Goldman Confirms $6 Billion AIG Bets

By SERENA NG Goldman Sachs Group Inc. still has $6 billion in trading bets outstanding with American International Group Inc. but had adequately protected itself from problems at the insurer before AIG nearly collapsed last fall, according to a senior executive. In a conference call Friday, Goldman Chief Financial Officer David Viniar described how the bank took steps to hedge its exposure to the insurer from July 2007 through late 2008. Goldman pried billions in cash collateral from AIG and bought large amounts of credit derivatives that would pay out if AIG defaulted on its obligations or filed for bankruptcy, he said. The disclosure comes amid a furor about how the AIG rescue benefited Goldman and other AIG trading partners. The $6 billion in trading bets Goldman has with AIG are mostly tied to mortgages and weren't settled as part of the financial bailout; the wagers are credit-default swaps on bundles of swaps and contain no underlying bonds. Just before the government rescued AIG in September, Goldman had a $10 billion exposure to the insurer under financial contracts AIG had sold Goldman, insuring the bank on $20 billion of mostly mortgage-related assets. Mr. Viniar said Goldman was holding $7.5 billion in collateral from AIG against those positions at that time, and had protected its remaining $2.5 billion exposure using credit-default swaps and other instruments. Goldman received another $8.1 billion from AIG and the U.S. between mid-September and year-end 2008 on swaps tied to mortgage assets. The payments helped make Goldman "whole" on some of its positions. "We had no material economic exposure to AIG," Mr. Viniar said. Goldman's disclosure confirms details previously reported in The Wall Street Journal. In a November page-one article, the Journal documented how Goldman sought to pry additional collateral from AIG on the swaps beginning in 2007 and how the bank took steps to hedge itself amid disputes on how much it received from the insurer. Goldman Sachs held a press conference to dispel rumors swirling around the company's exposure to AIG. Heidi Moore, lead writer for the WSJ Deal Journal tells Kelsey Hubbard what the company revealed. Goldman was one of AIG's biggest trading partners, or counterparties, on credit-default swaps that AIG's financial-products unit wrote to insure large bundles of mortgage securities or mortgage-related bets. Mr. Viniar said Goldman wouldn't have incurred credit losses from its direct exposure to AIG if the insurer had failed. But an AIG failure would have disrupted the markets and made it difficult or expensive to replace some of its trades. Steep declines in the mortgage and credit markets in the fourth quarter of last year forced AIG to fork over more cash to its counterparties. That prompted expansions of the government bailout that now totals more than $170 billion in taxpayer commitments. Critics have questioned why Goldman accepted those payments when its AIG exposure was hedged. Mr. Viniar said Goldman's transactions with AIG were "commercial contracts," and that the bank sought to protect its shareholders. Of the $20 billion in assets on which Goldman bought protection from AIG, $14 billion comprised cash securities that were bought late last year as part of the government bailout of AIG. As a result, the swap contracts were canceled. The remaining $6 billion are financial bets Goldman made with AIG. Mr. Viniar said Goldman has received $4.4 billion in collateral from AIG on those trades to reflect the market decline, indicating the underlying assets are valued at roughly 27 cents on the dollar. For these trades, "we have derivatives with [AIG] and derivatives on the other side," Mr. Viniar said. He said many of the trades stemmed from Goldman clients that wanted to make market bets. Goldman also shed light on its efforts to push AIG to face up to its huge financial obligations, which led to downgrades in the insurer's credit rating and culminated in a liquidity crisis that nearly sank AIG last fall. Mr. Viniar said Goldman began marking down the values of its "collateralized debt obligations," or pools of debt, in July 2007. "This resulted in collateral disputes with AIG," he said. Over the following months, Goldman demanded collateral from AIG as mortgage markets weakened. While Goldman received some collateral from AIG, Mr. Viniar said there were "material gaps between what we were paid and what we believed we were owed." Goldman hedged that gap using credit-default swaps that would pay out if AIG defaulted. The Journal reported in November that Goldman was among the first of AIG's trading partners to start making collateral demands in the summer of 2007 when the residential-mortgage debt market began deteriorating. In August that year, Goldman asked for $1.5 billion in collateral from AIG, but the insurer handed over only $450 million. In October, the bank asked for another $3 billion; AIG disagreed but ended up posting $1.5 billion. In late 2007, when AIG's auditor, PricewaterhouseCoopers LLP, learned about Goldman's demands, it reviewed the values of the contracts and ultimately led AIG to reflect its first major write-down on its swap positions. Those write-downs continued through the end of 2008. Write to Serena Ng at serena.ng@wsj.com