Goldman Sachs Drove Most Costly AIG Bargain, Document Shows

Jan. 26 (Bloomberg) -- Goldman Sachs Group Inc. was the most aggressive bank counterparty to American International Group Inc. before its bailout, demanding more collateral while assigning lower values to real estate assets backed by the insurer, documents obtained by lawmakers show.

A month before the September 2008 rescue, Goldman Sachs approached AIG about tearing up contracts protecting the bank against losses on collateralized debt obligations, or holdings backed by mortgages, according to a BlackRock Inc. presentation dated Nov. 5, 2008. Goldman Sachs was the only counterparty willing to cancel the credit-default swaps and bear the risk of further CDO losses, provided that AIG make payments based on the bank’s larger-than-average estimate of market declines.

“Goldman Sachs is the least risk-averse counterparty,” according to the presentation, which was prepared by the asset manager for AIG and later given to the Federal Reserve Bank of New York. The firm is “the only counterparty willing to tear up CDS with AIG at agreed-upon prices and retain CDO exposure.” The document was obtained by the Congressional panel scheduled to hold a hearing tomorrow on AIG’s $182.3 billion bailout.

The presentation offers the clearest picture yet of the negotiations between AIG and its counterparties before a rescue that fully reimbursed banks including Goldman Sachs for $62.1 billion in CDOs. The BlackRock materials indicate that Goldman Sachs, which has been pilloried by lawmakers for its dealings with AIG, may have been betting that the securities would rebound from the values it assigned to them.

‘Many Discussions’

“We had always made it clear that we were prepared to tear up contracts, it just had to be at the right price,” Lucas van Praag, a spokesman for Goldman Sachs in New York, said in an interview. “We’d had many discussions over a long period of time about doing it, I don’t know why BlackRock chose August” as a specific example.

Goldman Sachs, which created securities tied to home loans and serviced debt on residential properties, “would have had a very decent view of what the underlying mortgage bonds were and what they thought they were worth,” said Thomas J. Adams, a partner at law firm at Paykin Krieg & Adams LLP in New York.

The Treasury Department has said that Maiden Lane III, the taxpayer-backed vehicle that bought banks’ CDOs starting in November 2008, will probably be profitable because New York- based AIG has already taken most of the losses on the assets. Maiden Lane III assets surged 14 percent to $23.5 billion in the six months ended Sept. 30, after falling in the first quarter of 2009, according to data from the regulator.

‘Fairly Realistic’

“Goldman was not Pollyanna on what the underlying mortgage bonds were worth,” said Adams, who was a senior managing director in charge of the CDO business at FGIC Corp. from 2006 to 2008. “They were fairly realistic.”

BlackRock also anticipated the assets would have more value than Goldman Sachs assigned to them at the time. BlackRock expected “the portfolio to perform better than values implied by requested collateral,” its 44-page document says.

The BlackRock presentation, which reflects the status of the portfolios of assets that AIG was insuring for the banks as of Oct. 24, 2008, was among 250,000 pages provided by the New York Fed after a subpoena was issued by the House Committee on Oversight and Government Reform. The document is titled “Maiden Lane III Counterparty Briefers.”

The House committee, led by Representative Edolphus Towns, a New York Democrat, is set to hold a hearing tomorrow on whether the Fed acted appropriately. Treasury Secretary Timothy F. Geithner, who led the New York Fed during AIG’s bailout, is scheduled to testify.

No Haircut

The New York Fed used the BlackRock document to inform negotiations with AIG’s counterparties, according to Deborah Kilroe, a spokeswoman for the regulator.

The BlackRock “analysis was consistent with our efforts to secure concessions from AIG’s counterparties, which, as has been widely reported, they were ultimately unwilling to do,” she said.

BlackRock indicated that Goldman Sachs might be willing to accept less money than it was entitled to under its AIG contracts because the bank hadn’t received all of the collateral it requested.

Goldman Sachs’s van Praag said the firm was never open to anything less than full repayment and that it never indicated otherwise to BlackRock. Bobbie Collins, a spokeswoman for BlackRock, declined to comment on the document, as did Mark Herr, a spokesman for AIG.

‘Backdoor Bailout’

“We categorically never had discussions with BlackRock about making concessions or taking a haircut,” van Praag said.

Lawmakers have since said the taxpayer-funded payments from Maiden Lane III amounted to a “backdoor bailout” because the banks were fully reimbursed for the CDOs, rather than accepting a discounted price based on plummeting asset values. AIG’S former chief executive officer, Maurice “Hank” Greenberg, has gone as far as to publicly blame Goldman Sachs for AIG’s woes.

Goldman Sachs and AIG disagreed on the value of the CDOs that AIG’s swaps insured. Goldman Sachs’s prices were automatically marked up 12 percent to determine how much collateral AIG needed to post, the report shows.

“Because Goldman prices have been consistently lower than third-party prices, Goldman and AIG have negotiated a collateral posting protocol in which Goldman’s prices are given a 12 percent positive haircut for collateral posting,” the document says.

Collateral Damage

AIG posted about $6 billion in collateral to Goldman Sachs on the contracts before the bailout, according to the BlackRock document, a third of the sum that the insurer turned over to banks. Goldman Sachs’s bets accounted for about 22 percent of the assets insured by AIG through the swaps.

Goldman Sachs, the most profitable securities firm in Wall Street history, was allowed to keep collateral, including $2.5 billion posted after the bailout, and given $5.6 billion from Maiden Lane III in exchange for the CDOs in the deal to retire the swaps.

Goldman Sachs’s portfolio was expected to experience larger losses than the overall AIG portfolio because of so-called Alt-A residential mortgage-backed securities, BlackRock says in the document. While 38 percent of the assets covered by AIG’s agreement with Goldman Sachs were rated AAA, 25 percent were below investment grade, the document says.

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net

To contact the editors responsible for this story: Alec McCabe at amccabe@bloomberg.net; Dan Kraut at dkraut2@bloomberg.net.