[quote=SK in CV]
Can you give a quick explanation on this? Thinking it through, it makes sense that the collateral wouldn’t be the impaired assets, but I don’t understand how counter-parties to the contract would have anything other than an uncollateralized obligation. What assets exactly would they be asserting their ownership? They certainly didn’t have the right to sieze the TARP money.[/quote]
SK: Sure. As was explained to me from my buddy, the former Bear alum, Goldman had zero counterparty exposure to AIG, in spite of the $12.9Bn they were paid through TARP.
The reason for this is two-fold: Nearly $11Bn of the AIG position was collateralized through cash and securities that Goldman already held (on behalf of AIG). Further, the remaining $2Bn (approx) was insured through credit default swaps (CDS), so, even if AIG collapsed, the insurance would cover the balance. Simply put, if they hadn’t been paid through TARP, Goldman would have just retained the “collateral” they were already holding as security to cover the majority of the position and then collected the insurance for the balance.
So, your understanding and mine regarding “collateral” is largely driven by the commercial definition of the word, which differs nearly completely from “collateral” in this instance.
Much has been made of the Goldman Sachs “payoff” from TARP, but the truth is not nearly as exciting. Again, not to say they’re not a bunch of shitty sleazebags, just not in this instance. Speaking of Taibbi: Yeah, I did read the Rolling Stone article, but it was riven with factual inaccuracies. I understand the need to sell copy, but Taibbi is too willing (IMHO) to veer off into the fanciful or reckless to make his point.
