Goldman-AIG Conflict Reveals Inside Story on Housing Scheme

See NY Times Morgenstern Article on Goldman/AIG COnflict

See GRAPHICAL TIMELINE OF GOLDMAN\’S STRATEGIC \”DEFAULTS\”

Understandably this is a lot to take in so I invite you to pick up a copy of the New York Times, or go to the links above and study this article. First, I have excerpted what I think is important. second you have the whole article.

“Negotiating with Goldman to void the A.I.G. insurance was especially difficult, Federal Reserve Board documents show, because the firm did not own the underlying bonds. As a result, Goldman had little incentive to compromise.”THE MAIN POINT TO KEEP IN MIND, AS IT IS EXPRESSLY STATED IN THE ARTICLE, IS THAT THE INVESTMENT BANKS did not own THE mortgage bonds, THE OBLIGATIONS FROM HOMEOWNERS, THE NOTES SIGNED BY HOMEOWNERS OR THE MORTGAGE DEEDS OR DEEDS OF TRUST. THEY OWNED NOTHING BUT THEY WERE “TRADING” ANYWAY, SCREWING BOTH THE INVESTORS WHO ACTUALLY ADVANCED THE FUNDS FOR THIS SCHEME AND THE HOOMEOWNER WHO ADVANCED THE COLALTERAL OF THEIR HOMES.

This is important because it was the investment banks that initiated the securitization chains. The scheme started with them and was launched with the use of investor money unwittingly advanced into a pool of capital that would be used mostly to fund fees, profits, insurance proceeds, insurance premiums all for the benefit and paid to the investment banks and not the investors.

These were Fees and Relationships that were never disclosed to the homeowner despite very clear laws (Truth in Lending, Deceptive Lending) requiring full Transparency and Disclosure. It is quite clear that undisclosed fees, profits, kickbacks etc. are due back to the homeowner who signed the “loan” papers. I believe there are competing or complimentary claims from both the investors and the borowers against all that bailout and insurance money.

DEFAULT WAS UNNECESSARY: “if mortgage bonds were downgraded, if they were deemed to have lost value, or if A.I.G.’s own credit rating was downgraded. If all of those things happened, A.I.G. would have to make even larger payments.”The principal points you should come away with doubles down on prior comments (including yesterday’s post) about the manipulation or world finance and thus world politics. Until the financial oligopoly is broken apart like it was 100 years ago, we will continue to see nothing but worsening conditions in housing and the economy in general.

The actions of Goldman Sachs clearly show their intent and knowledge that they could cause a collapse and a government bailout. They did it because they could and they are still doing it.

We are now supposed to be lulled by the crisis in the Euro, which is chasing people in the U.S. dollar. Just browse the internet and you will bind blogs like www.baselinescenario.com and hundreds of others that will tell you and show you that this continues to be a banker’s dream scenario. Everytime there is a crisis or a boom the bankers make money on the movement of huge sums of capital. And now, they are controlling the crises and the booms. what could be better?

While the flood of money into the dollar is good for those who worry about inflation, it also guarantees that the housing market will, in real dollars, be down another 10-15% over the next year.

EXCERPTS:

Well before the federal government bailed out A.I.G. in September 2008, Goldman’s demands for billions of dollars from the insurer helped put it in a precarious financial position by bleeding much-needed cash. That ultimately provoked the government to step in.

The S.E.C. wants to know whether any of the demands improperly distressed the mortgage market, according to people briefed on the matter who requested anonymity because the inquiry was intended to be confidential.

$11 billion in taxpayer money that went to Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman under a deal the two banks had struck.

February 7, 2010

Testy Conflict With Goldman Helped Push A.I.G. to Edge

Billions of dollars were at stake when 21 executives of Goldman Sachs and the American International Group convened a conference call on Jan. 28, 2008, to try to resolve a rancorous dispute that had been escalating for months.

A.I.G. had long insured complex mortgage securities owned by Goldman and other firms against possible defaults. With the housing crisis deepening, A.I.G., once the world’s biggest insurer, had already paid Goldman $2 billion to cover losses the bank said it might suffer.

A.I.G. executives wanted some of its money back, insisting that Goldman — like a homeowner overestimating the damages in a storm to get a bigger insurance payment — had inflated the potential losses. Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities.

After more than an hour of debate, the two sides on the call signed off with nothing settled, according to internal A.I.G. documents and an audio recording reviewed by The New York Times.

