As Matt Taibbi explains in his excellent Rolling Stone piece on AIG:
In theory, at least, there’s nothing wrong with buying a CDS [Credit Default Swap] to insure your investments. Investors paid a premium to AIGFP, and in return the company promised to pick up the tab if the mortgage-backed CDOs [Collateralized-Debt Obligations] went bust.
Unfortunately for AIG, lots and lots of CDO’s went bust and they had to pay out more in insurance claims than their entire company was worth. And, who were the customers for this insurance?
Goldman Sachs, it turns out, was Cassano’s [AIGFP’s] biggest customer, with $20 billion of exposure in Cassano’s CDS book. Which might explain why Goldman chief Lloyd Blankfein was in the room with ex-Goldmanite Hank Paulson that weekend of September 13th [2008], when the federal government was supposedly bailing out AIG.
When asked why Blankfein was there, one of the government officials who was in the meeting shrugs. “One might say that it’s because Goldman had so much exposure to AIGFP’s portfolio,” he says. “You’ll never prove that, but one might suppose.”
Market analyst Eric Salzman is more blunt. “If AIG went down,” he says, “there was a good chance Goldman would not be able to collect.” The AIG bailout, in effect, was Goldman bailing out Goldman.
This is a point also mentioned by Frank Rich today.
[AIG] has, in essence, been laundering its $170 billion in taxpayers’ money by paying off its reckless partners in gambling and greed, from Goldman Sachs and Citigroup on Wall Street to Société Générale and Deutsche Bank abroad.
This analysis is lazy but it feels good so everyone is repeating it. Let’s get a couple of facts straight upfront. The reason that AIG went broke was because they had to pay out too many insurance claims at the same time and they didn’t have the capital to meet those obligations. The reason they received a massive amount of TARP-money was so they could pay their claims rather than defaulting on them and causing a massive ripple effect across the economy as company after company discovered that their insurance was worthless and they, too, were broke (or close to it). The entire point of bailing out AIG was so they could pay their biggest customer, Goldman Sachs, and everyone else they sold CDS’s to.
You can call it money laundering like Frank Rich or call it, like Taibbi, “transforming the government into a giant bureaucracy of entitled assholedom.” But, either way, it’s not some giant betrayal for AIG to take TARP money and use it to pay off its claims. What the hell did anyone think they were going to do with the money?
Now, the standard rebuttal to this is ‘why should the taxpayer make Goldman Sachs whole on their bad bets?’ We don’t ordinarily criticize people for betting that their insurer won’t go completely belly up and default on paying their claims. Given the situation we find ourselves in, it might have made sense to give Goldman Sachs a haircut…maybe pay them something less than the full insured amount? But the principle remains the same (even when TARP money went to foreign firms like Société Générale and Deutsche Bank). AIG owed people money. A decision was made that it would cause more problems than it would solve to let all those people go unpaid. That is why AIG was bailed out even though they are not a bank.
I do not intend to defend the actions of AIG or Goldman Sachs by writing this. I could write a long, ranting essay about all the reasons the top executives at those companies should be castrated and boiled in tar. I’m just really tired of reading bogus populist diatribes about the wrong things.
