Saturday, January 9, 2010

A New Enemy for Goldman Sachs

Former AIG chairman Hank Greenberg is not an uniased observer of events surrounding AIG. However, in a Holman Jenkins interview, he makes some interesting points and raises some interesting questions about the events surrounding Goldman Sachs getting paid 100 cents on the dollar. Greenberg portrays Goldman's role as sinister as you can get :

Goldman Sachs has a new enemy—as if it needed another one.

Hank Greenberg, as we sit in his Park Avenue office, is telling me how to do my job, saying reporters need to get to the bottom of the events that preceded and followed the government bailout of AIG, the insurance company he built into a global giant.

In particular, they need to get to the bottom of the part played by the investment bank of Goldman Sachs. He waves a sheaf of press reports from the New York Times, Washington Post and McClatchy papers about the firm's doings before and during the subprime meltdown. "We're dealing with a jigsaw puzzle where all the pieces are not in the box. Bit by bit, we're getting the pieces. The pieces are failing into place and the picture on the face of the puzzle is not a pretty picture."

Let me get this straight. Is Mr. Greenberg saying the machinations of Goldman Sachs were responsible for the disastrous failure of AIG amid the recent financial crisis? "Well, it certainly wouldn't be difficult to come to that conclusion."...

How did it all come apart so quickly [for AIG]? Here are the pieces Mr. Greenberg says he sees falling into place. In 2005, a trade group called the International Swaps and Derivatives Association got together and drafted new standards for the kinds of credit default swaps AIG had been writing.

Previously, Mr. Greenberg explains, losses to the underlying securities were paid off at maturity. Now, cash payments would have to be forthcoming to cover any drop in value or credit downgrades even before any losses were realized.

"I don't know whether Goldman Sachs was the force behind the ISDA change or Deutsche Bank," Mr. Greenberg concedes. "That's something investigative reporters are going to have to spend time digging out."

The next piece fell into place, he says, with recent reports in the press about how, at the top of the housing bubble, "a couple of people there [at Goldman Sachs], bright guys, decide the housing market is going to collapse." Goldman went to work creating new subprime housing-backed derivatives , Mr. Greenberg says, and "began marketing the hell out of them and at the same time shorting them" (or betting they would fall in value).

Bingo. When the housing boom imploded, Goldman demanded giant cash collateral payments from AIG on a "mark to market" basis for housing-backed securities whose price was plummeting even if the underlying payment streams were intact. True, Goldman was hardly the only one demanding cash, but Mr. Greenberg is suspicious about the size of the payments Goldman demanded based on Goldman's own "marks" (i.e. estimate of the securities now-depressed value). "Goldman had the lowest marks on the Street by everything I hear," he says. "There was no exchange. Where was the price discovery? It was all in the eye of the beholder."

In short, it added up to a perfect trap for AIG. As panic spread through the financial sector, impossible amounts of cash were required of the firm under insurance contracts that had years to run and (as Mr. Greenberg argues and events seem to be showing) would likely end up performing adequately in the long run.

But this is just half the puzzle, he says. When the government took over AIG, why did it insist that Goldman and other firms receive 100 cents on the dollar on their AIG exposure, while the terms of AIG's own bailout were so onerous as to force the firm into slow-motion liquidation? When the government's bailouts of Citigroup, Bank of America, GM and Chrysler were clearly designed to restore the firms to health, why was AIG's apparently designed to create a wasting asset that would wither and die in taxpayer hands?

Most of all, he cannot fathom why Treasury and the Federal Reserve let billions of dollars in taxpayer cash fly out the backdoor to Goldman and other firms.

Washington could simply have ordained that AIG's debts were the government's debts and so no collateral was due give Uncle Sam's bulletproof credit rating.

Mr. Greenberg has no doubt the destruction of AIG was the politically-dictated goal at the time. He points to Treasury Secretary Hank Paulson's statement on Sunday morning television shortly after the rescue, saying the purpose was to "allow the government to liquidate" the company.

Mr. Greenberg invokes the loaded constitutional word "takings" for the government's seizure of a 79.9% stake in AIG as part of the package dictated to the company's board. "They just took the goddamn thing. What's the basis for taking it? You gotta explain, How did you get to 79.9%? I'd be curious to know."

Read the full interview here

1 comment:

  1. Wow, greenberg does a stellar job of painting aig as the naive victim. Why'd they buy that crap from gs in the first place?