Did Goldman Sell Its $2.5 Billion AIG CDS While In Possession Of Material, Non-Public Information?

Tyler Durden's picture

As frequent readers will recall, on March 20, 2009, David Viniar and Lucas van Praag held a conference call in which, for the first time, the firm discussed the impact of its hedging on AIG as well as its collateral and otherwise exposure with the nationalized insurer. The full transcript of the call can be found here, while our immediate comments on call, which we posted after the call, are replicated below in their entirety:

In a nutshell - Goldman had bought billions in AIG CDS in the 2004 to
2006 timeframe. Whether this was predicated by their expectation that
subprime would blow up, or their very early understanding just how bad
things at AIG were, one will never know, especially not the SEC.
However, one look at the CDS chart below shows what prevailing levels
for AIG's CDS was in that time frame. As one can see, AIG 5 yr CDS
traded in a range of 4 bps to 52.50 bps between October 1, 2004 (only
goes back so far) and December 31, 2006. Indicatively 5 yr CDS closed
yesterday at a comparable running spread equivalent of 1,942 bps.

$10 billion in CDS (roughly in line with what Viniar claims happened)
at a hypothetical average price of 25 bps (and realistically much less
than that) and rolling that would imply that at today's AIG 5 yr CDS
price of 1,942 bps, the company made roughly $4.7 billion in profit from shorting AIG alone!
This would more than make up for the $2.5 billion collateral shortfall
(out of $4.4 billion total) GS claims AIG had with Goldman Sachs... If
AIG had filed for bankruptcy, and assuming Lehman is any indication,
the P&L would have likely hit $6+ billion.

Implicitly, one could say GS was incentivized to see AIG fail. Does
that maybe answer some of the questions of why GS allegedly pulled
AIG's collateral and started the avalanche that lead to its bailout?
However, a fine point - if AIG had really tanked none of the CDS would
be collectible as the entire CDS market would have likely imploded...
Thus demonstrating the need for a zombie bank system: not totally dead
(systemic collapse) but barely alive to pocket a nice little CDS
annuity from daily cash collateral posts as it leaks wider (and
taxpayers foot the bill).

Now that the dust has settled somewhat, we can refine this analysis: we now know that our original read of Viniar's words was excessive, and in fact Goldman only had $2.5 billion in long AIG CDS exposure. The linear relationship on P&L, keeping in line with the above math, means the profit on the CDS transaction was a quarter of the suggested $4.7 billion, or roughly $1.2 billion: still a staggering number for a firm that fundamentally did not experience any risk with regard to its CDO exposure, which as everyone and the kitchen sink now know, was paid down to goldman at par, thus assuring no P&L hit on the underlying security.

So far so good.

Yet the reason we bring up the topic of Goldman's AIG CDS transaction is due to a post James Keller which points out some distubring observations.

The bigger story, still unexplored by regulators and Goldman's
critics, concerns that $2.5 billion in protection Goldman had acquired
before the crisis hit. What became of those hedges? What did Goldman
Sachs do with its AIG protection?

Goldman spokesman Lucas van Praag made a disingenuous case in a letter to the Wall Street Journal
last April. He implied that nothing much became of the hedges: "In
order to collect under a credit default swap, there has to be an event
of default. No event of default means no payout." Goldman would have us
believe that since AIG did not default, the CDSs expired and vanished

The latter is of course not the case, and as we demonstrated 9 months ago, the company very likely sold its protection at a massive profit to cost. Keller continues:

This is not quite right. A company can avoid default, but one can make
a lot of money selling protection on the company when everybody else
thinks they are going to default. That is especially true if one has
been involved in meetings with the Fed where the subject of the
meetings was how to avoid such a default. A good trader buys protection
when a company seems very safe, and sells it when the company seems
very risky. It is not appropriate for a trader to sell protection when
he has non-public information that the risks have diminished, that the
government has unequivocally committed to saving this company.

The last sentence is critical, as while debate may rage over the definition of front running as it applies to Goldman, its clients, and its prop desk, trading on material, non-public information is broadly frowned upon by everyone in the marketplace.

When did Goldman sell its $2.5 billion of AIG protection? Goldman
representatives have said that the protection was sold in the six
months following the September 15, 2008 bailout loan
. This is
problematic. That is so because the details of the bailout were not
released until March 15 of last year, when the famous AIG counterparty
payments at last became public

This suggests that Goldman sold its protection to counterparties
that knew materially less about the actual risk of AIG than Goldman
Remember that this bailout was specifically designed to avoid an
AIG default, the event that forces Credit Default Swaps to be
triggered. Goldman, in frequent conversations with Paulson and
Geithner, knew that the government had just committed $85 billion to
avoid exactly this outcome.

And it keeps on getting worse for the vampire squid.

The rest of the world, purposely kept in the dark, saw the risk of
an AIG failure as imminent. In fact, on September 21, 2008
then-Treasury Secretary Paulson went on Meet the Press and
explained that the $85 billion bailout loan would "allow the government
to liquidate this company.
" Paulson may have been speaking loosely, but
in the specific language of Credit Default Swaps a government
"liquidation" is a Credit Event akin to bankruptcy and would "trigger"
these swaps
. This is why, immediately after the bailout was announced,
the cost of protecting AIG risk skyrocketed. It rose to more than 40%
of the amount hedged; meaning that Goldman, which had $2.5 billion in
hedges, would have been sitting on over a $1 billion profit. [
This number is in line with our estimates]

Not bad, even for Goldman. The government had just met their
collateral calls, their risk to AIG was gone, and their hedges were in
the money by $1 billion. What to do now? The right thing is to not sell
the protection until the full details of the bailout are in the public
domain. To wait until you have no material, non-public information.

It appears Goldman did not wait until after March to sell its
protection. Yet Goldman has denied making a windfall gain on AIG. AIG
CDS protection ended the second quarter of 2008 at about 200 basis
points. From September 15, 2008 to March 15, 2009 AIG CDS never closed
below 400 basis points. It is hard to see how Goldman could not have
had a windfall. Depending on when Goldman sold this protection, the
gain could have been as much as $1.5 billion. This would mean that
while most of AIG's counterparties got 100 cents on the dollar, Goldman
actually got far more.

This was the point of our original post all along, yet at that point we ignored the implications of the just released revelations of AIG's counteparties "make whole" agreements, which were certainly not public prior to March 15, except to Goldman and a select other few. The only exculpation is if such material CDS trades occurred in the presence of "big boy" letters, which as far as we know has never occurred.

In conclusion we thoroughly agree with Keller, that while anger at Geithner over the AIG fiasco is well warranted, the true culprit, with potential alleged elements of actual criminality even according to our flawed, corrupt and broken regulatory system, is and has always been Goldman Sachs.

Criticism of Geithner seems appropriate. Paying counterparties 100
cents on the dollar was unnecessary. Keeping the whole thing a secret
was indefensible. Allowing windfall profits was unconscionable. But the
Fed's behavior may not be the worst element of this episode.

Frankly, it is hard to see how, in having sold its AIG protection
before March 2009, that Goldman Sachs can avoid the appearance that
these trades were improper. Over a year on, we still await a clear
explanation of how much the firm made from this protection and how its
subsequent sale can be justified when Goldman had information that the
federal government was deliberately keeping from the public.

Once again, we encourage Congress to invite not just Tim Geithner, but Messers Van Praag and David Viniar to provide additional disclosure on the exact timing of their AIG CDS sales, and specifically whether these transactions occurred prior to March 15, while the firm was in possession of material non-public information.

Update: For those who claim the SEC has no regulation over CDS trading, we strongly suggest you read the following.

While it is worth noting that the definition of ?security-based swap agreement? has never be litigated in this context (a point the defendants are likely to stress), the commission will likely argue that CDSs are security-based swaps subject to the SEC‘s antifraud jurisdiction. Under the GLBA, a ?swap agreement? is ?any individually negotiated contract, agreement, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices or other assets ...[22]

In other words, ?an OTC derivative is "securities-related" when the reference is to an entity that is an issuer of securities (such as a public company), to a security itself (or a related event such as a dividend payment), to a group or index of securities or issuers, or based on related aspects of a security or group or index of securities or issuers, such as price, yield, volatility, dividend payments or value.?[23]

The SEC will likely argue that the VNU-related CDSs referenced bonds issued by the VNU holding company, and that such bonds are securities, therefore, the CDSs are "security-based."

The SEC will attempt to persuade the court to recognize that CDSs and the obligations they reference are so interrelated, that a finding against them would cause of anomalous result of permitting the SEC to pursue insider trading actions involving derivatives based on domestically traded securities but not those based on securities traded elsewhere, especially where derivative transactions might have effects in the United States. The commission will likely point to other ?long-arm? cases it has brought (and won) to convince the court that the defendants should be subjected to the commission‘s enforcement jurisdiction.


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TraderMark's picture

Following up on your story on SocGen's excellent analysis on Japan's sovereign debt yesterday, Kyle Bass of Hayman Capital this morning - "Japan defaults in 3-4 years" (or devalues) and US to follow in 10-12 years.

(7 min video)


suteibu's picture

Great video.  Thanks for the link.

WaterWings's picture

Here's an interesting video:


"Is that a bible! Hit the deck!"

suteibu's picture

I saw that one earlier.  Where do these guys come from?

trav7777's picture

Interesting...I made a prediction in 2006 or 07 of a Japan sovereign default in 2009.  Guess I was a little early.

I've thought Japan goes down as a matter of their debt/GDP and structural imbalances for some time.  During the meat of the boom then bust, 2009 looked to be a good target and jibed with what some like Volcker were calling for sovereign currency crises in 2009.

I made predictions a few years prior about what will unhinge the financial system - the Fed will lose control of the POG.  If/when that happens, all hell will break loose.

Machiavelli's picture

Why is this a big deal? Isn't it Goldman's business plan to trade on insider information leaked by the branch of Goldman inside the Treasury?

Ripped Chunk's picture

That's what I thought?? A no-risk business plan.

If you went to the right school and belonged to the right clubs insider trading isn't a crime.

Everyone else burns for it.

aint no fortunate son's picture

This hearing is great - blankfein looks ready to melt down any second.

Anonymous's picture

Whatever it takes to steal from the taxpayer... as long as it's the taxpayer it's legal baby!

Figured the masses would have figured that out by now.

Cindy_Dies_In_The_End's picture

Why someone doesn't hit them with a "Little RICO" lawsuit and get this shit over with, is beyond me (paging Mr. Cuomo).


even if the suit goes nowhere, the discovery documents from it would tell all.


Also, I guess no one there is game for a qui tam.

Anonymous's picture

why?....b/c just like the swiss tax evasion investigation was squashed....the discovery process would reveal the names of big people and politicians...and then what?

pros's picture

Stick a fork in GS...and their friends in Washington...

they're done


but it'll take a while..

check out the Watergate timeline...years


but this is way, way bigger

Ripped Chunk's picture

That is why it will take much longer. Nixon had enemies and it still took some time. This "cartel" runs the whole fucking show.

deadhead's picture

Keep it up Tyler, keep it up.

Like water on a stone.

Keep it up.

Thank you!

Anonymous's picture


The problem here is that there is no regulator for the CDS mkt. Insider trading is not illegal, but widley done. /they arre unethical but not criminal

Arco's picture

Exactly. The deeper you dig the more unethical finds you'll find, but it'll be very hard to find anything they do illegal. Especially with the teams of lawyers on staff and in third-party firms working for them--not to mention the Treasury.

Anonymous's picture

It seems to me that this is a critical point. I'd like to hear a response from people who know more about it than me.

tom a taxpayer's picture

Just get a criminal case to a jury. No plea bargains. In this case, I believe there is a good chance a jury would deliver justice.


See link to pdf Criminal Enforcement of U.S. Securities Law, including pages 11-13 on criminal prosecutions for insider trading.



jedwards's picture

Excellent work. For fuck's sake, SEC, at least ONE of these fucking allegations has got to stick.. DO YOUR FUCKING JOBS AND DO SOMETHING!!!

Anonymous's picture

I wish,unfortunately, shit doesn't sink.

Ripped Chunk's picture

"at least ONE of these fucking allegations has got to stick"

We see now perhaps when it is too late, what we are up against.

Anonymous's picture

would anyone forward this to a congressional staff, so it can be read during the hearings today?

Orly's picture


Assetman's picture

What it means is that Goldman didn't get 100 cents on the dollar for the AIG bailout.  They got roughly 150 cents on the dollar, due to the illusory AIG bankruptcy.

Way to go, Timmy, Hank, and Uncle Ben.  Job well done!

When we look back at this, I'm convinced that people will be left wondering why Hank Paulson shouldn't be given a life sentence.

Not that I have anymore sympathy for the other two.

ghostfaceinvestah's picture

Granted Paulson was corrupt and conflicted, but at least he is gone, I have a much bigger problem with Bernanke, he is going to be re-nominated for Christ's sake.  It was the Fed that enabled the bailout of AIG, the Treasury didn't have the funds to do it.

No Fed bailout money, no Goldman bailout via AIG.

Assetman's picture

I don't disagree with any of those points, Ghost.

It's just that Paulson does not deserve to be forgotten in this mess precisely because he had a direct hand in enhancing GS' fate-- at the expense of many others.

Bernanke is, indeed, a big problem as a renomination only extends the corruption.  But since Ben has demonstrated an unwavering willingness to be a "team player" in a den of thieves, he is exactly what we're getting.

TheGoodDoctor's picture

I was kind of hoping he would be drug through the streets so that everyone would get their chance to spit on him for what he did to America.

Stuart's picture

Nah!  Would Goldman do something like that?

