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Breaking WSJ: Massive Goldman-AIG Bailout Conflict Of Interest

by bobswern

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A story in this morning's Wall Street Journal, "Goldman Fueled AIG Gambles," by Seena Ng and Carrick Molenkamp, details how Goldman-Sachs obfuscated the fact that the firm was actually on the hook for far more billions of dollars in exposure to AIG's collapse than Goldman has previously acknowledged, in September 2008, when former Goldman CEO and then-Treasury Secretary Henry Paulson proclaimed a dire need to bailout the insurance firm with what eventually grew to become more than $180 billion in taxpayer-funded support.

In what may very well go down into the annals of journalism history as being right up there with Woodward's and Bernstein's coverage of the Watergate break-in, today's piece blows the lid off of the extent of the level of conflict of interest that was in place in the Treasury Department at the time the AIG bailout occurred.

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Putting it quite simply, between 2004 and 2007, Goldman-Sachs was up to its neck in AIG's business (Treasury Secretary Henry Paulson ran Goldman through 2006, prior to being appointed to his Bush administration post); and Goldman was exposed to far greater liability than any MSM reports have indicated to date. We know, from the breaking WSJ story that: 1.) "Goldman underwrote roughly $23 billion of the $80 billion in mortgage-linked CDOs that AIG agreed to insure."
2.) "When the federal government bailed out the insurer, Goldman avoided losses on its trades with AIG covering a total of $22 billion in assets."
Putting it a bit more succinctly, it's becoming increasingly clear to anyone that bothers to connect the dots that, despite any misdirected comments to the contrary by the firm, the very ongoing existence of Goldman Sachs may have hinged on AIG receiving the bailout, as turned out to be the case when Congress enabled the Treasury Secretary to serve up what eventually became more than $180 billion in taxpayer funds to AIG.
As is self-evident from today's WSJ story, the extent of the Goldman-AIG relationship was downright massive. I strongly suggest you read the entire piece, but here's a little more from the article (which speaks for itself):

Goldman Fueled AIG Gambles
by Seena Ng and Carrick Molenkamp
Wall Street Journal
December 12, 2009 ...A Wall Street Journal analysis of AIG's trades, which were on pools of mortgage debt, shows that Goldman was a key player in many of them, even the ones involving other banks.
Goldman as Middleman
Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Société Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman, according an analysis of ratings-firm reports and an internal AIG document that details several financial firms' roles in the transactions.
In Goldman's biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner--AIG, according to the Journal's analysis and people familiar with the trades.

Lastly, as noted by numerous reports since Fall 2008 (See: "Eight Days," by James Stewart, from the September 21st, 2009 edition of the New Yorker, and various other stories and blog posts), Goldman CEO Lloyd Blankfein was, literally, in the room with Treasury Secretary Paulson for much of that entire weekend in mid-September 2008 when the decision was made to bailout AIG. And, as many have asked, ever since: What the hell was he doing there? As time passes, eventually the real answer--the truth--is now coming out.
This story is, most certainly, going to have major implications going forward.  I could speculate as to where this will take us, but I'll leave that up to you in the comments, below. Go for it...

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