Goldman-Sachs Posts $1.8 Billion 1Q Profit, Looks to Sell Stock, Repay TARP

Additionally, 13 billion "looted" from AIG/taxpayers is a complicated issue that is being completely misinterpreted. As with a lot of transactions that involve questionable counterparties, they took collateral. So as the insurance contracts started to go into their favor, they asked for collateral to feel safer that they would be paid off even if they went bankrupt. The idea goes like, insurance is looking like it is in my favor, pledge me an asset so that I know there is a good chance I will be made whole on this. So in this case, those assets were treasury bills.

As they have stated many times, their contracts with AIG were largey collateralized. This means if they were owed 13 billion, then AIG pledged, for instance, something along the lines of 8-10 billion in treasury securities. Had AIG gone bankrupt and not been saved by the US taxpayer, they keep the treasury securities and lose a few billion, but certainly not the full amount like everyone thinks. If they are saved, which they were, then they give back the collateral and take in the cash.

What they did was a textbook case of how to protect yourself against a counterparty going bankrupt. It will be used as a case study one day of how to exercise prudence.

Direct from the conference call that explained their exposure:

"When AIG was rescued, Goldman Sachs had $10 billion of exposure to the insurance company that was offset with $7.5 billion of collateral as well as credit-default swaps that would have paid off in the event of an AIG bankruptcy, Viniar said on the March 20 call."

So Goldman had $10 billion of insurance with AIG. As the insurance started going in their favor, as is common banking practice, they demanded collateral be pledged (treasury securities) that they could seize in the event of bankrupty. This was 7.5 billion worth of collateral in extremely safe treasury bonds. So in the event of default, Goldman would have kept the securities in lieu of getting the cash settlement. Because they did not default, AIG had the securities returned to them and they paid out cash instead (this is the 10 billion number that "went from tax payers to goldman" that everyone keeps saying). The remainder 2.5 billion was the disagreement between the parties as to where the insurance should actually be marked. So to be prudent, they bought CDS protection that would pay 2.5 billion in the event of default.

What is the problem here?

R:

If someone has pledged the majority of what is owed to me in collateral, it is wrong for people to imply that the 10 billion flowing through the government was just some windfall flowthrough. They got what they were owed, and the taxpayers got their 7.5 billion in collateral back. If the taxpayers did not pay the 10 billion, then they wouldn't have gotten 7.5 billion worth in treasuries returned to them--Goldman would have had the right to keep it, and this is the whole point of having collateral pledged to them in the first place.

> Shouldn't the insurer be paying off, if solvent, and not the US govt? And, if the insurer is not solvent, why shouldn't Goldman take the hit?

Are you talking about the CDS insurer? The insurance only needs to be paid if AIG defaults. If AIG defaults then the US govt doesn't have to pay anything, the insurer does. Since AIG was bailed out, no credit event was triggered and the CDS insurance becomes worthless. The upside is of course they actually get their money. In either case, whether AIG was allowed to fail or not, they would have been made whole.

Goldman was not treated differently in this case. Many other banks were treated the exact same way. Yes, Goldman was paid out in their insurance. So is any individual who took out insurance with AIG--they will actually get paid what is owed to them as well now.