After years of doing absolutely nothing, the US Securities and Exchange Commission (SEC) appears to finally be investigating the role Goldman Sachs played in the failure of American International Group (AIG) and the collapse of the US mortgage market. Gretchen Morgenson and Louise Story report for the New York Times that AIG had already covered Goldman’s insured losses by January 2008. The insurance giant suspected it had overpaid on Goldman’s claims and wanted some of its money back, “insisting that Goldman—like a homeowner overestimating the damages in a storm to get a bigger insurance payment—had inflated the potential losses,” write Morgenson and Story. Goldman, for its part, wanted even more money all the while “resisting consulting with third parties to help estimate a value for the securities,” Morgenson and Story report.
In addition to the billions it received from AIG, Goldman also soaked the US taxpayers to the tune of US$12.9 billion.
You know the rest of the story: AIG bailed out Goldman and the US taxpayers bailed out AIG to the current tune of US$180 billion, with no guarantee that’s the end of it.
The SEC reportedly wants to know whether the demands of Goldman and other Wall Street firms “improperly distressed” the already flailing mortgage market. What’s not in doubt is that in 2006 Goldman began to make enormous bets that the US mortgage market would fail. As the mortgage market imploded, Goldman’s profits soared. It’s not inconceivable that Goldman would undervalue the securities in dispute with AIG. After all, the lower the securities were valued, the higher Goldman’s profits. Independent reports—if there is such a thing on Wall Street—indicate Goldman consistently valued the securities at prices lower than third parties, according to Morgenson and Story.
This is not to say that AIG is blameless in this fiasco. As Morgenson and Story report, AIG gambled heavily by writing more insurance than it could have ever possibly covered. More importantly, “without the insurer to provide credit insurance, the investment bank could not have generated some of its enormous profits betting against the mortgage market,” write Morgenson and Story.
