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The Truth About Goldman's 'AIG' Bailout

Editor's note: Documents released by the Senate Finance Committee on Friday detailed Goldman's actual exposure if AIG had defaulted on its financial obligations in the fall of 2008. The figures, cited Tuesday in a New York Times column , confirm those first highlighted in the story below, which was originally published on May 4.

NEW YORK ( TheStreet) -- In the world of financial conspiracy theories about Goldman Sachs' (GS - Get Report) connection to Berkshire Hathaway (BRK-B), this one can be debunked: Berkshire wasn't insuring the $20 billion that Goldman risked losing if AIG (AIG - Get Report)defaulted in September 2008 -- at least not all of it.
Goldman Sachs
Lloyd Blankfein, chairman and CEO of Goldman Sachs, testifies before the Senate Homeland Security and Governmental Affairs.

In fact, even that $20 billion figure isn't entirely accurate, nor is the $13 billion figure often cited as Goldman's counterparty "bailout" via AIG.

First, a little background on how this article came to pass.

A reader named Michael Folk sent an e-mail on Monday night, in response to an article I had written about Warren Buffett, who heads Berkshire Hathaway. Berkshire holds a $5 billion preferred stock investment in Goldman, and Buffett has been a vocal supporter of the firm and its CEO, Lloyd Blankfein, as Goldman faces high-profile scrutiny of a CDO deal it structured back in 2007. Besides a raft of negative media attention, the SEC has filed civil fraud charges against Goldman, and the Justice Department is reportedly investigating its behavior.

In his e-mail, Folk brought up Blankfein's testimony last week before a Senate investigatory committee, related to AIG's $180 billion bailout in the fall of 2008. A healthy portion of those taxpayer dollars were funneled through AIG to make whole its counterparties on mortgage-related derivatives deals that AIG insured . Goldman received $12.9 billion from the federal government, via AIG.

Goldman and the New York Federal Reserve -- as well as its then-president Timothy Geithner, who now leads the Treasury Department -- have taken a lot of heat as a result of the bailout, which paid 100 cents on the dollar for assets that were trading much lower in the market. In fact, Goldman's internal estimates had pegged the insurance assets, known as credit-default swaps, at just 50 cents on the dollar.

In any case, the AIG-Goldman transaction is more complicated than the headline dollar amounts would have you believe. Goldman held $20 billion in notional exposure to AIG deals in early September, ahead of the bailout. The government ended up covering $12.9 billion of that amount by late September, partly because Goldman also held $7.5 billion worth of collateral. The firm also ended up returning some of the funds as prices fluctuated post-bailout.
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