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Bailing Out AIG Like Goldman's Life Depended On It


How Wall Street's finest benefited from the Too Big To Fail doctrine.

Goldman Sachs (GS) is about $13 billion richer, thanks to money from the Federal Reserve funneled to the Wall Street firm through American International Group (AIG).

This appears to dent, and maybe demolish, Goldy's reputation as a sage, button-down company that knows how to limit risk better than its competitors.

The money Goldman Sachs received via AIG between last September and December is stunning: $2.6 billion in collateral from AIG Financial Products, $5.6 billion to purchase securities underlying selected credit swaps and $4.8 billion to meet lending agreements.

The federal bailout of AIG now totals about $160 billion and Goldman Sachs is one of the largest beneficiaries. Federal officials say the money was needed to prevent the collapse of the insurance company and avoid the threat its failure posed to the US financial system. On Sunday, AIG bowed to public pressure and said it shoveled a total of about $105 million to Societe General, Deutsche Bank (DB), Goldman Sachs, as well as several US states, including California and Virginia.

Someone is bound to ask why US taxpayers bailed out foreign companies when Lehman Brothers was allowed to fail. But that's almost a side issue for Wall Street watchers because of the amount of bailout money that flowed to Goldman Sachs. This plays out against AIG's announcement that it awarded about $165 million in retention bonuses to workers who handled the deals that helped set off the global credit crisis.

In the past, Goldman Sachs said it had no significant exposure to AIG and noted that what few dealings it had with the insurer were offset by collateral and hedges. In short, Goldman said its ties to AIG were, in the jargon of Wall Street, "not material."

The exposure may have been hedged, but $13 billion is still $13 billion more than Uncle Sam has given John Q. Citizen, directly or indirectly, in the economic downturn. Moreover, that amount of money suggests Goldman Sachs had significant interests in AIG.

It therefore appears that Goldman Sachs, like many others in the banking industry, was heavily dependent on AIG's health. The argument that AIG is too big to fail appears to be a good one, but that doesn't explain Goldman's prior denials that it was deeply involved with AIG. Ego is the simple explanation, but Goldman Sachs probably understood AIG's dicey condition and quickly calculated the hole it would punch in its finances and image if the insurer failed.

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No positions in stocks mentioned.
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