The Times’s Last Goldman Story Mostly Held Up Fine

But it's not a zero-sum game

Yesterday, I said Goldman had a minor but valid point in spokesman Lucas van Praag’s unusual public response to last Sunday’s Times piece on the Goldman/AIG collateral fracas that preceded the insurer’s great collapse.

For those new to the conversation, the Times piece chronicled the argument over the value of the complicated securities that AIG had agreed to insure for Goldman (and many others). As the value dropped, the insureds were entitled to cash collateral; the argument was over how much. The more AIG had to pay out, the more precarious its own position became. The Times reported that the “testy” conflict with Goldman helped to push AIG to the “edge.”

But, as I said, while Goldman’s post (we really are all bloggers now) provided a useful alternative view, most of the “errors” the bank cites really don’t qualify. Overall, the story holds up very well.

On the other hand, these corporate/newspaper collisions are not always a zero-sum game. That doesn’t mean we should just all get along, but it is something to think about when reading about these

Or you can leave it as a he-said/she-said, as Clusterstock did with its headline on van Praag’s piece:

The New York Times Piece On Goldman Killing AIG Is Total Nonsense And Riddled With Errors

Not so. Here’s a quick run-through of Goldman’s nine objections:

NYT assertion: “Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities.”

The facts: We would have been happy to consult with third parties. In fact, on numerous occasions we attempted—unsuccessfully—to agree on a process with AIG to obtain third-party values.

It is true that Goldman here is asked to prove a negative—that it wasn’t “resisting” consulting with third parties. Clearly, the two sides disagreed over how to do it, so Goldman can be said to have been “resisting,” just as the same thing could be said of AIG. The Times, however, does offer contemporaneous evidence that Goldman resisted. That’s below. Meanwhile, Goldman got to make the same point in the story it is making here.

NYT assertion: “Goldman’s demands for billions of dollars from the insurer helped put it in a precarious financial position by bleeding much-needed cash.”

The facts: Relative to the size of AIG’s overall business, Goldman Sachs was a small counterparty. We don’t believe our marks were “aggressive,” they reflected market prices at the time. We requested the collateral we were entitled to under the terms of our agreements. The idea that AIG collapsed because of our marks is not credible. In any event, the story later asserts that, by the spring of 2008, AIG’s dispute with Goldman Sachs was just one of its many woes.

Not only can both side be right, in this case they are. Goldman clearly helped push AIG to the edge, and AIG certainly had other problems.

NYT assertion: “In addition, according to two people with knowledge of the positions a portion of the $11 billion in taxpayer money that went to Societe Generale, a French bank that traded with A.I.G, was subsequently transferred to Goldman under a deal the two banks had struck.”

The facts: The assertion is false and misleading. Goldman Sachs provided financing to many counterparties, but in that role we would not have known whether a counterparty had obtained credit default protection, let alone from whom or in what amount.

This is the one I dealt with yesterday.

NYT assertion: “Goldman Sachs stood to gain from the housing market’s implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured.”

The facts: This statement is misleading and mischaracterizes how we positioned ourselves at the start of 2007. Goldman Sachs, like most other financial firms, was long the mortgage market at the end of 2006. In order to bring our exposure closer to flat, we began hedging our mortgage holdings in the first quarter of 2007. Those hedges certainly limited our exposure to the declining housing market, but we also recorded substantial writedowns on our residential mortgage holdings. Moreover, in most of the trades with AIG described in the article, Goldman Sachs was hedged by an offsetting position and did not have a short directional bet on the mortgage market.

Here the Times wisely says Goldman “had begun” to make the trades. Now, it’s a matter of record that its trades would soon “pay off”; that’s the premise of this important December 2007 WSJ story by Kate Kelly.

How Goldman Won Big On Mortgage Meltdown
The subprime-mortgage crisis has been a financial catastrophe for much of Wall Street. At Goldman Sachs Group Inc., thanks to a tiny group of traders, it has generated one of the biggest windfalls the securities industry has seen in years.

A caveat: Because two competing news organizations say it’s so doesn’t make it so. But at a minimum, the uncorrected Journal story supports the Times here.

Conceivably, Goldman’s response—that it limited its exposure but also recorded writedowns—could be squared with the idea that it made “huge trades” that would “pay off”—and just happened to lose money elsewhere.

Still, that’s a stretch. The fact is, the Times/Journal version of reality—that Goldman made out big shorting housing—is at odds with Goldman’s.

Leaning on the Journal, I side with the Times.

NYT assertion: “A November 2008 analysis by BlackRock, a leading asset management firm, noted that Goldman’s valuations of the securities that AIG insured were consistently lower than third-party prices.”

The facts: We believe that the marks we supplied to AIG represented fair market value for the underlying securities. We understand that the marks supplied by other AIG counterparties ultimately moved closer to ours, proving that we were at the forefront of taking realistic marks on our positions. Subsequent events in the housing market proved our marks to be correct.

Van Praag doesn’t directly address the Times assertion here—this is what Blackrock noted. Nor does the Times say that Goldman’s marks were wrong, just that it was aggressively pursuing its collateral, which is not unfair.

Okay, we’re almost done.

NYT assertion: “Perhaps the most intriguing aspect of the relationship between Goldman and AIG was that without the insurer to provide credit insurance, the investment banks could not have generated some of its enormous profits betting against the mortgage market. And when the market went south, AIG became its biggest casualty — and Goldman became one of the biggest beneficiaries.”

The facts: As we’ve already said, we were far from the biggest beneficiaries of the mortgage market’s decline. Through prudent hedging, we limited our losses, rather than generating “enormous profits.” AIG was only one of many counterparties with whom we had hedging arrangements.

The Times says Goldman was “one of” the biggest beneficiaries. This is a continuation of the dispute over whether Goldman made out well or broke even on the housing bust.

Last two points:

NYT assertion: “…the insurer’s executives believed that Goldman Sachs pressed Societe Generale to also demand payments.”
The facts: That’s not correct. We did not encourage other counterparties to issue collateral calls.

You can see van Praag’s complaint here: AIG’s executives may have believed it, and Goldman may have had incentive to do so, but the insurer’s executives had no way of knowing one way or another. Still, I find no problem with reporting AIG’s suspicions in this case. Perhaps others do.


NYT assertion: “Mr. Sherwood [Goldman vice chairman] said he did not want to ask other firms to value the securities because it would be embarrassing if we brought the market into our disagreement, according to an e-mail message from Mr. Cassano [now-fallen AIGFP chief] that described the call.”

The facts: It is not true that we were unwilling to agree to a dealer poll. On the contrary, AIG would not agree on a process to obtain third-party values. Michael Sherwood doesn’t know why someone might have suggested he thought it would be embarrassing to have third-parties value the securities.

It seems to me that the Times is fine to quote from Cassano’s email and that, as mentioned above, it qualifies as evidence of Goldman resistance.

As far as the big picture goes, the Times headline was:

Testy Conflict With Goldman Helped Push A.I.G. to Edge

That not-very-controversial premise is amply supported in the story.

Put it this way: of all the Times stories that Goldman dislikes, this is the one it should probably dislike least.

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.