Buy CDS From An Insurer That Wasn't AIG? You Got 13 Cents On The Dollar

Lloyd Blankfein Goldman Sachs

The $180 billion AIG bailout was so huge that it’s easy to forget the zombie insurer was only the Wal-Mart of the everyday-low-priced CDS market.

But there was a Target and a Costco of the CDS business too. And now we know how much their customers made out: 13 cents for every dollar in bond “insurance” purchased.

Those smaller players were called “monolines,” and traditionally their primary business was insuring municipal bonds in deals that enabled cities, states and public works program to borrow money more cheaply.

But during the mortgage boom the monolines followed AIG Financial Products into the trickier business of issuing credit insurance on dubiously AA-rated CDO squareds of Alt-A Power ARMs and the like, which led to their own AIG-esque death spirals of ratings downgrade-triggered collateral calls beginning early last year.

But if it was easy enough to copy AIG’s business model, it was impossible for the monolines to achieve the commitment to life support accorded to Goldman Sachs’ biggest creditor, according to the most recent instalment of the Goldman hate-parade in this week’s New York.

The collapse of the monolines has been the subject of legal wrangling at least since New York Insurance Commissioner Eric Dinallo approved MBIA’s plan to split in two. 18 banks that bought MBIA mortgage CDS from MBIA have sued the company, alleging the split to be fraudulent–but Goldman is nowhere to be found. 

The New York story, which may be the most damning Goldman piece yet, is the first we’ve seen to put an actual dollar amount on the terms of the monoline CDS payouts.  As for AIG, Goldman’s primary counterparty, an “ashen” and “jumpy” Lloyd Blankfein was apparently the only bank chief to show up to a September 15 New York Fed meeting on the future of the company; Goldman apparently sent three times the number of executives as any of the other banks.

But don’t say Blankfein never showed love for his fellow banker: Deutsche Bank and Jerome Kerviel’s old employer Société Générale both made out almost as well as he did in the AIG bailout.

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