Goldman Sachs Relied on Citigroup, Lehman for AIG Protection

The largest payments on the list were to European banks
Senator Charles Grassley, a Republican from Iowa. Photographer: Andrew Harrer/Bloomberg

Goldman Sachs Group Inc. documents show that it depended on banks including Citigroup Inc. and Lehman Brothers Holdings Inc. for protection against a failure of American International Group Inc.

Citigroup, which received the biggest government bailout of any U.S. bank, was Goldman Sachs’s largest provider of credit-default swaps on AIG as of Sept. 15, 2008, according to documents released by Senator Charles Grassley. Lehman Brothers, which declared bankruptcy that same day, is listed as fifth-biggest. Credit-default swaps act like insurance contracts, paying the owner in the event of a default.

Goldman Sachs, the most profitable securities firm in Wall Street history, has argued that it didn’t depend on the U.S. government’s $182.3 billion rescue of AIG because the investment bank had collateral and credit-default swaps to protect itself. Joshua Rosner, an analyst at research firm Graham Fisher & Co. in New York, said the list of counterparties indicates that Goldman Sachs may have had difficulty collecting on those swaps.

“Clearly Goldman’s calculation was more tied to their expectation of the political dynamics of forcing moral hazard than the fundamental realities of the financial strength of counterparties,” Rosner said. Moral hazard is created when government bailouts are perceived to reward risky activity.

Goldman Sachs’s relationship with AIG has been under scrutiny since AIG revealed in March 2009 that the bank had received $8.1 billion after the insurer’s 2008 bailout. The funds made good on credit-default swaps that AIG had provided to Goldman Sachs on mortgage-linked investments called collateralized debt obligations.

‘Backdoor Bailout’

Lawmakers, including Representative Darrell Issa, the California Republican, have called the AIG rescue a “backdoor bailout” of Goldman Sachs, as well as the other banks that got 100 percent of the money AIG owed them. The government bailout of AIG meant Goldman Sachs never had to collect on credit default swaps it bought to cover a default.

“The financial institutions from whom we purchased protection were required to post collateral to settle their net exposure to us on a daily basis,” Lucas van Praag, a spokesman for New York-based Goldman Sachs, said yesterday. “A default by any particular counterparty would not reduce the effectiveness of a hedge provided by that entity if adequate collateral had already been posted. This was the case with the protection we bought, even during the most stressed periods of the fall of


Bets Against AIG

Goldman Sachs, led by Chief Executive Officer Lloyd Blankfein, 55, turned over a list of counterparties on those swaps to the Congressional Oversight Panel and Financial Crisis Inquiry Commission, which are reviewing the use of taxpayer funds in financial bailouts. Grassley, a senator from Iowa and the ranking Republican on the Senate Finance Committee, released two documents July 23. He got the records after saying the firm could be subpoenaed for the information

One list shows the 148 different credit-default-swap positions that Goldman Sachs had on AIG, essentially bets on the insurer’s survival, as of Sept. 15, 2008.

The list shows Goldman Sachs stood to collect about $1.7 billion if AIG had gone bankrupt and all of the counterparties had made good on their promises.

“I don’t know anyone who kept hearing Goldman’s claims that they were hedged to an AIG collapse and didn’t assume that they had a lot of protection from people who themselves would be at risk of insolvency,” said Raj Date, executive director for the New York-based Cambridge Winter Inc. center for financial institutions policy and a former Deutsche Bank AG executive.

Zurich to Singapore

In addition to Citigroup and Lehman Brothers, the top counterparties included divisions of Zurich-based Credit Suisse AG and Swiss Reinsurance Co.; New York-based Morgan Stanley and JPMorgan Chase & Co.; Pacific Investment Management Co. in Newport Beach, California; and Frankfurt-based Deutsche Bank. The Government of Singapore Investment Corp. would also have owed Goldman Sachs $20 million.

The document shows that one division of Citigroup, the U.S. bank 18 percent owned by the U.S. Treasury Department, would have owed Goldman Sachs $402 million if AIG had defaulted, while a Lehman Brothers unit would have owed about $175 million. A London unit of Citigroup would have had a $12.5 million obligation, according to the documents. Partially offsetting that would be $700,000 that Citigroup’s global markets division would have been owed by Goldman Sachs.

