NEW YORK (Reuters) - Goldman Sachs Group Inc did nothing wrong when it accepted payments to close out trades with American International Group, the giant insurer rescued by the U.S. government, Goldman’s chief financial officer said on Friday.
CFO David Viniar, in a conference call, answered questions about Goldman’s trading relationship with AIG, which was given $180 billion of taxpayer funds in the last four months of 2008 to save it from collapse.
The bailout sparked public outrage amid revelations that $90 billion of those funds were funneled quickly to banks that traded with AIG. Goldman received $12.9 billion in payments and collateral, while most AIG investors were wiped out and the mounting cost of the bailout sparked outrage.
Viniar told reporters the trades with AIG were “commercial contracts” and the insurer was obligated to make good.
“We don’t think we did anything wrong,” he said. “We had commercial terms. It is our responsibility to our shareholders to make sure that we are protecting ourselves.”
Viniar disclosed that Goldman held $7.5 billion of collateral against $10 billion of AIG exposure when the insurance company was bailed out. The remaining $2.5 billion was hedged in the marketplace.
Goldman’s AIG exposure originally had a face value of $20 billion before market deterioration set in.
Currently, Goldman has $6 billion of AIG exposure, offset in part by $4.4 billion in collateral.
Viniar said the bank had no material direct exposure to AIG and has no net exposure now.
Goldman amassed most of its AIG trading exposure in 2006, he said. Goldman purchased credit protection from AIG to cover potential losses on collateralized debt obligations, or CDOs.
In the second half of 2007, as mortgage markets tumbled, Viniar said Goldman and AIG disputed the value of these CDOs, held by other Goldman counterparties. Goldman wanted AIG to post more collateral to reflect the falling value of CDOs.
Starting in July 2007, Goldman began to mark down certain “super senior” AIG risk, and the two companies had some disputes over collateral, he said. Goldman also scaled back its dealings with AIG at the end of that year.
As Goldman asked for more collateral from AIG, the insurer tried to settle its credit default swap contracts at a discount — both before and after it received its first bailout last September. Goldman refused and ultimately secured everything it was owed by AIG.
The collateral calls by Goldman and other trading partners contributed to the insurer’s sudden collapse. The initial rescue, and two subsequent AIG bailout efforts, has become a political flashpoint as the public watches billions of taxpayer dollars fly out the door and land in the pockets of big banks.
Yet Goldman only demanded what it was due, Viniar said.
“That’s why we enter into these contracts. That’s why we have collateral terms in the first place, to make sure that we are protected,” he said. “And all we did was call for the collateral that was due to us under the contracts. I don’t think there’s any guilt whatsoever.”
Viniar said that while Goldman would not have suffered direct losses from AIG’s failure, because it was hedged and collateralized, a collapse would have disrupted the financial markets.
Critics complain that Goldman, whose alumni populate the halls of government, benefits from its connections. Henry Paulson, Treasury secretary when AIG was bailed out, is a former Goldman CEO. The chairman of the Federal Reserve Bank of New York, Steve Friedman, is a former Goldman chairman.
Goldman says it was not party to any discussions about a government bailout of AIG.
Additional reporting by Lilla Zuill, editing by Matthew Lewis and John Wallace