Janet Tavakoli will not break scent. She's been pounding similar themes for the last few weeks; first calling for a 95% windfall profits tax on Goldman's ill-gotten, taxpayer-enhanced earnings; then delving last week further into the tangled hedge that was the AIG-Goldman relationship. This week she's back with another shot at Paulson, Blankfein and crew and the work of God that Goldman does so well.
TSF – Opinion Commentary – November 10, 2009 (last of a series)
Submitted by Janet Tavakoli
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 AIG’s near bankruptcy. When it came to the credit derivatives American International Group, Inc. (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 that isn’t even close to the full story. Goldman underwrote some of the 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.
Even if all of Goldman’s CDOs had been pristine, it poisoned its own well by elsewhere issuing deals like GSAMP Trust 2006-S3 that—along with dodgy deals issued by other financial institutions—eroded market trust in this entire asset class and drove down prices.
By September 2008, Goldman had approximately $20 billion in transactions with AIG. 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.
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