make calls for collateral, and protect itself. Goldman may not have been an arsonist buying fire insurance, but its trading activities with AIG and others were accelerants of AIG's problems.

During AIG's bailout, Goldman had influence over the decision to use public funds to pay 100 cents on the dollar for these CDOs (the underlying risk of the credit derivatives), but none of the information about the volume of Goldman's trades with AIG--or the Goldman CDOs hedged by AIG's other counterparties--was made public.

Goldman's public disclosures in September 2008 obscured its contribution to AIG's near bankruptcy and the need to bailout Goldman's trading partners in AIG related transactions. Goldman's trading activities played a starring role in the near collapse of the global markets.

Goldman Sachs CEO Lloyd Blankfein APOLOGIZES For Bank's Role in Financial Crisis

2009-11-17T15:40:35Z

Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., apologized for the firm's role in some of the activities leading to the financial crisis.

"We participated in things that were clearly wrong and have reason to regret," Blankfein, 55, said at a conference in New York hosted by the Directorship magazine. "We apologize."

Banking Sector Fix In Six Steps: Roger Lowenstein

2009-11-17T12:18:48Z

Financial reform seems to be flailing. Legislation has been proposed, but it is complicated and diffuse. Most of the proposed fixes are incremental changes that don't seem likely to prevent a future bubble.

The House and Senate are squabbling over which federal agency should take the lead in supervising banks. The administration, as well as the Congress, have fallen into the trap of trying to fix everything. Instead, they should agree on the most important remedies.

Who Was Really Bailed Out? We'll Never Know: NYT's : Floyd Norris

2009-11-17T11:39:06Z

Who were the ultimate beneficiaries of the Treasury's decision to make good on the credit default swaps written by the American International Group?

We still don't know.

Les Leopold: Goldman Sachs does God's Will while 49 Million go Hungry

2009-11-17T10:35:07Z

It's going from obscene to disgusting. Each day reveals how we've traded away our sense of decency and the common good in exchange for pure, unadulterated greed.

Unemployment is a statistic. We hear it so often that, unless we are without work, it loses its meaning. Even when we learn that the U6 jobless rate hit 17.5 percent it doesn't really register. After all this isn't the 1930s. We have few bread lines or Hoovervilles. We're not lined up outside of banks praying we can get our savings. We've come a long way...or have we?

We learn today that unemployment still means hunger. The Department of Agriculture reports that 49 million Americans don't have enough food. That's up 13 million over the last year and is the highest number ever recorded since the survey began 14 years ago. Next time you hear people blame the crisis on poor people buying houses they couldn't afford, think about skipping meals because you don't have a job.

Meanwhile, unemployment and hunger are rising because the very banks we bailed out are not lending money. As Ben Bernanke put it just yesterday:

"Banks' reluctance to lend will limit the ability of some businesses to expand and hire. Because smaller businesses account for a significant portion of net employment gains during recoveries, limited credit could hinder job growth."

And if that isn't enough, the TARP special inspector general reports that Tim Geithner completely botched the AIG negotiations, thereby showering billions of our dollars onto Goldman Sachs, JP Morgan Chase and other large banks. This one is a beauty.

If you recall, AIG was about to go under last fall and take down the global banking system. In response, the NY Fed, under Geithner, arranged for an $85 billion emergency loan. AIG got into trouble by insuring $450 billion dollars of toxic assets held by the largest banks in the worlds. Goldman Sachs alone was due $12.9 billion from AIG. But if AIG folded, Goldman Sachs and the other banks would have received pennies on the dollar, which in financial circles is called a "haircut." Geithner tried to get the big banks to take a voluntary haircut. Credit Suise was willing to take 98 cents on the dollar, which hardly seems like much of a compromise but at least showed some twinge of good faith negotiation. But not Goldman Sachs. No way. Goldman Sachs knew that Geithner was bluffing and didn't have the spine to really let AIG go into bankruptcy. Besides, "voluntary" and "Goldman Sachs" are two words that do not belong in the same sentence. As a result, Goldman Sachs did not have to visit the barber. Instead, we taxpayers got the haircut and the big banks got a "backdoor bailout."Here's how the New York Times put it:

"There have been suggestions that the Fed chose to negotiate weakly, Mr. Barofsky said, to give a "backdoor bailout" to A.I.G.'s banks. He said Mr. Geithner and the Fed's lawyers had denied this, but added that "irrespective of their stated intent," there was no doubt about the result: "Tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.'s counterparties."

Now think about this as we head into the holiday season: The big banks that we bailed out (and that are not making loans, which is driving up the unemployment rate and hunger) are making record profits as a direct result of our bailouts, and are about to award themselves record bonuses--again! This what the chairman of Goldman Sachs calls "doing God's will." He really did say that.

In a just world, Congress and the President would be all over this. They would immediately pass a 90 percent windfall profits tax on the large banks that would go to feed the hungry right now. But we know that our leaders don't have the will or the guts to take on the Wall Street billionaires.

In my own fantasy Christmas pageant, Wall Street would become haunted by the specter of 49 million Americans, mostly kids, going without the food they need. And in that dream, if there is a shred of decency left on Wall Street, they would decide to do God's will by donating their bonus pool to feed the hungry.

But back in the real world, we know that Wall Street doesn't take haircuts even if the entire world economy is collapsing. They will continue to ignore the anguish of our own people until we force them to take notice.

Welcome to the Billionaire Bailout economy.

Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.

