Apparently both the Angelides Commission and the NYT missed the really remarkable part of the story of Goldman Sachs buying credit default swaps (CDS) against the collaterized debt obligations (CDO) that it was issuing. The incredible part is not that Goldman bet against its own issues, but rather that they found a sucker (AIG, and eventually U.S. taxpayers) who was willing to take the bet. The basic story is that a CDO is a pile of assets of different types. It can include parts of mortgage backed securities, parts of other types of securities and just about anything else that the issuer chooses. Goldman knows exactly what it threw into the CDO, the insurer (AIG in this case) only knows the information that is publicly available and what Goldman might chose to tell them. When Goldman offers to buy a CDS from AIG on its CDO, it is either throwing its money away, in the event the CDO is good or it is expecting to make money because it knows the CDO is bad. If you were AIG, what would you think? (btw, note that Goldman was insuring an interest or "hedging" in any way. It sold the CDO, it didn't buy it, and therefore had no interest in it.)
--Dean Baker
