Thursday, March 19, 2009

Did Goldman Sachs precipitate the fall of AIG? - More Wall St. Jungle

This is a short followup to my last post, Welcome to the Wall St. jungle. I expect to write more followup posts given the timeliness of the topic of the secret money funneled to Goldman Sachs through AIG. Usually I embellish my posts with a tastefully chosen image that represents in some way the theme of the article. On some of these short followup posts I am forgoing that tradition in order to speed up my editing process. I apologize to my readers who have come to expect these images and enjoy pondering their meaning as much as I do.


I began wondering to what extent Goldman Sachs was not just a curious bystander during the fall of AIG, but instead an active participant that precipitated the fall through its actions. And now I've found an article that says that Goldman actively pushed AIG over the edge of the cliff.

Congress Grills Former AIG Chiefs — Lawmakers Ask Whether Executives Glossed Over Warnings About Risks Insurer Faced
By Liam Pleven and Susanne Craig
8 October 2008
The Wall Street Journal

AIG documents released by the House committee show that as market conditions deteriorated, Goldman pushed AIG to provide it with more collateral to offset its exposure on the derivative contracts. Minutes from one February meeting cited “Goldman’s acknowledged desire to obtain as much cash as possible from their collateral calls.”

It isn’t clear exactly how much collateral AIG has handed over to Goldman, before or after the downgrades on AIG’s credit ratings that helped trigger the government loan last month.

A Goldman spokesman said Tuesday that the firm not only has “no material exposure” to AIG, but also that the firm’s exposure is “insignificant.” Goldman over the past year has had disputes with AIG on the value of some of the positions at issue, and of the collateral AIG posted. To the extent there were disagreements, Goldman said, it demanded and received extra collateral in cash and cash equivalents. Any material exposure that wasn’t covered by collateral was hedged, the spokesman said.
Goldman was demanding cash payments at a time when the markets were down - kind of like a margin call. This put added pressure on AIG and sped its demise. The downward spiraling series of events led to AIG's credit rating being cut which only made the company more vulnerable. One has to wonder if Goldman Sachs was also placing short bets on AIG - betting that the company would fail and hoping to profit from it - while at the same time straining the finances of AIG to increases the chances that the short bet would pay off.

You can't really blame me for wondering about these things, given the news that has been coming out recently about the secret dealings of Goldman Sachs. For months now I have been highlighting the abuses of GS in my blog. It gives me great pleasure to see many mainstream journalists jump on the bandwagon. That's why I call my blog FNT - Future News Today. Thanks to all of you for reading and commenting on my articles.

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