> Goldman Sachs was owed $10B. 7.5B was available in pledged securities. Goldman got $10B in cash because of govt flow-through via AIG.
If someone has pledged the majority of what is owed to me in collateral, it is wrong for people to imply that the 10 billion flowing through the government was just some windfall flowthrough. They got what they were owed, and the taxpayers got their 7.5 billion in collateral back. If the taxpayers did not pay the 10 billion, then they wouldn't have gotten 7.5 billion worth in treasuries returned to them--Goldman would have had the right to keep it, and this is the whole point of having collateral pledged to them in the first place.
> Shouldn't the insurer be paying off, if solvent, and not the US govt? And, if the insurer is not solvent, why shouldn't Goldman take the hit?
Are you talking about the CDS insurer? The insurance only needs to be paid if AIG defaults. If AIG defaults then the US govt doesn't have to pay anything, the insurer does. Since AIG was bailed out, no credit event was triggered and the CDS insurance becomes worthless. The upside is of course they actually get their money. In either case, whether AIG was allowed to fail or not, they would have been made whole.
Goldman was not treated differently in this case. Many other banks were treated the exact same way. Yes, Goldman was paid out in their insurance. So is any individual who took out insurance with AIG--they will actually get paid what is owed to them as well now.
> If someone has pledged the majority of what is owed to me in collateral, it is wrong for people to imply that the 10 billion flowing through the government was just some windfall flowthrough.
I didn't say that it was a windfall. I said that Goldman was made whole by the US govt via AIG. If other folks are losing money in similar circumstances, it's fair to ask why Goldman is being treated differently.
And, even if everyone is being made whole, the question remains - why should the US make them whole? Why shouldn't they lose money for taking bad counter-party risks? They were planning to keep the money that they made for assuming said risks, so why shouldn't they take the hit when things work out badly?
If I buy something that turns out to be worth less than I expected, I take the loss. Why not Goldman and other banks?
> They got what they were owed, and the taxpayers got their 7.5 billion in collateral back. If the taxpayers did not pay the 10 billion
I'll pay $7.5B for $10B.
> In either case, whether AIG was allowed to fail or not, they would have been made whole.
Maybe, maybe not, but in any event, not by the US govt.
> Why shouldn't they lose money for taking bad counter-party risks?
I don't really know how else to explain this. They shouldn't lose money for taking counter party risk...because they were willing to pay the price to insure themselves on the counter party risk. Why do you keep insisting that they need to lose money? They had 7.5 in collateral, and they insured themselves for the other 2.5 in the event they defaulted. This is the definition of protecting yourself from bad counter-party risks.
> They were planning to keep the money that they made for assuming said risks, so why shouldn't they take the hit when things work out badly?
...because they insured themselves. Imagine someone who bought a share of Google stock and then also bought a put option on it to protect themselves. Then the stock goes down. It's like asking why that person shouldn't take the hit because they were going to keep the money if Google had gone up. Goldman doesn't take the hit because 1) they were prudently collateralized and 2) they PAID for CDS protection on the rest that was owed to them that was not collateralized. CDS is not free, of course.
If they were willing to pay the insurance and demand collateral, why should they have to take a hit at all?
> I'll pay $7.5B for $10B.
So would I, but this is obviously a mischaracterization. It's like a homeowner who defaults on their mortgage and gives a house worth 250k to the bank who lent them 500k to buy it. They are not "paying 250 for 500".
> Maybe, maybe not, but in any event, not by the US govt.
This is not really a maybe, maybe not situation. Clearly with the collateral and insurance arranagements, Goldman would not have lost money as a counterparty to AIG. If you have an explanation otherwise I would be interested to hear it.
If what you say is true, and Goldman hedged their hedge by purchasing CDS on AIG and/or outright shorting them, it should be trivial for a prosecutor to show that they entered a contract with AIG knowing fully that it could never be satisfied (who knows, there may even be a side letter to be found somewhere to that effect...) -- making the contract void and requiring a clawback of any payment made through AIG by Treasury.
How does purchasing CDS insurance on a counterparty imply that they knew full well it could never be satisfied? If I purchase hurricane insurance on my home do I know full well a hurricane is going to destroy my house? It was a precautionary measure for an amount that was the difference between what they were owed and how much collateral was pledged. It indicates nothing of the sort that they knew full well the world was going to blow up and AIG would default
And what I say is true, there are many many public disclosures on exactly what their positions were.
If someone has pledged the majority of what is owed to me in collateral, it is wrong for people to imply that the 10 billion flowing through the government was just some windfall flowthrough. They got what they were owed, and the taxpayers got their 7.5 billion in collateral back. If the taxpayers did not pay the 10 billion, then they wouldn't have gotten 7.5 billion worth in treasuries returned to them--Goldman would have had the right to keep it, and this is the whole point of having collateral pledged to them in the first place.
> Shouldn't the insurer be paying off, if solvent, and not the US govt? And, if the insurer is not solvent, why shouldn't Goldman take the hit?
Are you talking about the CDS insurer? The insurance only needs to be paid if AIG defaults. If AIG defaults then the US govt doesn't have to pay anything, the insurer does. Since AIG was bailed out, no credit event was triggered and the CDS insurance becomes worthless. The upside is of course they actually get their money. In either case, whether AIG was allowed to fail or not, they would have been made whole.
Goldman was not treated differently in this case. Many other banks were treated the exact same way. Yes, Goldman was paid out in their insurance. So is any individual who took out insurance with AIG--they will actually get paid what is owed to them as well now.