On Monday afternoon Goldman Sachs posted a miserable first quarter for most of its typical investment banking divisions — and a record $6.56 billion in revenue for its trading unit, giving the bank a net profit nearly double Wall Street expectations. Mere seconds into the question and answer session of yesterday’s conference call with analysts, Guy Moszkowski of Merrill Lynch asked the question on everyone’s lips: what did the $180 billion money vortex called AIG have to do with those numbers? Nothing, insisted chief financial officer David Viniar, who said the impact of the unwind for the quarter “rounded to zero” and later professing to Bloomberg he was “mystified” over the public fascination with the question.
Was Viniar lying? Yesterday we explained how Goldman appeared to have booked the cash flow from the bailout in its “orphan month” of December, making Viniar possibly technically truthful. But then Peter Fisher, who heads fixed income trading for the hedge fund BlackRock, all but accused Viniar of flat-out lying. With the seen-everything tone one might expect of the longtime central banker Fortune once described as “one of those behind-the-scenes guys who keep Wall Street from coming apart at the seams,” Fisher told Bloomberg Surveillance host Tom Keane in an audio segment uploaded by the blog ZeroHedge that Goldman, as
rumored, had reaped huge “one-off” profits on the AIG unwind.
“So,” Keane asked sarcastically, “did [Goldman] make those trading gains by taking the hide out of BlackRock?” That got a laugh, so Keane pressed:
“I mean, is the answer that you only had so many phones to pick up, so you had to dial 1-800 GOLDMAN SACHS and say ‘Oh yes, thank you for that 18 bp spread?”
Keane was making a wry reference to reports that the trading desk of AIG Financial Products, overwhelmed by the task of unwinding their trades and demoralized by the populist outrage over their hard-earned bonuses, had “thrown in the towel” and essentially outsourced the unwind to their trading partners, which were booking fat profits or “spreads” — the difference between the bid and ask that traders book as profit; a “bp” or basis point is a hundredth of a percentage point; 18 bp is a relatively massive spread to book for riskless trading in the volume AIG was unwinding. In any case, Fisher knew exactly what he was talking about:
Well I’m sure they had a good quarter and we know that, the credit markets are healing, and good for them, and good for those of us who trade fixed income. I’m a little nervous for the industry in that it’s a one-off phenomenon we may not get this kind of rebound. Some of that may simply have been from closing out the AIG positions. That’s a one-off P & L for the industry; they’re not gonna get that over and over again, so there are some one-offs going through the first quarter.
A little later in the program, Keane pressed again, asking whether he felt Goldman owed taxpayers more than the preferred interest we’ll get if Goldman repays its $10 billion in TARP funds early, which it is gearing up to do. “Did the government save Goldman Sachs?” he asked. Fisher didn’t dodge.
I don’t know the answer to that. Maybe someone does. I think obviously the government’s stabilization of AIG helped a number of firms, there was worry about the knock-on consequences of AIG’s trading exposure not being honored…I think that was the government’s choice to help AIG; history will tell if that was the right thing or not…I think the P&L I’m really talking about in the first quarter was just the trading P&L. Those wide spreads you were getting if you were someone who was helping close out AIG’s exposure, so that was a trading P&L event.
In other words, Goldman — along with its fellow banks — indeed got two massive payouts from the AIG bailout: the billions it booked for serving as counterparty on AIG Financial Products’ unbalanced book of risky bets — and potentially billions more taking a sizeable cut on closing out AIG’s business with the rest of its counterparties.
