Oh, well, GS says it did nothing wrong. Moving along!
They claim that the potential AIG default had been hedged. So what? The AIG securities were hedges in the first place; apparently that doesn't eliminate counterparty risk! If the public had not stepped in, and GS was forced to call upon the next insufficiently-capitalized insurer in the chain, it is likely that party would also have proved insufficient. After enough layers of recursion, eventually GS would have been left holding a bag of some size, and its precious shareholders would have lost some of their money. And that would have been perfectly OK. You can't claim with a straight face that unemployment would be any higher today in that fairer, more just world.
If the Treasury Secretary wasn't a Goldman alumna, there's no way in hell that only the AIG securities held by GS would have been made whole in the way that they were. That is pure corruption, and the verdict of history will be very harsh.
I'm truly very sorry if I upset you. I'm just trying to make sure we're on the same page. Goldman is indeed guilty, but not in a way that we agree.
Goldman had CDS against AIG imploding, had CDS-of-CDS against AIG's counterparties imploding, etc., etc. The solution to this hedging problem turns out to be the eigenvector of a CDS/exposure matrix, which is kind of fun.
Anyway... Goldman's bet was that the whole world would not implode. If there had been no bailout of anyone--you're right--everyone would've failed, including Goldman. In this scenario, there's no doubt in my mind unemployment would be higher today. But, given that someone was saved--anyone at all--Goldman turned out just fine. The cost of this hedge was ~$2.5 billion. For this, they were able to recover $10 billion. So, 75 cents on the dollar. More than they deserve!
The real crime has nothing to do with "needing to be bailed out"--this is just the story given to the public--it's the fact that Goldman may have had material nonpublic information about AIG. I think this article sums it up pretty well:
No worries! I was upset back in 2008-9, but now I consider that I've learned a valuable lesson about the nation in which I live.
You've turned over another rock to find another example of GS malfeasance, so thanks for the info, but you're wrong about economies in the long term. The fact that GS was backstopped by the public in this case, and that their ownership of Treasury had so much to do with that (now I see why a knucklehead like Geithner was fast-tracked into his current position), will inspire not just GS to keep doing the same thing, but everyone else in the market to emulate them. Next time around, all the amounts will be bigger, maybe even big enough to break the nation, but since everyone at every department and agency will be a puppet of some financial firm, our reaction will be even more corrupt. All because Bush the Lesser didn't have the stones to tell Paulson to go pound sand when he started his high-pressure sales routine. The seeds of future disaster were planted during this pretend disaster.
I've heard all the whining about pension funds and whatnot, but surely they weren't all all-in on GS and its ilk? When the stupid investment banks fail, the big institutional funds might drop 10 or 20%, but life will go on. This is an example of the well-known fact that sometimes securities decrease in value. The services that GS provides, others could provide just as well. The damage that was done to good regulation and fiscal prudence in this nation, will never be fixed.
Thank you! I certainly enjoyed this conversation, and I certainly appreciate your point of view. I can't disagree that people expect the big banks to get bailed out if anything bad happens again--big bank CDSs trade artificially low!
They claim that the potential AIG default had been hedged. So what? The AIG securities were hedges in the first place; apparently that doesn't eliminate counterparty risk! If the public had not stepped in, and GS was forced to call upon the next insufficiently-capitalized insurer in the chain, it is likely that party would also have proved insufficient. After enough layers of recursion, eventually GS would have been left holding a bag of some size, and its precious shareholders would have lost some of their money. And that would have been perfectly OK. You can't claim with a straight face that unemployment would be any higher today in that fairer, more just world.
If the Treasury Secretary wasn't a Goldman alumna, there's no way in hell that only the AIG securities held by GS would have been made whole in the way that they were. That is pure corruption, and the verdict of history will be very harsh.
[0] http://www.amazon.com/All-Devils-Are-Here-Financial/dp/15918...