Goldman Sachs finally held a conference call to dispel two widespread myths about its relationship with AIG, both of which originated in a horribly dishonest article by the NYT's Gretchen Morgenson. I've harped on this several times before, and I'm glad Goldman is finally addressing this directly. First, regarding the patently false claim that Goldman CEO Lloyd Blankfein was the only Wall Street executive at a meeting at the New York Fed to discuss the AIG bailout:

There was a Sept. 15 meeting at the NY Fed where AIG’s troubles were discussed. Goldman Sachs was invited to discuss a private-sector solution to AIG’s problems. Tim Geithner asked Lloyd to attend. Lloyd attended. So did Jon Winkelreid, our president, as well Bob Scully at Morgan Stanley who was advising the government. Jimmy Lee, a JP Morgan vice-chairman and AIG’s financial adviser, was there, as well as senior people from the Fed and AIG and Eric Dinallo, the New York State Superintendent of Insurance. Geithner didn’t stay for the meeting. Lloyd stayed for 20 minutes and left. At that meeting it was decided there was no private-sector solution, and at that point GS team left and GS was not party to any discussions with the government after that. After that, they decided a public-sector solution was the way to go. In terms of the government bailout of AIG, GS was not privy to any discussions at all.
Second, regarding the myth that Goldman had $20 billion of exposure to AIG (from Deal Journal's live-blogging of the conference call; italicized text is Deal Journal's translation):
"We established credit terms to them commensurate to those with other trading counterparties…we limited our overall credit exposure to AIG with collateral and market hedges in order to protect ourselves." [Translation: Goldman treated AIG like other counterparties, where it bought "insurance" through special contracts called credit-default swaps that would pay Goldman money if AIG went bankrupt. These CDS contracts are a common feature of trading relationships in the markets.] ... In mid-September, the majority of GS’s exposure, $10 billion, was collateralized or hedged. They held $7.5 billion in collateral. The rest was hedged in CDSs. "We had no material exposure to AIG."
So to sum up:
  1. Goldman never discussed a government bailout of AIG with the Fed or Treasury;
  2. Lloyd Blankfein, along with representatives from Morgan Stanley and JPMorgan, briefly attended a meeting at the New York Fed to discuss a private sector rescue of AIG; no government bailout was discussed at the meeting; and
  3. Goldman had no direct exposure to AIG.
Gretchen Morgenson: consider yourself rebutted.

2 comments:

Don said...

“All we did is call for the collateral that was due to us under the contracts,” he said. “So I don’t think there’s any guilt whatsoever.”

If you look at their actions, don't they support my idea that investors will demand collateral if they think that a business is bleeding funds? I agree that it's fine to write the terms in ahead, as happened here, but collateral calls are in order to keep the investor calm and not demand his money. In that sense, making collateral calls independent of downgrades would simply force them to be written in beforehand. But lowering collateral calls or putting them aside would seem to lead to just the scenario I was describing.

Don the libertarian Democrat

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