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Explain yourself, demanded an angry public, and Goldman Sachs responded. Chief financial officer David Viniar on Friday answered reporters’ questions about the bank’s relationship with AIG – namely why Goldman claims it protected itself against the insurer’s possible failure and how it then ended pocketing several billion dollars of AIG bail-out funds.
To recap, when AIG was taken over in September, Goldman had claimed $7.5bn of collateral against insurance written by AIG on a $20bn portfolio of debt securities. It topped that up with $2.5bn in hedges (predominantly credit derivatives written on AIG) because Goldman believed the securities’ value was lower than AIG did (Goldman was right). Goldman received a further $2.5bn of collateral by the end of last year. The Federal Reserve handed it another $5.6bn to buy up the underlying AIG-insured securities for a bail-out vehicle, Maiden Lane III. Goldman continues to collect collateral on about $6bn of securities that could not be thrown into the bail-out vehicle.
The size of Goldman’s exposure is unsurprising. After all, Goldman is a massive trading house and AIG the world’s largest insurer. These types of linkages were why AIG was saved. Of course, it is easy to understand why US taxpayers are uneasy about funnelling federal dollars through AIG to banks. Taxpayers might rightly ask why there was no discussion about banks taking some pain by selling assets into ML III at a discount. But that is a question for the authorities, not Goldman, which had its own investors to think about (among them, in circular fashion, the US taxpayer).
As a relative success story, it is worrying that Goldman felt obliged to put on a public relations dog and pony show to defuse the furore over AIG. Public outrage over bonuses and bail-outs can become self-defeating if it distracts executives and tramples staff morale. It also risks rendering less effective government’s proposed cures. Damaging the banks that intervention was designed to protect means cutting off the system’s nose to spite its face. Put down the knife.
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