Goldman can't say how much it made from housing crash

McClatchy NewspapersJune 30, 2010 

WASHINGTON — A congressional commission pressed Goldman Sachs executives Wednesday to spell out how much their company has earned from its exotic bets against the housing market, including $20 billion in wagers that helped force a $162 billion taxpayer bailout of the American International Group.

However, Goldman's president and chief risk officer told members of the Financial Crisis Inquiry Commission that their company never breaks out its figures that way.

"We can dig and dig and dig," Goldman President Gary Cohn said in sworn testimony. "We won't find that report."

Many of Goldman's trades with AIG offset protection it wrote for clients on mortgage securities, but McClatchy reported Tuesday that Goldman wagered its own money on some swaps purchased from AIG. A special Senate investigations panel disclosed in April that Goldman bet billions of dollars of its own money on a housing downturn.

The panel, which opened two days of hearings into Goldman's dealings with AIG, has been seeking information since February on how much the Wall Street giant reaped from bets against the housing market. Overall, Goldman posted profits of $2.32 billion in 2008, despite the meltdown, and $13.4 billion in 2009. Earlier in June, commission leaders subpoenaed Goldman, accusing the Wall Street giant of deluging them with 2.5 billion documents.

The commission also heard Wednesday from the man who oversaw AIG's disastrous decision to insure nearly $80 billion in subprime mortgage securities. Joseph Cassano, who recently was cleared of criminal wrongdoing after lengthy FBI and Securities and Exchange Commission inquiries, emerged publicly for the first time since the economic meltdown and said that his ouster might have cost taxpayers tens of billions of dollars.

Cassano contended that his departure as the head of London-based AIG Financial Products in March 2008 apparently left no one with the expertise to fend off Goldman's demands for billions of dollars in collateral — demands that helped put AIG into a cash squeeze.

"The taxpayers would have been served better," Cassano said, if the company's chief executive hadn't requested his resignation. Cassano said that he'd succeeded for months in paring Goldman's demands for cash and would have continued to assert the insurer's "rights and remedies" in private contracts, known as credit-default swaps, that effectively insured Goldman against losses on risky home mortgages.

The commission, which faces a December deadline to deliver a comprehensive report to Congress on the causes of the nation's financial crisis, has intensified its focus on Goldman and AIG while examining the role of swaps in mushrooming the dimensions of the economic collapse.

The panel released internal AIG e-mails and other documents tracing Goldman's demands for collateral, which ballooned from $1.8 billion in July 2007 to $10 billion, which stunned AIG executives. The two firms haggled for more than a year over the value of underlying mortgage securities as credit markets froze and the market for the securities shrank and all but disappeared.

Cohn said, however, that the parties' trading agreements stated "very specifically" that if there were declines in "fair value" on the insured securities, AIG would have to post cash collateral to make up for the loss. As the securities lost value, he said, eventually trades occurred and "we used those actual real-live trades as reference points."

Commission members, however, questioned Goldman's motives in pushing AIG. When then-Treasury Secretary Henry Paulson, a former Goldman chief executive, and other Bush administration officials committed as much as $182 billion for a taxpayer bailout, Goldman collected $12.9 billion, the most of any U.S. bank.

In an e-mail on Sept. 11, 2007, an AIG official reported after speaking with a representative of the French bank Societe Generale that Goldman had shared its "marks," or estimated values of offshore mortgage securities, with SocGen.

At first, SocGen disputed Goldman's estimates, which were lower than those of most banks, but by November, it, too, was demanding collateral from AIG. Goldman's value estimates ultimately proved accurate as the housing market continued to slide.

In pressing for more information from Goldman, Commission Chairman Phil Angelides told Cohn and Craig Broderick, the firm's chief risk officer: "It's pretty clear that you (Goldman) helped build the bomb. It's pretty clear that you built a bomb shelter. Now the question I want to get to is, did you light the fuse?"

The panel detailed one Goldman bet with AIG, dating to 2004, in which Goldman paid the insurer $2.1 million annually for $1.7 billion in insurance coverage on a so-called synthetic deal in which neither party actually bought any mortgage securities. In the deal, one of the first in a series known as Abacus, Goldman wound up collecting $806 million in a negotiated settlement with AIG, the commission said.

Cohn likened Goldman's bet to buying a fire insurance policy on a home.

Such deals, he said, are "leveraged on the probability your house is going to burn down."

Cassano defended AIG's swap-writing on mortgage securities, saying that none of the securities acquired on behalf of taxpayers by the Federal Reserve Bank of New York has yet soured.

"I still think that the underwriting standards we had set will support those transactions," he said.

Cassano, who was flanked by former AIG President and Chief Executive Martin Sullivan and current chief risk officer Robert Lewis, noted that AIG stopped writing swaps on securities backed by subprime mortgages to marginally qualified borrowers. The commission noted that AIG's swap exposure tripled that year from $17 billion to $54 billion and reached $78 billion by 2007.

The federal inquiries into the behavior of Cassano and two other AIG executives related to whether the company illegally failed to disclose the declining value of the insured securities to shareholders.

Commissioner Byron Georgiou traced the events surrounding a Dec. 5, 2007, investor conference in which Sullivan played down AIG's housing-related risks, despite a $1.5 billion adjustment due to collateral calls. Georgiou said commission investigators were told that Sullivan, Cassano and other executives had discussed risks reaching $5 billion days earlier, prompting Sullivan to remark at the time that he was "going to have a heart attack."

Sullivan testified that he didn't recall making such a comment.

After a review by AIG's auditor, PricewaterhouseCoopers, the insurer restated earnings two months later, making an $11.1 billion adjustment for mortgage risks. AIG's stock fell from $50 a share to $44.

Angelides told Sullivan that he found his "lack of knowledge, lack of recognition disturbing" and reflective of the "failure of leadership and management" at AIG.

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