Goldman vs. NYT

It's now official: the NYT editorial board has no clue how financial markets work. Its ignorance is truly embarrassing.

I've been following the back-and-forth between the NYT and Goldman Sachs pretty closely, mostly because I think the NYT's outrageous claims about Goldman were patently untrue. The paper's refusal to admit its mistake—and the fact that it continues to recycle the false claims—is just pathetic.

One of the absurd claims in the original article about AIG's downfall was that Goldman had $20 billion of exposure to AIG. Goldman aggressively denied the claim (calling it "seriously misleading"), and insisted that it had hedged its exposure to AIG:

For the avoidance of doubt, our exposure to AIG is offset by collateral and hedges and is not material to Goldman Sachs in any way.

Now that AIG has released a list of its largest counterparties and Goldman is on top, having received $12.9 billion from AIG since the initial government rescue, the NYT thinks it has been vindicated. It hasn't, and the fact that it thinks it has been vindicated is pathetic. From an editorial in today's NYT:

The largest single recipient was Goldman Sachs ($12.9 billion). The amount — hardly chump change even by Wall Street standards — appears to contradict earlier assertions by Goldman that its exposure to risk from A.I.G. was “not material” and that its positions were offset by collateral or hedges. If so, why didn’t the hedges pay up instead of the American taxpayers?

Huh? What does that even mean? Clearly, the NYT editorial board doesn't know what it means for a bank to hedge its exposure to AIG. Goldman hedged its exposure by buying CDS protection on AIG; had AIG been allowed to fail, Goldman would have received the payouts on those CDS contracts. As a Goldman spokesman told Reuters today:

The majority of Goldman Sachs' CDS (credit default swap) exposure to AIG Financial Group was collateralized. That means that Goldman Sachs had collateral. To the extent it wasn't collateralized, Goldman Sachs hedged its exposure via the credit default swaps market. If the government had allowed AIG to fail, Goldman Sachs would have received its collateral. A credit event would be triggered, and Goldman Sachs would receive a payout from the credit default swap insurance that it had. This is from other counterparties.
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AIG was not allowed to fail. So there was no payout from the hedges.

FT Alphaville's Sam Jones (who should know better) fell into the trap of equating the list of AIG's counterparties with the extent of each bank's exposure to AIG, and concluded that the NYT was right and Goldman was wrong. This is false. The list of AIG's counterparties does not vindicate the NYT in any way, shape, or form.

As I said earlier, the list of AIG's counterparties says nothing about each bank's exposure to AIG. Goldman hedged its exposure to AIG via the CDS market, so if AIG had failed, the money Goldman would have theoretically made on those CDS positions would have offset any money it lost from AIG's failure. That's what it means to be hedged. The fact that Goldman received $12.9 billion from AIG doesn't mean that Goldman had $12.9 billion of exposure to AIG, because, for one thing, AIG never failed. Moreover, it doesn't take into account the money Goldman received on its CDS contracts on AIG—that is, its hedges. If the money Goldman would have made on its hedges would have offset the money it would have lost on AIG's failure, then Goldman would have had no exposure to AIG. It's as simple as that.

The fact that the NYT editorial board doesn't understand this is embarrassing.