The Wall Street Journal reports that Goldman Sachs has offered buy a bundle of risky AIG bonds acquired by the NY Fed in 2008. According to sources, Goldman has offered to buy a third of a pool of mortgages with unpaid principal of $20 billion and valued at 47 cents on the dollar, suggesting a $3 billion bid.
As the WSJ notes, the Fed’s wants to “divest its holdings of crisis-era securities” fairly and “[fetch] the best value for U.S. taxpayers,” and now is an opportune time to do this.
The index tracking the subprime mortgages having risen 10% in the last month.
Goldman’s motivation is simple: they think they bonds will recover in value (full recovery to par would represent a $4 billion gain)
But why would the Fed allow Goldman to do this? Aren’t regulators supposed to be cutting down on risk taking at the largest financial institutions?
In 2008 when the NY Fed bailed out AIG, the result was that Goldman and other AIG counterparties were spared billions of dollars in potential losses. The NY Fed’s action greatly contributed to Goldman’s ability to stay afloat during the financial, despite the firm’s repeated claims to the contrary.
But the Fed was also stuck with billions of dollars of toxic AIG assets.
Now it appears Goldman is being allowed to return the favour and bail out the NY Fed by taking a big chunk of those toxic assets off Fed’s books and onto its own.
In the face of a crackdown on proprietary trading and other types of highly profitable investing, bidding on the AIG bonds and returning the NY Fed’s systemic favour of all favours may be one of the few ways Goldman can super-charge its recently languid performance.