Emerging justifications for AIG… Goldman Sachs and the London unit
September 28, 2008
See this NYtimes article for an example of emerging and ongoing construction of justifications for the AIG bailout. The content of the claims for why AIG and not Lehman? Goldman Sachs and the London unit.
Note the different qualities of the arguments mixed in the same piece.
With regards to Goldman, there is more than a whiff of the classic accusation – powerful interests with ties to important people.
- “The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern. / Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.”
The involvement of the London unit takes on a technical flavor, having to do with dynamics of financial contracts, accounting and the firm’s organization.
- “Because the London unit was set up as a bank and not an insurer, and because of the way its derivatives contracts were written, it had to put up collateral to its trading partners when the value of the underlying securities they had insured declined. Any obligations that the unit could not pay had to be met by its corporate parent. / So began A.I.G.’s downward spiral as it, its clients, its trading partners and other companies were swept into the drowning pool set in motion by the housing downturn.”
Powerful interests or systemic risk? The article explores the tension but gives no verdict. If anything it tends towards a hybrid justification where the two are interrelated.
- “Yet an exploration of A.I.G.’s demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected — and astonishingly fragile — financial world that began to implode in recent weeks.”