Goldman AIG To Become Obama's New Scandal

By William K. Black
New Economic Perspectives, June 9, 2015

EXCERPT...

The bailout of Goldman via AIG had two parts. The largely fraudulently-originated mortgages backing Goldman's CDOs suffered crushing defaults as the housing bubble burst and the bad loans could no longer be refinanced to delay the loss recognition. The credit rating agencies, whose managers became wealthy by selling enormously inflated ratings to toxic CDOs and mortgage-backed securities (MBS) finally began to recognize reality and engaged in, by far, the greatest and quickest rating downgrades in history. This should have triggered AIG's obligation to pay the CDS protection for vast amounts of toxic CDOs and MBS - but that would have rendered AIG insolvent and the CDO and MBS holders would have had to recognize vast losses. Other entities that sold CDS protection were in a similar position to AIG and they began negotiating deals to pay roughly 15 cents on the dollar of their obligation. It is better to get 15 cents on the dollar now than risk getting close to zero 18 months from now after the firm that sold you illusory CDS protection is liquidated in a bankruptcy proceeding. This kind of commercial workout is the norm in big finance.

Goldman had already received the twin direct bailouts provided by the Fed and Treasury (through the TARP program). Absent similar bailouts every one of the largest banks in the U.S. and the EU would have failed as the financial markets froze and the economy went into freefall.

But Goldman was the primary indirect beneficiary of two federal bailouts through AIG. The first bailout of AIG was the U.S. purchase of most of most of AIG's equity at a price far above market value. Absent this bailout AIG would have had to declare bankruptcy in Fall 2008. This bailout was strongly pushed by what became the U.S. bailout troika - Ben Bernanke (the Fed Chairman), Timothy Geithner (President of N.Y. Fed), and Hank Paulson (Treasury Secretary). Yes, the same Hank Paulson who was made even wealthier by leading Goldman's purchase of huge amounts of toxic CDOs and MBS and illusory CDS "protection" from AIG.

Goldman is known as "Government Sachs" because of its incestuous relationship with government. Bob Rubin had run Goldman before becoming President Clinton's Treasury Secretary. The Bush and Obama administration were infested with Goldman alums in key positions. The Obama administration also had Rubin protégés like Geithner controlling most of the top financial positions. Indeed, for extensive periods every top Obama economics official has been a Rubin protégé.

While Geithner is famous for his faux indignation that people believed from his slavish devotion to furthering the interests of the wealthiest and most criminal banksters that he had worked at a Wall Street firm, everyone knows that the NY Fed is Wall Street. It functions for Wall Street's CEOs, not the American people, regardless of what administration is in power. Geithner, who has now, formally, joined Wall Street and been made even wealthier, is one of the three most infamous financial regulators in U.S. history. He shares that dishonor with Bernanke and the worst-of-the-worst, Alan Greenspan. The Financial Crisis Inquiry Commission (and even the Fed's own external report) confirm what we all knew - even among the embarrassment that was "Fed Lite" regulation globally, the NY Fed stood out as uniquely terrible because of its servile approach to the elite banksters.

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http://www.econmatters.com/2015/06/goldman-aig-to-become-obamas-new-scandal.html