When American International Group failed, the financial system de-stabilized and some firms were thrust into a panic amid the dust. Now, the picture becomes more clear on exposures, and protection plans that were in place. Recently released Goldman Sachs Group Inc. (NYSE: GS) documents show that the bank depended on Citigroup Inc. (NYSE: C) and Lehman Brothers Holdings Inc. (NYSE: LEH) for protection against a failure of AIG.
As of September 15, 2008, Goldman Sachs was the largest provider of credit defaults swaps on AIG, while Citigroup ultimately received the biggest government bailout of any U.S. bank. Credit-default swaps essentially act like insurance contracts, paying the owner in the event of a default. Throughout the turmoil, Goldman has argued that it did not depend on the U.S. government’s rescue of AIG, because the bank had collateral and credit default swaps to protect itself. However, as Joshua Rosner notes, an analyst at Graham Fisher & Co., the list of counter parties indicates Goldman may have had difficulty collecting on those swaps.
Rosner commented, “Clearly Goldman’s calculation was more tied to their expectation of the political dynamics of forcing moral hazard than the fundamental realities of the financial strength of counter parties.” The relationship between Goldman and AIG has been heavily scrutinized since March 2009, when it was divulged the firm received $8.1 billion after the insurer’s 2008 bailout. Darrell Issa, (R-California) called the AIG rescue a “backdoor bailout” of Goldman Sachs, as well as the other banks that got 100 percent 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 list of counter parties that CEO Lloyd Blankfein turned over to the Congressional Oversight Panel shows the 148 different credit-default-swap positions that Goldman Sachs had on AIG, essentially bets on the insurer’s survival, as of Sept. 15, 2008. In addition to Citi and Lehman, firms around the globe would have owed Goldman, including JPMorgan Chase (NYSE: JPM), Credit Suisse (NYSE: CS) and others.
As time passes, the events of the Fall of 2008 come into focus, leaving winners and losers more clearly identifiable. In the AIG bailout case, it seems Goldman may have been the biggest winner of all, as they did not have to write down any losses, or fail to collect on any swaps that could not be covered.
