Arguably, Goldman has the most sophisticated traders in the world. And under former CEO Hank Greenberg, AIG also thought it did. But at best it had the second smartest, and that wasn't good enough. What AIG did have was one of the biggest balance sheets in the world, and AIG used it to take on huge exposure to what turned out to be toxic investments.
According to the Journal story, what Goldman apparently saw was just how toxic those investments could turn out to be. Sure they were triple A, but the agencies that rated them - Standard & Poor's, Moody's Investors Service and Fitch - didn't seem to know mortgages from sausages.
The tip off could have been that potential home buyers in California were getting $400,000 mortgages with no money down and no credit history. The mortgages were then bundled and passed off to banks. But in most instances the banks hedged their bets by purchasing default swaps - basically a form of insurance in case the mortgages went sour. AIG became a big buyer of these default swaps because, after all, the mortgages were rated triple A. They had to be safe.
Goldman Sachs was the biggest of these banks. It bought $33 billion of the $80 billion of mortgage assets that AIG then insured during the housing boom, according to the Journal, more than twice as much as the next two biggest banks, Societe Generale and Merrill Lynch.
Eventually everyone, even AIG, realized that the housing market was overheated. AIG stopped selling this kind of protection and putting it on its balance sheet. But by then it was too late. Watching AIG totter, Goldman bought protection from other banks against the prospect that AIG itself would default. Goldman continued to engage in sharp trading with AIG, but demanded collateral from the insurer, thereby helping to insure its demise.
Brilliant? Yes. Unscrupulous? Arguably. Illegal, no. Just pure capitalism in the tradition of John D. Rockefeller, J.P. Morgan, and Jay Gould.
The Journal also notes one other asset Goldman had that AIG didn't. When the crash came, Goldman avoided losses on its trades with AIG for as much as $22 billion in assets because the federal government stepped in and bailed out AIG. And who, you might ask, in "government" did that? None other than Treasury Secretary Henry Paulson and New York Federal Reserve Chairman Stephen Friedman, both former Goldman Sachs CEOs.
So while it helps to be smart, it's even more helpful to have friends in high places.