One of the big stories of the bailout of AIG was that it indirectly bailed out institutions with direct exposure to AIG, such as those having sold insurance on the quality of AIG’s debt (through the use of credit default swaps). One large beneficiary of this bailout was Goldman Sachs, which had written billions of dollars of such insurance (oops!) and happened to be the ex employer of then Treasury secretary Paulson (during the crisis Paulson asked for and got fed information from Goldman after getting his ethics requirement that he not deal with or communicate with Goldman waived). While this all looks pretty suspect, Goldman has repeatedly claimed that they had this exposure hedged, so maybe there was no incentive to distort the information they gave Paulson. But as far as I know, Goldman has never said who they had this agreement with, allowing us to see whether their own counterparty would have been able to make good if AIG did not get bailed out. That is, my own suspicion, given that Goldman has never stated the name of their counterparty, is that anyone writing this insurance for Goldman was probably writing it for others and was probably not going to be able to pay if AIG went under. Also, it is now clear that Goldman objected to having any AIG debt written down as the government tried to find an alternative to a full bailout. Anyway, this story has been good gossip so far, but without many facts, only conspiracy theories. Now, some answers may be on the way. Treasury Secretary Geithner, who headed the NY Fed at the time, has accepted an invitation to testify before Congress on
Wednesday, January 27, 2010, at 10:00 a.m. in Room 2154 of the Rayburn House Office Building . . .[to] examine the collapse and federal rescue of AIG, in particular the compensation of AIG credit default swap counterparties . . . [and]. the role of the New York Federal Reserve Bank and other Federal agencies in AIG’s failure to disclose to the public the counterparty payments.
Should be interesting.