AIG Bailout: Not a Gift to Goldman

This article was originally published on RealMoney on Thursday, April 9. For a free trial to RealMoney, click here.

Did Goldman Sachs(GS Quote) really make out like a bandit on the AIG(AIG Quote) bailout, as has endlessly been reported by the media? Lately there has been so much misguided and reckless commentary about AIG being a "backdoor bailout" of Goldman and other firms that I feel the need to add my two cents' worth.

As most readers know, I am a proud Goldman alumnus, so I will save the "Goldman taking over the world" conspiracy theorists some time: If you believe in that nonsense, you can stop reading now, though I believe you are doing yourself a disservice by ignoring the actual story. I believe I have proven that I speak my own mind on enough topics that maybe we can invest the time to explore this situation a little further, speak about facts a little more accurately and not jump to conclusions based on a sound bite.

Goldman's CFO, David Viniar, hosted a call a couple of weeks ago on this topic, so I am surprised people continue to rant about this, but I will attempt to add some color. I am going to use rough numbers here, rounding to the nearest billion -- this is about the "forest" and not the "trees." It was reported that Goldman received a total of $13 billion after the AIG government intervention. This was in three large buckets, which we will examine in turn.

The first bucket consisted of about $5 billion as a result of a securities lending unwind. Most people are familiar with the concept of margin accounts and borrowing and lending stock. If you have a margin account, you have likely signed a hypothecation agreement, which says that the stock you hold can be lent out to others.

In the bond market, the lending of securities is a highly negotiated process. Institutions will lend out their own portfolios for various terms, rates and time frames. In exchange, they get money back, typically lent at an advantageous rate, so that the securities lender can in turn reinvest that money in the money markets and earn a spread. These lenders of bonds typically over-collateralize their counterparties by anywhere from a half a percent to upwards of 10% or 20%, on the basis of the riskiness of the bonds they lend, and that collateral is marked to market to protect the cash lender.