The Financial Times reports tonight that Goldman has apparently won part of the mandate to manage the initial public offering of AIG’s Asian life insurance unit — AIA — in Hong Kong. The offering is expected to be for $10 billion or more, and Goldman will be one of seven investment banks to sell it.
As far as I know, Goldman didn’t do anything improper to get this deal. It’s a big IPO, Goldman is a top player in the league tables and this is one of its core competencies.
But still. Goldman Sachs, more than any other firm on Wall Street, has managed to profit on almost every angle of the biggest single trainwreck (AIG) in the biggest financial crisis this country has ever seen.
Goldman, for all its blue-blood highmindedness, was an enthusiastic bundler and securitizer of godawful subprime mortgages from the most notorious lenders in the country — Fremont, New Century, just about any lender that wasn’t totally controlled by one of Goldman’s rivals on Wall Street.
Goldman wasn’t alone, of course. It probably wasn’t the worst. But what set it apart was its decision around late 2006 to start hedging its exposure in the subprime market. Even as it was selling subprime mortgage-backed securities, it was ramping up its bet on a downturn by loading up on credit-default swaps — insurance against the falling value of subprime securities. A lot of that protection, of course, came from AIG.
As Gretchen Morgenson and Louise Story recounted in the New York Times, Goldman began pushing AIG hard by early 2008 to post big margin payments, arguing that the value of the securities had fallen sharply.
When AIG became completely insolvent in September 2008, mainly because of its huge obligations to make good on all its mortgage-related credit-default swaps, the Federal Reserve and Treasury had to provide $180 billion in loans, credit lines and asset purchases to keep AIG from collapsing and causing a complete meltdown of the entire financial system.
In November, Fed officials in Washington and New York had to put up $62 billion to buy up collateralized debt obligations that AIG had insured. These CDO’s amounted to the second stage of Wall Street’s alchemy for turning junk mortgages into AAA securities. The so-called “mezzanine CDO’s” pooled the riskiest tranches of securitizations that were lready based on the riskiest mortgages ever made in U.S. history.
Goldman held $12 billion worth of those CDO’s. And in an intensely controversial decision, Fed officials ultimately paid Goldman and the other big banks 100 cents on the dollar for their CDO’s.
All this was happening, of course, at the same time that Goldman was being propped up with TARP money from the Treasury, staggering volumes of federal guarantees under the FDIC’s Temporarly Liquidity Guaranty Program and access to dirt-cheap financing from the Fed.
Goldman earned record profit in 2009, paid out almost as much in bonuses as it did in 2007, and is now stronger than ever. Oh yes, it’s also now a bank holding company and thus permanently eligible to borrow directly from the Fed’s discount window if it gets in trouble again.
I am not one of those who argue that Goldman Sachs caused the collapse of AIG. But this just seems like playing too many angles at the same time.
Goldman executives recognized that the subprime market was in big trouble, but managed to limit their risk by shorting the market even as they stayed in the game.
Goldman was a part of the mortgage melee, and its aggressive stance toward AIG almost certainly made the insurance company’s problems even worse. Somehow, Goldman managed to get billions back from AIG (make that from taxpayers) at the same time that it was getting all manner of direct and indirect help from the government.
Now AIG is a ward of the state and trying to sell off many of its most valuable assets in order to repay the federal government. And here is Goldman Sachs, once again poised to earn another healthy commission, this time for helping with AIG’s dismemberment.