Prelude to a Panic


After 10 straight days of mortgage portfolio losses, an internal debate breaks out over whether to short the mortgage market. The firm decrees that traders should "get closer to home," meaning neither short nor long, but neutral.

JUNE 2007

Bear Stearns hedge funds invested in subprime mortgages show signs of distress; both ultimately fail.

JULY 2007

Mortgages underpinning Goldman's securities begin to decline, triggering collateral calls to AIG, which had written $20 billion of credit protection.


France's BNP Paribas freezes three funds because it's unable to value subprime mortgage assets.


As stock market zooms upward, mortgage derivatives market freezes because of subprime default wave. Goldman ups its collateral calls and AIG starts to push back. Ben Bernanke's Fed begins to cut interest rates.


Stock market hits all-time high. In Britain, subprime lender Northern Rock is near collapse. Citigroup begins a string of write-downs on its subprime mortgages. Treasury Secretary Henry Paulson seeks "private sector alliance" on mortgages but initiative fails.


Mortgage securities are all but illiquid. Goldman tells AIG it must rely on Goldman's "marks," or valuations for when collateral is due. Other banks' prices are higher but they aren't "actionable," meaning no one would sell the securities at that level.


Goldman informs its auditor, PricewaterhouseCoopers, also AIG's auditor, about the collateral dispute. AIG loses the battle when PwC finds that AIG has understated mortgage derivative losses and says the insurer has a "material weakness" in its accounting.

MARCH 2008

By now, AIG has paid Goldman $7.5 billion in collateral but disputes an additional $2.5 billion. Goldman buys insurance on that $2.5 billion with other institutions to cover all its AIG exposure.

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