8/7/2019 Goldman Short Warsh Email FRBNY-ToWNS-R1-147944
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Sarah,We met with Govs. Kohn and Warsh today to update them on
the package of measures being prepared for AIG.The governors asked
two questions in the meeting that we did not know the ans wers to.
I expect these are issues that someone on your team is already
workingon, but we would like to get the latest information from you
so we can get back to the governors with answers.1. Who is
overseeing the tear-up process on the COS? There are two issues
here, concessions and Goldman.Concessions: the worry is that giving
the counterparties par in exchange for the underlying COO security
might be giving them a gift - they no longer have AIGcredit risk,
and whatever CVA they have taken against potential future exposure
to AIG will be released upon tear-up. If a counterparty has not
received all thecollateral it has called for, the tear-up
eliminates current exposure also. On the other hand, AIG is now
receiving government support so the perceived credit risk ofAIG is
less. Also, AIG needs to get the CDS torn up to put its problems
behind it, so its bargaining power may be weak. I f I understand
the current version of theproposed structure, any concessions will
result in an excess amount left in the escrow account which pays
down the Fed's senior note. This may reduce AIG'sincentive to
bargain for the best concession possible. Is Morgan Stanley or some
advisor from our side embedded in the tear-up negotiations to track
theseissues?Goldman: is a special case because their CDS with AIG
are a naked short position and they don' t own the bonds. If the
CDS are jus t torn up at current mark-tomarket, the value of that
mark influences the cash Goldman will receive in a way that is not
the case for the counterparties who own the bonds and will
bereceiving par. The Fed, Goldman's s enior management, and
Treasury all have an interest in making sure the negotiation o f
the mark between AIG and Goldman isdone in a fair way. However, the
normal procedure might be for the negotiations to be done between
someone at AIGFP and their counterpart on a trading desk atGoldman.
A Goldman trader may not share the perspective of Goldman's senior
management and may attach higher value to an extra billion dollars
of P&L thatcould affect his or her 2008 bonus, even if that
carries significant reputation risk for Goldman as a firm. Again,
is Morgan Stanley or some advisor involved hereand aware of the
issue? Is there a contingency plan to approach Goldman at a more
senior level if roadblocks start appearing in the negotiations?2.
What public disclosures will be made of the mark-to-market on ML II
and ML III once they are consolidated on FRBNY's balance sheet?The
governors were concerned that the market could attach a
disproportionate significance to any public disclosureof "the
Fed's" marks on the nonagency RMBSand ABS COO portfolios once ML II
and ML III are consolidated onto FRBNY's balance sheet. Do we have
a strategy for that? Would the disclosure be the sameas Maiden Lane
LLC (quarterly disclosure of fair value of the holdings of ML II
and ML III on the H.4.1)?Three more questions that are mine, not
the governors.1. Given all the public hue and cry about the transit
authorities whose tax-motivated lease transactions are in danger of
unwinding due to AIG's downgrade belowAAA, are there o ther similar
transactions that we should know about (and alert the governors
about)? I assume this transaction was part of the AIGFP
TOGportfolio; do what know what else lurks there?2. What is the
status of the FP winddown?3. Can we have an update on the asset
disposal process?Thanks,Mike
