Goldman’s Backdoor Bailout

A call for transparency in the taxpayer rescue of Wall Street

Last week, I wrote that the lack of disclosure surrounding the American International Group bailout had put The New York Times at odds with Bloomberg over a fundamental question: What was Goldman Sachs’s stake in that bailout?

The Times, recall, reported via anonymous sources on September 29 that Goldman’s risk was up to $20 billion, while a lengthy Bloomberg profile of Goldman and its chief executive, Lloyd Blankfein, three weeks later asserted via its own source that Goldman’s risk had been hedged down to zero, implying Goldman had no stake in the AIG bailout.

In its October 21 story, Bloomberg had put it this way (emphasis is mine):

Goldman wouldn’t have lost money if AIG had gone out of business, the person said, although the collapse would have caused wide-spread economic distress.

It appears that “wouldn’t have lost money” is not the full story, not by a long shot. Goldman in fact reaped what may be a huge taxpayer-financed windfall, authorized by its former chief executive, Hank Paulson, shortly after its current chief executive, Lloyd Blankfein, was meeting Federal Reserve officials in New York on that very topic.

Who says? Bloomberg.

On September 29, three weeks before Bloomberg’s Goldman profile, Bloomberg’s Mark Pittman published a story that blows away any inference that Goldman had no stake in the bailout. This story was brought to my attention after I wrote the earlier piece. Here are excerpts with my emphasis:

Sept. 29 (Bloomberg) — As much as $37 billion from federal bailout loans to American International Group Inc. has gone to investment banks including Goldman Sachs Group Inc., the firm Treasury Secretary Henry Paulson used to run.


Without the government money, Goldman, Merrill Lynch & Co., Morgan Stanley, Deutsche Bank AG and other firms could have become some of the biggest creditors in a bankruptcy filing by AIG, the world’s largest insurer, because of its billions in losses on subprime bonds and corporate debt.

And finally, just in case you are not getting the picture:

“It was the biggest crisis ever — if you’re an investment bank,” said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York. “We didn’t just save AIG. We saved the counterparties, the banks. It’s true that it would have been a disaster, but it would have been a disaster for them.”

And here’s what we know about Blankfein’s role:

Paulson’s successor at Goldman, Lloyd Blankfein, was the only chief executive at a meeting Sept. 15 at the New York Federal Reserve Bank at which the troubles at AIG were discussed, although representatives of other firms were present, a Fed spokesman said.

This is the same information published by Gretchen Morgenson the same day in the Times’s story referenced above.

Oh, and lest we forget, Goldman’s former director, Ed Liddy, was named by Goldman’s former CEO to head Goldman’s counterparty, AIG:

My point is not to give the later Bloomberg story a hard time. The point is, again, that we—journalists and readers—are still, even today, after the blowup, are forced to rely on anonymous sources to find out basic information: Who is getting taxpayer funds?

Does it get any more fundamental?

The excellent earlier Bloomberg story does not say how much of the $37 billion went to meet Goldman’s demands for collateral, only that it was among several Wall Street banks in the welfare line to cover the bad trades with AIG that the banks themselves, via their overeducated, overpaid, and overprivileged employees, had made of their own volition in a boneheaded attempt to boost their own profit and their employees’ own compensation. Pathetic.

When you think we’re still trying to figure out whether we can afford to extend unemployment benefits it makes you look at those black cars wheeling around Manhattan in a whole new light.

Goldman spokespeople have been on the record saying its exposure to AIG was hedged, collateralized, and “not material” to its financial position. That may be technically true, but, I would point out, materiality is a broad-enough term that it can cover both a scenario in which the bailout fills a sizeable—albeit “not material”—hole at Goldman or provides a sizeable-but-not-material windfall. We’re talking billions.

And just in case you still buy the Goldman source’s line that the AIG bailout didn’t matter to the firm—that it “wouldn’t have lost money” and that Blankfein was concerned merely about “wide-spread economic distress”—additional reporting this week has offered glimpses of exactly how desperate Goldman was—how fiercely it hounded AIG—for collateral on its AIG-issued bond insurance as the insurer’s troubles become apparent.

