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article imageOp-Ed: Wangling AIG To Precipice Proved Profitable for Goldman Sachs

By Bill Lindner     Feb 13, 2010 in Business
An NYT investigative report offers more insight into the predatory practices of Goldman Sachs, their role in pushing AIG to brink of bankruptcy, and more evidence suggesting the financial bailout was fraudulent and illegal
A New York Times (NYT) investigative report -- entitled "Testy Conflict With Goldman Helped Push A.I.G. to Edge" -- offers more insight into the predatory practices of major Wall Street banks that have played a central role in the financial meltdown and the ongoing global economic crisis and chronicles how Goldman Sachs pushed American International Group (AIG) to the brink of bankruptcy.
Since it's inception, there have been many allegations that the bailout was fraudulent and illegal. Now there is more evidence supporting those allegations.
In mid-September 2008, the Bush administration threatened to impose Martial law if Wall Street wasn't bailed out and stepped in to rescue AIG with billions of dollars in taxpayer money. To date, the Federal government has given AIG more than $182 billion. The U.S. Treasury now owns 80 percent of AIG.
In thanking the American people for bailing them out, AIG used the money to pay its executives and top traders hundreds of millions of dollars in bonuses. Despite public outrage over the bonuses, the Obama administration shielded their Wall Street masters from any attempts at limiting those bonuses.
Goldman Sachs Profited from Betting on the Collapse of the Housing Bubble
The review of internal AIG documents by NYT journalists Gretchen Morgenson and Louise Story, along with review of a January 29, 2008 recorded conference call between Goldman Sachs executives and AIG reveals how Goldman, two years prior to the AIG bailout -- when AIG was the biggest seller of credit default swap contracts -- worked to undermine investor confidence in AIG and drive down the market value of mortgage-backed securities.
A couple of years before the bailout, Goldman Sachs was betting on a collapse of the housing bubble that it helped create by promoting sub-prime mortgages. While Goldman's top traders structured credit default contracts with AIG on mortgage-backed securities in a manner that enabled them to profit from declining prices of those securities, Goldman was making money by purchasing the same type of securities for clients while charging fees for bundling home loans into 'collateralized debt obligations' (CDOs) and selling them back into the market.
Banks and corporations purchase 'insurance' against the default of bonds issued by other banks, companies and governments. If a seller of swaps -- in this case AIG who was by far the biggest seller of the unregulated multi-trillion-dollar credit default swaps -- goes bankrupt, its counter parties would lose billions of dollars.
By the time the financial meltdown came to a head, AIG had vastly over-leveraged itself and was hemorrhaging due to demands from its counter parties that it make good on its guaranteed mortgage-backed CDO losses. Had AIG gone bankrupt, Goldman Sachs and Morgan Stanley, and other large U.S. and International banks would have gone bankrupt with them.
Goldman Sachs Manipulated the Housing Market
The NYT report reveals that Goldman Sachs used its close relationship with AIG to manipulate the housing market and encourage a panic selloff of mortgage-backed assets, partially by pressuring AIG to make billions of dollars in collateral payments based on mortgage-backed CDOs Goldman had insured with AIG. Goldman's demands for payment were a major factor in AIG's downfall.
Once again Goldman Sachs has been revealed as the culprit in the apparently fraudulent creation of yet another financial crisis. According to the NYT, the Securities and Exchange Commission (SEC) wants to know whether any of Goldman's demands on AIG distressed the mortgage market. As a reminder, the SEC knew about Bernie Madoff and his ponzi scheme for 10 years but did nothing about it.
The NYT noted that well before the AIG bailout in September 2008, Goldman's demands for billions of dollars from AIG helped put it in a precarious financial position by bleeding much needed cash and that Goldman stood to gain from the housing market's implosion because in late 2006 it began making huge trades that would pay off if the mortgage market soured. The more mortgage securities imploded, the greater Goldman's profits became.
The report also reveals that Goldman Sachs made billions of dollars extorting cash from AIG then turned around and made billions more at taxpayer expense when the government bailed AIG out. A year before the bailout, Goldman Sachs made $7 billion from AIG, then received another $12.9 billion when the government covered AIGs debt to Goldman Sachs in full.
Wall Street Has Run the U.S. Government for Years
When AIG was bailed out, then-Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and then-President of the Federal Reserve Bank of New York Timothy Geithner secretly funneled $62 billion from the bailout to rescue AIG's major bank counter parties -- of which Goldman Sachs was by far the biggest beneficiary -- through a back-door taxpayer bailout of the banks. Morgan Stanley and JPMorgan Chase were two other U.S. companies that netted billions of dollars in the back-door bailout.
