Monday, March 16, 2009

The Goldman infallibility myth

AIG - the monstrously reckless US insurance and financial group - last night published a list of the counterparties" that benefited from the $85bn emergency loan it received in September from the US central bank, the Federal Reserve. This disclosure of which banks were on the other end of its complicated financial deals came after weeks of pressure from Congress. And it's a remarkable event: such information is typically cloaked in secrecy.

What it shows is why the US authorities felt they had to rescue AIG, while almost simultaneously Lehman to collapse. If AIG had collapsed into bankruptcy, the losses for some of the world's biggest and most important banks would have been life-threatening for them and arguably lethal for the financial system as a whole.

Now, the name that leaps out for me as a leading beneficiary of the AIG bailout is Goldman Sachs. Between 16 September and 31 December last year, Goldman received $2.6bn in collateral from AIG Financial Products which in turn had been provided by the Federal Reserve on credit default swaps (these are a kind of insurance against borrowers defaulting on loans, which are frequently used as a way of speculating on the health of businesses or other creditors).

There were subsequent payments to Goldman of $5.6bn, to purchase from it the securities underlying certain credit default swap contracts.

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