Janet Tavakoli: Goldman’s Lies of Omission
A big thanks to Janet for always sending her thoughts.
Full Excerpt Below
Goldman’s Lies of Omission TSF Opinion Commentary – October 28, 2009
By Janet Tavakoli
In my opinion, David Viniar’s (CFO of Goldman Sachs) comments in the fall of 2008 were a lie (see endnote), and for that matter, Lloyd Blankfein’s (CEO of Goldman Sachs) later comments to the Wall Street Journal were disingenuous. In the context of what was happening near the time of AIG’s implosion, the key question was “What is going on between Goldman and AIG?” Their rhetoric surrounding this issue is a deft dodge. They may claim they didn’t “technically” lie, but Goldman’s business exposure to AIG posed both credit risk and reputation risk. They seem to overlook elements of the former and put insufficient value on the latter.
Goldman should have plainly stated that it was owed billions in additional collateral from AIG—after already having collected billions—due to credit default swap contracts and other trading positions. Whether or not Goldman thought its credit risk was totally hedged is a separate, albeit important issue, and I’ll get to that later.
Among the proximate causes of AIG’s failure were previous calls for collateral made by its credit default swap trading counterparties, including Goldman Sachs. They were entitled to pressure AIG on its prices and demand more collateral; I had publicly challenged AIG’s prices myself more than a year earlier. These actions gave a major push to AIG’s subsequent credit downgrade, which tripped contract triggers that AIG had unwisely permitted its more clever counterparties to insert. (The credit default swap market is not standardized.) This meant AIG had to come up with collateral equal to the entire remaining amount of the credit default swap contract.
Unfortunately, AIG was essentially bankrupt at this point and it couldn’t meet its obligations. The government could have stepped in and renegotiated its contracts. [Goldman’s “hedges” might have disputed whether a reduced payment triggered a restructuring event, if applicable, in their contracts.] But that isn’t what happened.
Absent a bailout of AIG, Goldman was vulnerable to increasing systemic risk which would have likely affected its hedge counterparties and many of its other trading counterparties. Liquidity was very tight in the fall of 2008. [In March of 2008, Alan Schwartz, then CEO of Bear Stearns, saw tens of billions of dollars of seeming liquidity disappear in hours. Schwartz publicly stated he had ample liquidity, until suddenly he did not.] In September of 2008, Goldman negotiated for additional capital with Berkshire Hathaway and paid up for it. The outcomes for both AIG and Lehman were uncertain.
If AIG had gone under, the already illiquid market would have frozen. Collateral requirements for all trading would have increased (just as they did the week Bear imploded), and Goldman would have had problems collecting from many trading counterparties, if not the exact counterparties “hedging” its exposure to an AIG disaster.
It is never a given that hedges will pay off when the chips are down. A counterparty may dispute whether the contractual definition of a credit event is met, if only to buy time. Even when there is no default at issue, counterparties can try to change the rules when the market is in turmoil. In the fall of 2008, there were already anomalies in the derivatives market. For example, China refused calls for collateral on derivatives contracts in Asia, and its counterparties were forced to renegotiate. The entire market pretended this event didn’t cause a cross default.
Goldman was not a disinterested party in AIG’s bailout. AIG’s bailout—and the way the payouts were handled for its trading counterparties—hugely benefited Goldman Sachs. Goldman received a cash payment worth more than $10 billion from the U.S. Treasury—via AIG—during a system‐wide liquidity crunch. Under the circumstances, I cannot think of any scenario that would have provided a more certain and stable outcome for Goldman Sachs.
