In the latest of many recent, strange turns regarding the Greek sovereign debt crisis (and for that matter,
any sovereign economic crisis where Goldman Sachs was a major player in restructuring debt), all one has to do is connect the dots regarding recent, publicized pronouncements and analysis about the Goldman-AIG relationship to reach a rather grotesque and bizarre conclusion: there's a very strong--
albeit not fully-confirmed--possibility that the U.S. taxpayer may end up being on the hook for significant amounts of unacknowledged debt due to the unbridled behavior of Goldman-AIG in their run-up to American
International Group's nationalization by our government in September, 2008. (Folks, for all we know--and we'll probably know a lot more quite soon--we could be talking about trillions of dollars in "notional" derivatives liabilities, heretofore unmentioned, that would fall immediately into the laps of U.S. taxpayers if certain sovereign states default on their debt.)
But, don't take
my word for it--although I'm going to explain why the writing
may already be on the wall here as far as this nightmare's concerned--the very concept of this matter, nevermind a story just published in a highly-respected German paper over the past day--has kept Naked Capitalism's Yves Smith up late, tonight, writing about it: "
German Paper Says AIG May Have Sold CDS on Greece."
German Paper Says AIG May Have Sold CDS on Greece
Yves Smith
Naked Capitalism
February 21, 2010 (1:10AM)
From FAZ. Note the text below, translated by EuroSavant, replaces an earlier GoogleTranslate version. You can read an English version of the entire article here.
In the larger scheme of things, this example shows how AIG could have, and probably did, serve to channel funds from the public at large to speculators.
London investment bankers name AIG as a further CDS-seller. That company had to be nationalized during the financial crisis due to its having written insolvency insurance on American mortgages. This debt-load would have led to the collapse of the world's biggest insurer. Prior to the financial crisis AIG is said to have widely held State credit-risk. If yet-larger insurance positions on Greece exist, then the American government would have a strong interest in preventing that country's insolvency.
Even if these are mere rumors about the Greek banks and AIG, this example makes clear the weakness of CDS markets. This protection is sold by banks or insurers who themselves have access only to limited capital resources. They have as a rule clearly lesser credit-worthiness than the states for which they are selling insolvency protection. Insurance by CDS could turn out to be just a bubble.
Bold type is diarist's emphasis. Also, as the second link in Smith's post tells us: Frankfurter Allgemeine Zeitung, or FAZ. is frequently referred to as Germany's version of the NY Times.
The implications here are nothing short of stunning, IMHO. As the quotes above not-so-tacitly note: it really doesn't even matter whether or not the story's 100% accurate (although, IMHO, I think the likelihood it is far outweighs the likelihood it's not, as I detail my reasons on this a bit, below, and in the links which follow them). Just the fact that this could happen (or, may have already occurred), in light of the reality that U.S. taxpayers would be responsible for these derivatives-related liabilities, is beyond the pale!
The facts are fairly simple:
1.) Goldman arranged swaps deals almost exclusively with AIG (unlike most other Wall Street players) to hedge/leverage most of their own business.
2.) Goldman was either the lead player or the co-lead on many sovereign debt deals around the globe, including the last 10 Greek sovereign debt offers.
3.) Getting to the heart of the conflict-of-interest claims and stories made by a multitude of MSM and blog-based pundits regarding the highly-obfuscated truths concerning the Goldman-AIG relationship, the reality is the ONLY way out for Goldman to have--for all intents and purposes--maintained solvency in September 2008 was to make certain that AIG did not declare bankruptcy, because then virtually all of the actual liability for AIG's swaps deals would have fallen upon those that created, managed, and brokered their deals (i.e.: Goldman, etc.).
So, if Greece--or any sovereign state--defaults on their debt, will those respective sovereign bondholders aim their legal guns at the firms involved in structuring those deals; or are these bondholders already getting ready to make claims against the U.S. government (i.e.: AIG) for credit default swaps that were also sold to leverage those deals, in the first place (and we just don't know it yet)? (Or, both!?)
Looks like yet another appropriate moment to repost my favorite Harry S. Truman quote: "The only thing we have to fear is the history we don't know."
# # #
For more background on this...
2010--
"Voila! Greek Gov't Appoints Ex-Goldman Exec As New Debt Chief" (2/19/10)
"Greece Loses EU Vote Status Amidst Goldman Revelations (updated)" (2/17/10)
"Germany: 'Goldman broke the spirit of Maastricht Treaty...'" (2/16/10)
"Johnson: Eurozone May Ban Goldman, Humiliate Fed (updated)" (2/15/10)
"First Greece; Now Spanish Intelligence Opens Wall St. Probe" (2/14/10)
"Does Wall Street Now Openly Control U.S. Foreign Policy, Too?" (2/9/10)
From Zero Hedge: "The Ever Increasing Parallels Between AIG And Greece... And The CDS Puppetmaster Behind It All" (2/8/10)
From Gretchen Morgenson at the NYT: "Testy Conflict With Goldman Helped Push A.I.G. to Edge" (2/7/10)
How Paulson's People Colluded with Goldman to Destroy AIG... (1/28/10)
Fed-AIG Scandal For Dummies: Corporate Kleptocracy Edition (1/27/10)
Is Geithner Toast? Barofsky Announces 2 New Fed-AIG Probes (1/26/10)
Reuters: SEC Considered AIG Bailout National Security Matter (1/25/10)
Naked Capitalism Guest Post: AIG Bailout Secrets Exposed! (1/23/10)
Breaking (Update): Fed Denies House Subpoena For AIG Docs (1/12/10)
2009--
3 Fraud Probes Target Goldman, AIG: Is It "The" Story of 2010? (12/28/09)
"The AIG-Wall St. Bailout Corruption Story That Won't Go Away" (12/23/09)
"Breaking WSJ: Massive Goldman-AIG Bailout Conflict Of Interest" (12/12/09)
"New Economic Travesties: GDP Revision, Goldman/AIG, Reform" (11/24/09)
"Goldman's Eviscerated In NYT; Admits Geithner's 'AIGenerosity' (11/22/09)
Gretchen Morgenson, over at the NY Times: Revisiting a Fed Waltz With A.I.G." (11/22/09)
"Fed'l Reserve, IG Barofsky: Paulson, Treasury Lied To Public" (10/6/09)
One of Gretchen Morgenson's (NYT) best pieces of the entire recession: "Member and Overseer of the Finance Club" (4/27/09)
"Is it the largest betrayal of public trust in history?" (3/15/09)
"Doesn't Geithner's Middle Finger Look Just Like Paulson's?" (3/12/09)
"Wall St. Bailout: Is A Massive Scandal About To Unfold?" (3/8/09)
"On Geithner, NYT Leak and TARP II Drama: Kuttner Nails It" (2/13/09)
2008--
"Fed Refuses to Name Recipients of $2 Trillion Bailout" (11/10/08)
"Paulson/Fed Gives O.K. To Banks To Steal Your Money! (For real!)" (9/16/08)
"BREAKING: NY Times, 'AIG joins Merrill and Lehman in Wall Street Collapse'" (9/15/08)