Goldman Sachs treated too well by regulators in AIG mess?

June 30, 2010 | By Jim Kim

When hearings loom, press leaks are common. And that has kept the Goldman Sachs-AIG controversy in the headlines. Following a review of reams of documents, the New York Times suggests that bank regulators viewed the issues through the eyes of bankers.

To some, it looked like they were acting almost on behalf of the banks. Roughly $46 billion of the taxpayer money was used, as part of the massive AIG (NYSE: AIG) bailout, to pay off counterparties like Goldman Sachs (GS) and Société Générale. They were made whole on their CDSs deals. Regulators were apparently advised by their staff to make the banks swallow some losses on those deals, but that advice went unheeded.

The Times reports the regulators went further and forbid AIG from suing the banks. All in all, this suggests a very punitive attitude toward AIG and a very accommodating attitude toward the banks. "It also contrasts with the hard line the White House took in 2008 when it forced Chrysler's lenders to take losses when the government bailed out the auto giant." The regulators' main concern was stabilizing the system. Which makes sense. But it certainly seems that their whole perspective reflects the banking industry and what's good for it. I'm not sure what the answer is to that.

These revelations are relevant again, as some really questionable practices by Goldman Sachs, as it sold CDOs that held CDSs, have come to light. The SEC has accused the troubled bank of fraud in relations to an ABACUS deal, and an Australian hedge fund has sued over another deal. So the obvious issue is: Was AIG misled into insuring some CDOs?

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