Was Goldman Just Out-Trading AIG?

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MarketWatch

June 30, 2010 Wednesday 3:46 PM EST

SECTION: NEWS & COMMENTARY; Commentary; MarketWatch First Take

LENGTH: 345 words

HEADLINE: Was Goldman just out-trading AIG?

BYLINE: MarketWatch

NEW YORK (MarketWatch) — Does Goldman bet against clients? Maybe not, but from the testimony that emerged Wednesday during the Financial Crisis Inquiry Commission, it sure seemed to pants its trading partners — including the government.

The commission heard from Joe Cassano, the former head of the financial products group at American International Group Inc. (AIG) and Gary Cohn, chief operating officer of Goldman Sachs Group Inc. (GS) . The issue: a series of trades and purchases of credit default swaps made between Goldman and AIG.

For those without the math tattooed on their foreheads by now: $132 billion taxpayer bailout of AIG, $10 billion bailout of Goldman, $12 billion funneled through AIG to Goldman so AIG made 100% good on its obligations.

Cassano: “I believe I would have been able to negotiate substantial discounts on the collateral calls and enable the company to preserve that cash.”

Translation: If he hadn’t quit and the market hadn’t dried up, Cassano said he could have forced counterparties to accept less than 100 cents on the dollar for their agreements.

Cohn: “While every market participant benefited from the government’s actions, we took our own steps, from the very beginning, to protect our shareholders.”

Translation: Cohn squeezed AIG when trading positions with the insurer were marked down. It bought protection against an AIG default. It held firm and, voila, the government bailed everyone out.

So, what’s the upshot and who’s to blame? Well, AIG managed its business very badly — even though Cassano testified he thinks AIG was good for its exposure. The government capitulated to the banks holding AIG claims when it probably wasn’t required. And Goldman, well, as Cohn said the bank protected itself and its shareholders. It defended its own interests. If it hadn’t, well, it would have been Lehman Brothers or Bear Stearns.

None of these has the key elements for a good story: a hero or a happy ending.

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