In order to implode and cost taxpayers $180 billion, AIG first had to make — and lose — positively massive market bets with other Wall Street firms.
It will come as a surprise to no one that the firm on the other side of many of those lost bets was Goldman Sachs.
In fact, as Gretchen Morgenson and Louise Story reveal in the NYT, Goldman’s hardball tactics and smart bets bled AIG dry.
But don’t go blaming Goldman. No one forced AIG to do these stupid deals. All Goldman did was stick it to AIG at the negotiating table and then demand that AIG do what it said it was going to do. The only entity responsible for the collapse of AIG was AIG.
One very interesting nugget in this article: As AIG got more and more distressed, Goldman offered to cancel the insurance contracts AIG had written on Goldman’s behalf AND buy the contracts AIG held with other banks at deeply distressed prices. This was presumably before Tim Geithner charged in and paid out those contracts at 100 cents on the dollar.
Although the details of what happened here will have to be fleshed out, it’s conceivable that Goldman’s offer could have significantly reduced the need for government involvement.
In just the year before the A.I.G. bailout, Goldman collected more than $7 billion from A.I.G. And Goldman received billions more after the rescue. Though other banks also benefited, Goldman received more taxpayer money, $12.9 billion, than any other firm.
In addition, according to two people with knowledge of the positions, a portion of the $11 billion in taxpayer money that went to Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman under a deal the two banks had struck.
Goldman stood to gain from the housing market’s implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured. The further mortgage securities’ prices fell, the greater were Goldman’s profits.
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