Having been CEO of AIG since the 1960s, only to resign in 2005 amidst a major accounting scandal, you could perhaps forgive him if he doesn’t.
Maurice `Hank’ Greenberg spoke with the Wall Street Journal this weekend past, and he had some interesting things to say about the bailed-out insurer, as well Goldman Sachs.
To wit:
. . . In the months after [Greenberg] left, AIG amped up its bets on the housing market by writing what where, in effect, insurance policies on derivative securities backed by subprime mortgages. These securities were created by Wall Street firms, notably Goldman Sachs, and held on their own books or sold to investors. AIG, in turn, had committed not only to insure them again eventual loss, but to make cash payments in the meantime to compensate for any drop in price or downgrade of their Triple-A ratings by credit agencies—both of which promptly happened as housing collapsed and panic spread about the possible failure of large financial institutions.
Suddenly, AIG was bleeding vast amounts of cash at a time when a spooked market was increasingly unwilling to lend to the firm. Finally, Washington stepped in to prevent AIG’s bankruptcy, fearing the alternative was an economic meltdown.
How did it all come apart so quickly? Here are the pieces Mr. Greenberg says he sees falling into place. In 2005, a trade group called the International Swaps and Derivatives Association got together and drafted new standards for the kinds of credit default swaps AIG had been writing.
Previously, Mr. Greenberg explains, losses to the underlying securities were paid off at maturity. Now, cash payments would have to be forthcoming to cover any drop in value or credit downgrades even before any losses were realized.
“I don’t know whether Goldman Sachs was the force behind the ISDA change or Deutsche Bank,” Mr. Greenberg concedes. “That’s something investigative reporters are going to have to spend time digging out.”
The next piece fell into place, he says, with recent reports in the press about how, at the top of the housing bubble, “a couple of people there [at Goldman Sachs], bright guys, decide the housing market is going to collapse.” Goldman went to work creating new subprime housing-backed derivatives , Mr. Greenberg says, and “began marketing the hell out of them and at the same time shorting them” (or betting they would fall in value).
Bingo. When the housing boom imploded, Goldman demanded giant cash collateral payments from AIG on a “mark to market” basis for housing-backed securities whose price was plummeting even if the underlying payment streams were intact. True, Goldman was hardly the only one demanding cash, but Mr. Greenberg is suspicious about the size of the payments Goldman demanded based on Goldman’s own “marks” (i.e. estimate of the securities now-depressed value). “Goldman had the lowest marks on the Street by everything I hear,” he says. “There was no exchange. Where was the price discovery? It was all in the eye of the beholder.”
But there’s no need to speculate — Goldman’s pricing was made publicly available when an internal AIG memo dating November 2007, and breaking down all of the insurer’s CDO CDS portfolio, was published by CBS News back in June. In it, Goldman stands out amongst its reference CDO-pricing peers for consistently being the most aggressive (i.e. lowest) quoter, in effect, forcing AIG to post higher collateral.
But there are two ways of looking at Goldman’s aggressive pricing.
You can, of course, think that Goldman were being evil or greedy in demanding higher collateral payments (part of their conspiracy to force AIG into bankruptcy). The other way of looking at it, is that Goldman were pricing their CDOs more pragmatically at a time when the market was well and truly illiquid. As Economics of Contempt noted, for comparison, Merrill Lynch was quoting a deal called Independence V at 90, while Goldman had it down at 67.5.
In any case, we know where Hank stands:
Mr. Greenberg has no doubt the destruction of AIG was the politically-dictated goal at the time. He points to Treasury Secretary Hank Paulson’s statement on Sunday morning television shortly after the rescue, saying the purpose was to “allow the government to liquidate” the company.
More in the full Hank Greenink interview.
Related links:
Greenberg gets back Persian rug – FT
Goldman and AIG, redux – FT Alphaville
AIG and the Fed, not above water but drowning? – FT Alphaville
Goldman’s collateral damage – FT Alphaville