Section of SIGTARP Report Related to Goldman Sachs

SIGTARP spoke with officials from Goldman Sachs and Merrill Lynch (two of AIGFP's largest domestic counterparties) to obtain their perspectives:

• Goldman Sachs: Goldman Sachs had approximately $22.1 billion of notional amount of outstanding credit default swap contracts with AIG, approximately $20 billion of which were against an underlying portfolio of CDOs. According to Goldman Sachs, it had one telephone conversation with FRBNY staff in which the possibility of concessions was mentioned. Goldman Sachs has since explained that it did not agree to concessions because it would have realized a loss if it had. Goldman Sachs did not hold the underlying CDOs but rather had sold equivalent credit protection to its clients who held those positions; Goldman Sachs then purchased the corresponding value in protection from AIG to hedge against its own exposure in the event of a default of the reference CDOs. Accordingly, Goldman Sachs was obligated to pay its clients in full on the other side of the derivative transactions, and, if it granted a haircut to FRBNY, it would have to realize that amount as a loss.

• In addition, Goldman Sachs informed SIGTARP that it had purchased additional credit risk protection against an AIG default. Of the $22.1 billion of credit default swaps outstanding in November 2008, approximately $13.9 billion was resolved through Maiden Lane III. For that portfolio, Goldman had already received $8.4 billion of collateral payments from AIG, representing AIG's calculation of the decline in the fair market value of the underlying CDOs. However, Goldman Sachs believed that the drop in value was actually $9.6 billion, and it purchased credit default swaps and other protection from third parties that would have paid Goldman Sachs slightly more than the difference ($1.2 billion) had AIG defaulted on its obligations. That additional protection, which related to all of Goldman Sachs' AIG hedges, cost Goldman Sachs more than $100 million. Thus according to Goldman Sachs, even if AIG defaulted, Goldman Sachs would be made whole on the Maiden Lane III credit default swaps in light of the collateral it already held ($8.4 billion), the additional protection it had purchased (totaling more than $1.2 billion), and what it calculated to be the value of the underlying CDOs ($4.3 billion). As a result, it did not consider itself materially at risk if AIG in fact defaulted.

• Of course, notwithstanding the additional credit protection it received in the market, Goldman Sachs (as well as the market as a whole) received a benefit from Maiden Lane III and the continued viability of AIG. First, in light of the illiquid state of the market in November 2008 (an illiquidity that likely would have been exacerbated by AIG’s failure), it is far from certain that the underlying CDOs could have easily been liquidated, even at the discounted price of $4.3 billion. Second, had AIG collapsed, the systemic implications on other market participants might have made it difficult for Goldman Sachs to collect on the credit protection it had purchased against an AIG default, although Goldman Sachs stated that it had received collateral from its counterparties in those transactions. Finally, if AIG had defaulted, Goldman Sachs would have been forced to bear the risk of further declines in the market value of the approximately $4.3 billion in CDOs that it transferred to the Maiden Lane III portfolio as well as approximately $5.5 billion24 for its credit default swaps that were not part of the Maiden Lane III portfolio; Maiden Lane III removed any risk for the $4.3 billion within that portfolio, and continued Government backing of AIG provided Goldman Sachs with ongoing protection against an AIG default on the remaining $5.5 billion.

24 Goldman Sachs calculated that the $8.2 billion in non-Maiden Lane III AIG credit default swaps had a market value of approximately $5.5 billion. It had received collateral or bought credit protection slightly in excess of the $2.7 billion difference.