Comments on: AIG and Faux Transparency http://dukeresearchadvantage.com/charvey/2009/03/16/aig-and-faux-transparency/ Research that Matters Thu, 27 May 2010 07:41:08 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Cam http://dukeresearchadvantage.com/charvey/2009/03/16/aig-and-faux-transparency/comment-page-1/#comment-234 Cam Sun, 22 Mar 2009 21:13:56 +0000 http://dukeresearchadvantage.com/?p=812#comment-234 Here's a good primer on CDS http://www.securitization.net/pdf/content/Nomura_CDS_Primer_12May04.pdf<div class="comment-remix-meta"><a href="#" class="quote" onclick="quote('234','Cam','Here\'s a good primer on CDS\r\n\r\nhttp:\/\/www.securitization.net\/pdf\/content\/Nomura_CDS_Primer_12May04.pdf'); return false;">Quote</a></div> Here’s a good primer on CDS

http://www.securitization.net/pdf/content/Nomura_CDS_Primer_12May04.pdf

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]]> By: Malcolm Chisholm http://dukeresearchadvantage.com/charvey/2009/03/16/aig-and-faux-transparency/comment-page-1/#comment-232 Malcolm Chisholm Sun, 22 Mar 2009 12:55:34 +0000 http://dukeresearchadvantage.com/?p=812#comment-232 Can you explain how the CDS's pay out. I have heard that it is not a lump sum in the event of a default, but some kind of payment stream (maybe to cover lost coupon payments). I have no idea if this is true, but if it is, it would seem that it would indeed be very difficult to calculate future taxpayer "obligations".<div class="comment-remix-meta"><a href="#" class="quote" onclick="quote('232','Malcolm Chisholm','Can you explain how the CDS\'s pay out. I have heard that it is not a lump sum in the event of a default, but some kind of payment stream (maybe to cover lost coupon payments). I have no idea if this is true, but if it is, it would seem that it would indeed be very difficult to calculate future taxpayer \"obligations\".'); return false;">Quote</a></div> Can you explain how the CDS’s pay out. I have heard that it is not a lump sum in the event of a default, but some kind of payment stream (maybe to cover lost coupon payments). I have no idea if this is true, but if it is, it would seem that it would indeed be very difficult to calculate future taxpayer “obligations”.
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]]> By: Don http://dukeresearchadvantage.com/charvey/2009/03/16/aig-and-faux-transparency/comment-page-1/#comment-231 Don Thu, 19 Mar 2009 18:20:27 +0000 http://dukeresearchadvantage.com/?p=812#comment-231 Cam: G. Morgenson's NYT article about the demise of Lehman would call into question Goldman's answer to the question about discussions with Paulson about an AIG bail-out: http://www.nytimes.com/2008/09/28/business/28melt.html?_r=2&hp&o<div class="comment-remix-meta"><a href="#" class="quote" onclick="quote('231','Don','Cam:\r\n\r\nG. Morgenson\'s NYT article about the demise of Lehman would call into question Goldman\'s answer to the question about discussions with Paulson about an AIG bail-out:\r\n\r\nhttp:\/\/www.nytimes.com\/2008\/09\/28\/business\/28melt.html?_r=2&hp&o'); return false;">Quote</a></div> Cam:

G. Morgenson’s NYT article about the demise of Lehman would call into question Goldman’s answer to the question about discussions with Paulson about an AIG bail-out:

