It’s September 2008. Goldman and AIG are trading in the markets, and Goldman notices that AIG seems to be having very severe liquidity problems. AIG needs to renew repo agreements after investing the trades’ cash in plunging mortgage collateral bought from investment banks, and asks around for various other sources of funding.

Recognizing an emergency, Blankfein whips out his cell phone and calls Hank Paulson. He gasps to the Treasury Secretary and former Goldman CEO: "AIG, one of my favorite trading partners is going under! This will cause a market meltdown! What should we do?" Paulson, in a calm comforting voice says: "Take a deep breath and pull yourself together. I can help. First, let's make sure AIG is really going under."

There is a long pause, during which Blankfein checks the status of his credit default protection and other hedges against an AIG failure, yanks AIG’s credit lines, and presses AIG with calls for collateral on credit default swap agreements on plummeting CDOs. Blankfein’s voice finally comes back on the line. He says: "OK, now what?"

Hat tip to the late Spike Milligan

By Janet Tavakoli

web site: www.tavakolistructuredfinance.com

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2010 Copyright Janet Tavakoli- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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