Goldman Bets Against the Assets It Sold to AIG

“This is half-baked justice at best,” US District Judge Jed Rakoff wrote in an opinion yesterday afternoon. The SEC sued Bank of America for lying to their shareholders over the company having been forced to buy Merrill Lynch.

In a move that smacks of some backroom deal you and I will never be privy to, the SEC sued for only $150 million. That’s 2.4% of the $3.6 billion in 11th-hour bonuses Merrill execs awarded themselves days before they merged with BofA. It’s an even smaller fraction of the $4.4 billion bonus pool Bank of America henchmen enjoyed last year.

Half-baked justice? Yeah. On a pure cost-benefit model, it’s more like incentive for execs from BoA and Merrill and the Treasury and whoever else to go out rape, pillage, lie and steal all over again. Contrary to our Unofficial, Unauthorized Darwin Awards, these companies and execs climb the food chain when they concoct corrupt insider schemes.

Good luck restoring confidence in the financial system while they’re still lounging in the corner office…rather than in a cell next to some fat guy with “Mom” tattooed on his arm. Oy.

Even more for the “Wall Street Ire” file this morning: It has now been confirmed that Goldman Sachs bet against the very subprime assets it sold to AIG, which ultimately caused the insurer’s collapse. Here’s the breakdown, per a Bloomberg report and documents recently released from the House Committee on Oversight and Government Reform:

  • Goldman Sachs underwrote $17.2 billion of CDOs for AIG, more than any other firm
  • Knowing precisely the garbage it had underwritten (our assertion), Goldman bought billions in credit default swaps that would rise in value as AIG stumbled (fact)
  • AIG ultimately paid Goldman – with taxpayer dollars confiscated by many former Goldmanites in the Treasury – the full value of their default contracts: $14 billion.

Of course, all this has been suspected for so long that it was assumed to be true…but now it’s in stone. How this isn’t securities fraud, we don’t know… It’s like selling a teenager napalm (that you made in your backyard) and buying fire insurance on his dad’s house.

The Daily Reckoning