AIG Trading Partners Got Funds Before Bailout
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Tuesday, June 23, 2009
Goldman Sachs and Société Générale extracted about $11.4 billion from American International Group before the insurer's collapse as the firms demanded to hold cash against losses on mortgage-linked securities, according to regulatory filings.
Goldman Sachs got $5.9 billion and Société Générale received $5.5 billion of about $18.5 billion in collateral paid by AIG in the 15 months before the September bailout. The payments helped settle AIG's obligations on $62.1 billion of credit-default swaps that the Federal Reserve later removed from the New York-based insurer as part of the rescue. Officials at AIG, Goldman Sachs and Société Générale declined to comment.
"When counterparties see trouble coming, they'll do everything they can to get their money back, even if it means the death of the other firm," said William Cohan, a former J.P. Morgan Chase investment banker and author of "House of Cards," about the financial crisis.
President Obama proposed a regulatory overhaul last week to prevent the failure of systemically important institutions such as AIG, which needed a $182.5 billion government rescue to stave off a bankruptcy filing. Banks that bought swaps as protection against losses on mortgage-linked assets demanded cash collateral as the market value of the securities plunged last year, overwhelming AIG's ability to pay.
"It was precisely that drain of liquidity to Goldman and SocGen that put AIG in a position of illiquidity and ultimately threw them into the government's arms," said Charles Calomiris, a finance professor at Columbia Business School.
AIG disclosed a complete list last month of payments made to settle the $62.1 billion in derivatives.
Including collateral from before and after the rescue and payments made by Maiden Lane III, a vehicle created by the Fed to retire the swaps, Goldman Sachs received about $14 billion from AIG, Société Générale got $16.5 billion, and Deutsche Bank received $8.5 billion. More than a dozen more banks got a total of about $23.1 billion.
