Quelle Surprise! Goldman Profited From AIG Bailout Via Abacus Trades (You Read It Here First) (Naked Capitalism)

THURSDAY, JANUARY 27, 2011

Quelle Surprise! Goldman Profited From AIG Bailout Via Abacus Trades (You Read It Here First) (Naked Capitalism)

Shahien Narisipour at Huffington Post revealed that the FCIC report, due to be released officially tomorrow, shows that contrary to its pious assertions to the contrary, Goldman received funds for its own account from the AIG bailout, to the tune of $2.9 billion.

Why is this significant? Because Goldman maintained that the monies it received from the rescue were for customer trades, not for its own account.

And while this may seem to be news, it isn’t, except for putting a firm dollar value on what Goldman received for its own account. We posted on Goldman’s AIG exposures both as principal and agent on February 7, 2010, and specifically flagged that the Abacus trades that Goldman insured with AIG were principal positions, not client trades. We caught some flack for it by the time from various commentators who seemed more persuaded by Goldman’s PR that the extensive work done by Tom Adams, which we presented in a series of posts in early 2010 (seehere, here and here for some examples).

From the February 2010 post:

Possible Productive Lines of Inquiry That Get Short Shrift

The focus on Goldman’s marks with AIG largely bypasses what we think is a more serious issue: the role of all synthetic or heavily synthetic CDOs, which allowed Goldman to go net short. The usual vehicle for that was a “mezz” CDO, because the CDS would be on BBB subprime trances, the layer that would go “boom” first. The bulk of Goldman’s AIG-related CDOs were older vintage “high grade” CDOs, meaning the synthetic component was not large (on the deals we looked at, a maximum of 20%) and they would be on AA bonds, which were not the slice you’d be eager to use if your strategy was to go net short. So the fixation on the marks has the unfortunate effect of diverting attention away from what we think was the much more troubling activity: the use of heavily/all synthetic CDOs to establish a short position.

Even though the deal documents allowed for the possibility that Goldman would keep the short interest created by these deals, anyone who invested in them or acted as a guarantor would have thought very differently, and probably have asked for much higher returns if it had understood Goldman was acting as a principal rather than as a middleman (and how Goldman influenced the deal parameters to assure that its short position worked out). The story indicates that $5.5 billion of Abacus trades (a Goldman synthetic short program of 26 deals in total) were insured by AIG. Using the AIG Abacus trades as an entry point into the entire Abacus program would be a very useful exercise.

Note that the disclosure on the Abacus trades guaranteed by AIG continued to be sparse. The Abacus trades were pure synthetic CDOs, and pure synthetics were excluded from the Maiden Lane III portfolio (the special purpose entity established by the Fed to hold the non-synthetic CDOs that the Fed purchased from various dealers).

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