(The following comments and conclusions reflect my personal opinions as well as the reports and comments of others, including notes on breaking news events.)
This brief diary is based upon my extensive research and writing (over the past 16 months, since September 2008) about the collapse of AIG, its unique relationship with Goldman Sachs, and Goldman Sachs' unique relationship with the New York Federal Reserve Branch, of which Goldman was/is a major owner. Many folks have asked for a "summary for dummies" overview of the matter; and, since it's pretty much a "showdown at the not-okay corral" that's occurring over at the House Oversight and Government Reform Committee as you read this--and an event that may be resplendent with significant breaking news--I thought I'd take the time in this brief diary to spell out the situation, in the most updated manner possible, as well.
No brief overview and update on these matters would be complete without a link and summary of what, IMHO, may be
the most important piece ever written on the matter, which appeared on Monday over at HuffPo...from David Fiderer's must-read post there: "
How Paulson's People Colluded With Goldman To Destroy AIG And Get A Backdoor Bailout."
...you must remember...the dagger hanging over AIG and Goldman -- the eventual payout to the CDO, which Wikipedia tells us is the abbreviation for "Collateralized Debt Obligations," counterparties -- was a zero-sum game between the two financial giants. On June 30, 2008, AIG's net worth was $79 billion and its CDO obligations totaled $62 billion. On August 27, 2008 Goldman's net worth was $42 billion and its share of the infamous CDO portfolio was $22 billion. The stakes were huge.
Also, none of the critical elements that led to AIG's demise were obscure. In retrospect they seem quite obvious. Unfortunately, few in the financial media have attempted to understand those critical elements.
Fiderer's reference to the "zero-sum game" between AIG and Goldman Sachs relates to the reality that Goldman, like all substantial investment firms, hedged their investments, which is akin to "covering" them (i.e.: managing risk) by making investments elsewhere to insure they weren't exposed to significant losses on their original money.
Fiderer makes a comparison between what was occurring in-between AIG and Goldman with the purchase of an imaginary futures contract for a barrel of oil. So, imagine buying a futures contract for the right to purchase a barrel of oil a year from now for $78. As that transaction is concluded the same party that purchased the right to buy a barrel of oil for $78, a year from now, concurrently buys another contract--perhaps from a third firm--to sell a barrel of oil for $80 a year from now, too. The net-net of the two transactions is the entity that purchased the two contracts is managing their risk, and has taken a $2 profit on a fully-hedged deal on two futures contracts. (One buy contract, one sell contract.)
In theory, this works wonderfully, millions of times a year, throughout the financial services industry...as long as all parties involved in their respective deals are able to settle their contracts.
As Fiderer tells us in great detail, however, therein lies the rub. The two major differences between AIG's "insurance" on Goldman's CDOs and the monoline insurance companies' "insurance" on Goldman's competitors' garbage paper was a huge revenue opportunity for Goldman; and, Goldman massively exploited this to its advantage:
1.) that the only way AIG could not make good on their obligations to Goldman Sachs was if AIG went bankrupt; a monoline insurance company (such as MBIA, Ambac, etc.), on the other hand, is fully regulated/controlled by their respective governmental insurance authorities; in addition to providing numerous other benefits to Goldman, AIG 's unique deal with them was not subject to that regulatory supervision, therefore AIG's unique status mitigated Goldman's (and other major financial firms' exposure, such as France's Societe Generale) exposure to external regulatory interference with their structured hedges, as well;
2.) and, in fact, the other primary reason Goldman did business, almost exclusively, with AIGFP (AIG's financial products subsidiary, based in London) was due to the fact that, unlike the other insurance purveyors in the industry, if the value of the underlying equities diminished (for virtually any reason, such as a ratings downgrade of the underlying toxic paper covered in the CDO's), Goldman could hit AIG up for virtually immediate cash payments to cover their losses, too. (Of course, this was all predicated upon avoiding an AIG declaration of bankruptcy since it was the only event that could undermine the deal, due to the obfuscated reality that Goldman would then be on the hook for up to $22 billion in make-good payments as a result of the firm's exposure--exposure which the firm publicly denied even existed at the time Paulson made his decision to bailout/takeover AIG.)
Considering the significant percentage of Goldman's position in CDOs (equivalent to more than half of Goldman's entire net worth in the third quarter of 2008, according to Fiderer's analysis, linked above), and understanding that it was under none other than then-Treasury Secretary Hank Paulson's watch as CEO of Goldman when many of these original deals--and, indeed this entire strategy--were formulated, it is beyond far-fetched to posit that Paulson was not aware of the severity of the situation when he made the call to, essentially, take over AIG in mid-September 2008, and subsequently replace AIG CEO Willumsted with none other than a member of Goldman's Board of Directors, Liddy.
