Too Big to Fail [99]
Whenever the subject of insurance had come up at previous board meetings, Liddy had been unenthusiastic. “It’s a totally different game,” he had warned. His view on the matter hadn’t changed, no matter how much of a bargain AIG may have seemed. “It isn’t worth getting entangled with AIG,” he insisted.
The morning session ended without any decisions being made about AIG, but the insurer came up again after lunch for an entirely different reason. AIG traded through Goldman as well as other Wall Street firms, and like many other companies would put up securities as collateral. There was just one problem: AIG was claiming that its securities were worth a good deal more than Goldman thought they were. Although Goldman’s auditor was looking into the matter, there was another snag: the auditor, PricewaterhouseCoopers, also worked for AIG.
In a videoconference presentation from New York, a PWC executive updated the board on its dispute with AIG over how it was valuing or, in Wall Street parlance, “marking to market,” its portfolio. Goldman executives considered AIG was “marking to make-believe,” as Blankfein told the board.
Strangely, however, no one in the room in Moscow made the critical connection; no one raised the collateral dispute as evidence of a potential fatal flaw in Goldman’s consideration to merge with AIG—that the company itself was in serious trouble and had resorted to overvaluing its securities as a stop-gap. Instead, the afternoon session proceeded with upbraiding PricewaterhouseCoopers: “How does it work inside PWC if you as a firm represent two institutions where you’re looking at exactly the same collateral and there’s a clear dispute in terms of valuation?” Jon Winkelried, Goldman’s co-president pointedly asked.
It was the second time PWC had been criticized during a Goldman board meeting. Goldman’s board had first learned of the collateral dispute with AIG in November 2007. At the time, the sum involved was more than $1.5 billion. Nervously, Goldman started buying up protection in the form of credit default swaps—insurance—against the possibility that AIG would fail. Given that no one at the time seriously thought that would ever happen, the insurance was relatively cheap: For $150 million, Goldman could insure some $2.5 billion worth of debt.
The Goldman board ended its day in St. Petersburg in a more leisurely manner. With the northern sky still light well after 10:00 p.m., the thirteen directors and their spouses rode gondolas along the city’s storied canals.
On Sunday, the board flew down to Moscow for the second part of the meeting, gathering at the Ritz-Carlton, on the edge of Red Square. Mikhail Gorbachev was the speaker at their dinner that evening. Power in Russia was still very much in the hands of Vladimir Putin, even though Dmitry Medvedev had recently been elected to succeed him. Many foreign investors feared that Russia’s commitment to open and free markets was quickly fading, particularly in light of the power grabs in the energy industry.
Gorbachev, who had initiated the changes that led to the end of communist rule, struck several Goldman directors as oddly deferential to the Kremlin. “Russia is now realizing its potential as a democratic state, opening itself up to new ideas and outside investment.”
Some directors joked that if the last hotel wasn’t bugged, this one certainly must be.
In a strange coincidence, late that afternoon another key figure in American finance arrived in Moscow. Treasury secretary Henry Paulson had come there on a stop on a five-day European tour that would later take him to Berlin, Frankfurt, and then London.
He had been on the road a great deal that month—visiting the Persian Gulf states; attending the Group of Eight meeting of finance ministers in Osaka, Japan; and now passing through Europe and Russia. The highlight of his trip, he hoped, would be London, where he had been preparing