How Goldman Sachs and AIG Got Top Dollar for Worthless Assets

February 24, 2010

How Goldman Sachs and AIG Got Top Dollar for Worthless Assets
Geithner's Gotta Go
By MIKE WHITNEY

Would it be wrong to take out a $1,000,000 policy on your wife and then put strychnine in her double-tall nonfat mocha?

Not if you are Goldman Sachs it wouldn't. In fact--according to an article on today's Bloomberg News--that's exactly what they did. They slapped together $17.2 billion in garbage CDOs and then insured the hell out of them with credit default swaps (CDS) issued by AIG. As soon as the CDS blew up, G-Sax collected 100 cents on the dollar for their ingenuity. (G Sax received $14B altogether)

Richard Teitelbaum's excellent article "Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs " is a must read for anyone who wants a peak into the sleazy underworld of high finance and the Ponzi scamsters who run it.

"Representative Darrel Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

"These were the deals that pushed the insurer to the brink of insolvency -- and were eventually paid in full at taxpayer expense. The New York Fed, which secretly engineered the bailout, prevented the full publication of the document for more than a year, even when AIG wanted it released." (Bloomberg News.)


Naturally, the NY Fed, operating on the behalf of the banks, did not want to expose its incestuous relationship with Wall Street or the clear conflict of interest posed by shoveling billions of dollars in taxpayer loot to hucksters who had gamed the system. That wouldn't do at all, especially if the public figured out that they were rewarding shifty high-stakes gamblers for activities which--at the very minimum--border on fraud.

"The public can now see for the first time how poorly the securities performed, with losses exceeding 75 percent of their notional value in some cases. Compounding this, the document and Bloomberg data demonstrate that the banks that bought the swaps from AIG are mostly the same firms that underwrote the CDOs in the first place." (Bloomberg News.)


Okay; so (presumably) the banks (like G Sax) knew that the CDOs were junk because, in many cases, "the banks also owned mortgage lenders." Nice, eh? It's the equivalent of dousing one's home in jet fuel and then taking out a million dollar insurance policy before firing up the Bar-B-Q. The only difference is that, when Joe Blow files his insurance claim, he can't count on government crooksters to help him obstruct the investigation.

"As details of the cover-up emerge, so does anger at the perceived conflicts. Philip Angelides, chairman of the Financial Crisis Inquiry Commission, at a hearing held by his panel on Jan. 13, questioned how banks could underwrite poisonous securities and then bet against them. “It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars,” he said." (Bloomberg News.)

Indeed. But as G-Sax warlord Loyd Blankfein sagely noted in his testimony before congress just weeks ago; these were "sophisticated investors", so they should have known they were being fleeced. Caveat emptor.

"AIG paid its counter parties -- the banks -- the full value of the contracts, after accounting for any collateral that had been posted, and took the devalued CDOs in exchange. As requested by the New York Fed, AIG kept the bank names out of the Dec. 24 filing and edited out a sentence that said they got full payment." (Bloomberg News.)

AIG has already cost US taxpayers $180 billion. And there's more to come.

Even now, the NY Fed is still fighting to avoid full disclosure. There have been 400 redactions to schedule A, which contains much of the relevant information. The critical documents were only made available through the Freedom of Information Act (FOIA).

"Among the CDOs on Schedule A with notional values of more than $1 billion, the worst performer was a tranche identified as Davis Square Funding Ltd.’s DVSQ 2006-6A CP. It was held by Societe Generale, underwritten by Goldman Sachs and managed by TCW Group Inc., a Los Angeles-based unit of SocGen, according to Bloomberg data. It lost 77.7 percent of its value -- though it isn’t in default and continues to pay." (Bloomberg News.)

Imagine what fun the structured finance alchemists must have had when they tossed these dogshit loans into the CDO blender and then pawned them off as "sound investments". In fact, it turned out to be the perfect deal; the banks were able to make money on the front end off investors who originally purchased the toxic CDOs, and then get a second payoff when they imploded. It's a "Two-fer".

Bottom line, ex-NY Fed chief Timothy Geithner made sure that his buddies at G-Sax got top dollar for crappy CDOs and then did everything in his power to hide his tracks. Geithner's gotta go.

Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com