Goldman Sachs has a $3 billion line of credit out to troubled small-business lender CIT Group. This, of course, has many recalling that Goldman was one of the biggest creditors to AIG, which received an enormous bailout from the federal government. Much of that was passed on directly to creditors such as Goldman, prompting calls that the government was really engaging in a covert bailout of AIG’s creditors.
Goldman said at the time that they had effectively hedged their exposure to AIG or held collateral that made their exposure to AIG minimal. Now they’re saying the same thing about CIT, downplaying any risk to the firm if CIT draws down on its credit line and then goes into bankruptcy.
This should be greeted as good news. It means that Goldman has been acting prudently, reducing the systemic risk from a CIT failure. Unfortunatley, we don’t know how Goldman hedged its CIT exposure, which means we don’t really know where the risk has gone. On the collateral side, this is pretty straight forward. But what other hedges had Goldman taken out?
The most obvious answer is that Goldman has bought credit default swaps to protect against a CIT default. This, however, just means that the risk of the CIT failure has been spread to others. Who are they? What’s their capital position? These questions matter because they will tell us something about who the government is actually protecting if it bails out CIT.
Business Insider Emails & Alerts
Site highlights each day to your inbox.