Tuesday, July 14, 2009

Requim for AIG - Props For Goldman

I hope everyone had a chance to read the AIG piece buy Michael Lewis in Vanity Fair.


I have written pretty continuously about AIG and CDS.




It really describes the fact that AIG was the last resort for Wall Street Firms to buy Sub Prime CDS Insurance from, once AIG stopped doing so in 2006-2007 period, AIG thought they had side stepped the entire disaster. But a simple downgrade in their credit rating opened the flood gates for collateral calls, most of which went to Goldman.

Quite simply- Goldman had bought billions in AIG CDS in the 2004 to 2005 time frames. Because quite frankly this was predicated by their expectation that sub prime would blow up. When these vintage year CDS backed by sup prime loans came under pressure, AIG originally balked at paying collateral as their credit rating was still AAA, that all changed when that rating was lowered. AIG had to file in regulatory filings what their true exposure was.

Going back to AIG CDS levels, between Oct 2004 and Dec 2006, AIG 5 year CDS traded between 4 and 50 basis points, not a huge deal.

5 yr CDS closed in late March 2009 at a comparable running spread equivalent to about 1,942 Bps.

So purchasing $10 billion in CDS at a hypo average price of say 15 bps, and selling that would imply that at late March price of AIG 5 yr CDS price of 1,942 bps, Goldman made roughly $6 billion in profit from shorting AIG alone!

This would more than make up for the $2.5 billion collateral shortfall (out of $4.4 billion total) GS claims AIG had with Goldman Sachs... If AIG had filed for bankruptcy with no bailout the P&L would have likely hit $6+ billion for GS.

One can say that GS was praying that AIG fail. GS wins either way.This does maybe answer some of the questions of why GS allegedly pulled AIG's collateral and started the avalanche that lead to its bailout. One little note - If AIG had filed for bankruptcy, The entire CDS Market would have done a Titanic, and no likely CDS contracts would have been able to settle, that was the reason for creating "Zombie Institutions" like Citigroup and AIG.

And with all of this mass confusion, the government felt the need to pay GS collateral of about $6 Billion anyway.


  1. Does GS really care? Is there a conscience anywhere inside those walls? Kill the golden goose, take whats owed to you, help orchestrate the demise of your competitors, move on to the next cash cow while your alum's "help" the gov't figure out what went wrong. There's a RICO case in here somewhere.

  2. You forgot...The Prosecutor is a former Goldman Compliance Officer.

  3. You forgot...The Prosecutor is a former Goldman Compliance Officer.