Behind-the-scenes disputes over huge sums are common in banking, but the standoff between A.I.G. and Goldman would become one of the most momentous in Wall Street history. Well before the federal government bailed out A.I.G. in September 2008, Goldman’s demands for billions of dollars from the insurer helped put it in a precarious financial position by bleeding much-needed cash. That ultimately provoked the government to step in.

With taxpayer assistance to A.I.G. currently totaling $180 billion, regulatory and Congressional scrutiny of Goldman’s role in the insurer’s downfall is increasing. The Securities and Exchange Commission is examining the payment demands that a number of firms — most prominently Goldman — made during 2007 and 2008 as the mortgage market imploded.

The S.E.C. wants to know whether any of the demands improperly distressed the mortgage market, according to people briefed on the matter who requested anonymity because the inquiry was intended to be confidential.

In just the year before the A.I.G. bailout, Goldman collected more than $7 billion from A.I.G. And Goldman received billions more after the rescue. Though other banks also benefited, Goldman received more taxpayer money, $12.9 billion, than any other firm.

In addition, according to two people with knowledge of the positions, a portion of the $11 billion in taxpayer money that went to Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman under a deal the two banks had struck.

Goldman stood to gain from the housing market’s implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured. The further mortgage securities’ prices fell, the greater were Goldman’s profits.

In its dispute with A.I.G., Goldman invariably argued that the securities in dispute were worth less than A.I.G. estimated — and in many cases, less than the prices at which other dealers valued the securities.

The pricing dispute, and Goldman’s bets that the housing market would decline, has left some questioning whether Goldman had other reasons for lowballing the value of the securities that A.I.G. had insured, said Bill Brown, a law professor at Duke University who is a former employee of both Goldman and A.I.G.

The dispute between the two companies, he said, “was the tip of the iceberg of this whole crisis.”

“It’s not just who was right and who was wrong,” Mr. Brown said. “I also want to know their motivations. There could have been an incentive for Goldman to say, ‘A.I.G., you owe me more money.’ ”

Goldman is proud of its reputation for aggressively protecting itself and its shareholders from losses as it did in the dispute with A.I.G.

In March 2009, David A. Viniar, Goldman’s chief financial officer, discussed his firm’s dispute with A.I.G. in a conference call with reporters. “We believed that the value of these positions was lower than they believed,” he said.

Asked by a reporter whether his bank’s persistent payment demands had contributed to A.I.G.’s woes, Mr. Viniar said that Goldman had done nothing wrong and that the firm was merely seeking to enforce its insurance policy with A.I.G. “I don’t think there is any guilt whatsoever,” he concluded.

Lucas van Praag, a Goldman spokesman, reiterated that position. “We requested the collateral we were entitled to under the terms of our agreements,” he said in a written statement, “and the idea that A.I.G. collapsed because of our marks is ridiculous.”

Still, documents show there were unusual aspects to the deals with Goldman. The bank resisted, for example, letting third parties value the securities as its contracts with A.I.G. required. And Goldman based some payment demands on lower-rated bonds that A.I.G.’s insurance did not even cover.

A November 2008 analysis by BlackRock, a leading asset management firm, noted that Goldman’s valuations of the securities that A.I.G. insured were “consistently lower than third-party prices.”

To be sure, many now agree that A.I.G. was reckless during the mortgage mania. The firm, once the world’s largest insurer, had written far more insurance than it could have possibly paid if a national mortgage debacle occurred — as, in fact, it did.

Perhaps the most intriguing aspect of the relationship between Goldman and A.I.G. was that without the insurer to provide credit insurance, the investment bank could not have generated some of its enormous profits betting against the mortgage market. And when that market went south, A.I.G. became its biggest casualty — and Goldman became one of the biggest beneficiaries.

Longstanding Ties

For decades, A.I.G. and Goldman had a deep and mutually beneficial relationship, and at one point in the 1990s, they even considered merging. At around the same time, in 1998, A.I.G. entered a lucrative new business: insuring the least risky portions of corporate loans or other assets that were bundled into securities.

A.I.G.’s financial products unit, led by Joseph J. Cassano, was behind the expansion. To reduce its own risks in the transactions, the company structured deals so that it would not have to make early payments to clients when securities began to sour. That changed around 2003, however, when A.I.G. began insuring portions of subprime mortgage deals. A lawyer for Mr. Cassano said his client would not comment for this article. A.I.G. also declined to comment.

Alan Frost, a managing director in Mr. Cassano’s unit, negotiated scores of mortgage deals around Wall Street that included a complicated sequence of events for when an insurance payment on a distressed asset came due.

