WASHINGTON — Reversing its oft- repeated position that it was acting only on behalf of its clients in its exotic dealings with American International Group, Goldman Sachs now says it also used its own money to make secret wagers against the U.S. housing market.
A senior Goldman executive disclosed the “bilateral” wagers on subprime mortgages in an interview with McClatchy Newspapers, marking the first time that the Wall Street titan has conceded that its dealings with troubled insurer AIG went far beyond acting as an “intermediary” responding to its clients’ demands.
The official, whom Goldman made available to McClatchy on the condition he remain anonymous, declined to reveal how much money Goldman reaped from its trades with AIG.
However, the wagers were part of a package of deals that had a face value of $3 billion, and in a recent settlement, AIG agreed to pay Goldman between $1.5 billion and $2 billion. AIG’s losses on those deals, for which Goldman is thought to have paid less than $10 million, were ultimately borne by taxpayers as part of the government’s bailout of the insurer.
Goldman’s proprietary trades with AIG in 2005 and 2006 are among those that many members of Congress sought unsuccessfully to ban during recent negotiations for tougher federal regulation of the financial industry.
A McClatchy examination, including a review of public records and interviews with present and former Wall Street executives, casts doubt on several of Goldman’s claims about its dealings with AIG, which at the time was the world’s largest insurer:
• The latest disclosure undercuts Goldman’s repeated insistence during the past year that it acted merely on behalf of clients when it bought $20 billion in exotic insurance from AIG.
• Although Goldman has steadfastly maintained that it had “no material exposure” to AIG if the insurer had gone bankrupt, in fact the firm could have lost money if the government hadn’t allowed the insurer to pay $92 billion of American taxpayers’ money to U.S. and European financial institutions whose risky business practices helped cause the global financial collapse.
• Goldman took several aggressive steps — including demanding billions in cash collateral — against AIG that suggest to some experts that it had inside information about AIG’s shaky financial condition and therefore an edge over its competitors. While former Bush administration officials said AIG was financially sound and merely faced a cash squeeze at the time of the bailout, McClatchy has reported that the insurer was swamped with massive liabilities and was a candidate for bankruptcy.
A spokesman for Goldman, Michael DuVally, said the firm followed its “standard approach to risk management” in its dealings with AIG.
The relationship between Goldman and AIG has drawn intense scrutiny over the past year because several Goldman alumni held senior Treasury Department jobs when the Bush administration guaranteed as much as $182 billion to bail out AIG, $12.9 billion of which AIG paid to Goldman, the most money it paid any U.S. bank.
Today and Thursday, a congressional panel investigating the causes of the financial crisis plans to question current and former senior Goldman and AIG officials, including Joseph Cassano, the former head of the London-based AIG unit that covered $72 billion in bets against risky home mortgages — wagers that cost U.S. taxpayers tens of billions of dollars when the housing bubble burst.
The proprietary trades at issue were carried out using private contracts known as credit-default swaps, essentially bets on the performance of designated securities and traded in murky, loosely regulated markets with little disclosure about who placed wagers, who won and who lost.
Documents emerging from the AIG bailout and a Senate investigation of Goldman’s secret bets against the housing market while it sold off tens of billions of dollars in mortgage-backed securities — first reported by McClatchy Newspapers in November — have provided a window into some of these dealings.
