Goldman Sachs Fueled Mortgage Crisis, Nearly Killed AIG
The Wall Street Journal, Goldman Fueled AIG Gambles, reported on Saturday that Goldman Sachs played a big role in creating the financial mess with reckless bets on mortgages which resulted in millions of Americans workers unemployed, families losing their homes to foreclosure, and the U.S. economy into the Great Recession.
“Goldman Sachs Group Inc. played a bigger role than has been publicly disclosed in fueling the mortgage bets that nearly felled American International Group Inc.”
AIG would not exist today if the U.S. government had not stepped in with bailout. On September 16, 2008, the Federal Reserve created an $85 billion credit facility to enable the AIG to meet increased collateral obligations consequent to the credit rating downgrade, in exchange for the issuance of a stock warrant to the Federal Reserve Bank for 79.9% of equity in AIG.
The Federal Reserve and Treasury by May 2009 had increased the potential financial support to AIG, with the support of an investment of as much as $70 billion, a $60 billion credit line and $52.5 billion to buy mortgage-based assets owned or guaranteed by AIG, increasing the total amount available to as much as $182.5 billion.
“Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Société Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman…”
When the federal government bailed out AIG. As AIG’s obligations to counterparties were being unwound, Goldman Sachs was the largest single recipient of this money, $12.9 billion. Société Générale and Deutsche Bank each got $12 billion — Barclays ($8.5 billion), Merrill Lynch ($6.8 billion), including other major U.S. and international financial institutions.
As of April 2009, the federal government loans to AIG totaled over $180 billion.
Goldman Sachs’ defense
Goldman Sachs has maintained that its net exposure to AIG was ‘not material’, and that the firm was protected by hedges — credit default swaps with other counterparties — and $7.5 billion of collateral.
The collateral and credit default swaps would have protected Goldman Sachs from incurring an economic loss in the event of an AIG bankruptcy.
AIG “was viewed as one of the most sophisticated financial counterparties in the world. It wasn’t until the government intervened in September 2008 that the full extent of AIG’s problems became apparent. What is lost in the discussion is that AIG assumed billions of dollars in risk it was unable to manage,” said a Goldman spokesperson.
Inside The Great American Bubble Machine
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“Matt Taibbi on how Goldman Sachs has engineered every major market manipulation since the Great Depression.
The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
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“Goldman’s role in the sweeping global disaster that was the housing bubble is not hard to trace. Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren’t in IPOs but in mortgages.”
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