The terms, described by several A.I.G. trading partners, stated that A.I.G. would post payments under two or three circumstances: if mortgage bonds were downgraded, if they were deemed to have lost value, or if A.I.G.’s own credit rating was downgraded. If all of those things happened, A.I.G. would have to make even larger payments.

Mr. Frost referred questions to his lawyer, who declined to comment.

Traders loved Mr. Frost’s deals because they would pay out quickly if anything went wrong. Mr. Frost cut many of his deals with two Goldman traders, Jonathan Egol and Ram Sundaram, who had negative views of the housing market. They had made A.I.G. a central part of some of their trading strategies.

Mr. Egol structured a group of deals — known as Abacus — so that Goldman could benefit from a housing collapse. Many of them were actually packages of A.I.G. insurance written against mortgage bonds, indicating that Mr. Egol and Goldman believed that A.I.G. would have to make large payments if the housing market ran aground. About $5.5 billion of Mr. Egol’s deals still sat on A.I.G.’s books when the insurer was bailed out.

“Al probably did not know it, but he was working with the bears of Goldman,” a former Goldman salesman, who requested anonymity so he would not jeopardize his business relationships, said of Mr. Frost. “He was signing A.I.G. up to insure trades made by people with really very negative views” of the housing market.

Mr. Sundaram’s trades represented another large part of Goldman’s business with A.I.G. According to five former Goldman employees, Mr. Sundaram used financing from other banks like Société Générale and Calyon to purchase less risky mortgage securities from competitors like Merrill Lynch and then insure the assets with A.I.G. — helping fatten the mortgage pipeline that would prove so harmful to Wall Street, investors and taxpayers. In October 2008, just after A.I.G. collapsed, Goldman made Mr. Sundaram a partner.

Through Société Générale, Goldman was also able to buy more insurance on mortgage securities from A.I.G., according to a former A.I.G. executive with direct knowledge of the deals. A spokesman for Société Générale declined to comment.

It is unclear how much Goldman bought through the French bank, but A.I.G. documents show that Goldman was involved in pricing half of Société Générale’s $18.6 billion in trades with A.I.G. and that the insurer’s executives believed that Goldman pressed Société Générale to also demand payments.

Goldman’s Tough Terms

In addition to insuring Mr. Sundaram’s and Mr. Egol’s trades with A.I.G., Goldman also negotiated aggressively with A.I.G. — often requiring the insurer to make payments when the value of mortgage bonds fell by just 4 percent. Most other banks dealing with A.I.G. did not receive payments until losses exceeded 8 percent, the insurer’s records show.

Several former Goldman partners said it was not surprising that Goldman sought such tough terms, given the firm’s longstanding focus on risk management.

By July 2007, when Goldman demanded its first payment from A.I.G. — $1.8 billion — the investment bank had already taken trading positions that would pay out if the mortgage market weakened, according to seven former Goldman employees.

Still, Goldman’s initial call surprised A.I.G. officials, according to three A.I.G. employees with direct knowledge of the situation. The insurer put up $450 million on Aug. 10, 2007, to appease Goldman, but A.I.G. remained resistant in the following months and, according to internal messages, was convinced that Goldman was also pushing other trading partners to ask A.I.G. for payments.

On Nov. 1, 2007, for example, an e-mail message from Mr. Cassano, the head of A.I.G. Financial Products, to Elias Habayeb, an A.I.G. accounting executive, said that a payment demand from Société Générale had been “spurred by GS calling them.”

Mr. Habayeb, who testified before Congress last month that the payment demands were a major contributor to A.I.G.’s downfall, declined to be interviewed and referred questions to A.I.G. The insurer also declined to comment for this article. Mr. van Praag, the Goldman spokesman, said Goldman did not push other firms to demand payments from A.I.G.

Later that month, Mr. Cassano noted in another e-mail message that Goldman’s demands for payment were becoming problematic. “The overhang of the margin call from the perceived righteous Goldman Sachs has impacted everyone’s judgment,” he wrote to five employees in his division.

By the end of November 2007, Goldman was holding $2 billion in cash from A.I.G. when the insurer notified Goldman that it was disputing the firm’s calculations and seeking a return of $1.56 billion. Goldman refused, the documents show.

In many of these deals, Goldman was trading for other parties and taking a fee. As the mortgage market declined, Goldman paid some of these parties while waiting for A.I.G. to meet its demands, the Goldman spokesman said. But one reason those parties were owed money on the deals was that Goldman had marked down the securities.

