Monday, 16 March 2009
Robert Peston raises the interesting issue of whether European banks (and Goldman Sachs) were taking high risks in dealing with AIG. Goldman, Barclays, Society Generale and Deutsche Bank have each received between $8bn and $13bn since the US government's AIG bailout.
Peston takes this as some indication that these banks were not being managed prudently - their reliance on AIG being a risky one.
But the main complaint against AIG is that it was selling credit default swaps and other financial insurance products while not having enough capital to cover them, and underpricing the risk of default. If this is the case, then it might have been perfectly legitimate for these banks to buy the insurance, even factoring in the risk that AIG would default.
A large proportion of the payments received by Goldman (Peston doesn't break down the payments to the other banks) are CDS-related - indicating that their insurance policy paid off. Even if it hadn't, they would not have "lost" the $13 billion, but only the much smaller amount paid as premium on the CDS.
It's also quite possible that the banks gambled that AIG would not be allowed to fail by the US authorities. If so, it looks like they have been proved right.
Of course you can't prove that a bet was a good one by the fact that it was successful. But in this case the indications don't point the way Peston suggests. These banks have come out of the situation quite well and it may be a bit unfair to criticise them for it.