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How AIG Became Goldman's Toilet

After it discovered AIG would write credit default swaps contracts on anything, Goldman used the insurance firm to magnify its short bet on the U.S. housing market.

By Jeff Nielson of Bullion Bulls Canada

There have been many accounts of the shady dealings that

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. Report

had with


(AIG) - Get American International Group, Inc. Report


But one key point has been soft-pedaled, and another has been ignored altogether.

The first is that Goldman used AIG as a financial toilet. The second is that Goldman began openly and deliberately misrepresenting assets/investments to investors starting in 2006 or 2007 -- at a time when all the other banker-oligarchs were continuing to assert their "mark-to-model" valuations both publicly and privately.

I'm basing my analysis on two accounts of the Goldman/AIG relationship:



New York Times

columnist Gretchen Morgenson, and

a blog entry

TheStreet Recommends

by Yves Smith and Tom Adams, an attorney and former monoline executive.

Others have alluded to my first point, but never in blunt terms. Essentially, as the bankster-created U.S. housing-bubble progressed, Goldman Sachs discovered that AIG was so eager and aggressive to cash in on what it perceived to be a bankster gold mine that it would write up insurance on anything -- irrespective of whether its own personnel had any genuine understanding of what they were writing up.

Thus, Goldman Sachs began to take the worst of its financial waste to AIG, in order to get AIG to write up credit default swaps on the assets in question. For those still not familiar with some of the bankster jargon, a credit default swap is a form of insurance used specifically to insure against the risk of default on debt instruments.

As a brief aside, I and others have suggested that much of the CDS industry was simply a sham involving the writing up of phony insurance that was never intended to be relied upon. These phony insurance contracts would then allow the banksters to pretend they had reduced their risk -- which would in turn allow them to leverage their mountains of paper to even more obscene levels.

But that issue is not relevant to the Goldman/AIG relationship, because it is clear that at least one of the parties (Goldman Sachs) took these CDS contracts very seriously.

Indeed, some time in 2006 or 2007, after finding that the greedy-but-gullible "bankers" at AIG would insure anything it brought to them, Goldman's intent in entering into these agreements changed.

Originally, like the other banksters, Goldman executives entered into these CDS contracts purely for "risk management." However, as Goldman Sachs began to aggressively short the various "assets" of the U.S. housing bubble, it had its housing shorts dupe AIG into entering into these CDS contracts for the specific purpose of making huge, windfall profits when the contracts blew up.

Regular readers will note a similarity here between this scam and a much bigger one in which most of the banksters participated: interest rate swaps. In the latter scam, while loyal

Federal Reserve

Chairman Ben Bernanke was still pumping up U.S. markets with talk of the U.S.' "Goldilocks economy," behind the scenes the banksters were duping towns, states and institutions all over the world into believing that U.S. interest rates would have to go much higher to "cool off" the nation's "economic juggernaut."

In reality, of course, the banksters' multitrillion-dollar mortgage scam was just about to implode, resulting in staggering losses and obviously necessitating that interest rates plummet toward zero.

Having fooled all the chumps into taking the wrong side of that interest rate bet, the banksters are now attempting to collect on their trillion dollar scam. (See

WHO were the WINNERS in Interest Rate Swaps?

) However, with some of those "chumps" beginning to realize how they were "played," the lawsuits have now begun, and in the case of China, it is simply tearing up some of those contracts and flushing them to where they belong.

Lest any argue that AIG was much too sophisticated to play the role of gullible stooge for Goldman Sachs, I need only remind people that Harvard University was fleeced for about $1 billion when financing only $2 billion of debt, using interest rate swaps. And that fleecing took place when Harvard University was being run by "banking genius" and Obama economic policy adviser Larry Summers.

If the man who is telling the U.S. how it should run its economy could get fleeced in that manner by

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. Report

, then it is no great leap to believe the insurance salesmen of AIG could be Goldman's patsy.

Thus, Goldman Sachs went from (passively) using AIG as its insurance toilet, to pushing AIG to insure the same "assets" that Goldman Sachs was aggressively shorting. Then, once all the bait had been taken, Goldman began relentlessly writing down those assets at a time when all the other banksters were still maintaining their mark-to-model (i.e., fantasy) valuations.

Goldman was selling these toxic financial products to investors as long investments, while behind their backs it was not only shorting the same assets, but it was also writing down those assets -- in order to trigger the massive payouts on the CDS contracts it had conned AIG into underwriting.

In other words, apart from the market forces that were shredding the valuations of these assets quite nicely, Goldman was greasing the skids on these products (and the entire sector) by marking down their valuations far lower than any other financial institution -- in order to collect on its scams.

In short, apparently alone in the financial community, Goldman Sachs was openly and intentionally misrepresenting the values and risk levels of various assets, while attacking those assets through its own shorting and CDS scam.

With unequaled access to the White House and Treasury Department, and with advance notice of policy decisions, which is not available to even most of the other banksters, Goldman Sachs had the best and clearest view of where the U.S. economy was headed -- making their subsequent double-dealing completely unequivocal with respect to Goldman's malevolent intent.

I see no sign of any specific intent to take down AIG. Rather this former insurance Goliath was simply another mark to be played by Goldman. While the other banksters lined up only one parachute to help them bail out of their massive Ponzi-scheme (interest-rate swaps), Goldman Sachs had prepared two for itself: interest-rate swaps and AIG.

As a final note, the blog entry I cited earlier made one other extremely interesting observation: Many of these contracts written at AIG's expense were done while good old Hank "Bazooka" Paulson was CEO of Goldman Sachs. Then, as Treasury secretary, "Bazooka" Paulson ordered AIG to pay 100 cents on the dollar to Goldman on every one of those same contracts (with taxpayer money).

In the country where the concept of "conflict of interest" simply does not exist, neither Paulson nor the Bush regime saw anything wrong with Paulson handing billions of taxpayer dollars to his former employer -- as payment for contracts that (at the least) have a heavy stench of fraud. This also sheds additional light on why Paulson attempted to have himself personally exempted from any and all liability for his handling of the TARP money (a waiver so broad, it would have made him immune to even blatant acts of fraud or misappropriation).

In any other country, a scandal of this magnitude would be enough to bring down an entire government. In the U.S., however, it is merely business as usual.

Jeff Nielson studied economics for four years at the University of British Columbia, before going on to attain a law degree from that same institution in 1989. He came to the precious metals sector around the middle of last decade as an investor, but quickly decided this was where he wanted to focus his career. After publishing his own, amateur blog for a year, in 2008 he founded Bullion Bulls Canada: a web-site providing information and analysis to precious metals investors. Today, reaches a global audience of precious metals investors in more than 120 countries.