US investment bank Goldman Sachs has refuted allegations that it profited improperly from the state rescue of insurance giant AIG and that it took positions against clients to whom it had sold high-risk property assets.
Goldman Sachs said in a letter to shareholders on Wednesday that AIG was a top credit-rated company with which it had had a wide spread of sophisticated financial business relationships since the mid 1990s. The letter was signed by the chief executive of Goldman Sachs, Lloyd
Blankfein, and the chief operating officer Gary Cohn. The bank, noting that in the last year its relationships with AIG had attracted much interest, said that it had handled its credit arrangements with AIG in the same way as with other big groups, and that “collateral arrangements were tightly managed.”
Goldman Sachs said: “We limited our overall credit exposure to AIG through a combination of collateral and market hedges in order to protect ourselves against the potential inability of AIG to make good on all its commitments.” These arrangements were similar to those it used with “most other counterparty relationships.” In a key passage of its defence against criticism of conflict of interest, the bank said: “As part of our trading with AIG, we purchased from them protection on super-senior collateralized debt obligation (CDO) risk. “The protection was designed to hedge equivalent transactions executed with clients taking the other side of the same trades.
“In so doing, we served as an intermediary in assisting our clients to express a defined view on the market.”The net risk we were exposed to was consistent with our role as a market intermediary rather than a proprietary market participant.”In July 2007, as the market deteriorated, we began to significantly mark down the value of our super-senior CDO positions.” Rigorous accounting and daily trading as a market maker led the bank to reduce its valuations of assets as prices changed. Goldman Sachs said it believed that this policy meant that it had revalued assets downwards “earlier than other institutions” and that this had resulted in collateral disputes with AIG.
“We believe that subsequent events in the housing market proved our marks to be correct — they reflected the realistic values markets were placing on these securities.” In March 2009, AIG said that Goldman Sachs had been the company to benefit most from from 52 billion dollars of public funds used between September and December 2008 to unwind positions taken by the Financial Product subsidiary of AIG. Goldman Sachs had benefited to the extent of 12.9 billion dollars, including 4.8 billion dollars’ worth of US Treasury bonds that AIG had committed in return for a loan of 4.8 billion dollars.
“If AIG hadn’t repaid the loan, we would simply have sold the securities and received the 4.8 billion dollars of value in that way.” AIG also owed 2.5 billion dollars in respect of trades that occurred between the rescue on September 16, 2008, and the end of 2008. Goldman Sachs also received 5.6 billion dollars linked to a special financial vehicle called Maiden Lane III, created in the middle of November 2008 by the US Federal Reserve central bank to unwind high-risk positions taken by AIG. “The Federal Reserve required that the counterparties deliver the cash bonds to Maiden Lane III in order to settle the CDS contracts and avoid any further collateral calls,” they said.
Goldman Sachs said that it was continuously taking all manner of positions in the market as part of its normal business. “This does not mean that we know or even think that prices will fall every time we sell or are short, or rise when we buy or are long. “Clients come to us as a market maker because of our willingness and ability to commit our capital and to assume market risk.” The letter said: “We are not ‘betting’ against them.”
New York, April 8, 2010 (AFP)
