AIG and Goldman: A Game of 'Survivor'

(MoneyWatch)  Those snowbound by this weekend's storm can find entertaining reading in the New York Times story explaining how Goldman Sachs brought down American International Group.

We can only hope that today's Super Bowl is a little less lopsided. The investment bank was the clear winner because it correctly called the crash in the mortgage market. AIG, and ultimately the taxpayers, were the losers as we stumbled into the worst recession in 80 years.

For more than a year, journalists, Congress and now the Securities and Exchange Commission have been trying to find the smoking gun that proves Goldman, and other investment banks, did something illegal. But what they continually uncover is a business school model that will be studied at capitalist citadels like the University of Chicago for generations. Goldman played the game like a contestant on the reality show Survivor, "heads I win, tails you lose." And AIG lost. If it weren't for the $182 billion taxpayer bailout, no one except AIG's erstwhile stockholders would care.

The Times story shows how Goldman saw the mortgage disaster brewing, and purchased insurance for itself and its clients against it. That makes perfect sense. If you live in the coastal United States and see a hurricane coming, you run to buy more insurance. If someone is terminally ill, they may try to purchase a million-dollar life insurance policy.

It's up to the insurer to see that this is an unacceptable risk. AIG didn't. It thought the U.S. mortgage market would hum along forever and fell into the trap. When Goldman saw the mortgage market teeter even further, it demanded more collateral, and wrangled with AIG over the value of the bonds AIG had insured.

Again, Goldman was right in seeing what was coming before AIG, or anyone else for that matter. Goldman acted "aggressively" protecting itself and its clients, as the Times puts it, and arguably those actions helped bring down the giant insurer. It negotiated sharp deals. It may, in fact, have acted through other banks like Societe General to further pressure AIG.

The Times story doesn't cover the final act, when Goldman and the other banks put the squeeze on the U.S. government, forcing it to use taxpayer money to pay off on the collateral that AIG owed Goldman and the other banks. But now that's common knowledge.

In the end, Goldman looks like what it is: rapacious, clever, the ultimate "Survivor." Five years ago business journalists would have extolled the investment bank. Now, in the depths of recession, we vilify it.