Tavakoli on AIG Swaps: "There’s No Way They Should Have Paid at Par. AIG Was Basically Bankrupt", and Goldman Sachs CFO Lied About AIG

George Washington's picture

Washington's Blog.

Derivatives expert Janet Tavakoli made the following comments by email about the Bloomberg article "New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers":

“There’s no way they should have paid at par,” she says. “AIG was basically bankrupt.”

I agree.

By way of contrast, Tavakoli points out that:

Inc. agreed last year to accept about 60 cents on the dollar from New
York-based bond insurer Ambac Financial Group Inc. to retire protection
on a $1.4 billion CDO.

Tavakoli also says that Goldman Sachs CFO David Viniar lied about AIG:

is a strong statement to say that a CFO lied to the public, and in my
opinion, David Viniar, Goldman Sach’s CFO lied about Goldman’s exposure
to AIG while the AIG bailout was in progress in September 2008. Viniar
spoke about risk management, but that is a separate issue from whether
or not Goldman Sachs would have money at risk due to its direct
business with AIG. Goldman Sachs would have been out billions of
dollars in collateral had a bankruptcy-like settlement been negotiated
with AIG, and that is material. 


This is what David Viniar said during his Sept 16, 2008 investor conference call:

David Viniar - The Goldman Sachs Group, Inc. - EVP, CFO Sure.
Without giving exact numbers, let me just tell you how we think about
this. AIG and Lehman, big important financial institution
counterparties to Goldman Sachs. We did and we do a lot of business
with both of them, as we do with all other major financial
institutions. The way we do business with financial institutions is by
having appropriate daily margin terms. That is how we are able to do
the volume of business with each other that we do. And that goes for
AIG, Lehman, and also Morgan Stanley, and JPMorgan, and Citi, and UBS,
and Credit Suisse. That is how we manage our risk. In addition to the
margin terms, we augment our risk management with appropriate hedging
strategies. You heard at the beginning of my remarks that we believe
one of the biggest challenges we have is to avoid large concentrated
exposures; and we took that very much into account in managing our
credit exposures to Lehman and to AIG, as well as we do with any other
financial institution. Given
that, what I would tell you is given the outcome at Lehman and whatever
the outcome at AIG, I would expect the direct impact of our credit
exposure to both of them to be immaterial to our results.