Adding to the pressure on A.I.G., Mr. Viniar, Goldman’s chief financial officer, advised the insurer in the fall of 2007 that because the two companies shared the same auditor, PricewaterhouseCoopers, A.I.G. should accept Goldman’s valuations, according to a person with knowledge of the discussions. Goldman declined to comment on this exchange.

Pricewaterhouse had supported A.I.G.’s approach to valuing the securities throughout 2007, documents show. But at the end of 2007, the auditor began demanding that A.I.G. provide greater disclosure on the risks in the credit insurance it had written. Pricewaterhouse was expressing concern about the dispute.

The insurer disclosed in year-end regulatory filings that its auditor had found a “material weakness” in financial reporting related to valuations of the insurance, a troubling sign for investors.

A spokesman for Pricewaterhouse said the company would not comment on client matters.

Insiders at A.I.G. bridled at Goldman’s insistence that they accept the investment bank’s valuations. “Would we call bond issuers and ask them what the valuation of their bonds was and take that?” asked Robert Lewis, A.I.G.’s chief risk officer, in a message in January 2008. “What am I missing here, so I don’t waste everybody’s time?”

When A.I.G. asked Goldman to submit the dispute to a panel of independent firms, Goldman resisted, internal e-mail messages show. In a March 7, 2008, phone call, Mr. Cassano discussed surveying other dealers to gauge prices with Michael Sherwood, Goldman’s vice chairman. At that time, Goldman calculated that A.I.G. owed it $4.6 billion, on top of the $2 billion already paid. A.I.G. contended it only owed an additional $1.2 billion.

Mr. Sherwood said he did not want to ask other firms to value the securities because “it would be ‘embarrassing’ if we brought the market into our disagreement,” according to an e-mail message from Mr. Cassano that described the call.

The Goldman spokesman disputed this account, saying instead that Goldman was willing to consult third parties but could not agree with A.I.G. on the methodology.

Trouble Grows at A.I.G.

By the spring of 2008, A.I.G.’s dispute with Goldman was just one of its many woes. Mr. Cassano was pushed out in March and the company’s defenses against the growing demand for payments faltered. By the end of August 2008, A.I.G. had posted $19.7 billion in cash to its trading partners, including Goldman, according to financial filings.

Over that summer, A.I.G. had tried, unsuccessfully, to cancel its insurance contracts with the trading partners. But Goldman, according to interviews with former A.I.G. executives, would allow that only if it also got to keep the $7 billion it had already received from A.I.G. Goldman wanted to keep the initial insurance payouts and the securities in order to profit from any future rebound.

In addition to offering to cancel its own contracts, Goldman offered to buy all of the insurance A.I.G. had written for several other banks at severely distressed prices, according to three people briefed on the discussions.

Negotiating with Goldman to void the A.I.G. insurance was especially difficult, Federal Reserve Board documents show, because the firm did not own the underlying bonds. As a result, Goldman had little incentive to compromise.

On Aug. 18, 2008, Goldman’s equity research department published an in-depth report on A.I.G. The analysts advised the firm’s clients to avoid the stock because of a “downward spiral which is likely to ensue as more actual cash losses emanate” from the insurer’s financial products unit.

On the matter of whether A.I.G. could unwind its troublesome insurance on mortgage securities at a discount, the Goldman report noted that if a trading partner “is not in a position of weakness, why would it accept anything less than the full amount of protection for which it had paid?”

A.I.G. shares fell 6 percent the day the report was published. Three weeks later, the United States government agreed to pour billions of dollars in taxpayer money into the insurer to keep it from collapsing.

The government would soon settle the yearlong dispute between Goldman and A.I.G., with Goldman receiving full value for its bets. The federal bailout locked in the paper losses of those deals for A.I.G. The prices on many of those securities have since rebounded.

Alan Feuer contributed reporting.

7 Responses

  1. Ok. I am tired. There is no Law and Order ! We can’t fight when the banks/servicers are fabricating documents. When judges pension funds are buying the homes that the judges foreclose, when instead of giving the banks our money, the government could have bailout US.
    I am calling their associations and letting them know: WE THE CITIZENS WHO PAYED THE TAXES THAT BAILOUT THE BANKS are going to withdraw our money from all accounts we have in all banks, pension funds, investment accounts etc …

  2. http://www.bloomberg.com/apps/news?pid=20601087&sid=aKGZkktzkAlA

    Feb. 10 (Bloomberg) — President Barack Obama said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon or the $9 million issued to Goldman Sachs Group Inc. CEO Lloyd Blankfein, noting that some athletes take home more pay.