http://www.nytimes.com/2008/09/28/business/28melt.html?_r=2&hp&o

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]]> By: Cam http://dukeresearchadvantage.com/charvey/2009/03/16/aig-and-faux-transparency/comment-page-1/#comment-230 Cam Wed, 18 Mar 2009 17:28:10 +0000 http://dukeresearchadvantage.com/?p=812#comment-230 Here is the Reuters interview with key information: <i> 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." </i> The key is the answer to question 1: <i>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.</i> It is not clear to me what this collateral is and how much of the exposure the collateral covers. Second, it is not clear to me that receiving a payout on insurance it had from other counterparties was fully or partially hedging them. Finally, if AIG went down, it is possible that their other counterparties would go down too - leaving them with no insurance. <div class="comment-remix-meta"><a href="#" class="quote" onclick="quote('230','Cam','Here is the Reuters interview with key information:\r\n\r\n<i>\r\n A day ahead of the hearing, Reuters posed 10 questions to\r\nGoldman about these issues. The following are the questions and\r\nthe answers from Goldman spokesman Michael DuVally:\r\n \r\n\r\n QUESTION: If Goldman Sachs was collateralized and hedged on\r\nits AIG positions, why did it take $12.9 billion of taxpayer\r\nmoney?\r\n \r\n\r\n ANSWER: \"Goldman Sachs has maintained that its exposure to\r\nAIG was collateralized and hedged. The majority of Goldman\r\nSachs\' CDS (credit default swap) exposure to AIG Financial\r\nGroup was collateralized. That means that Goldman Sachs had\r\ncollateral. To the extent it wasn\'t collateralized, Goldman\r\nSachs hedged its exposure via the credit default swaps market.\r\nIf the government had allowed AIG to fail, Goldman Sachs would\r\nhave received its collateral. A credit event would be\r\ntriggered, and Goldman Sachs would receive a payout from the\r\ncredit default swap insurance that it had. This is from other\r\ncounterparties.\"\r\n \r\n\r\n Separating out the money Goldman received due to AIG\'s\r\nsecurities lending obligations, DuVally said: \"AIG was not\r\nallowed to fail. So there was no payout from the hedges.\r\nAdditionally after the bailout there was some additional\r\ndeterioration in AIG\'s position. Under the terms of the\r\ncontracts that Goldman Sachs had with AIG, it was entitled to\r\ncollateral. We were always fully collateralized and hedged.\"\r\n \r\n\r\n QUESTION: Did then-U.S. Treasury Secretary Henry Paulson or\r\nhis aides discuss Goldman\'s exposure to AIG with Goldman Chief\r\nExecutive Lloyd Blankfein or any other executive or director of\r\nthe bank? Also, if they did, what was the substance of the\r\nconversations, and did Goldman Sachs take any position on\r\nwhether AIG should be saved?\r\n \r\n\r\n ANSWER: \"Goldman Sachs was not party to any discussions\r\nabout the bailout of AIG.\"\r\n \r\n\r\n QUESTION: Did Goldman do any due diligence on AIG before\r\nbuying credit default swaps (CDS) from it?\r\n \r\n\r\n ANSWER: \"We do extensive due diligence on all our\r\ncounterparties.\"\r\n \r\n\r\n QUESTION: From what other institutions did Goldman buy CDSs\r\nto insure its collateralized debt obligations or other\r\nsecurities?\r\n \r\n\r\n ANSWER: \"We do not disclose counterparty information.\"\r\n \r\n\r\n QUESTION: How did Goldman account for the counterparty risk\r\nin its dealings with AIG?\r\n \r\n\r\n ANSWER: \"We made sure our positions with AIG were\r\ncollateralized and hedged.\"\r\n \r\n\r\n QUESTION: Did Goldman have more exposure to AIG through\r\nCDSs than that disclosed by AIG on Sunday? If yes, how much\r\nis\/was that exposure?\r\n \r\n\r\n ANSWER: \"The disclosures by AIG encompass all the\r\ncollateral received by Goldman Sachs on its credit default swap\r\npositions with AIG financial products for the period from\r\nSeptember through the end of the year.\"\r\n \r\n\r\n QUESTION: Why did Goldman decide to close its securities\r\nlending transactions with AIG?\r\n \r\n\r\n ANSWER: \"AIG could not return the cash it owed to Goldman\r\nSachs under the terms of the transaction. It was the terms of\r\nthe agreement. Note that Goldman Sachs had the ability all\r\nalong if AIG could not honor its transaction to sell those\r\nsecurities into the market. Note that those securities which\r\nstill had value went back to the government.\"\r\n \r\n\r\n QUESTION: Was the value of the securities returned to AIG\r\nless than the cash received from AIG?\r\n \r\n\r\n ANSWER: \"They were equivalent. Under the terms of the\r\nagreement if the securities Goldman Sachs borrowed had declined\r\nin value, Goldman Sachs had the right to request that part of\r\nthe cash collateral it posted to AIG be returned.\"\r\n \r\n\r\n QUESTION: Has Goldman Sachs received more money from AIG to\r\nsatisfy counterparty obligations since the end of 2008, and\r\nwhat did it receive before Sept. 16?\r\n \r\n\r\n ANSWER: \"We are not disclosing the amount of collateral we\r\nreceived from AIG before the government bailout nor after the\r\nend of 2008. We can say that our notional exposure to AIG is a\r\nfraction of what it was at the time of the September bailout.\r\nAnd as has been the case, our exposure remains collateralized\r\nand hedged.\"\r\n<\/i>\r\n\r\n\r\nThe key is the answer to question 1:\r\n\r\n<i>If the government had allowed AIG to fail, Goldman Sachs would\r\nhave received its collateral. A credit event would be\r\ntriggered, and Goldman Sachs would receive a payout from the\r\ncredit default swap insurance that it had. This is from other\r\ncounterparties.<\/i>\r\n\r\n\r\nIt is not clear to me what this collateral is and how much of the exposure the collateral covers. Second, it is not clear to me that receiving a payout on insurance it had from other counterparties was fully or partially hedging them. Finally, if AIG went down, it is possible that their other counterparties would go down too - leaving them with no insurance.\r\n'); return false;">Quote</a></div> Here is the Reuters interview with key information:


