March 17, 2009 / 9:25 PM / in 9 years

Q&A with Goldman Sachs over AIG bailout

NEW YORK, March 17 (Reuters) - Goldman Sachs Group Inc (GS.N) got the largest chunk of U.S. taxpayer money that found its way to companies that were on the other end of certain transactions with American International Group Inc (AIG.N).

Rep. Paul Kanjorski, whose House Subcommittee on Capital Markets and Insurance will quiz AIG Chief Executive Edward Liddy, said last weekend the counterparties and bonuses paid to AIG employees will topics for investigation at a hearing on Wednesday.

A day ahead of the hearing, Reuters posed 10 questions to Goldman about these issues. The following are the questions and the answers from Goldman spokesman Michael DuVally:

QUESTION: If Goldman Sachs was collateralized and hedged on its AIG positions, why did it take $12.9 billion of taxpayer money?

ANSWER: “Goldman Sachs has maintained that its exposure to AIG was collateralized and hedged. The majority of Goldman Sachs’ CDS (credit default swap) exposure to AIG Financial Group was collateralized. That means that Goldman Sachs had collateral. To the extent it wasn’t collateralized, Goldman Sachs hedged its exposure via the credit default swaps market. If the government had allowed AIG to fail, Goldman Sachs would have received its collateral. A credit event would be triggered, and Goldman Sachs would receive a payout from the credit default swap insurance that it had. This is from other counterparties.”

Separating out the money Goldman received due to AIG’s securities lending obligations, DuVally said: “AIG was not allowed to fail. So there was no payout from the hedges. Additionally after the bailout there was some additional deterioration in AIG’s position. Under the terms of the contracts that Goldman Sachs had with AIG, it was entitled to collateral. We were always fully collateralized and hedged.”

QUESTION: Did then-U.S. Treasury Secretary Henry Paulson or his aides discuss Goldman’s exposure to AIG with Goldman Chief Executive Lloyd Blankfein or any other executive or director of the bank? Also, if they did, what was the substance of the conversations, and did Goldman Sachs take any position on whether AIG should be saved?

ANSWER: “Goldman Sachs was not party to any discussions about the bailout of AIG.”

QUESTION: Did Goldman do any due diligence on AIG before buying credit default swaps (CDS) from it?

ANSWER: “We do extensive due diligence on all our counterparties.”

QUESTION: From what other institutions did Goldman buy CDSs to insure its collateralized debt obligations or other securities?

ANSWER: “We do not disclose counterparty information.”

QUESTION: How did Goldman account for the counterparty risk in its dealings with AIG?

ANSWER: “We made sure our positions with AIG were collateralized and hedged.”

QUESTION: Did Goldman have more exposure to AIG through CDSs than that disclosed by AIG on Sunday? If yes, how much is/was that exposure?

ANSWER: “The disclosures by AIG encompass all the collateral received by Goldman Sachs on its credit default swap positions with AIG financial products for the period from September through the end of the year.”

QUESTION: Why did Goldman decide to close its securities lending transactions with AIG?

ANSWER: “AIG could not return the cash it owed to Goldman Sachs under the terms of the transaction. It was the terms of the agreement. Note that Goldman Sachs had the ability all along if AIG could not honor its transaction to sell those securities into the market. Note that those securities which still had value went back to the government.”

QUESTION: Was the value of the securities returned to AIG less than the cash received from AIG?

ANSWER: “They were equivalent. Under the terms of the agreement if the securities Goldman Sachs borrowed had declined in value, Goldman Sachs had the right to request that part of the cash collateral it posted to AIG be returned.”

QUESTION: Has Goldman Sachs received more money from AIG to satisfy counterparty obligations since the end of 2008, and what did it receive before Sept. 16?

ANSWER: "We are not disclosing the amount of collateral we received from AIG before the government bailout nor after the end of 2008. We can say that our notional exposure to AIG is a fraction of what it was at the time of the September bailout. And as has been the case, our exposure remains collateralized and hedged." (To read related ANALYSIS, double-click [ID:nN17127064]) (For more M&A news and our DealZone blog, go to www.reuters.com/deals) (Editing by Jeffrey Benkoe)

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