Geithner Singled Out In TARP Watchdog Neil Barofsky's Scathing Report On AIG Bailout

2009-11-16T21:36:44Z

A brutal report issued Monday by a government watchdog holds Timothy Geithner -- then the head of the Federal Reserve Bank of New York and now the nation's Treasury Secretary -- responsible for overpayments that put billions of extra tax dollars in the coffers of major Wall Street firms, most notably Goldman Sachs.

The authoritative new narrative describes how, while bailing out insurance giant AIG last fall, a team led by Geithner failed nearly every step of the way.

Instead of bargaining with AIG's numerous counterparties to resolve its billions of dollars in souring derivatives contracts, Geithner's team ended up paying top dollar for toxic assets -- "an amount far above their market value at the time," the report notes.

"There is no question that the effect of FRBNY's decisions -- indeed, the very design of the federal assistance to AIG -- was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG's counterparties," the Office of the Special Inspector General for the Troubled Asset Relief Program said.

Wall Street firms like Goldman Sachs, Merrill Lynch and Wachovia got full value for their derivatives contracts with AIG, and taxpayers got the bill. In total, $27.1 billion of public money was transferred to companies that did business with AIG.

Throughout the bailout of AIG, the report says, the New York Fed failed to develop appropriate contingency plans; failed to properly assess the impact of its decisions; and generally engaged in negotiation strategies that were doomed to fail.

Then, after Geithner's team paid off AIG's counterparties on Wall Street, it imposed "onerous" terms on the troubled insurer, the report says.

"[T]he decision to acquire a controlling interest in one of the world's most complex and most troubled corporations was done with almost no independent consideration of the terms of the transaction or the impact that those terms might have on the future of AIG," the report finds.

Geithner, now the nation's chief financial officer, just didn't bargain hard enough with Wall Street's biggest companies, the report concludes:

[T]he refusal of FRBNY and the Federal Reserve to use their considerable leverage as the primary regulators for several of the counterparties, including the emphasis that their participation in the negotiations was purely "voluntary," made the possibility of obtaining concessions from those counterparties extremely remote. While there can be no doubt that a regulators' inherent leverage over a regulated entity must be used appropriately, and could in certain circumstances be abused, in other instances in this financial crisis regulators (including the Federal Reserve) have used overtly coercive language to convince financial institutions to take or forego certain actions. As SIGTARP reported in its audit of the initial Capital Purchase Program investments, for example, Treasury and the Federal Reserve were fully prepared to use their leverage as regulators to compel the nine largest financial institutions (including some of AIG's counterparties) to accept $125 billion of TARP funding and to pressure Bank of America to conclude its merger with Merrill Lynch. Similarly, it has been widely reported that the Government, while arguably acting on behalf of General Motors and Chrysler, took an active role in negotiating substantial concessions from the creditors of those companies.

Meanwhile, the Fed was attempting to keep the details of AIG's counterparties hidden from public view -- another big mistake, according to the report:

The now familiar argument from Government officials about the dire consequences of basic transparency, as advocated by the Federal Reserve...once again simply does not withstand scrutiny. Federal Reserve officials initially refused to disclose the identities of the counterparties or the details of the payments, warning that disclosure of the names would undermine AIG's stability, the privacy and business interests of the counterparties, and the stability of the markets.

After public and Congressional pressure, AIG disclosed the identities. Notwithstanding the Federal Reserve's warnings, the sky did not fall; there is no indication that AIG's disclosure undermined the stability of AIG or the market or damaged legitimate interests of the counterparties. The lesson that should be learned -- one that has been made apparent time after time in the Government's response to the financial crisis -- is that the default position, whenever Government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with Government funds.

While SIGTARP acknowledges that there might be circumstances in which the public's right to know what its Government is doing should be circumscribed, those instances should be very few and very far between.

READ the full report:

SIGTARP Report Nov 16 -

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Huffington Post Business Editor Ryan McCarthy also contributed to this report.

Neil Barofsky, TARP Watchdog: Bailout Will 'Almost Certainly' Result In Loss For Taxpayers

2009-11-12T17:48:26Z

Nov. 12 (Bloomberg) -- Neil Barofsky, the federal watchdog for the $700 billion financial industry bailout, said the program will "almost certainly" result in a loss to U.S. taxpayers.

WSJ: AIG CEO Robert Benmosche Ready To Quit Over Pay Constraints

2009-11-11T01:32:42Z

NEW YORK — After just three months as head of battered insurer American International Group, Robert Benmosche has threatened to leave his post as he struggles to deal with heavy government oversight and restrictions on what the bailed-out company wants to pay employees, according to a published report.

Citing unnamed people familiar with the matter, The Wall Street Journal reported online late Tuesday that Benmosche told AIG's board he was "done" with the job, although he reportedly is reconsidering his stance in the face of the board's dismay.

Federal Reserve-Led Regulation Opposed By Lawmakers From Both Parties

2009-11-09T09:21:09Z

An unusual alliance of conservatives and liberals is pushing to break up or downsize banks deemed "too big to fail," rather than create a new regulatory regime led by the Federal Reserve to try to keep them from getting into trouble again.

Andy Borowitz: Wall Street Cheers as Employment Hits 90%

2009-11-06T09:15:15Z

NEW YORK (The Borowitz Report) - Wall Street celebrated the latest employment figures today, rallying on the news that employment had hit an eye-popping 90%.

While some on Main Street grumbled that the country was struggling through a so-called "jobless recovery," Wall Street professionals were cracking open the champagne and sending jewelry to their mistresses.

"I know that there are some whiners out there who are moaning and groaning about the unemployment numbers," said Carol Foyler, a senior executive at the bailed-out financial behemoth AIG. "But from where I sit, the glass is 90% full." More here.