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The next day, Goldman made the collateral call official by forwarding an invoice
requesting . billion. On the same day, Goldman purchased million of five-
year protection—in the form of credit default swaps—against the possibility that AIG
might default on its obligations.
Frost never responded to Davilman’s email. And when he returned from vaca-
tion, he was instructed to not have any involvement in the issue, because Cassano
wanted Forster to take the lead on resolving the dispute. AIG’s models showed
there would be no defaults on any of the bond payments that AIG’s swaps insured.
The Goldman executives considered those models irrelevant, because the contracts
required collateral to be posted if market value declined, irrespective of any long-
term cash losses. Goldman estimated that the average decline in the market value
of the bonds was .
So, first Bear Stearns’s hedge funds and now AIG was getting hit by Goldman’s
marks on mortgage-backed securities. Like Cioffi and his colleagues at Bear Stearns,
Frost and his colleagues at AIG disputed Goldman’s marks. On July , Forster was
told by another AIG trader that “[AIG] would be in fine shape if Goldman wasn’t
hanging its head out there.” The margin call was “something that hit out of the blue
and it’s a f***ing number that’s well bigger than we ever planned for.” He acknowl-
edged that dealers might say the marks “could be anything from to sort of, you
know, ” because of the lack of trading but said Goldman’s marks were “ridiculous.”
In testimony to the FCIC, Viniar said Goldman had stood ready to sell mortgage-
backed securities to AIG at Goldman’s own marks. AIG’s Forster stated that he
would not buy the bonds at even cents on the dollar, because values might drop
further. Additionally, AIG would be required to value its own portfolio of similar as-
sets at the same price. Forster said, “In the current environment I still wouldn’t buy
them . . . because they could probably go low . . . we can’t mark any of our positions,
and obviously that’s what saves us having this enormous mark to market. If we start
buying the physical bonds back then any accountant is going to turn around and say,
well, John, you know you traded at , you must be able to mark your bonds then.”
Tough, lengthy negotiations followed. Goldman “was not budging” on its collat-
eral demands, according to Tom Athan, a managing director at AIG Financial Prod-
ucts, describing a conference call with Goldman executives on August . “I played
almost every card I had, legal wording, market practice, intent of the language, mean-
ing of the [contract], and also stressed the potential damage to the relationship and
GS said that this has gone to the ‘highest levels’ at GS and they feel that . . . this is a
‘test case.’”
Goldman Sachs and AIG would continue to argue about Goldman’s marks, even
as AIG would continue to post collateral that would fall short of Goldman’s demands
and Goldman would continue to purchase CDS contracts against the possibility of
AIG’s default. Over the next months, more such disputes would cost AIG tens of
billions of dollars and help lead to one of the biggest government bailouts in Ameri-
can history.
