by Matt Taibbi
And as long as the deals kept rolling, Neuger’s losses would remain hidden, or at least intermittent and therefore manageable. At the very least, this is what the state insurance officials, examining things jointly in June, expected.
“We didn’t see any reason why the counterparties should worry,” says the state official. “The stuff was still valuable. There wasn’t much risk.”
But then something surprising happened. The counterparties did start closing out their accounts with Neuger. One in particular was extremely aggressive in returning securities to AIG: Goldman Sachs. Goldman had been leading the charge throughout the year in closing out its accounts with Neuger; now, in the summer of 2008, it stepped up the pace, hurling billions of dollars’ worth of Neuger’s securities back in his car-salesman face and demanding its money back.
Dinallo here interjects with what he calls a “powerful” piece of information—that during this period when Goldman and all the other counterparties suddenly started pulling cash out of AIG’s securities-lending business, no other sec-lending firm on Wall Street was having anything like the same problems. If Neuger’s counterparties were pulling their cash out en masse, it didn’t seem to be because they were worried about the value of the securities they were holding. Something else was going on.
“We analyzed every single other sec-lending business that was under our jurisdiction,” Dinallo says. “And not any one of them had problems. To this day they don’t have problems … You had Met Life, and AXA, and all these others—there were twenty-three others—and they had no issues. It was just AIG.”
So of all the billions of dollars’ worth of securities that had been lent out, it seemed the big Wall Street banks in the summer of 2008 suddenly found reason to worry only about those lent out by just one company—the same company that just so happened to owe these same banks billions via its unrelated credit-default-swap business.
“So what’s the coincidence of that?” asks Dinallo. “It was clearly a result of what was going on in the financial products division.”
Once the sec-lending counterparties started pulling out, the run on AIG was on. Already besieged with requests for cash to cover nutjob Joe Cassano’s bets, AIG now needed to come up with billions more to cover the losses of the firm’s other idiot stepchild, Win Neuger.
Lacking the funds to cover Neuger’s losses, AIG once again rang up the state insurance regulators along with the Federal Reserve, this time with a more urgent request. The parent company wanted permission from the regulators to reach down into its subsidiary companies and liquidate some of their holdings—imperiling the retirement accounts and insurance policies of thousands—in order to pay off the likes of Goldman and Deutsche Bank.
The states balked, however. In fact, the situation grew dire enough that by the first week of September, Texas—which was home to some of AIG’s biggest subsidiary insurance companies and would have been affected disproportionately if AIG tried to raid those companies’ holdings—had drawn up a draft letter outlining its plans to seize control of four AIG subsidiary companies, including American General.
“We got active in stepping in to protect those companies from being swallowed up in what was happening with the overall AIG picture,” says Doug Slape of the Texas Department of Insurance.
“Texas was definitely very aggressive,” says Dinallo.
The seizure of AIG subsidiaries would have been an extraordinary, unprecedented event. It was an extreme step, the nuclear option: had this occurred, the state would have simply stepped in, frozen the companies’ business, and then distributed the assets to the policyholders as equitably as possible. If the assets weren’t sufficient to cover those policies (and they almost certainly would have covered just a fraction of the company’s obligations), then the state also had public guaranty associations that would have kicked in to help rescue the policies. But without a doubt, had Texas stepped in to seize American General and other companies, policyholders and retirees who might already have paid premiums for a lifetime would have been left basically with pennies on the dollar.
“Thousands would have been affected,” says Slape.
It gets worse. Had Texas gone ahead and seized those subsidiaries, all the other states that had AIG subsidiaries headquartered within their borders would almost certainly have followed suit. A full-blown run on AIG’s subsidiary holdings would likely have gone into effect, creating a real-world financial catastrophe. “It would have been ugly,” says Dinallo. Thousands if not tens or hundreds of thousands of people would have seen their retirement and insurance nest eggs depleted to a fraction of their value, overnight.
