The Blame Game: Goldman vs. AIG

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

This week, executives from Goldman Sachs (NYSE: GS  ) and AIG (NYSE: AIG  ) appeared before the Financial Crisis Inquiry Commission in hearings to try to determine what, if any, role the investment bank had in the insurer's collapse. Predictably, both sides had differing views on the matter. Surely Goldman is the culprit here -- they're too successful not to be. Think again; the facts tell a different story.

Goldman tops another list
You'll remember that Goldman was AIG's largest counterparty with regard to credit default swaps (CDS) and securities lending transactions (there were other large counterparties -- see table below). Goldman ultimately received $12.9 billion in payments from AIG, sparking a public uproar.

Payments and collateral postings with regard to CDS and securities lending agreements

Goldman Sachs (NYSE: GS  )

$12.9 billion

Societe Generale

$11.9 billion

Deutsche Bank (NYSE: DB  )

$11.8 billion

Barclays (NYSE: BCS  )

$8.5 billion

Merrill Lynch (now part of Bank of America)

$6.8 billion

Bank of America (NYSE: BAC  )

$5.2 billion


$5.0 billion

Source: AIG.

Now I fully expect to get comments to the effect that I am on Goldman's payroll, but I'm unapologetic in thinking that the main villains in this matter were AIG and the New York Federal Reserve, not Goldman Sachs.

These transactions were hedges
First, let's get one thing straight. Critics seem to believe these payments were pure profit that went directly to pay for summer homes in the Hamptons for Goldman employees; however, Goldman was transacting with AIG to hedge the risk from trades with other clients. Those counterparties would need to be paid, too.

Why push for less?
Another point of controversy is that the banks were repaid at full value, but I have seen no one argue that these contracts were not worth 100 cents on the dollar. Why expect Goldman or any other bank to push for anything less than full repayment?

Sure, it may have been entirely legitimate for the New York Fed -- who took over negotiations from AIG -- to try to negotiate a haircut on these payments. But it appears that they did not choose to follow this strategy.

The Fed's failed negotiations
According to a testimony by Goldman CEO Lloyd Blankfein before the same commission on January 13 of this year, the New York Fed contacted a Goldman employee and inquired whether the bank would accept less full value on its contracts with AIG. The employee responded that he was not sufficiently senior to make that decision. The New York Fed did not contact him again, nor did it contact Mr. Blankfein in regard to the matter.

Furthermore, the New York Fed was outmaneuvered by French banks and the French banking regulator into paying 100 cents on the dollar. The French contingent made an audacious argument, claiming that if bank executives accepted less than full payment, they could be held criminally liable in France. Once the New York Fed gave in to the French banks, they decided to treat all of AIG's counterparties in the same manner.

Your turn -- fire away
There are sound reasons to criticize Goldman Sachs, and I have done so in the past, but the AIG fiasco is not one of them. I'm sure many readers will disagree with me -- fire away in the comments box below.

Warren Buffett invested $5 billion in Goldman preferred shares at the height of the crisis, but he wishes he could buy these stocks instead.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 02, 2010, at 5:09 PM, kitikatism wrote:

    I blame the SEC for letting companies trade in synthetic products. The SEC has been asleep at the wheel for a long time now. These products are made from nothing but greed. Might as well bring Enrons great idea of trading weather to reality!

    They need to bring back the uptick rule, do away with synthetic products and ban naked short selling. Any reasoning against any of these stems from nothing but greed.

  • Report this Comment On July 02, 2010, at 8:25 PM, acdcredsox wrote:


  • Report this Comment On July 03, 2010, at 12:25 AM, Starfirenv wrote:

    Hey, I bet that one rec is your own. Stooge.

    " the New York Fed was outmaneuvered by French banks"...

    Oh, Those French are so slick!

    Zero cred.

  • Report this Comment On July 06, 2010, at 8:39 AM, BMFPitt wrote:

    Both get plenty of blame, but who gets more depends on whether or not you believe Goldman and the NY Fed to be distinct entities. Writing naked insurance policies should be criminial, but bailing them out is treason.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1224647, ~/Articles/ArticleHandler.aspx, 10/21/2016 10:03:41 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 47 minutes ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
AIG $60.00 Down -0.07 -0.12%
American Internati… CAPS Rating: ****
BAC $16.67 Up +0.11 +0.66%
Bank of America CAPS Rating: ****
BCS $8.92 Up +0.01 +0.11%
Barclays CAPS Rating: ****
DB $14.31 Down -0.06 -0.42%
Deutsche Bank CAPS Rating: **
GS $174.67 Up +0.16 +0.09%
Goldman Sachs CAPS Rating: ***
UBS $13.67 Up +0.03 +0.22%
UBS AG (USA) CAPS Rating: **