The Wall Street Journal has reported that Goldman Sachs Group Inc. played a bigger role in fueling the mortgage bets that crippled American Insurance Group Inc. than has been publicly disclosed. An analysis by the paper of AIG’s trades on pools of mortgage debt reveals that Goldman was a key player in many of them, including those involving other banks. As you will recall, 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, as reported by the Journal. Goldman would act as the middleman between AIG and banks, taking billions in risk of the mortgage-related investments. It was reported that Goldman then insured the risks with a single trading partner, AIG.
The Journal reports that trades, mostly booked from 2004 to 2006, yielded less than $50 million in profits for Goldman. 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 government audit in November on part of the AIG bailout described Goldman’s middleman role. The size of the government’s bailout of Goldman and the other AIG counter-parties has been very unpopular. It should be noted that Henry Paulson, the U.S. Treasury secretary, was a former Goldman chief executive.
Source: Wall Street Journal
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