Goldman Sachs Gives U.S. Commission Examples of How It Priced AIG Trades

Gary Cohn, president and chief operating officer of Goldman Sachs Group Inc., responds to a question during a Financial Crisis Inquiry Commission hearing. Photographer: Andrew Harrer/Bloomberg

Goldman Sachs Group Inc. gave the panel investigating the causes of the credit crisis examples of how it set prices for illiquid mortgage derivatives before the U.S. rescue of American International Group Inc.

The data provided to the Financial Crisis Inquiry Commission include mortgage-related trades from May 2007 through November 2008, which the New York-based firm reported in a nine- page document on its website. Those trades and other market information showed that prices were falling, which in turn led to demands for collateral from AIG, Goldman Sachs said.

During two days of hearings earlier this year, FCIC members questioned whether the investment bank deliberately discounted prices to push markets lower because it had bet on a decline in the value of subprime mortgage-backed debt. Gary Cohn, Goldman Sachs’s president and chief operating officer, and Chief Financial Officer David Viniar said at the hearings that the firm’s prices reflected what it saw in the market.

In the document on its website, Goldman Sachs said “a certain degree of judgment was necessary” in valuing the transactions. “We were able to access the best available market information to price these CDO securities and to ensure that our pricing represented actual fair market values at the time,” the firm said in the document.

The Wall Street Journal reported the details of Goldman Sachs’s response to the FCIC late yesterday on its website.

Risk Management

The dispute is at the heart of whether Goldman Sachs had a role in the near-bankruptcy of AIG or was a careful risk manager whose focus on marking assets to fair value helped the securities firm prepare for the credit contraction earlier than rivals. Goldman Sachs, whose 2007 profit benefited from bets against securities backed by subprime mortgages, was one of the biggest buyers of AIG’s insurance covering such debt and increased demands for collateral from AIG as prices fell.

“You guys are net short and you’re driving down prices, are you creating a self-fulfilling prophecy?” Philip N. Angelides, chairman of the FCIC, asked Viniar during the hearings. “Were you in fact pushing the market down?”

The FCIC is investigating what caused the credit crisis, and will report findings to Congress and President Barack Obama by December.

Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net