Filings Disclose Goldman Sachs’ AIG Collateral Demands Were Reason For AIG Implosion

Bloomberg out with an article disclosing what every "tinfoil" hat wearer has known for a long time, namely that it was precisely Goldman’s collateral extractions out of AIG that were the cause for the firm’s collapse, and the ensuing financial catastrophe that to this day has been propped up only thanks to the US government’s backstop of nearly $10 trillion in various worthless assets.

Goldman Sachs got $5.9 billion and Societe Generale received $5.5 billion of about $18.5 billion in collateral paid by AIG in the 15 months before the September bailout. The payments helped settle AIG’s obligations on $62.1 billion of credit-default swaps that the Federal Reserve later removed from the New York-based insurer as part of the rescue. Officials at AIG, Goldman Sachs and Societe Generale declined to comment.

“It was precisely that drain of liquidity to Goldman and SocGen that put AIG in a position of illiquidity and ultimately threw them into the government’s arms,” said Charles Calomiris, a finance professor at Columbia Business School in New York.

AIG disclosed a complete list last month of payments made to settle the $62.1 billion in derivatives. The figures for the period before the bailout were calculated by subtracting post- rescue payments disclosed in March from the sum of more than 150 transactions outlined in May.

“Goldman is to be congratulated for seeing the problem ahead of others and protecting itself from the impending failure of AIG,” said William Poole, former president of the St. Louis Fed, in an interview last week. “It’s not the responsibility of any private firm to determine what the public interest is — that’s why we have a government.”

Goldman Sachs bought protection on about $20 billion in assets from AIG, meaning the company was counting on $10 billion from the insurer after the underlying holdings lost about half their value, Goldman Sachs Chief Financial Officer David Viniar said in a March conference call. The firm had “no direct exposure” to AIG because it held about $7.5 billion in collateral and hedged its remaining $2.5 billion risk to the firm’s potential failure, Viniar said. The $7.5 billion tally includes trades unrelated to Maiden Lane.

The article goes into some juicy details on everyone favorite Joseph Cassano, who singlehandedly created a half a trillion derivative monster, that blew up, essentially to the benefit of Goldman. But the take home message is that Bill Poole believes that by precipitating the biggest financial collapse in history, Goldman was doing an admirable thing, and while making money for itself it put the fate of every other bank at the forced mercy of America’s taxpayers. The outcome: first – paying back TARP after orchestrating a 40% bear market rally and second – guaranteeing its employees record bonus payments. Everything on Wall Street is back to normal until the next and potentially final collapse, likely anticipated and once again monetized by Goldman. The only remaining question: what is Goldman Sachs currently shorting in order to make money out of the next collapse, while everyone else has to get bailed out by Team Bailout America. For some recommended names, we suggest readers familiarize themselves with the Goldman Sachs Conviction Buy List.