Saturday, March 21, 2009

Did Goldman Sachs Want AIG to Fail?

Zero Hedge runs the numbers:

Purchasing $10 billion in CDS (roughly in line with what Viniar claims happened) at a hypothetical average price of 25 bps (and realistically much less than that) and rolling that would imply that at today's AIG 5 yr CDS price of 1,942 bps, the company made roughly $4.7 billion in profit from shorting AIG alone!

There’s some argument in the comments section of ZH’s blog posting, but you get the idea – Goldman Sachs (GS) did very well in betting against AIG (AIG). Perhaps Goldman was hedging counterparty risk or an investment in another asset class, but this bet alone shielded Goldman from some of the subprime mess and helped keep it alive.

ZH also makes this conclusion:

Implicitly, one could say GS was incentivized to see AIG fail. Does that maybe answer some of the questions of why GS allegedly pulled AIG's collateral and started the avalanche that lead to its bailout? However, a fine point - if AIG had really tanked none of the CDS would be collectible as the entire CDS market would have likely imploded... Thus demonstrating the need for a zombie bank system: not totally dead (systemic collapse) but barely alive to pocket a nice little CDS annuity from daily cash collateral posts as it leaks wider (and taxpayers foot the bill).

The fine point – the potential damage to the CDS market – is not fine at all. It is huge. Goldman would surely like to profit from any bet it makes, but its traders would have assumed that massive trouble at AIG would decimate not only the booming CDS markets. It would crater confidence in the capital markets – the engine of Goldman’s profits.

Now if a scenario like the government financing a Goldman Sachs acquisition of AIG (you never know!, the conspiracy theorists will be out in force. But for now, there’s no reason to believe Goldman would want AIG out of business.