Yesterday, in a fine piece on the fine screwups by a Yale economist and consultant to AIG, who turned out not to be America’s Top Risk Modeler, The Wall Street Journal reveals how Goldman put the screws to AIG last year:

AIG’s trading partners were worried. Goldman Sachs held swaps from AIG that insured about $20 billion of securities. In August 2007, Goldman demanded $1.5 billion in collateral, arguing that the assets backing the securities were falling in value. AIG argued that the demand was excessive, and the two firms eventually agreed that AIG would post $450 million to Goldman, this person says.

Late last October, Goldman asked for even more collateral, $3 billion. Again, AIG disagreed, and it ultimately posted $1.5 billion. Goldman hedged its exposure by making a bearish bet on AIG, buying credit-default swaps on AIG’s own debt, according to one person knowledgeable about this move.

Indeed, it was Goldman’s demands that triggered AIG’s initial writedowns:

When AIG’s outside auditor, PricewaterhouseCoopers LLP, learned about Goldman’s demands, it reviewed the value of the swaps, according to a Pricewaterhouse official cited in minutes of a meeting of the audit committee of AIG’s board. Last November, when AIG reported third-quarter results, it took its first major write-down on the swaps, lowering their value by $352 million.

The Washington Post yesterday moved the Goldman ball forward in a good story reporting the concern of experts that AIG is stuck putting up more and more collateral as the value of its crummy assets declines and is forced to sell those assets into a declining market. Worries about the value of AIG assets came up at an AIG board meeting last February when nervous directors were confronted with demands from—guess who?—for more collateral (my emphasis):

In February, internal notes show, board members discussed a growing dispute between AIG Financial Products and Goldman Sachs about the value of those assets when Goldman called for AIG to post collateral. AIG’s chief financial officer warned of “Goldman’s acknowledged desire to obtain as much cash as possible.” But AIG’s external accountants warned that it was they who alerted management to the dispute, not AIG Financial Products, and that the division was not properly considering the market in its pricing.

[A bond expert] Rutledge warns that because there has been no public disclosure of AIG’s payments to counterparties, it is impossible to know whether the pricing it is using now is proper.

Which brings us to the main point. The AIG bailout, it is now apparent, is basically a pass-through from taxpayers to the counterparties. It is clear the tax money is barely stopping at AIG for a cup of coffee.

Even AIG’s former chief Hank Greenberg, not exactly Ralph Nader, says the bailout is going straight to Wall Street banks on the worst terms. From the Post story:

In the first weeks of its federal rescue, AIG has used the loan money to post collateral demanded by these firms, sources close to those deals say.

“No one else benefits,” former AIG chief executive and major shareholder Maurice R. “Hank” Greenberg wrote to AIG’s current chief executive on Thursday. “Unless there is immediate change to the structure of the Federal loan, the American taxpayer will likely suffer a significant financial loss.”

Can the U.S. get a better deal? I have no idea.

But what strikes me as utterly unacceptable—a true scandal—is that the recipients of U.S. taxpayer funds in the AIG bailout are not even disclosed. We pay them, and we don’t even get to know who they are? Has this ever happened before?

Reporters are still—to this day—forced to beg, scrape, snuffle, and pry information loose the best they can from anonymous sources. From the case of the source in Bloomberg’s Goldman profile—Mr./Ms. “Wouldn’t Have Lost Money”—we know these sources have their own hidden, bogus agendas. This source was trying to pretend the AIG bailout didn’t matter to Goldman. My eye.

Finally, get a load of the answers to Bloomberg’s Pittman when he asked the relevant public agencies and the government-owned AIG which counterparties are receiving U.S. bailout money:

“What AIG did with its money, you should call AIG,’” said Fed spokesman Calvin Mitchell. “I doubt that we will be talking about AIG’s CDO portfolio.’”


AIG spokesman Nicholas Ashooh said the company would not disclose its counterparties or the contents of the CDO portfolio. He declined further comment.


Treasury spokeswoman Brookly McLaughlin said, “The Fed had the lead on this one: It’s their loan. I don’t know how I could be more clear.”’

I don’t know how I could be more clear, Brookly: This stinks.

The case for AIG-bailout transparency is obvious. The Columbia Journalism Review is ready to stand with anyone interested in forcing disclosure of taxpayer spending on Wall Street. Just email me at

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.