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) 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)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.

When all was said and done, Goldman ultimately retained $2.5 billion in taxpayer dollars.

During a tit-for-tat exchange with Sen. Carl Levin (D., Mich.) last week, Blankfein gave off something of a "So what?" attitude concerning the funds Goldman received from AIG -- and perhaps with good reason. See the following exchange between Levin and Blankfein, in which Levin appears to be willfully ignorant of who is actually responsible for how the event transpired. It starts at roughly 2 hours and 28 minutes into Blankfein's Q&A session:

Blankfein: The only thing that flowed through to us was an additional $2.5 billion worth of margin that they owed us, against which we had an insurance contract in case they didn't pay us.

Levin: I understand, but they owed you $2.5 billion dollars.

Blankfein: They owed us $2.5 billion

Levin: the government did not owe you $2.5 billion, did we?

Blankfein: No, the government did not.

Levin: But you ended up with $2.5 billion of taxpayers' funds.

Blankfein: That we would've gotten from an insurance company, had we not.

Levin: Yeah, but you wouldn't have gotten it from the taxpayers.

Blankfein: Well, we weren't looking to get it from the taxpayers.

Levin: But you got it from the taxpayers.

Blankfein: In lieu of what would've come from the insurance company.

Levin: From a private party! We didn't owe you any money. Two private parties owed you money that either AIG or that insurance company that you insured the AIG debt with. So why do you end up with $2.5 billion of taxpayers' money in your pocket, when we don't owe you the money; AIG owes you the money or an insurance company.

Blankfein: Because the U.S. government decided not to allow AIG to default. And if they had defaulted -- that is, if they had not paid us the money -- they would've been in default and we would've gotten paid from an insurance company

Levin: You woulda gotten paid from somebody other than the taxpayers?

Blankfein: Correct.

Levin: So why do you end up with $2.5 billion of taxpayers' money?

Blankfein: Because the government made a decision that the government didn't want AIG to default.

Levin: And you could've gotten that money from a private insurance company?

Blankfein: Correct.

Levin: And now you've got money of the taxpayers in your pocket -

Blankfein: No, we got money from AIG.

Still awake? Good.

Now to address Michael Folk's query.

"The question not asked ... was: Who was the insurance company that did not have to pay as a result of the AIG bailout?" asked Folk, adding that: "There are probably only a handful of insurance companies in the world that could insure a $12 billion risk. Berkshire or one of its subsidiaries is probably one."

While Blankfein indicated that it was one entity by using a singular noun, Goldman says it purchased insurance from "major financial institutions" -- more than one. Goldman won't reveal the identity of the firms, nor will it confirm or deny that Berkshire was one of them. When reached by phone, a Berkshire spokeswoman asked to e-mail questions, but didn't respond in time for publication.

The other major providers of such insurance may have been GMAC's ResCap subsidiary, and others like Ambac ( ABK), MBIA ( MBI) and Assured Guaranty ( AGO), or perhaps the insurance arms of diverse financial services firms.

Additionally, the $2.5 billion represents what AIG had refused to pay before the government stepped in, because of a dispute over pricing. Those funds were backed up by collateral arrangements in place as well, making the high-profile Goldman-via-AIG bailout appear a lot less significant than other bailed-out counterparties . Those include foreign banks taking in billions of dollars' worth of taxpayer funds, such as Societe Generale, Deutsche Bank ( DB), Barclays ( BCS) and UBS ( UBS).

While Levin tried hard to pin blame on Goldman for accepting taxpayer funds, Blankfein kept hammering back that it wasn't Goldman's decision, but the government's. He also made a point to note that, while the bailout helped Goldman tremendously by stabilizing the broader financial system, the firm wasn't having much trouble raising private funds, even in the few weeks before TARP.

"We were not waiting for a government bailout," said Blankfein, pointing out that Goldman raised $5 billion from Buffett and $3.75 billion from common stock investors.

"We could get financing in the world -- we got it!" he added. "And, frankly, when we took the five ($5B) and three and three quarters ($3.75B) we could've gotten more if we wanted."

Perhaps that's true, but it's hard to tell what would've happened without having TARP to support market confidence, even if Blankfein deems its effect on Goldman's balance sheet to be negligible.

-- Written by Lauren Tara LaCapra in New York.