The Texas letter was prepared and ready to go on the weekend of September 13–14. That was when an extraordinary collection of state officials and megapowerful Wall Street bankers had gathered in several locations in New York to try to figure out how best to handle the financial storm that had gathered around a number of huge companies—not only AIG, but Lehman Brothers, Merrill Lynch, and others.
The key gathering with regard to AIG took place at the offices of the New York Federal Reserve Bank. The government/state players included a group from the Fed, led by then–New York Fed official Timothy Geithner, as well as officials from the Treasury (then run by former Goldman Sachs chief Henry Paulson) and regulators from Dinallo’s office at the New York Insurance Department. The private players of course included AIG executives and teams of bankers from, primarily, three private companies: JPMorgan, Morgan Stanley, and Goldman Sachs. For most of the weekend, the AIG meetings took place in the Fed building, with Fed officials in one corner, Dinallo’s people in a conference room in the center, and bankers from the three banks in each of the remaining corners.
Now, JPMorgan had a good reason to be there: it had been hired as a banking consultant by AIG some weeks before to try to salvage its financial health. Morgan Stanley, meanwhile, had been (since the Bear Stearns rescue) hired to consult with the U.S. Treasury. Why Goldman was there is one of the key questions of the whole bailout era. Goldman did not represent anyone at this gathering but Goldman.
Ostensibly, Goldman was there because of its status as one of AIG’s largest creditors. But then Deutsche Bank and Société Générale were also similarly large creditors, and they weren’t there. “I don’t know why they were there and other large counterparties weren’t there,” says Dinallo. There was something special about Goldman’s status, and what that thing was was about to come out, in a big way.
On that Saturday, one state regulatory official present for these meetings—we’ll call him Kolchak—saw the prepared Texas letter for the first time and immediately realized its implications. In conference calls with other state officials Kolchak understood that the Texas letter was like a giant bomb waiting to be set off. If Texas moved on the companies, the other states would follow and a Main Street disaster would be under way. And that bomb was going to blow under one specific circumstance. Texas was waiting to see if AIG was determined to reach into those subsidiary companies, and AIG was only going to do that if Neuger’s counterparties insisted on a massive collateral call. But among those counterparties, most were willing to be cool and hold on to the securities. Only one was making noise like it was not going to be patient and was willing to pull the plug: Goldman Sachs.
That fact was made clear the next morning, on Sunday, when all the main parties met in the grand old conference room on the first floor of the Fed building. “It’s like this weird, medieval lobby,” says Kolchak. “No one ever goes in there, ever. That made it even weirder.” The sight of this seldom-used hall, packed with fifty or sixty of the most powerful financiers in the world, was surreal—as was the angry announcement made by Goldman CEO Lloyd Blankfein at the outset of the meeting. Kolchak reports that Blankfein was the dominant presence at the meeting; he stood up and threw down the gauntlet, demanding that AIG cough up the disputed collateral in the CDS/Cassano mess.
“Blankfein was basically like, ‘They [AIG] can start by givi
ng us our money,’ ” Kolchak says. “He was really pissed. He just kept coming back to that, that he wanted his fucking money.”
After that meeting Kolchak suddenly grasped, he thought, the dynamic of the whole weekend. Goldman was really holding a gun not only to the head of AIG but to the thousands of policyholders who, somewhere outside the room and all across America, had no idea what was going on. Basically what was happening was that Blankfein and the other Goldman partners wanted the money AIGFP and Cassano owed them so badly that they were willing to blow up the other end of AIG, if needed, to make that happen. Even though they weren’t really in danger of losing any money by holding on to Neuger’s securities, they were returning them anyway, just to force AIG into a crisis.
With Texas ready at any moment to move in and seize the AIG subsidiaries, all Goldman had to do to create a national emergency was make that one last giant collateral call on Neuger’s business. If it did that, all the other banks would follow, the run on Neuger’s business would continue, and AIG would be forced to try to raid its subsidiaries. That in turn would force the states to step in and seize the subsidiary insurance companies.
