Beleaguered Wall Street powerhouse Goldman Sachs Group switched to offense Friday, contending that the $13 billion the firm received from bailed-out American International Group Inc. was fully justified and in fact was good for taxpayers.
But that did little to quell the criticism that Goldman and other financial institutions should have taken less than they were owed on insurance for their risky bets on the subprime housing market.
Goldman Chief Financial Officer David Viniar said his company simply was trying to protect its shareholders -- which now include taxpayers after the firm received $10 billion in financial rescue money last fall.
“If we had taken a discount, then we would have taken a loss to Goldman Sachs,” Viniar said in a conference call with reporters convened by the company to address its involvement with AIG. “We also have taxpayer money at Goldman Sachs and it’s part of our responsibility to protect that money and not lose it.”
But some lawmakers and others contended that holders of the insurance should have been forced to take less than 100% -- a haircut in Wall Street parlance -- because they would have gotten much less if AIG had been allowed to slip into bankruptcy.
“If you invest in GM you’re asked to take a huge haircut,” said Rep. Brad Sherman (D-Sherman Oaks).
Sherman noted that terms of the federal bailout of General Motors Corp. required it to renegotiate deals with company bondholders.
“But those who put their money in the AIG casino are told that you will be paid in full at the cost of the federal government,” Sherman said.
Goldman received $13 billion -- more than any other financial institution -- in payment for AIG investment guarantees after the federal government stepped in with bailout commitments that now total as much as $172 billion to keep the insurance giant from failing.
In the wake of outrage over its payment of $165 million in employee retention bonuses, AIG this week disclosed the names of dozens of banks and other institutions that it had paid last year after being bailed out by the Federal Reserve and Treasury Department.
Sherman said Goldman should return the $13 billion it received from AIG to the Treasury.
“And it may well be that if Goldman can’t repay that money, that the best thing for the country is for Goldman to be in receivership,” he said.
Details of the AIG payments have sparked sharp criticism from Sherman and other lawmakers, who complained that companies that helped cause the financial crisis should not have received full payment of their collateralized debt obligations from AIG with the help of taxpayer funds.
Goldman’s Viniar said AIG tried before and after the bailout to get Goldman to take a discount on the money it was owed, but Goldman consistently refused.
“We had ongoing negotiations with AIG and they would periodically say to us . . . we’d like to settle this for less than we thought they owed us and our answer would always be no,” Viniar said. “It’s kind of what we do in most of our transactions. If people want to settle for less than we think we’re due, we say no.”
But some in Congress think that’s exactly what Goldman and other companies should have done given that taxpayer money helped save their investment insurance from AIG.
Criticism of Goldman has come from both sides of the political spectrum. Former House Speaker Newt Gingrich, a Republican, and former New York Gov. Eliot Spitzer, a Democrat, blasted Goldman and other companies for being made whole on their AIG exposure at taxpayers’ expense.
And there is growing sentiment that the full payments by AIG to Goldman and other large financial institutions, including Bank of America Corp., Citigroup Inc., Barclays and Deutsche Bank, are a bigger outrage than the bonuses because so much more money is involved.
“What I want to know is why more people aren’t paying attention to the fact that some other banks were being paid 100 cents on the dollar as counter parties,” Sen. Christopher J. Dodd (D-Conn.) said Friday. AIG “had the opportunity to do less than that. The question is, why didn’t they?”
The answer isn’t so simple, said Chris MacDonald, a business ethicist at Saint Mary’s University in Canada who has followed the AIG issue. Although protecting shareholders is paramount to company executives, the calculations can be different in a time of national crisis.
“The managers of Goldman Sachs need to make sure their shareholders are treated fairly and arguably should be asking for full payment,” MacDonald said. “But there’s nothing to say that AIG and the federal government shouldn’t say, ‘You should accept 80 cents on the dollar, or 50 cents on the dollar.’ ”
AIG Chief Executive Edward M. Liddy told Congress this week that AIG believed it had an obligation to pay off companies holding credit default swaps and other investments.
“We owe those people that money. I mean, it’s just a fact of life,” Liddy said. “The result of not paying them is an event of default. And it forces the company into bankruptcy.”
Critics contend that Goldman is a different case. Some have blamed the company for pushing AIG to the brink of bankruptcy in December by calling in collateral owed to it by AIG for about $10 billion in credit default swaps and other investment insurance.
Critics also claim that Goldman’s gold-plated government connections helped pave the way for the massive federal bailout.
Henry M. Paulson, who was Treasury secretary last fall when the government rescued AIG, was a former Goldman chief executive. And Liddy was on Goldman’s board of directors until he took the top job at AIG in September after the government received an 80% ownership stake.
Viniar repeated Goldman’s assertion that its potential losses to AIG were adequately hedged. The company wouldn’t have lost the money if AIG failed, he said, although the broader damage to the economy would have hurt Goldman.
“It is our responsibility to our shareholders to make sure that we are protecting ourselves. That’s why we enter into these contracts,” Viniar said. “All we did was call for the collateral that was due to us under the contracts. I don’t think there’s any guilt whatsoever.”