Friday, July 10, 2015

Paulson and Goldman Sachs: A dirty secret of the Wall Street bailout

The article makes clear that at the heart of the rescue of AIG was a decision to use taxpayer funds to cover dollar for dollar the billions owed by the insurance firm to Wall Street banks that held credit default swap contracts with AIG. Credit default swaps play a central role in the vast edifice of speculation upon which the banks depend to reap huge profits and reward their top executives and traders with multi-million-dollar bonuses and pay packages.
By means of the unregulated credit default swap market, banks and corporations purchase insurance against the default of bonds issued by other banks and companies. If a seller of swaps—AIG was by far the biggest—goes bankrupt, its counterparties stand to lose billions and go bankrupt themselves.
This was precisely the position of major financial firms in September of 2008, when AIG was teetering on the brink of collapse. The Times cites Paulson’s spokeswoman, Michele Davis, as saying that government officials were concerned that both Goldman and investment bank Morgan Stanley “were in danger themselves of failing later in the week...”
No firm was more exposed than Goldman Sachs, the biggest and most profitable of the Wall Street investment houses, which stood to lose $13 billion in credit default swaps and other derivative contracts with AIG.
The Times article documents the fact that Paulson, who by law and ethics rules was prohibited from maintaining undue contact with his former bank, held dozens of telephone discussions with Blankfein on and around September 16, 2008, when Paulson and the Federal Reserve Board announced the bailout of AIG.

https://www.wsws.org/en/articles/2009/08/pers-a11.html