Goldman’s Risk: Somewhere Between Zero and $20 Billion

Contradictory NYT, Bloomberg stories show need for bailout transparency

Coverage of Goldman Sachs has perplexed me throughout the crisis.

I’d still like to know, for instance, which subprime lenders it financed during the bad old days and how many of their mortgages it repackaged and sold as collateralized debt obligations onto the global bond markets.

In other words, what was its contribution to this whole state of affairs while our current Treasury Secretary was in charge?

But then, I’d like to know that about all the Wall Street banks. That’s just me; I’m greedy.

Sharp-eyed business-press readers, however, may also be perplexed about another important question: to what extent was Goldman exposed to American International Group?

In recent major stories, The New York Times and Bloomberg are at odds.

The Times, via anonymous sources, says Goldman’s exposure was up to $20 billion. Bloomberg, via its own source, says it was basically zero.

The issue is important because, as everyone knows, the Treasury secretary and former Goldman CEO nationalized the insurer rather than see it go under and bring down its counterparties with it.

It is worth recalling that this was probably the most dramatic and unprecedented Treasury move in the crisis so far, committing up to $85 billion in U.S. funds in return for an 80 percent stake in an insurance company. The federal government, in normal times, has almost nothing to do with insurance. It’s also worth recalling that AIG was/is one of the most complex and opaque financial organizations ever created. Talk about a leap of faith.

And as the Times reported in the same story, Lloyd Blankfein, Paulson’s successor at Goldman, participated in meetings at the New York Federal Reserve in the mid-September days preceding the bailout, including a meeting specifically about what to do about AIG (although judging from a lengthy correction at the bottom of the story, there was some confusion about who participated in what meeting. The correction says Blankfein did, but Paulson did not, attend a meeting devoted to AIG).

Further, the AIG bailout decision came on the heels of the government’s decision not to bail out Lehman Brothers, which filed for bankruptcy the same day Blankfein was at the Fed.

The coincidences spurred the House Committee on Oversight and Government Reform to look into whether the USG did GS any special favors that weekend and heard testimony from former AIG chief Robert Willumstad (on page 178) who said Goldman had indeed bought insurance contracts on bonds worth $20 billion from AIG Willumstad added, however, that he didn’t know the answer to the key question — the degree to which that position was offset by other investments Goldman may have made.

Don’t get me wrong. I love Goldman Sachs as much as the next media critic, probably more. They’re one of The Audit’s funders, for Pete’s sake! (You think this job is easy? It’s not.)

And most observers dismiss any crude conspiracy theorizing and understand that the entire financial system was a risk in the event of an AIG failure, hence the need for action no matter what Goldman’s position.

But even so, it’s more than a fair question. What did Goldman have at stake in that move?

Here’s the Times in an edgy September 29 story by Gretchen Morgenson on AIG’s risk-taking, a story that also zeroed in on a key, smart question: who were its counterparties? The emphasis is mine:

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

The Times then quotes a Goldman spokesman who knocks down the $20 billion figure and flatly denies that Blankfein was looking for any special favors for Goldman.

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.


Lucas van Praag, a Goldman spokesman, declined to detail how badly hurt his firm might have been had A.I.G. collapsed two weeks ago. He disputed the calculation that Goldman had $20 billion worth of risk tied to A.I.G., saying the figure failed to account for collateral and hedges that Goldman deployed to reduce its risk.

Here’s Bloomberg’s account, in a basically laudatory, still interesting story on October 21 by Lisa Kassenaar and Christine Harper about how Goldman has survived:

This year, Goldman also saw trouble brewing in the insurance sector and began hedging its exposure to AIG, which had a notional value of about $20 billion as of mid-September, according to a person familiar with the strategy. The hedges included short positions on AIG and other insurance companies, as well as CDSs. 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.

“Wouldn’t have lost money” means, to me, that Goldman’s net exposure was zero.

Michael DuVally, a Goldman Sachs spokesman, told me the firm’s exposure is hedged, collateralized and ultimately “not material” to the firm’s overall financial condition. That sounds awfully close to Bloomberg’s account, but materiality is an elastic enough concept that the Times’s version can’t be excluded entirely. It’s not zero. It’s not $20 billion.

Morgenson, by the way, stands by her story in a note to me. A Bloomberg spokeswoman did the same for the Bloomberg story. They can’t both be right.

Who’s closer?

I don’t know. I have a hunch Bloomberg’s zero is, but that’s just a guess.

And that’s the problem. The real point is, at this late hour, should we really be relying on guesses, anonymous sources, or a company spokesman’s word to know where Wall Street banks’ interest lie in the disposition of public funds to fill holes created by private companies?

Taxpayers, remember, now own AIG, and they own it precisely because of well-founded fears for the counterparties to the insurance contracts it clearly could not pay. There is no other reason. The U.S. Government accidentally got into the property/casualty business (and every other insurance line) only because of AIG’s unnamed counterparties who were exposed to some unknown degree of risk of losing some undisclosed amount of money that they willingly took on for their employees’ own excessive remuneration.

And taxpayers can’t even find out who these institutions are? They’re still squinting over news stories and parsing quotes from anonymous sources, none of whom has any real knowledge themselves? How’s that again?

This is not to mention the fact that taxpayers—you remember, those people with the stagnating median incomes for the last eight years—were forced to become unwilling shareholders in Goldman itself, along with eight other firms, only because no one else would do it on the same terms.

What we have here, Audit readers, is a classic transparency problem, without doubt. Whatever Goldman’s hedges were and whatever collateral it holds—down to the last security—should be disclosed for taxpayer inspection. Those are public records now.

At this point, the old business press/Wall Street rules—relying on anonymous sources to answer a basic question—should be thrown into a giant trash compactor.

The story of the battling sources shows how little we have learned and how deeply the Wall Street culture needs to change.

On the other hand, it also shows a way forward to restoring public confidence in the government, its bailout and the bailed out institutions:

Put it all online.

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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.