“There’s a question about Citigroup’s ability to pay Goldman if AIG failed, given it had major problems,” said Ed Grebeck, CEO of Stamford, Connecticut-based debt-consulting firm Tempus Advisors and an instructor on derivatives at New York University.

Hedge Funds, CDOs

David Viniar, Goldman Sachs’s chief financial officer, said in March 2009 that the company had credit-default swap protection on AIG from “all of the large financial institutions” inside and outside the U.S.

The document shows that Goldman Sachs also would have depended on payments from an assortment of hedge funds and CDO managers such as Alphadyne Asset Management LLC’s International Master Fund, which would have owed Goldman Sachs $27.8 million, and Wicker Park CDO I, Ltd., which would have owed $17.5 million.

“Does this undermine Goldman’s claim that it was ‘fully collateralized and hedged’ with regard to the risk of an AIG default, and thus demonstrate that Goldman did, in fact, receive a direct benefit from the government’s assistance to AIG?” Grassley wrote on his website.

Citigroup spokeswoman Shannon Bell, JPMorgan’s Brian Marchiony, Morgan Stanley’s Mark Lake, Credit Suisse’s Duncan King and Deutsche Bank’s Renee Calabro declined to comment.

Writedowns Possible

The document shows only the “notional” amount of money Goldman Sachs was owed by its counterparties, Cambridge Winter’s Date said. The firm is likely to have written down the value of at least some of the protection, he said.

Goldman Sachs “should have been haircutting the valuation of that protection pretty significantly as the viability of those firms looked more and more suspect,” Date said.

The list also shows companies that would have been owed money by Goldman Sachs on credit-default swaps if AIG had defaulted. They include divisions of London-based HSBC Holdings Plc, Zurich-based UBS AG and hedge funds managed by Och-Ziff Capital Management Group.

A second document shows that the contracts Goldman Sachs had with AIG on collateralized debt obligations, securities made up of pools of mortgage loans, helped offset similar contracts the bank had written on the same CDOs with other parties. In all, the document shows that 32 separate counterparties received a total of about $14.1 billion on the 45 CDOs that were taken over by the Federal Reserve through the Maiden Lane III subsidiary created in late 2008.

European Banks

That includes $9.8 billion described as “mortgage cashflow” and $4.3 billion in payments to buy the bonds that had been insured by AIG for Maiden Lane III. Viniar, 55, said in March 2009 that the firm spent the “vast majority” of $5.6 billion it received to cancel CDS contracts with AIG to buy the cash bonds from counterparties and deliver them to Maiden Lane.

The largest payments on the list were to European banks, led by Frankfurt-based DZ Bank AG, Germany’s biggest cooperative lender, and Madrid-based Banco Santander SA. The list also includes the London branch of Rabobank Nederland NV, Swiss regional bank Zuercher Kantonalbank, and Brussels-based Dexia Bank SA.

Other firms include the Hospitals of Ontario Pension Plan and a GSAM Credit CDO Ltd., a collateralized debt obligation managed by Goldman Sachs Asset Management.

Explanation Sought

“The majority of these beneficiaries appear to be foreign entities,” Grassley wrote in a set of questions directed at Elizabeth Warren, chairman of the Congressional Oversight Panel, and published on his website. “Can you please explain how ensuring that these institutions were paid in full, rather than required to suffer the consequences of the risks that they took, benefited the U.S. taxpayer?”

The list includes only the so-called cash CDOs, or CDOs that are made up of actual loans or bonds, and doesn’t include any synthetic CDOs, which contain derivatives on loans or bonds, that Goldman Sachs insured with AIG.

While U.S. government actions may have benefited some non-U.S. companies, Cambridge Winter’s Date said that it’s also true that bank bailouts by other countries, including Switzerland, Germany and the U.K., helped U.S. investors.

“No one actually knows who’s the beneficiary versus the biggest payer into this global sovereign backstop on the banking system,” Date said. “Maybe U.S. taxpayers ended up worse than others but I don’t know if that’s necessarily true.”

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