Stuart's picture

The world is Goldman's oyster, free to manipulate and play as they see fit.   Does not matter who the other playa is.  Goldman is as Goldman does. 

curbyourrisk's picture

Why isn't this check mate against the cash machine known as GoldmanSachs?

Cyan Lite's picture

There are many, many politicians, staffers, spouses on the Goldman Sach's payroll.  There's nothing wrong or illegal with GS hiring a congressional staffer's wife at an outrageous salary (just ask Michelle Obama).  $100-200k a year is quite cheap to protect a multi-billion dollar a year racket.



buzzsaw99's picture

Anyone who does business with GS deserves the screwing imo.

Stuart's picture

BUT it is also the unwilling taxpayer who is also getting screwed, deliberately and purposefully by Goldman.   Much the same as a few hundred thousand taxpayers with clubs can deliberately and purposeful exact their pound of flesh from each of those complicit in the original heist.

buzzsaw99's picture

Write your CONgreffman.

Anonymous's picture

Have they managed to capture government so completely that nobody at all can stand against them? No other interest in the USA can win bureaucratically in DC or what? It's unreal--it's a nightmare of post-Soviet Union scale.

buzzsaw99's picture

Have they managed to capture government so completely that nobody at all can stand against them?


trav7777's picture



They control the currency.  It matters not who makes the laws.

It took basically armed action and enduring a total bust for Andrew Jackson to throw these people out and they were back again within less than 30 years.

The system enables these people to have massive real wealth even if the currency is based on shit.  They pile up producing assets, real things, gold, whatever with their inflation dollars while an increasing share of people live paycheck to paycheck.  This is the equivalent of serfdom for most.  A lucky few ride the bubble adroitly and elevate themselves to wealth as well, but most simply get rolled by it.

Anonymous's picture

Not misplaced; just not inclusive enough.

Conspiracy was never more apt a description for this ripoff
of the American people.

As for any organization who, after realizing what Goldman Sucks has done, is now doing and will do again if their counterpartys (ies?)continues to do ANY business with them,
they should know that they will not be bailed out under any circumstances.

Anonymous's picture

Who gives a fuck anymore? The US is doomed. The banksters have won. For every piece of fraud that is discovered, three more Pieces of fraud emerge. I have closed my Chase account. I will vote Republican. The only way That this problem will end is by the total economic collapse of the US ( Run out of money).

buzzsaw99's picture

Most astute comment ever. Kudos.

Anonymous's picture

It's just my opinion. There's nobody guarding the hen house from the wolves. I see right through this sideshow.

trav7777's picture

no...no, no, no

Years ago when the GOP had a lock I said that we should eliminate the labor unions not because I dislike unions but because they are a main money funnel for the Democrap party.  Also, this was not out of support for the GOP it was a pragmatic step.

We MUST kill one of the political parties.  Right now that means vote AGAINST the GOP.  I know, I really do that this is counterintuitive, but it IS the right thing to do.  Only once one of the parties is dead will the other collapse of its own weight.

People, please, pick the weaker gazelle...don't strengthen it.  Kill it.  Whichever it is.  Vote FOR the party in power...nothing will change until and unless we have a political revolution but that cannot happen so long as we have this two-party illusion.

Just look at how much more quickly one-party rule speeds the collapse.  There is no choice now but to endure what's coming and the sooner, the better.

If we vote the GOP back into power they will simply do the same things because they ARE establishment just as surely as Democraps are.  Repugnicons do not stand for change or anything of the kind, they stand for Repugnicons getting paid.  They will simply perpetuate the mess while lining their own pockets.  If this collapse drags on, they will succeed in migrating more and more of your money into their pockets.  When the end does come, you'll be destitute.  Let's have the collapse NOW before our society and infrastructure so degrades due to neglect that there is no road out.

TheGoodDoctor's picture

Well, why not support Ron Paul?

Anonymous's picture

excuse me, HST would never recommend a GOP candidate NEVER.

Anonymous's picture

Yea, vote Republican so we get another Bush, who appoints another Paulson. That'll fix it!

seventree's picture

Vote any way you want, once in office the winners will be introduced to reality and toe the line. The federal government and anyone who is part of it derives power from the ability to spend without limit, and at this point that means perpetuating the schemes that keep the phoney-money maching going. They are riding a tiger and there is no getting off at this point.

Ripped Chunk's picture


Many good people have tried political office only to quit in disgust (Bill Bradley for one)

Thinking that party politics means anything is ludicrous.  the daily show of Dem vs Repub, Liberal vs Conservative is the oldest crowd control technique know to "civilization": Divide the masses, control the masses.

Please wake up.