Goldman Sachs began increasing its negative bets on the mortgage market bottoming out in December 2006. A few months later it began demanding that AIG pay it billions of dollars on mortgage-backed securities that the bank valued considerably lower than AIG. Obviously AIG didn't want to accept Goldman's valuations so AIG tried to no avail for more than a year to resolve the dispute.
As noted by the Intel Daily, while the NYT article paints a damning picture of Goldman Sachs predatory role, no mention is made of the most crucial aspect of the story: What emboldened Goldman Sachs to pursue a course that could easily have backfired and driven it into bankruptcy along with AIG?
The answer is quite simple. Goldman Sachs, having key former executives in key positions of the Federal government, knew that the government would step in and cover its potential losses from an AIG collapse. At the heart of Goldman's fraudulent adventures is the incestuous and corrupt relationship between the most powerful Wall Street firms and the government. Wall Street has run the U.S. government for years and it needs to stop.
The U.S. Political System has been Subverted by Goldman's Role in Washington
The accounting fraud perpetrated by Enron pales in comparison to the accounting fraud perpetrated by the too-big-to-fail financial institutions, including Goldman Sachs, yet the Federal government turns the other cheek and does nothing about it.
For decades, the U.S. political system -- including both major political parties, extending from the White House to Congress, to the courts and the media, to the financial elite -- has been subverted by Goldman Sach's role in Washington.
President Obama will never get any serious financial or health care reform done because his administration is stacked with Wall Street insiders from the Clinton and Bush administrations. Accountability for all the financial fraud perpetrated against Americans and the rest of the world will never happen for the same reason. Until you rid Washington of the corruption, hope and change remain nothing but a pipe dream.
Henry Paulson was chairman of the board and CEO of Goldman Sachs before being appointed as Treasury Secretary by George W. Bush in June of 2006. Paulson worked closely with then-New York Fed President Timothy Geithner to engineer the fraudulent bailout in the fall of 2008, including the rescue of AIG to cover potential losses of Goldman Sachs and AIG's other bank counter parties.
Under Paulson's leadership in the Federal government, Goldman Sachs launched its scheme to profit from encouraging the housing market collapse coupled with the downfall of AIG. Paulson was in constant contact with his successor at Goldman's helm during the height of the financial meltdown in the fall of 2008.
The Financial Crisis was Deliberately Created and Exploited
Being in his position, Paulson, in collusion with Geithner and Bernanke, was able to easily orchestrate the back-door bailout of the counter party banks by rescuing AIG. Paulson personally fired AIG's CEO and replaced him with Edward M. Liddy, a Goldman Sachs board member who owned Goldman stock shares that are now valued at more than $4 million.
Appointing Geither -- who has since been implicated in concealing the use of taxpayer funds given to AIG to pay off its bank counter parties, primarily Goldman Sachs, at 100 cents on the dollar by emails exchanged between the New York Fed and AIG -- to the post of Treasury Secretary by President Obama reveals a lot about the character of his administration and the depths of his role in America's financial kleptocracy.
Bloomberg News reported that there is a secret banking cabal intent on destroying the financial system to benefit a few. Again, this has been going on for decades. In fact, instead of enacting stricter regulations on Wall Street, Washington has actually watered down some important protections that were in place.
World Trade Organization's FSA Committed to Deregulating Financial Markets
On March 1, 1999, countries that accounted for more than 90 percent of the global financial services market signed the World Trade Organization's Financial Services Agreement (FSA). By signing the FSA, those countries committed themselves to deregulating their financial markets.
The U.S. signed the FSA and agreed not to break up too-big-to-fail financial firms while promising to repeal the Glass-Steagall Act, which they did 8 months after signing the FSA. The U.S. government has selectively honored contracts as it sees fit, especially this past decade. The idea of a global economy is dangerous and costly. Washington could renege on the FSA as it has the Geneva conventions and a few other agreements, but selling out their constituents has proved more profitable. The deregulation of Wall Street began under Clinton and is being completed under Obama.
Washington is now taking aim at privatizing Social Security and slashing Medicare. Doing either would be a deadly mistake that would further destroy this country.
The financial crisis was deliberately created and exploited to impoverish the American and international working class. There is more than ample evidence to launch criminal investigations into the actions of Wall Street, Goldman Sachs and their accomplices in Congress and the White House.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
More about Timothy geithner, Henry paulson, Ben bernanke, Obama, Political corruption
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