Goldman Played Bigger Role in AIG Trades, WSJ Reports

December 14, 2009

Goldman Sachs Group Inc. played a bigger role in fueling the mortgage bets that crippled American Insurance Group Inc. than has been publicly disclosed, the Wall Street Journal reported Saturday.

An analysis by the paper of AIG’s trades on pools of mortgage debt shows that Goldman was a key player in many, including those involving other banks, the Journal said.

Goldman was one of 16 banks the U.S. government rescued last year after closing out losing trades that AIG had made with the financial firms.

The bank originated or bought protection from AIG on roughly $33 billon of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom.

That was about twice as much as Societe Generale and Merrill Lynch, the firms with the largest exposure to AIG after Goldman, according to an analysis of ratings-firm reports and an internal AIG document, the Journal said.

In one deal Goldman acted as the middleman between AIG and banks, taking on as much as $14 billion in risk of the mortgage-related investments. But Goldman then insured that risk with a single trading partner, AIG, according to the Journal’s analysis and people familiar with the trades.

The trades, mostly booked from 2004 to 2006, yielded less than $50 million in profits for Goldman, the Journal said.

But the trades added risks onto AIG’s books and later came to haunt the insurer and Goldman. The trades also gave Goldman a unique window into AIG’s exposure to losses on securities linked to mortgages.

When the federal government bailed out the insurer, Goldman avoided losses on its trades with AIG covering a total of $22 billion in assets.

A Goldman spokesman told the Journal that until AIG was rescued by the government, the insurer “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,” the Goldman spokesman added.

The Journal said an AIG spokesman declined to comment on the firm’s trades with Goldman.

Recently more clarity has emerged over the roles that firms such as Goldman played, as complex deals carried out by banks are now being untangled in legal and regulatory inquiries. Last month a government audit of part of the AIG bailout described Goldman’s middleman role, the Journal said.

The size of the government’s bailout of Goldman and the other AIG counter-parties caused a firestorm of protest against the U.S. Treasury and Federal Reserve in Congress.

Henry Paulson, the U.S. Treasury secretary as the financial crisis boiled last year, was a former Goldman chief executive.

The U.S. House of Representatives on Friday passed a sweeping Wall Street reform bill that would rewrite rules for financial markets like mortgage-backed securities traded by AIG and Goldman and restrict the operations of such big firms in future.

(Reporting by Christine Stebbins; editing by Mohammad Zargham)

Topics USA AIG

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