The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who's Who of Goldman Sachs graduates.
Now he's going to publish, very shortly here, a piece explaining that AIG didn't necessarily have to die with its hands in the structured finance cookie jar:
The collateral calls that AIG faced from Goldman and other companies actually had nothing, or very little, to do with the credit default swaps in the actual deals. What happened was this: the subsidiary of AIG that wrote those contacts, a company called AIG Financial Products (AIGFP), wrote them in such a way that their customers could demand cash collateral in the event that the parent company, AIG, suffered a downgrade in its credit rating. At the time the contracts were written, primarily before 2006, the idea that AIG would suffer a downgrade was almost unthinkable; it was the world’s largest insurance company and considered one of the strongest firms in the world.
However, in 2006, AIG got wrapped up in a major securities fraud scandal in which the company was caught using sham transactions to hide losses. AIG ended up having to pay $800 million in fines and the scandal led to a downgrade of AIG’s credit rating, which in turn led to Goldman making the first of its collateral calls in the summer of 2007. Collateral calls happen when an investor or customer is sufficiently worried about your long-term liquidity that it demands cash to make itself feel better about having tons of money tied up in your future. AIGFP’s contracts allowed customers to make such calls in the event of a downgrade, and that’s why the firm became vulnerable so shortly after the 2006 scandal.