Blankfein’s announcement that Sunday morning was a declaration that Goldman had no intention of relenting. It was going to pull the pin not only on AIG but on the financial universe if someone didn’t come up with the money it felt it was owed by AIG.
“That’s what the whole weekend was about,” says Kolchak. “We’re all basically there to try to figure out if Goldman is going to stand down. There’s literally a whole army of bankers there trying to figure out a way to get Goldman to call off the dogs.”
After that Sunday morning announcement, the scene became even more surreal. Literally hundreds of bankers from the three banks had already descended upon AIG’s headquarters at nearby 70 Pine Street (which has since been sold off for pennies on the dollar to Korean investors—but that’s another story, for later) and begun poring over AIG’s books in search of value. But there wasn’t much left.
“Honestly, pretty much everything that hadn’t been nailed down had already been liquidated and invested in RMBS [residential-mortgage-backed securities] and stuff like that,” says one source close to AIG who was there that weekend. The only stuff left was a lot of weird, eclectic crap. “We’re talking ski resorts in Vail, little private equity partnerships, nothing that you could sell off fast,” he says.
The bankers who were poring over this stuff were working feverishly to see if there was enough there that could be turned into ready money to fight off the collateral calls. “They’re working to see if there’s enough value, enough liquidity, to pay up,” says Kolchak. “And at the end of this, Goldman comes back and basically says no. There’s not enough there to satisfy them. They’re going to turn the jets up.”
AIG, meanwhile, was begging state officials to intercede on its behalf with Goldman with regard to the collateral demands on the Neuger business. “They’re like, ‘Can you get Goldman to lay off?’ ” says one state regulator who was there that weekend.
All of this pressure from the collateral calls on the Win Neuger/sec-lending side were matched by the extremely aggressive collateral calls Goldman in particular had been making all year on the Cassano/CDS side of the business. In fact, two years later, the question of whether or not Goldman had used those collateral calls to accelerate AIG’s demise would be a subject of open testimony at hearings of the Financial Crisis Inquiry Commission in Washington. I was at those hearings on June 30, 2010, sitting just a few seats away from the homuculoid Cassano, who was making his first public appearance since the crash. And one of the first things that Cassano was asked, by the commission’s chairman, Phil Angelides, was whether or not Goldman had been overaggressive in its collateral calls. The author apologizes on behalf of Angelides for the reckless mixing of metaphors here, but his question is all about whether AIG fell into crisis or was pushed by banks like Goldman:
ANGELIDES: The chronology … appears to indicate that there’s some pretty hard fighting with Goldman Sachs in particular through March of 2008, and then after. I used the analogy when I started here: was there a cheetah hunting down a weak member of the herd? … I am trying to get to this very issue of was a first domino pushed over? Or did someone light a fuse here?
Another FCIC commissioner put it to Cassano this way: “Was Goldman out to get you?”
Angelides during the testimony referred to Goldman’s aggressiveness in making collateral calls to AIG. At one point he quotes an AIGFP official who says that a July 30 margin call from Goldman “hit out of the blue, and a fucking number that’s well bigger than we ever planned for.” He called Goldman’s numbers “ridiculous.”
Cassano that day refused to point a finger at Goldman, and Goldman itself, through documents released to the FCIC later in the summer of 2010 and via comments by Chief Operating Officer Gary Cohn (“We are not pushing markets down through marks”), denied that it had intentionally hastened AIG’s demise by being overaggressive with its collateral demands.
