A New Wrinkle In The Goldman-AIG CDO Mess

Bloomberg breaks more news today about the ongoing fiasco involving Collateralized Debt Obligations (CDOs), Goldman Sachs, AIG, the New York Fed and Rep. Darrell Issa (R-CA). Documents finally released from the NY Fed after about a year indicate that Goldman Sachs created more of the toxic CDOs insured by AIG than any other bank, which played a part in AIG's troubles and eventual bailout. Those securities were so bad that they sometimes had losses exceeding 75% of their notional value, according to Bloomberg. If Goldman and other banks knew these securities were garbage, should they explain why they asked AIG to insure them? Not necessarily.

First, let me summarize the situation, for those who haven't been following along. During the financial crisis AIG got an enormous bailout, to the tune of $180 billion. Several months later, it was learned that AIG's bailout led to a sort of backdoor bailout for some big investment banks like Goldman. Those banks received tens of billions of dollars in cash based on swaps and other obligations that they had with AIG. This angered many, especially in Washington, who believed that this fact was hidden when they approved the bailout.

More recently, in January, the NY Fed finally released some more documents about this debacle at the request of Rep. Issa. They appeared to indicate that the NY Fed was well aware of the fact that there would be a substantial backdoor bailout for banks when AIG got its government cash, but purposely hid that fact until after Congress provided the funding. At that time Treasury Secretary Timothy Geithner was the president of the NY Fed. Yet, he says he knew nothing about the AIG bailout, because he was already recused. But that didn't prevent Congress from ripping into him during a hearing on the matter last month.

The news today provides a little bit more detail on those CDOs that AIG insured. We learned that Goldman originated a huge number of them -- more than any other investment bank at $17.2 billion. Merrill Lynch (aka Bank of America) underwrote the second most at $13.2 billion. Germany's Deutsche Bank created the third most at $9.5 billion. We also learn that they were incredibly ugly, incurring enormous losses. That means AIG had to pay up to these banks, since the firm made the mistake of agreeing to insure the bonds.

The NY Fed hid this detail for a long time, and many are critical of that decision. They believe that it misled Congress and the public. While conspiracy theorists might believe that they were in cahoots with these banks. I suspect the answer is simpler: the NY Fed was trying to stabilize the financial industry, and this detail going public sooner would certainly not have helped its cause. This doesn't necessary absolve the Fed's actions, but it does explain them.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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