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.”

The key is the answer to question 1:

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.

It is not clear to me what this collateral is and how much of the exposure the collateral covers. Second, it is not clear to me that receiving a payout on insurance it had from other counterparties was fully or partially hedging them. Finally, if AIG went down, it is possible that their other counterparties would go down too – leaving them with no insurance.

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]]> By: Peter Moles http://dukeresearchadvantage.com/charvey/2009/03/16/aig-and-faux-transparency/comment-page-1/#comment-229 Peter Moles Wed, 18 Mar 2009 16:51:11 +0000 http://dukeresearchadvantage.com/?p=812#comment-229 I agree with you, it is time for regulators to take a hatchet to financial institutions that are too big to fail and where a business miscalculation or venality leads to systemic risk. Big organisations are also more prone to the herd instinct. As regards naivete by counterparties to AIG: it would appear from other commentary that Goldmans didn't think AIG couldn't fail, since they insured their exposure to CDS on AIG with other financial institutions! I don't think many others did, though.<div class="comment-remix-meta"><a href="#" class="quote" onclick="quote('229','Peter Moles','I agree with you, it is time for regulators to take a hatchet to financial institutions that are too big to fail and where a business miscalculation or venality leads to systemic risk. Big organisations are also more prone to the herd instinct.\nAs regards naivete by counterparties to AIG: it would appear from other commentary that Goldmans didn\'t think AIG couldn\'t fail, since they insured their exposure to CDS on AIG with other financial institutions! I don\'t think many others did, though.'); return false;">Quote</a></div> I agree with you, it is time for regulators to take a hatchet to financial institutions that are too big to fail and where a business miscalculation or venality leads to systemic risk. Big organisations are also more prone to the herd instinct.
As regards naivete by counterparties to AIG: it would appear from other commentary that Goldmans didn’t think AIG couldn’t fail, since they insured their exposure to CDS on AIG with other financial institutions! I don’t think many others did, though.
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]]> By: Dan W. http://dukeresearchadvantage.com/charvey/2009/03/16/aig-and-faux-transparency/comment-page-1/#comment-226 Dan W. Mon, 16 Mar 2009 22:10:12 +0000 http://dukeresearchadvantage.com/?p=812#comment-226 How is it possible to lose $40 billion doing securities lending. What were they doing with the collateral? I haven't seen anything on this.<div class="comment-remix-meta"><a href="#" class="quote" onclick="quote('226','Dan W.','How is it possible to lose $40 billion doing securities lending. What were they doing with the collateral? I haven\'t seen anything on this.'); return false;">Quote</a></div> How is it possible to lose $40 billion doing securities lending. What were they doing with the collateral? I haven’t seen anything on this.
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]]> By: Bill http://dukeresearchadvantage.com/charvey/2009/03/16/aig-and-faux-transparency/comment-page-1/#comment-225 Bill Mon, 16 Mar 2009 18:04:35 +0000 http://dukeresearchadvantage.com/?p=812#comment-225 AMEN! Keep telling the truth, Cam, sooner or later it will matter (I hope).<div class="comment-remix-meta"><a href="#" class="quote" onclick="quote('225','Bill','AMEN! Keep telling the truth, Cam, sooner or later it will matter (I hope).'); return false;">Quote</a></div> AMEN! Keep telling the truth, Cam, sooner or later it will matter (I hope).
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