Goldman Sachs officials insisted demands for billions of dollars from insurer AIG ahead of a $182-billion government rescue package were based on legitimate market prices and denied gaming values for a massive payout.
Members of the Financial Crisis Inquiry Commission peppered Goldman witnesses with questions on Thursday about their aggressive demands for collateral from AIG and why the market values triggering those demands were often lower than others.
The issue revives a debate about the accuracy of mark-to-market accounting during the financial crisis and whether Goldman got a backdoor bailout from taxpayer support for American International Group.
Commission Chairman Phil Angelides, stopping just short of bald accusations, pressed Goldman officials on whether the firm was deliberately driving down prices for its own gain. Are you then creating a self-fulfilling prophesy? he asked.
We never instruct people to mark these down, Goldman Chief Financial Officer David Viniar calmly told the panel on its second day of looking into the role of derivatives in the financial crisis.
He also denied Goldman got a special benefit from the AIG bailout. It is not true, said Viniar, adding that the firm was itself on the hook for the money on behalf of its clients.
The exchange lacked the heat of other appearances by Goldman officials in Washington in recent months, most notably Chief Executive Lloyd Blankfein's dramatic confrontation with lawmakers in April over accusations his firm bet against clients.
The congressionally appointed panel is trying to craft a definitive account of what caused the 2008 financial crisis, that forced a massive taxpayer bailout of the nation's top banks and led to the most severe recession since the 1930s.
Its public sessions, in contrast with many congressional hearings, are usually conducted politely, perhaps reflecting that commissioners and staff usually meet privately ahead of time with witnesses, sometimes weeks before a hearing.
But the commission is not expected to issue formal recommendations, raising questions about its relevance, particularly with Congress likely just weeks away from sending financial reform legislation to President Barack Obama.
The crisis panel is due to deliver its findings by December 15.
MAKING AIG WHOLE
Goldman was among U.S. and European banks that had purchased credit default insurance from AIG and were quickly made whole after the U.S. government bailed out AIG, beginning in September of 2008.
The insurance known as credit default swaps (CDS) hinged on pools of collateralized debt obligations (CDOs) that included subprime mortgages. As mortgage values fell in 2007, purchasers of the CDS began calling on AIG for collateral payments.
AIG official Elias Habayeb told the panel that AIG tried to negotiate with Goldman and other counterparties to trim their demands, but with little success.
Unfortunately AIG had little negotiating leverage, said Habayeb. Even if AIG went bankrupt the counterparties would get special protection under bankruptcy law.
By March 2009, Goldman had received $12.9 billion of the $93 billion in money paid to AIG counterparties, the most of any bank.
Several commissioners were exasperated by Goldman's refusal to say it benefited from AIG's government bailout.
The panel is desperately trying to get you to acknowledge that you received an economic benefit, said Douglas Holtz-Eakin, a former director of the Congressional Budget Office.
The U.S. government's decision to pay AIG's counterparties in full has been criticized by lawmakers and bailout watchdogs, who have said it did not do enough to negotiate discounts.
Joseph Cassano, the former head of AIG's Financial Products Division, told the crisis panel on Wednesday he could have saved taxpayers money if allowed to stay on and negotiate. Instead he was edged out of his executive position in February 2008.
Even if the government was overly generous, AIG shareholders seem to have little legal recourse because the government had AIG sign a waiver, forfeiting its right to sue, according to documents released by the House Committee on Oversight and Government Reform back in May.
Viniar and other Goldman officials insisted they based their collateral demands on actual trades -- trades the panel has asked for further details on.
The hearing echoed a debate about mark-to-market valuation that raged during the height of the financial crisis.
Critics charged then that thin and non-existent markets for some securities led to premature recognition of losses that accelerated the crisis. Proponents of mark-to-market said investors needed to know the true value of assets.
The U.S. Financial Accounting Standards Board is now suggesting an expansion of mark-to-market accounting to all financial instruments, including individual loans.
But the International Accounting Standards Board has proposed to value assets at amortized cost, which would provide information about expected cash flows.
Cassano argued at Wednesday's hearing that the pools of loans marked down by AIG have actually performed well, but mark-to-market pricing during the financial crisis produced accounting losses that enabled the collateral calls.
Viniar was dismissive of Cassano's long-term valuation at Thursday's session. Maybe in the end they do pay off in 30 years, but in the interim, you have to pay attention to the market.
(Reporting by Karey Wutkowski, Steve Eder, Kim Dixon and Rachelle Younglai; Editing by Tim Dobbyn)