Executives at Goldman Sachs Group Inc. on Thursday defended the investment bank’s aggressive pursuit of billions of dollars in payments from American International Group Inc. in 2008, which critics said added to the deep financial problems of the insurance giant and led to a $182-billion federal bailout.
Goldman and AIG sparred over the value of mortgage bonds behind complex financial derivatives for more than a year before the government rescued AIG in September 2008, executives from the two companies told the Financial Crisis Inquiry Commission.
And Goldman’s later push to recover all the money it was owed by AIG on the derivatives, known as credit default swaps, eventually cost taxpayers billions of dollars, according to members of the commission, which spent Wednesday and Thursday examining the role of derivatives in the financial crisis.
“You got 100 cents on the dollar and the only people who were out money were the American people,” said Commissioner Brooksley Born.
As part of the bailout, the government took an 80% ownership stake in AIG. After the rescue, federal officials decided to pay Goldman the entire $13 billion it was owed by AIG on credit default swaps. At the time, the swaps were worth about half their face value, said Bill Thomas, the commission’s vice chairman.
“The government paid 100 cents on the dollar for something that was going for 48 cents at the time,” Thomas said.
But Goldman Chief Financial Officer David Viniar said the company was not trying to gouge taxpayers.
“All we were paid was what we were due under a contract,” Viniar said.
Goldman had insurance for the money owed by AIG and would have received all it was owed had the government decided not to pay off AIG’s debts, he said.
A representative from the Federal Reserve Bank of New York, a key player in the AIG bailout, called Goldman at one point to ask whether top executives would think about taking less than all that was owed, but there were no other conversations, Viniar said.
Federal officials, including former Treasury Secretary Henry M. Paulson — a onetime Goldman chief executive — and current Treasury Secretary Timothy F. Geithner, who was head of the Federal Reserve Bank of New York, have been strongly criticized for not forcing Goldman and other large financial firms to take reduced payments to save taxpayers some money.
In all, AIG paid $62 billion to those counterparties, including financial institutions such as Merrill Lynch & Co., France’s Societe Generale and Germany’s Deutsche Bank.
As the housing market collapsed, Goldman sought collateral payments from AIG for credit default swaps related to mortgage investments. With the market drying up for mortgage investments, the two companies argued about the value of those investments and the amount of collateral due Goldman based on those values.
“It seems like you guys are going in and being as aggressive as you can,” commission Chairman Phil Angelides told Viniar.
Angelides questioned the reliability of Goldman’s pricing data when it reduced the collateral it was seeking from AIG to $1.2 billion from $1.8 billion over six days in 2007.
Viniar said Goldman did the best it could to value the investments in a difficult market.
“It’s not a science. There is judgment involved,” he said.