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By Matthew Quinn
In times like these, people respect a little humility. We all feel weak and exposed to some degree. We find comfort when we see others are facing the same struggles.
That's why comments from Goldman Sachs executives are so vexing to people: it's not that they haven't admitted they were scared during the height of the financial crisis and grateful for government assistance. Indeed, they have. The issue is that they have also said they were confident they'd be fine and they wouldn't have taken TARP funds if they had to do it all over again.
You might even say they've hedged their exposure in their comments. After all, hedging is something Goldman is a pro at, arguably better at it than anyone.
But one observer, structured finance guru Janet Tavakoli, is taking them to task over how well Goldman was in fact hedged when it came to its exposure to American International Group.
Tavakoli isn't arguing Goldman wasn't hedged, but rather what those hedges really meant. She went as far as calling comments from Goldman CFO David Viniar "lies" and others from the bank's CEO Lloyd Blankfein "disingenuous."
"The may claim they didn't 'technically' lie," Tavakoli wrote in a commentary posted on her firm's website, "but Goldman's business exposure to AIG posed both credit risk and reputation risk. They seem to overlook elements of the former and put insufficient value on the latter."
A big problem for the many pundits hounding Goldman is that the bank has largely blown off the claim that it was essentially saved from collapse when the U.S. government stepped in and made all AIG's counterparties whole. (Goldman, for its part, received $12.9 billion.) Instead, Goldman has insisted it was completely hedged.
In a conference call announcing earnings in September 2008 right after Lehman Brothers filed for bankruptcy and the first bailout of AIG, Viniar told analysts that because of its margin terms and hedging strategies, "I would expect the direct impact of our credit exposure to both of them to be immaterial to our results."
Tavakoli, for one, found that assurance completely insufficient, if not false.
"Goldman should have plainly stated that it was owed billions in additional collateral from AIG -after already having collected billions - due to credit default swap contracts and other trading positions," she wrote. "Whether or not Goldman thought its credit risk was totally hedged is a separate, albeit important issue."
The issue regarding the hedges for Tavakoli is how susceptible they were to the systemic risk AIG posed.
"Absent a bailout of AIG, Goldman was vulnerable to increasing systemic risk which would have likely affected its hedge counterparties and many of its other trading counterparties," she wrote. "It is never a given that hedges will pay off when the chips are down. A counterparty may dispute whether the contractual definition of a credit event is met, if only to buy time."
Of course, AIG was bailed out and Goldman can claim they would have been fine either way. It's high time the bank learned that's not exactly what people want to hear.
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