These, and many other pieces of information brought forth in Fiderer's commentary, comprise the much-easier-to-understand, salient facts that, up until now, have been largely obfuscated and/or ignored in MSM coverage of this entire nightmare, to date.
Of course, it's significantly more complex than this, once one takes the numerous other facts into consideration, with not the least of those other facts being that under federal and international securities laws, the issuing party of securities deemed fraudulent by a court, is liable for redemption of those securities at 100% (face) value. (What's not being said here is that this, in fact, was the not-so-tacit reason why the AIG counterparties were paid 100 cents on the dollar by the government's AIG conduit for toxic crap issued by Goldman that was widely acknowledged to be worth only a small fraction of that.) And, if one bothered to reference what, IMHO, may be the first truly seminal news coverage of the "mortgage meltdown"-- an op-ed piece by lawyer Sean Olender published in early December 2007 in the San Francisco Chronicle, entitled "Mortgage Meltdown." --this was explained to the public at the outset of this economic travesty we now call the Great Recession.
Lastly, as Fiderer also makes note of it, the "financial fate of the the free world" did not rest upon our government bailing out AIG. In fact, virtually all of AIG's other divisions and subsidiaries were in far better shape than press reports indicated in mid-September 2008. Perhaps more importantly, upon closer look, the total value of AIG's exposure in the derivatives market was approximately (just) one-third that of Lehman Brothers, a company that Treasury Secretary Paulson had allowed to slip into bankruptcy just hours before making his fateful decision to bailout AIG.
Summing it all up, and reiterating what Fiderer points out in the opening lines of his brilliant piece published on Monday at HuffPo, "...none of the critical elements that led to AIG's demise were obscure. In retrospect they seem quite obvious. Unfortunately, few in the financial media have attempted to understand those critical elements."
Combining Fiderer's overview of AIG bailout history with the (as Meteor Blades has noted) uncharacteristically spot-on assessments issued in a report published last night from U.S. Rep. Darrell Issa, the top Republican on the House Oversight and Government Reform Committee, as it directly relates to today's proceedings on the Hill, and one realizes that we're finally shedding the brightest of lights on what, IMHO, is nothing less than the greatest pillaging of a society by its status quo in recorded history. Some are speculating that this event may shut the door on Geithner's stint as Treasury Secretary; it may also adversely impact Bernanke's confirmation for a second term as Chair of the Federal Reserve.
For hardcopy of prepared testimony from the likes of former Treasury Secretary Hank Paulson, et al, as well as a live stream of the fireworks related to this week's House Oversight and Government Reform Committee's hearings, you may click RIGHT HERE.
Kossack h/t's...
Joanneleon has a rocking live blog diary on the committee hearings, a few diaries down on the Rec List. And Badabing mentioned the Fiderer piece in her post, last night.
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For more background on this:
2010--
Is Geithner Toast? Barofsky Announces 2 New Fed-AIG Probes (1/26/10)
Reuters: SEC Considered AIG Bailout National Security Matter (1/25/10)
Naked Capitalism Guest Post: AIG Bailout Secrets Exposed! (1/23/10)
Breaking (Update): Fed Denies House Subpoena For AIG Docs (1/12/10)
2009--
3 Fraud Probes Target Goldman, AIG: Is It "The" Story of 2010? (12/28/09)
"The AIG-Wall St. Bailout Corruption Story That Won't Go Away" (12/23/09)
"Breaking WSJ: Massive Goldman-AIG Bailout Conflict Of Interest" (12/12/09)
"New Economic Travesties: GDP Revision, Goldman/AIG, Reform" (11/24/09)
"Goldman's Eviscerated In NYT; Admits Geithner's 'AIGenerosity' (11/22/09)
Gretchen Morgenson, over at the NY Times: Revisiting a Fed Waltz With A.I.G." (11/22/09)
"Fed'l Reserve, IG Barofsky: Paulson, Treasury Lied To Public" (10/6/09)
One of Gretchen Morgenson's (NYT) best pieces of the entire recession: "Member and Overseer of the Finance Club" (4/27/09)
"Is it the largest betrayal of public trust in history?" (3/15/09)
"Doesn't Geithner's Middle Finger Look Just Like Paulson's?" (3/12/09)
"Wall St. Bailout: Is A Massive Scandal About To Unfold?" (3/8/09)
"On Geithner, NYT Leak and TARP II Drama: Kuttner Nails It" (2/13/09)
2008--
"Fed Refuses to Name Recipients of $2 Trillion Bailout" (11/10/08)
"Paulson/Fed Gives O.K. To Banks To Steal Your Money! (For real!)" (9/16/08)
"BREAKING: NY Times, 'AIG joins Merrill and Lehman in Wall Street Collapse'" (9/15/08)