Goldman Sachs Group documents show that it depended on banks including Citigroup and Lehman Brothers Holdings for protection against a failure of American International Group.
Citigroup, which received the biggest government bailout of any US bank, was Goldman Sachs’s largest provider of credit-default swaps on AIG as of September 15, 2008, according to documents released by Senator Charles Grassley. Lehman Brothers, which declared bankruptcy that same day, is listed as fifth- biggest. Credit-default swaps act like insurance contracts, paying the owner in the event of a default.
Goldman Sachs, the most profitable securities firm in Wall Street history, has argued that it didn’t depend on the US government’s $182.3 billion rescue of AIG because the investment bank had collateral and credit-default swaps to protect itself. Joshua Rosner, an analyst at research firm Graham Fisher & Co in New York, said the list of counterparties indicates that Goldman Sachs may have had difficulty collecting on those swaps.
Goldman Sachs’s relationship with AIG has been under scrutiny since AIG revealed in March 2009 that the bank had received $8.1 billion after the insurer’s 2008 bailout. The funds made good on credit-default swaps that AIG had provided to Goldman Sachs on mortgage-linked investments called collateralised debt obligations.
‘Backdoor bailout’
Lawmakers, including Representative Darrell Issa, the California Republican, have called the AIG rescue a “backdoor bailout” of Goldman Sachs, as well as the other banks that got 100 per cent of the money AIG owed them. The government bailout of AIG meant Goldman Sachs never had to collect on credit default swaps it bought to cover a default.
“The financial institutions from whom we purchased protection were required to post collateral to settle their net exposure to us on a daily basis,” Lucas van Praag, a spokesman for New York-based Goldman Sachs, said yesterday. “A default by any particular counterparty would not reduce the effectiveness of a hedge provided by that entity if adequate collateral had already been posted. This was the case with the protection we bought, even during the most stressed periods of the fall of 2008.”
Bets against AIG
Goldman Sachs CEO Lloyd Blankfein turned over a list of counterparties on those swaps to the Congressional Oversight Panel and Financial Crisis Inquiry Commission, which are reviewing the use of taxpayer funds in financial bailouts. Grassley, a senator from Iowa and the ranking Republican on the Senate Finance Committee, released two documents July 23. He got the records after saying the firm could be subpoenaed for the information. One list shows the 148 different credit-default-swap positions that Goldman Sachs had on AIG, essentially bets on the insurer’s survival, as of September 15, 2008.