Nonetheless, it’s pretty clear that the unwavering collateral demands by Goldman and by the other counterparties (but particularly Goldman) left the Fed and the Treasury with a bleak choice. Once the bankers came back and pronounced AIG not liquid enough to cover the collateral demands for either AIGFP or Neuger’s business, there was only one real option. Either the state would pour massive amounts of public money into the hole in the side of the ship, or the Goldman-led run on AIG’s sec-lending business would spill out into the real world. In essence, the partners of Goldman Sachs held the thousands of AIG policyholders hostage, all in order to recover a few billion bucks they’d bet on Joe Cassano’s plainly crooked sweetheart CDS deals.
Within a few days, the crisis had been averted, but at the cost of a paradigm-changing event in American history. Paulson and the Fed came through with an $80 billion bailout, which would later be expanded to more than $200 billion in public assistance. Once that money was earmarked to fill the hole, Texas stood down and withdrew its threat to seize AIG’s subsidiary life companies, since AIG would now have plenty of money from the Federal Reserve to pay off Neuger’s stupidities.
As is well known now, the counterparties to Joe Cassano’s CDS deals received $22.4 billion via the AIG bailout, with Goldman and Société Générale getting the biggest chunk of that money.
Less well known is that the counterparties to Neuger’s securities-lending operations would receive a staggering $43.7 billion in public money via the AIG bailout, with Goldman getting the second-biggest slice, at $4.8 billion (Deutsche Bank, with $7 billion, was number one).
How they accomplished that feat was somewhat complicated. First, the Fed put up the money to cover the collateral calls against Neuger from Goldman and other banks. Then the Fed set up a special bailout facility called Maiden Lane II (named after the tiny street in downtown Manhattan next to the New York Federal Reserve Bank), which it then used to systematically buy up all the horseshit RMBS assets Neuger and his moronic “ten cubed”–chasing employees had bought up with all their billions in collateral over the years.
The mechanism involved in these operations—whose real mission was to filter out the unredeemable crap from the merely temporarily distressed crap and stick the taxpayer with the former and Geithner’s buddies with the latter—would be enormously complex, a kind of labyrinthine financial sewage system designed to stick us all with the raw waste and pump clean water back to Wall Street.
The AIG bailout marked the end of a chain of mortgage-based scams that began, in a way, years before, when Solomon Edwards set up a long con to rip off an unsuspecting sheriff’s deputy named Eljon Williams. It was a game of hot potato in which money was invented out of thin air in the form of a transparently bogus credit scheme, converted through the magic of modern financial innovation into highly combustible, soon-to-explode securities, and then quickly passed up the chain with lightning speed—from the lender to the securitizer to the major investm
ent banks to AIG, with each party passing it off as quickly as possible, knowing it was too hot to hold. In the end that potato would come to rest, sizzling away, in the hands of the Federal Reserve Bank.
Eljon Williams is still in his house. He scored an extraordinary reprieve when two things happened. One, the state of Massachusetts in the person of Attorney General Martha Coakley launched an investigation of some of the mortgage-lending companies in her state, including Litton Loans—a wholly owned subsidiary of Goldman Sachs that ended up owning the smaller of Eljon’s two mortgage loans. Coakley accused Goldman Sachs of facilitating the kind of fraud practiced by Solomon Edwards by providing a market for these bad loans through the securitization process, by failing to weed out bad or unfair loans, and by failing to make information about the bad loans available to potential investors on the other end. By the time Coakley settled negotiations with Goldman Sachs, the latter had already been the beneficiary of at least $13 billion in public assistance through the AIG bailout, with $10 billion more coming via the Troubled Asset Relief Program and upwards of $29 billion more in cheap money coming via FDIC backing for new debt under another Geithner bailout program, the Temporary Liquidity Guarantee Program.
Despite all that cash, Goldman drove a very hard bargain with Coakley. It ultimately only had to pay the state a $50 million fine, pennies compared to what the bank made every month trading in mortgage-backed deals. Moreover, it did not have to make a formal admission of wrongdoing. A month or so after Coakley and Goldman went public with the terms of their settlement, Goldman announced that it had earned a record $3.44 billion in second-quarter profits in 2009.