    The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

    “I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.”

    Obama sought to combat perceptions that his administration is anti-business and trumpeted the influence corporate leaders have had on his economic policies. He plans to reiterate that message when he speaks to the Business Roundtable, which represents the heads of many of the biggest U.S. companies, on Feb. 24 in Washington.

    Blankfein and Dimon took their bonuses in stock rather than cash, which Obama encouraged other corporations to do. Such compensation, he said, “requires proven performance over a certain period of time as opposed to quarterly earnings.” He said that’s a “fairer way of measuring CEO success and ultimately will make the performance of American businesses better.”

    Record Profits

    His comments come just days after 2009 bonus packages were announced for Dimon and Blankfein. Dimon, 53, led New York-based JPMorgan, the second-biggest U.S. bank, to a profit during each quarter of the financial crisis. Blankfein, 55, was at the helm when New York-based Goldman’s shares doubled last year as profit soared to a record high. The two banks were among those that repaid the bailout money they received from the federal government during the financial crisis.

    Obama said compensation packages over the last decade haven’t always been commensurate with performance and reiterated his call for shareholders to have a say in CEO pay.

    “That serves as a restraint and helps align performance with pay,” he said. “Shareholders oftentimes have not had any significant say in the pay structures for CEOs.”

    Compensation Master

    Blankfein’s payment of 58,381 restricted stock units, valued at $9 million at the Feb. 5 closing price of $154.16, compares with the Wall Street record $67.9 million he received in 2007. Dimon, who got a $27.8 million bonus for 2007 and a $1 million salary for 2008, received restricted stock units and options and no cash bonus for last year.

    Joseph Evangelisti, a spokesman for JPMorgan, said the company would have no comment. Lucas van Praag, a spokesman for Goldman Sachs, also declined to comment.

    The Obama administration named Kenneth Feinberg special master on executive compensation in June after a political outcry over bonuses paid to
    employees at American International Group Inc.

    Feinberg, 64, ordered the seven companies whose pay he supervised, including Citigroup Inc. and Bank of America Corp., to emphasize long-term stock compensation rather than cash payments. Citigroup and Charlotte, North Carolina-based Bank of America repaid their federal bailout funds in December, leaving Feinberg with five companies, including AIG, under his supervision.

    Heeding ‘Prescriptions’

    Feinberg told Bloomberg Television on Feb. 8 that Goldman Sachs heeded his “prescriptions” even as he called Blankfein’s $9 million total pay excessive. “I don’t believe there are more than one or two” executives making as much among the 700 he has had under his jurisdiction, Feinberg said.

    Goldman Sachs said in December that the top 30 employees would receive all their year-end incentive pay in stock that they can’t sell for five years. Blankfein’s bonus, which he gets on top of his $600,000 salary, is subject to that restriction.

  3. In Florida Attorney George Gingo “GET’S IT”
    http://www.gingolaw.com

    [youtube=http://www.youtube.com/watch?v=p76BGYCa8tA&hl=en_US&fs=1&color1=0x5d1719&color2=0xcd311b]

  4. “IF YOU CANNOT AFFORD AN ELECTED OFFICIAL… ONE WILL BE APPOINTED FOR YOU”

    after 1:22 the video gets better (sans the magic silliness), glad to see the topic coming to the forefront! how do these people sleep at night?

    [youtube=http://www.youtube.com/watch?v=D-4wpoBIYjU&hl=en_US&fs=1&color1=0x5d1719&color2=0xcd311b]

  5. Lawyers are to blame for all of this. Neil, I dare you to post this.

  6. And keeping the $11 billion in the Societe Generale column keeps everybody from noticing that GS was ACTUALLY paid $23.9 BILLION ($12.9B from AIG directly PLUS $11B from AIG thru SG) betting against mortgage-backed securities that it was also actively and publicly shorting at the time, and as Neil points out, didn’t even own (probably never owned). All other counterparties of AIG pale in comparison to GS’s payout.

    But GS paid back the $1.1 Billion TARP warrant in in July 2009 and all of Congress came out to praise CEO Blankfein and touch his feet. That’s all America needs to know about the matter. The President and US Congress says you can all go back to sleep now. Or maybe watch some television – perhaps there’s a funny sitcom or “reality” show on. There. That’s better. Relax. That is, unless your house is being foreclosed on; if that’s the case, your government wants you to get packing.

  7. I invite any readers here to Google “Goldman Sachs conspiracy” to see the real strangle-hold they have over our government.

    Steve
    99Libra@gmail.com

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