More Pitchforks?

February 06, 2010

When the mortgage crisis first started unfolding, I remember reading in a number of articles how Goldman Sachs had been more clever than other firms in avoiding heavy exposures to subprime mortgage bonds.  In fact, at least one article pointed out that Goldman had been betting against the subprime securities market for its own accounts, even while still trading the bonds for customers.  

When Goldman's counterparty AIG faltered, the U.S. Government stepped in to back up its insurance contracts on bonds.  The firm itself had traded directly on the parent company's legendary AAA status.  But it turned out they did not have nearly enough capital to cover all the bets they'd made.  Like a bookie who's taken the wrong side of too many "sure things," AIG was busted and American taxpayers ended up having to bail them out.  Among the biggest winners in this game?  Goldman Sachs, who received an estimated $12 billion in taxpayer money funnelled through AIG to make good on their contracts. 

Today's New York Times extends the debate about Goldman's role in the market's unraveling, outlining in a lengthy article how Goldman resisted AIG's attempts to pay less than full value on the contracts, arguing that the securities they'd guaranteed were worth more than Goldman claimed.

Perhaps the commission headed by former California Treasurer Philip Angelides will get to the bottom of who did what to whom.  For now, it seems safe to say that the behavior that seemed so smart two years ago may prove to have been too smart by half when re-examined in the wake of the worst financial crisis in more than 70 years.