But even if we assume that someone could establish a theoretical market value based on a company's internal financial model, which model would prevail? Neither one. No single party decided what the market value actually was; Goldman and AIG both decided. Both companies were designated as the "Calculation Agent" in the swap confirmations. (AIG was the exclusive Calculation Agent for swaps conducted with SG.)
Goldman and AIG could debate the value of West Coast I, and all the other CDOs, and then, after failing to agree, each side would appoint its independent representative, who would then take a while to deliberate on the valuation. If they failed to agree, the two representatives would deliberate over the choice of a final, single arbiter, who would then ascertain the value of the CDO tranche, at a point long past the date of the initial dispute.
It wasn't only the "market values" that might shift over time; the investments within the CDO portfolios could easily shift as well. Most of the CDOs insured by AIG were managed, meaning that they were run by asset managers who had great latitude to substitute different investments within the CDOs. So each time the assets changed, a brand-new valuation was necessary. So nothing about the CDOs' valuations, in a nonexistent market, could ever be pinned down. So nothing could ever be settled, except in court or in arbitration.
And if there's no way to attain a timely resolution, then the margin requirements seem meaningless. In real markets that trade with a cash basis, the need for timeliness can be easily measured. If you pay less attention to the form and focus the underlying substance of the transactions, which were governed by vague and sloppy wording, you have to wonder whether Goldman's demands for margin would have been enforceable.
But Goldman's management didn't care about the contract language. It wanted AIG to hand over cash, sooner rather than later. And they pulled out the stops to pressure into everyone into accommodating their dubious demands.
How Goldman Tried to Scam AIG
A few days after executives at Goldman made their initial demands in July 2007, they started playing hardball with Tom Athan of AIGFP. "Tough conf call with Goldman," he emailed afterwards. "They are not budging and are acting irrational." The issue was a "test case" that had gone to "the highest levels" at Goldman. But--here's the smoking gun--Goldman insisted that AIG present it "actionable firm bids and firm offers" to come up with a "mid market quotation," for valuing the insured assets. The idea was patently nonsensical. There never were and there never would be any bona fide bids of any kind, be they "actionable and firm," or merely "indicative," because no one ever intended to buy or sell the assets, which were never available for sale on a free-and-clear basis. But the people at AIG never put two and two together. Like a bunch of suckers, they went out soliciting "quotes," which Merrill Lynch would only offer on a confidential basis. They also got quotes from Goldman and SG.
Goldman clearly wanted to override the wording of the documents, which prevented the bank from asserting the upper hand, according to reporting in The New York Times:
[David] Viniar, Goldman's chief financial officer, advised the insurer in the fall of 2007 that because the two companies shared the same auditor, PricewaterhouseCoopers, A.I.G. should accept Goldman's valuations, according to a person with knowledge of the discussions.When A.I.G. asked Goldman to submit the dispute to a panel of independent firms, Goldman resisted, internal e-mail messages show. In a March 7, 2008, phone call, [AIGFP CEO Joe] Cassano discussed surveying other dealers to gauge prices with Michael Sherwood, Goldman's vice chairman. At that time, Goldman calculated that A.I.G. owed it $4.6 billion, on top of the $2 billion already paid. A.I.G. contended it only owed an additional $1.2 billion.
Mr. Sherwood said he did not want to ask other firms to value the securities because "it would be 'embarrassing' if we brought the market into our disagreement," according to an e-mail message from Mr. Cassano that described the call.
The Goldman spokesman disputed this account, saying instead that Goldman was willing to consult third parties but could not agree with A.I.G. on the methodology
As noted here eariler, you need to take everything Cassano says with a pound of salt, especially since he "retired." three days after sending the e-mail in question.
Nonetheless, it sure looks as if Goldman has been trying to scam the Financial Crisis Inquiry Commission in much the same manner that it scammed AIG, with a lot of dissembling about "market values." Again, Goldman's auditor, PriceWaterhouse and, Deloitte & Touche, the auditor for Maiden Lane III, the entity holding the toxic CDOs once insured by AIG, found that these assets had no "market value;" they could not neither be measured according to actual sales nor comparable sales of similar assets in the marketplace. The only valid way to ascertain their fair value would be to perform fundamental cash flow analyses.
Why Goldman Never Shares Its Cash Flow Calculations With Anyone Else
There's no indication that Goldman shared its cash flow evaluations with AIG or with anyone else. A lot of documents have been released so far by Goldman, the FCIC, the Senate Permanent Subcommittee on Investigations, and the Congressional Oversight Panel. None of those documents show any contemporaneous communication by Goldman to AIG about how the bank actually calculated the values of the CDOs. In its highly selective and misleading history of events written after the fact, Goldman glosses over the fact that the reference assets were never available for sale on the open market, and that its valuations based on comparable sales violated fair value accounting standards.
There's no doubt that Goldman performed fundamental cash flow analyses on all its mortgage assets. As management relayed to the Board of Directors in a slide titled, "Independent Price Verification" :
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