Wow. Our experiment is off to a great start—let's see if we can finish it off sooner than expected.
It may not look like good news, but if you're an American taxpayer, pay attention. AIG, the massive global insurer and beneficiary of billions of dollars in taxpayer cash, is eyeing a lawsuit against Goldman Sachs, a move clearly piggybacking on the Securities and Exchange Commission's announcement that it was suing Goldman for allegedly misleading its clients. The SEC's suit, filed on Friday, says Goldman created and sold a complex financial product called a collateralized debt obligation (CDO), whose value depended on the health of the subprime mortgage market, and that Goldman let a hedge fund trader wanting to bet against the housing bubble, John Paulson, pick basement-quality bonds to make up that CDO. More importantly, Goldman, the SEC alleges, failed to tell the buyers of that CDO that Paulson picked those bonds and that he was betting against those bonds and the housing market.
AIG's potential suit, the Financial Times reports, would center on "losses incurred on USD 6 billion of insurance deals on mortgage-backed securities similar to one that led to fraud charges against the US bank." In other words, AIG sold insurance against the failure of the Goldman bonds in question, from a family of bonds called Abacus. When those bonds inevitably failed, AIG had to pay out, recording losses of $2 billion. But now knowing that crucial information about the strength of those bonds was allegedly left out, AIG could have a case to make.
The insurer, you'll remember, is a company largely buoyed by the American taxpayer—something to the tune of $134 billion, including the Federal Reserve and Treasury's support. Someday, a portion of those funds could make their way back into the government's coffers if and when AIG returns to full health. This suit against Goldman, however, could help AIG recoup some of its losses, which ultimately is a good thing for the American taxpayer that so generously kept a too-big-to-fail AIG from crumbling to the ground.