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.”

6 Responses to “Emerging justifications for AIG… Goldman Sachs and the London unit”

  1. yuvalmillo Says:

    Good quotes! Maybe I’m a cynic, but the revealed very tight interpedently between Goldman Sachs and AIG may help to explain why Paulson was on his knees before Pelosi, begging for a deal. It was not only the fate of the US economy at stake, it was also the jobs and the nice lifestyle of his old buddies. Just a reminder: he was in GS from 1974 until he moved to the administration, a few years ago.
    About systemic risk: as we discussed here about a week ago, systemic risks cannot be assessed in advance – this is what makes them systemic – they are like the AIDS of the financial system. No one has ever seen an AIDS virus, only its antibodies witness, circumstantially, as to its existence. Same with systemic risks: we can only assume that certain situations may contribute to the crystallisation of systemic risk situations, but that’s about all we can do.

  2. marthapoon Says:

    wait! there IS an HIV virus. what has been questioned is whether it is the cause of the AIDS syndrome.

    as epstein documents in Impure Science (1996) Duesberg did raise the question that there was no direct evidence that HIV was the cause of AIDS if by causality the principles of classic virology enunciated by Koch were invoked. however, it seems to me a somewhat loose invocation of sts scholarship as well as of infectious disease models to suggest that there is no virus involved in AIDS…

    biological contagion is a very material process; it is not ‘social’ in the cognitive and psychological sense as both Gladwell and now Shiller’s metaphorical use of it would have us believe…

  3. typewritten Says:

    Martha, yours is a pretty good point here in that comment. Social students of finance and behavioral economists are often inclined to use the “contagion” metaphor but, oddly enough, to refer to mental transfer of opinions and states of mind, i.e. not at all in the material sense of biological contagion (which they should).

    On the financial metaphors scene, it’s nonetheless interesting that financiers and commentators have been recently heard using the idea of “toxicity” to refer to financial products, in a quite material-literal way.

  4. yuvalmillo Says:

    The AIDS virus was not a metaphor, but an example: financial contagion is just as material as biological contagion. Similarly, the materiality of financial systemic risks is the same as that of the AIDS virus. In both cases, we don’t have direct evidence (from a positivistic perspective) to their existence, but we know of the circumstances that bring about the symptoms of AIDS and the symptoms of a systemic financial collapse.

  5. typewritten Says:

    Ep, what do you think of this?

    http://krugman.blogs.nytimes.com/2008/10/01/bailout-narratives/

    Not bad, but I prefer Socfinance.wordpress.com.
    😉


  6. […] these massive financial firms makes some sense. Much was made after the fact, for example, of the massive, dangerous interdependence of AIG and Goldman Sachs, and conceivably if Fed officials could have picked up on that, intervention with AIG could have […]


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