This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

AIG Bailout: Not a Gift to Goldman

Stocks in this article: GS AIG TBT

Now, many people have suggested that the counterparties should have taken a haircut. But keep in mind, AIG did get to liquefy its risk outside the scope of the contract, and it isn't like a total gift was bestowed upon the counterparties, either.

The counterparties had to deliver the actual bonds to AIG/Maiden Lane and tear up the contracts. If the counterparty did not hold the bond, it had to go out in the open market and buy that bond. The tearing up of the contract could have had actual costs to the counterparties.

Let's say I owned bond ABC as the result of facilitating a customer trade, but couldn't find protection or a market on ABC. But I could buy protection on bond XYZ that looks very similar to bond ABC, so I used the XYZ protection as my hedge. Now, by entering into the Maiden Lane deal, I have lost my XYZ protection. Yes, I may have been paid for some of the mark-to-market deterioration, but what if it gets worse? I no longer have my hedge. Now I need to go out and find a replacement hedge, and there are friction costs there, or I need to bear the risk of further market weakness.

Liquidity in the fixed-income markets relies on the ability of dealers to take principal risk. They are enabled to take principal risk by being able to hedge risk. When the ability to hedge is diminished, liquidity dries up. While some people may think Maiden Lane was a one-way street, in actuality there was give and take on both sides.

So could we have allowed AIG to fail? Not without a price -- a price we got an inkling of when Lehman failed. That was the whole purpose of the AIG intervention to begin with: to ensure the (semi) orderly functioning of markets, and to prevent an already vulnerable system from suffering a massive shock. This was the defusing of a bomb so that no further damage was done. We did so by having AIG be a viable, but unwinding, entity.

You have seen the roughly $13 billion Goldman received from AIG. Bucket one was return of collateral for return of cash lent. Bucket two was collateral posted based on market values. Bucket three was a transaction that unwound trades -- at a cost to both parties. Two of the buckets were unwinds of trades where bonds were exchanged for cash, and the third was posting of collateral that may very well be returned, depending on the future course of asset performance.

None of this should be controversial; this was not a gift of money from the taxpayer to the counterparty -- in fact, it allowed for the unwind of AIG in an orderly manner, a manner which protected the taxpayer's 80% stake in AIG. Maybe now we can drop the showboating witch hunt and perhaps focus on issues that have some validity.

Know What You Own: In midday trading on Thursday, the most active stocks included Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), the Financial Bull 3X (FAS), the SPY Depositary Receipts (SPY), the Financial Select SPDR (NYSE) and Ford Motor (F).

At the time of publication, Oberg was long Goldman Sachs.

Eric Oberg worked in fixed income, currencies and commodities for Goldman Sachs for 17 years before retiring as a managing director.

5 of 5

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs