The Financial Crisis Inquiry Commission is turning its focus to derivatives at two days of hearings starting Wednesday. On the hot seat will be former executives of American International Group Inc., the insurance conglomerate saved from collapse by a $182 billion taxpayer bailout, and current officials of Goldman Sachs Group Inc., the finance powerhouse that has been one of Wall Street’s biggest derivatives dealers.
After the subprime mortgage bubble burst in 2007, derivatives called credit default swaps, which insured against default of securities tied to the mortgages, collapsed. That brought the downfall of Lehman Brothers and pushed AIG to the brink. New York-based AIG got an initial $85 billion infusion from the government in September 2008.
Goldman Sachs profited from its bets against the housing market before the crisis, and continued to ring up huge profits after accepting federal bailout money and other government subsidies. The firm’s dealings in another type of derivative, known as collateralized debt obligations, have brought it harsh scrutiny by a Senate panel and in the case of one $2 billion CDO, civil fraud charges from the Securities and Exchange Commission.
The panel is looking at the relationship between the two financial giants. “They had very substantial dealings with each other,” commission chairman Phil Angelides said in a conference call with reporters Tuesday.
Much of the federal rescue money for AIG went to meet the company’s obligations to its Wall Street trading partners on credit default swaps. The biggest beneficiary of the AIG money was Goldman, which received $12.9 billion. Among the executives expected to testify: two former CEOs of AIG, Joseph Cassano and Martin Sullivan; and Gary Cohn, Goldman’s president and chief operating officer.
