Goldman Sachs and bailed out insurer American International Group face a rough two days of questioning about the destructive relationship that contributed to the 2008 financial crisis.
The Financial Crisis Inquiry Commission (FCIC) will zero in on the ties between Goldman Sachs and AIG, and how the two financial giants sold derivatives that deepened the crisis.
The congressionally appointed panel begins two days of hearings on Wednesday, headlined by former AIG Financial Products head Joseph Cassano and Goldman President Gary Cohn.
A key focus will be how the interaction of these two financial giants may or may not have contributed to the causes of the financial crisis, Phil Angelides, chairman of the commission, said in a call with reporters on Tuesday.
Goldman has long been criticized for benefiting from the U.S. taxpayers' bailout of AIG. Taxpayers pledged up to $182 billion to address problems at AIG's financial products division.
U.S. and European banks that had purchased credit protection from AIG were quickly made whole after the U.S. government bailed out AIG. Goldman, as a major trading partner of the insurer, was one of the biggest beneficiaries of the government rescue of AIG.
AIG said in March, 2009, that $93 billion had been paid to banks, including $12.9 billion to Goldman Sachs, which was the most received by any bank.
Cassano, who has evaded public appearances since leaving the bailed-out insurer more than two years ago, participated in more than five hours of preliminary interviews with the commission's staff, Angelides and vice chairman Bill Thomas said.
He was at the center of this. He obviously knows a lot about not just what they did, but the interrelationship with Goldman Sachs, Angelides said.
THE ROLE OF DERIVATIVES
AIG Financial Products wrote a form of insurance, known as credit-default swaps, on bonds created out of the home mortgage loan market during the U.S. housing boom.
When the loans began to sour and the bonds lost value, firms that had taken out the insurance demanded collateral from AIG, leading to the insurance industry's equivalent of a run on a bank.
Under the financial regulatory reform legislation nearing a vote in Congress, banks would be allowed to continue dealing credit-default swaps, as long as they go through a clearinghouse.
Goldman has found itself under fire stemming from its marketing and packaging of derivative products.
On April 16, the SEC charged Goldman with civil fraud relating to the Abacus collateralized debt obligation, an investment product linked to the performance of a group of mortgages.
Goldman Chief Executive Lloyd Blankfein later in April faced tough questioning from U.S. Sen. Carl Levin during a Senate subcommittee hearing in April about Goldman's other mortgage-linked products that turned toxic during the financial crisis.
Earlier this month, Goldman was criticized by the FCIC for failing to be responsive to its requests for information. The FCIC said Goldman dumped some 2.5 billion pages of digital documents on the commission in response to a request.
The commission said on Tuesday that Goldman has been better about responding to requests, but that there were still information outstanding.
EXECUTIVES TAKE STAND
The commission said that a raft of Goldman executives, including Chief Executive Lloyd Blankfein, also participated in preliminary interviews for this week's derivatives-focused hearing. Blankfein, who testified before the commission in January, is not scheduled to participate in this week's hearings.
Among those due to appear are Goldman Chief Financial Officer David Viniar, former AIG Chief Executive Martin Sullivan, and AIG Chief Risk Officer Robert Lewis.
The FCIC has been holding both public hearings and private meetings with financial industry players, including investor Warren Buffett, to piece together the causes and impact of the financial meltdown.
The commission is supposed to issue a report by December 15, detailing the crisis that peaked in late 2008 after the collapse of former investment banking giant Lehman Brothers.
The report will serve as a public record of the historic event and will not likely include thorough recommendations for reform.
(Reporting by Steve Eder, Karey Wutkowski, and Kim Dixon in Washington; Editing by Tim Dobbyn)