The Wall Street End Game

Barry Ritholtz sees no new news in yesterday’s Times piece recreating the AIG/Goldman talks, which forced the insurer to hand over collateral, pushed it toward the edge of insolvency, and revealed the yawning size of its exposure to toxic securities.

And I can understand the point.

But just as the outlines of the AIG bailout story—the widest public window onto the financial crisis—start to sound familiar, new insights emerge.

For instance, one section of this, in fact, valuable piece, by Gretchen Morgenson and Louise Story, looks at some of the deals whose value would later be in dispute and helpfully names the traders who created them, including one Ram Sundaram. The sourcing, by the way, looks very strong (my emphasis):

Mr. Sundaram’s trades represented another large part of Goldman’s business with A.I.G. According to five former Goldman employees, Mr. Sundaram used financing from other banks like Société Générale and Calyon to purchase less risky mortgage securities from competitors like Merrill Lynch and then insure the assets with A.I.G. — helping fatten the mortgage pipeline that would prove so harmful to Wall Street, investors and taxpayers. In October 2008, just after A.I.G. collapsed, Goldman made Mr. Sundaram a partner.

Here we get a useful glimpse into how an ill subprime wind becomes an aftermarket whirlwind. Goldman borrows from fellow global banks to buy the better-quality assets of the insatiable Merrill Lynch, freeing Stan O’Neal’s wrecking crew to buy more predatory loans, incentivizing mortgage bucket shops, including its own First Franklin unit, in strip malls across the country to peddle ever more defective products on debt-strapped civilians. (And if you wonder how Wall Street compensation fits into all this, check out this stellar Story story from the Times storied “Reckoning” series from the end of 2008.)

And so it goes.

This is the fuel that stoked the boiler-room culture that overran mortgage lending in the early ‘00s and kept it going during the critical later years, especially, 2006, when subprime lending reached an unheard-of $600 billion, or 20 percent of the mortgage market. We’ve written that the business press never really got its arms around the radical transformation of the mortgage business, a press failing that has led to all sorts of public policy mischief today (the link only goes to the first page of the story; write to for a hardcopy).

Importantly, the Times story also offers a reminder about the later stages of the mortgage bubble, when the financial sausage-making was starting to get really ugly. For a refresher on late-stage aftermarket sleaze, check out this superb December 2007 WSJ piece by Carrick Mollenkamp and Serena Ng on “Norma,” the Merrill-sponsored CDO vehicle managed by a Long Island penny-stock impresario. As the Journal story reminds us, Merrill was the top CDO underwriter from 2004 to mid-2007. Wrap your mind around that for a second.

I see a couple of press lessons here.

One is that it’s hard to have TMI about AIG.

Two, the story of AIG-Goldman wrangling is another reminder that what might be called Wall Street’s end game offers investigative opportunities that have yet to be exploited. This is the period beginning sometime in 2006 and extending deep into 2007, when even the dumb money on Wall Street knew that it was all going down in flames. Indeed, this first-rate Times graphic with yesterday’s story reminds us that even AIG—now exposed as the dumbest of all dumb money, ever—had figured out that something was amiss in the mortgage market when it stopped writing CDO insurance in February 2006.

And yet the subprime boiler rooms and CDO factories churned on.

Remember, when Chuck Prince famously announced Citi was “still dancing,” it was in July 2007.

It’s also worth remembering that this was the period when the banks were storing some of their worst assets off their balance sheets in so-called special investment vehicles, as this July 2008 Bloomberg story says.

“The riskiest assets we had, our CDOs, weren’t even on our balance sheet,” Merrill Chief Executive Officer John Thain said on a June 11 conference call with investors. Merrill would have to provide $15 billion in financing for CDOs and related obligations under a “severe stress scenario,” according to a Merrill regulatory filing published in May.

Bloomberg’s Jon Weil, as usual, was onto it early. His columns shouldn’t be the last word on this kind of thing, but the first.

The Goldman/AIG action offers a window onto Wall Street’s pre-crash period, which involved mammoth, unexplored and highly questionable transactions that go beyond even the likes of Goldman Sachs and AIG. My sense is that readers have only begun to understand this period because the press has only begun to explore it.

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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.