I have to take issue with William Cohan’s Op-Ed, How Goldman Killed A.I.G.
First off, let me start out by saying that these are two bad actors; there are no “good guys” here. Second, let me remind the reader that AIG under-wrote $3 trillion worth of derivatives, a massive high-risk exposure — and collected $3 billion (10 bps) in fees on their exposure.
Tom Savage, President, the head of AIG’s Financial Products, it free money: “The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy the money.”
Gee, how could that go bad?
Thus, looking at what was done, I think its more accurate to say that AIG committed suicide. Goldman was merely one of the many Brute(s) that thrust their daggers into Caesar.
Goldman became a counter-party of AIG by paying them $100 million to insure $23 billion of mortgage securities. The contract included several triggering events that required AIG to post more reserves. These included AIG’s loss of their Triple AAA ratings, as well as a drop in the value of the underlying securities. Both events occurred, forcing AIG to pony up billions.
The “dispute” between GS and AIG was over the timing and amount of the collateral call. I must emphasize that this was part of the contract between two very sophisticated financial firms — AIG was the world’s biggest insurer, and GS was one of the world’s biggest bankers.
As Cohan states “On July 27, 2007, Goldman sent a $1.81 billion collateral call to A.I.G. Financial Products.” But Cohan’s mention that: “Goldman — pretty much alone at that point — thought represented the decline in the value of the securities.”
But so what? That AIG gave GS the ability to demand increased collateral based on their own valuations is pretty astonishing — and dumb as hell. AIG ultimately negotiated down the $1.8B collateral call to “only” $450m; eventually, they ponied up an additional $1.55 billion in collateral. AIG also had to pay collateral to Merrill and Soc Gen.
So the question I ask: Is Goldman to blame for enforcing its legal rights against AIG?
How Goldman Killed A.I.G.
WILLIAM D. COHAN
NYT Opinionator, February 16, 2011, 9:00 pm
AIG’s Financial Products Division (December 2008)
Revenge of the Black Swan (December 2008)
Why AIG Counter-Parties Recieved 100% on Derivatives (January 2010)
Solvent Insurer / Insolvent Insurer (March 2009)
Backdoor Bailouts for Goldman Sachs? (March 2009)
Myths of the AIG Collapse (September 2009)