AIG Bailout Saved Goldman Billions, Or Not

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The New York Times, it seems, can’t make up its mind on l’affaire Goldman and AIG. In the past week the Grey Lady has had dueling articles on whether Goldman would have or wouldn’t have lost billions if the giant insurer had failed back at the height of the financial crisis. On Saturday, Gretchen Morgenson wrote that newly released documents finally prove that had AIG failed Goldman would have lost at least $577 million, and quiet possibly as much as $2.5 billion. Here’s a quote from the article that sums it up:

“This illustrates that the Goldman version of reality is not entirely accurate,” said Christopher Whalen, managing director at Institutional Risk Analytics. “They did have exposure to A.I.G., and that is what drove their behavior in the bailout.”

Great. We can put the matter to rest once and for all. Goldman would have lost billions if AIG failed. Or wait. Maybe it wouldn’t have. Three days later, on Tuesday, the New York Times published another article by reporter Andrew Ross Sorkin, based on the same newly released documents no less, concluding exactly the opposite. Sorkin says definitively that had AIG failed Goldman wouldn’t have lost a cent, at least not directly. Here’s Sorkin:

A popular narrative has been constructed that government officials, led by Henry M. Paulson Jr., then Treasury secretary and the former chief executive of Goldman, and Timothy F. Geithner, then the president of the Federal Reserve Bank of New York, saved A.I.G. to save banks that were exposed to the insurance giant — and in particular Goldman.So what was Goldman’s exposure? According to some newly released documents, perhaps far less than its detractors maintain.

The problem is at least one of those detractors Sorkin is talking about is in fact the very newspaper he works for. I called both Sorkin and Morgenson, and both declined to comment on their articles and the Goldman and AIG issue. So here’s the question: When two top reporters can’t agree on Goldman’s role and motivation in the AIG bailout, what are we supposed to think?

As we all, painfully, know, AIG did not in fact fail. Instead, the insurer was bailed out by Uncle Sam to the tune of $180 billion out of taxpayers’ pockets. Of the collapses that happened in late 2008, only Fannie Mae and Freddie Mac are expected to end up costing the government more.

Within months it was revealed that much of the money that was used to bailout AIG ended up going to Wall Street and foreign banks. AIG owed the institutions tens of billions. The largest single chunk of the AIG bailout/government dough ended going to Goldman, which got nearly $13 billion. And so, almost immediately, people started accusing Goldman of manipulating the government’s hand, using its oversized influence to get Washington to use taxpayer money to pay out on Goldman’s big bets with AIG, when the insurer itself no longer had the cash to do so.

Goldman has countered that it never needed AIG to get bailed out to get the money it was owed back. The Wall Street firm says that it placed offsetting bets with other firms that would have paid off if AIG had folded. So if AIG failed or not Goldman was getting paid. As such, the firm contends it has no incentive to push the government to bailout AIG, and in fact Goldman has said that it shouldn’t be seen as a direct beneficiary because again, it was going to get paid no matter what happened to AIG.

For months, this debate about Goldman’s role in the AIG bailout has simmered as one of the unsolved backroom mysteries of what went on during the height of the financial crisis. Fast forward to the past week, when two New York Times reporters claimed to finally solve the mystery based on the same documents in exactly the opposite way. Morgeson says Goldman needed the AIG bailout. Sorkin says not.

So who are we to believe? Morgenson says some of the large hedges that Goldman placed were with other institutions that either had failed or where close to it, namely Lehman and Citigroup. That’s why Morgenson says Goldman would have at least lost $577 million without the government help. Sorkin counters that Goldman had collected collateral on those bets already, so it already had a lot of the money that was owed even before those firms neared ruin.

One detail Sorkin points out to prove his point, actually does a lot to damage it. He says that an official at the NY Fed did some back of the envelope math and found out that Goldman could lose as much as $6 billion if AIG failed, though not all directly. Nonetheless, the official said he believed Goldman’s math instead which contended that the firm was not actually exposed. But if the NY Fed official could do that back of the envelope math, so could have Goldman. Perhaps Goldman bankers 90% believed they would lose nothing if AIG failed, but on the other had thought like the NY Fed that there was a 10% chance it could lose $6 billion–not an insignificant sum to even a large bank, especially at a time when everyone was questioning whether Goldman and others were solvent. The government’s AIG bailout was the hedge that Goldman’s math was wrong.

So I guess I side with Morgenson, but really I don’t know. Sorkin’s collateral point is a good one. And he does appear to have done more digging than Morgenson. The larger point is this: Even after the definitive history of the bailout is written, there’s still going to be plenty we will probably never know.

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