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Goldman’s Switcharoo on AIG

June 30, 2010

Joe Cassano, former head of AIG Financial Products, on Capitol Hill

As AIG’s former wonderboy, Joe Cassano, tells congress that he regrets nothing and by the way, is still right, Gretchen Morgenson and Louise Story of the New York Times are telling us something we didn’t already know about the $180 billion AIG bailout.

 No, not that it really was meant to benefit a few big banks. We already know that.

What Morgenson and Story have unearthed in the quarter million pages of documents the New York Fed disgorged last month is that the deal, meant to benefit Goldman Sachs, was inked by Goldman people, and that it had a special provision barring AIG from suing anyone later, once the truth came out:

The legal waiver barring A.I.G. from suing the banks was not in the original document that regulators circulated on Nov. 6, 2008 to dissolve the insurer’s contracts with the banks. A day later a waiver was added but the Congressional documents show no e-mail traffic explaining why that occurred or who was responsible for inserting it. The New York Fed declined to comment.

Dan Jester, the government’s point man on the AIG bailout, was a former Goldman guy who still held stock in the company, according to the Times. He was the guy who, rejecting advice from cooler heads, pushed to pay AIG’s counterparties 100 percent of the money supposedly owed, rather than requiring them to take a 10 percent “haircut” on their investment, which is the more common solution. Goldman got about $14 billion from AIG—all of that supplied, effectively, by taxpayers.

Today, Cassano is telling Congress that his company had stopped insuring mortgage-backed securities around 2005—before the most toxic crap was stuffed into the sausage casings. Cleared of criminal and civil liability for the debacle two weeks ago,  he still believes that the securities AIG backed were mainly non-toxic, he says.

If he’s right—and that is by no means undisputed—AIG would have cause to seek reimbursement from the banks paid off in 2008 when those securities were given unreasonably low values. The provision barring such a suit, which the Times says was not routine, appears to have anticipated this contingency:

Unless A.I.G. can prove it signed the legal waiver under duress, it cannot sue to recover claims it paid on $62 billion of about $76 billion of mortgage securities that it insured. (A.I.G. retains the right to sue on about $14 billion of the mortgage securities that it insured.)

“Duress” seems an understatement.

Putting a late-hour switcharoo in a contract is not always illegal, but it’s not always kosher either, as this little dispatch from yesterday’s Sun illustrates.  

Until recently, rewriting a loan guaranty “in an identical type size and font as the original restated guaranty” but with words that say, in effect, “not a guaranty,” would be considered sharp business—if not standard operating procedure–especially if the counterparty fell for it. Now the Office of Thrift Supervision is coming down hard on a Hunt Valley bank executive for doing just that.

Wonder if those kinds of rules will ever apply to the million-bucks-a-day set.

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