Goldman denies its collateral demands led to collapse of insurance giant AIG

Stephen Foley
Friday 02 July 2010 00:00
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Goldman Sachs denied responsibility for the collapse of insurance giant AIG in 2008, saying its demands for billions of dollars in collateral from the company were a prudent response to deteriorating financial conditions. Executives at the two companies traded accusations in front of the Financial Crisis Inquiry Commission yesterday, on the second day of a hearing into the role of derivatives in the credit crunch.

Goldman had earlier been accused by the FCIC chairman, Phil Angelides, of behaving like "a cheetah chasing down a weak member of the herd" as it demanded more and more money to protect itself from losses on AIG's mortgage trading with the bank.

Demands for collateral were generated mathematically, based on calculations about the market value of AIG's mortgage positions, Goldman's chief financial officer, David Viniar, said. AIG had insured trading partners such as Goldman against losses on hundreds of billions of dollars of mortgage derivatives. The insurer believed the eventual losses would be so small that it could make easy money from the premiums, but it did not count on clauses in the contracts that allowed trading partners to demand collateral.

It was those demands that crippled the company and forced it into a $180bn (£120bn) bailout by the US government. An AIG official, Elias Habayeb, told the panel that AIG tried to negotiate with Goldman and other counterparties to lower their demands, but with little success. "Unfortunately, AIG had little negotiating leverage," he said.

Even if AIG went bankrupt, the counterparties would get special protection under bankruptcy law. By March 2009, Goldman had received $12.9bn of the $93bn in money paid to AIG counterparties, the most of any bank. Mr Angelides again yesterday wondered if Goldman was deliberately driving prices down on the debt securities linked to the credit insurance sold by AIG. Mr Viniar and other Goldman officials insisted they based their collateral demands on the price of actual trades – trades the panel has asked for further details on.

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