Thanks to Bloomberg News, we now have a good idea how much of that $13 billion pass-through bailout Goldman Sachs got from AIG last year was pure taxpayer-financed gravy: $5.2 billion, courtesy Tim Geithner.

AIG collapsed last year in part because it had written insurance policies on billions of dollars in stupid bets made by Goldman, Merrill Lynch, Deutsche Bank and others. Since it was functionally bankrupt, last September AIG thought it would be able to convince those banks to accept significantly less than face value on the credit default swaps it had sold them. How much less?

[Elias] Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar, according to people familiar with the matter.

Then a funny thing happened: The New York Fed opened an $85 billion credit line for AIG, staving off bankruptcy with a massive influx of taxpayer dollars and effectively taking control of the insurer. Habayeb was pushed aside as chief negotiator with Goldman and the other banks on the issue of how much AIG owed for those swaps and replaced by Tim Geithner, then the chairman of the Federal Reserve Bank of New York. Geithner had a different opening position:

Geithner's team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps.... Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar.

We'll never know how much Goldman would have accepted in the end, or how much the other banks would have accepted, or if one or all of them would have forced AIG into bankruptcy. But we know this: AIG's target was 60 cents on the dollar, and after Geithner turned on the taxpayer-financed spigot the banks got everything.

The logic of the decision, according to an analyst quoted by Bloomberg, was driven by the fact that some banks claimed that they needed the full amount of what AIG owed them or they risked failure.

One reason par was paid was because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. "Some of those banks needed 100 cents on the dollar or they risked failure," Vickrey says.

Goldman Sachs was not one of those banks. In March, CFO David Viniar told analysts on a conference call that Goldman's exposure to AIG was hedged: "There would have been no credit losses if AIG had failed." So if Geithner had negotiated a separate peace with Goldman—perhaps using the same sort of bullying tactics and arm-twisting that the Treasury Department and Fed had shown toward Bank of America and other institutions while trying to keep the financial system alive—he may well have gotten them down to $7.8 billion, the 40-cents-on-the-dollar haircut AIG thought it could get, and saved taxpayers $5.2 billion.

Geithner made the decision in total secrecy. He tried for months to keep the list of counterparties to AIG secret, and Bloomberg reports that the New York Fed ordered AIG executives not to file SEC documents that would reveal details of how the swaps were being handled: "Don't you think your counterparties will be concerned?"

As long as the counterparties are happy, right? Another thing that makes Goldman happy is "dark pools." Matt Taibbi has flagged a white paper the firm is circulating in D.C.—and posted on its web site—arguing straight-faced that transparency and free flow of information are not good things when it comes to equities markets, and that billions of dollars in secret transactions to which only obscenely wealthy bankers are privy are healthy. Because real-time public disclosure of huge transactions could hurt Goldman's bottom line:

In traditional exchange trading, bids and offers are public, and this transparency helps buyers and sellers to achieve the best price.

For some market participants, however, the openness and transparency of the equity market actually mean they are unlikely to achieve the best price.

Instead, Goldman argues, regulators should allow "so-called dark pools" of "non-displayed liquidity" so that they can do whatever they want to, when they want to, so the schlubs don't find out about it until it's too late and they've already parted with their money. This is actually posted on Goldman Sachs' web site, publicly.

CORRECTION: We initially misread Bloomberg's report that AIG wanted banks to "accept discounts of as much as 40 cents on the dollar" as meaning they wanted to banks to accept as little as 40 cents on the dollar. In fact, AIG wanted banks to accept as little as 60 cents on the dollar—a 40 percent discount. We've adjusted the figures in the post to reflect that.


If you know how Goldman employees will be spending their taxpayer-financed bonuses this year, let me know: you can e-mail me at the address below or post to the #goldmanproject page.