Today the New York Times ran a story, "The Guys From Government Sach's". The article mostly deals with the disproportionate amount of Goldman guys running key parts of public monetary and fiscal policy. Some people get all bent out of shape about it, perhaps more now than ever as government has taken an active roll in deciding the life and death of our financial firms. If you're from Lehman Brothers you have a legitimate beef in asking why your firm was allowed to die while Merrill Lynch, Morgan Stanley and Goldman Sachs were allowed to live. One can defintely argue that Merrill was a bigger disaster than Lehman. This is a relative statement; just like saying Hiroshima was worse than Nagasaki. Merrill had a former Goldman CEO, John Thain running the show, while Lehman had Dick Fuld. Personally, I don't think Thain's Goldman pedigree had anything to do with that decision. Rather I believe Ken Lewis of Bank of America was told, "You can pick choice "A" (Lehman Brothers) or choice "B" (Merrill Lynch) and Lewis picked "B". Lehman guys claim that it was dirty pool to allow Goldman and Morgan Stanley to get bank holding company charters AFTER Lehman was rebuffed and left to die. Unfortunately, Lehman's problem was a solvency and credibility issue as much as it was a liquidity issue. Morgan Stanley has the exact same problem now WITH their bank charter. What saves Stanley is that after letting Lehman go down, Treasury realized that they can't let anymore of these guys go down. That is the only reason that Stanley is alive today. So what about Goldman?
As you know, we have had a serious issue with what exactly went down with the Fed's saving of AIG and that company's involvement with Goldman Sachs. Richie and I both wrote pieces shortly after the AIG rescue, where the Fed lent AIG $85 billion (now $122 billion). AIG's largest trading partner was Goldman Sachs. That is a fact. We believe that Goldman had bought default protection on $ billions of AAA CDOs via Credit Default Swaps (CDS), from AIG. AIG had an immediate need for $ billions of cash when they were downgraded by the rating companies in the second week of September. They needed the cash, or cash-like equivalents to post as collateral with their CDS counterparties. AIG had a notional CDS book of over $400 billion. Goldman Sachs was their biggest counterparty. When AIG was downgraded they had to come up with $20 billion in additional collateral to post with Goldman. If they couldn't come up with the cash, which they couldn't, they faced certain bankruptcy. Bankruptcy would mean Goldman getting on line with the rest of AIG's creditors to collect on their CDS. Suddenly, Goldman would be holding CDOs that had marked down significantly, with the corresponding hedges (the CDS) held up in bankruptcy proceedings. This could have crippled Goldman Sachs. Hence, the Fed's bailout of AIG.
Could the system handle the downfall of Goldman Sachs? Absolutely not. Did saving AIG potentially save Goldman? I think so. Goldman however, denies that it was ever in trouble in the event AIG went down. According to the NYT article, "Goldman has said repeatedly that its exposure to AIG was 'immaterial' and that the $20 billion was hedged so completely that it would have insulated the firm from significant losses." Really? I wonder how one hedges CDS exposure with a counterparty so "completely"? Another $40 billion of CDS on AIG perhaps? I wonder who the counterparties were on those? If you read our "Goldman Superheroes" maybe they really did do a deal with the Martians!
The reason I believe Goldman is so "completely" hedged is because their counterparty has become Uncle Sam! It is real easy way to find out if I'm wrong, right? Nearly the entire $85 billion line the Fed gave AIG has been drawn down. Is it unreasonable as taxpayers to ask where our money went? If Goldman was completely hedged then there would have been no need for ANY significant money to have gone to Goldman. Maybe Goldman did have $ billions of CDS protection on AIG. Can't Goldman clear this up by giving us their positions and showing that these counterparties were so solid that they could have paid Goldman out if AIG went down? I think we have a right to know the answers to these questions. I am all for doing WHATEVER it takes to fix our financial system. However, we cannot build anew on top of a bed of lies. I want to be proven wrong.
Eric, that is very interesting. I would like to see you discuss this w/ your panel tomorrow on the strategy room where I watch you and rich everyday day on my computer at work!
Posted by: mike | October 19, 2008 at 09:04 PM