AIG and Goldman trade blame for crisis

Goldman Sachs executives responded to allegations that the bank was overly aggressive in seeking collateral from AIG, which was hurtling toward its $180bn government bail-out, noting the insurer had refused to share its valuations of the debt securities at the heart of the companies’ dispute.

Goldman’s relationship with AIG and its alleged role in the insurer’s spectacular collapse has emerged as a flashpoint for regulators and politicians searching for the causes and the villains of the financial crisis.

In testimony before the Financial Crisis Inquiry Commission, Goldman executives disputed that the bank had consistently marked debt securities insured by AIG at artificially low levels and pressed its counterparty for billions of dollars in collateral.

“AIG continued to dispute our marks, but for almost six months, AIG refused to provide Goldman Sachs with its marks on these same positions,” David Lehman, co-head of Goldman’s structured-products group trading desk, said during testimony before the commission.

Mr Lehman reiterated that Goldman had based its marks on similar transactions in the market. And while AIG had consistently argued that the marks were too low, the insurer was never willing to buy back Goldman’s positions at those lower prices.

“We offered, at various times, to transact with AIG, or other interested market participants that AIG was aware of, at prices consistent with those that we were using to calculate the collateral amounts,” Mr Lehman said. “AIG never took us up on this offer.”

At Thursday’s hearing, AIG’s Andrew Forster dismissed Goldman’s offer as unrealistic given the frozen state of the debt markets at the time.

“Their offer was kind,” Mr Forster quipped, “but not one we were ever going to take up.”

Mr Forster also said AIG had lacked an internal pricing system for much of 2007, and could not provide its own accurate marks until December of that year.

The allegations against Goldman resurfaced during Wednesday’s FCIC hearing, when Joseph Cassano, the former AIG executive who ran the financial-products division that housed its credit default swap portfolio, said his team was stunned by the bank’s collateral calls.

In internal e-mails and in interviews with the commission, AIG executives said they suspected Goldman was intentionally mismarking assets to profit from counterparties’ losses.

“We had heard nothing more than rumours,” said Mr Forster, an executive vice-president at the insurer’s financial products division. “We had heard from other dealers that Goldman was very aggressively marked down in many different products.”

David Viniar, Goldman’s finance chief, defended the bank’s marks and calls, pointing out that it had to post collateral to other counterparties in parallel trades.

“For illiquid assets like this, it’s not a science,” Mr Viniar said of the bank’s marks. “There is judgment involved. We use our best estimate of all times for what the market is.”

In September 2008, shortly before the government moved to save AIG from insolvency, Goldman’s exposure to AIG totalled $7.5bn. The bank held $7.5bn in collateral and had covered the rest of its exposures through hedges.