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AIG Eyes Action on Goldman over $2 Billion CDO Losses

Francesco Guerrera in New York and Brooke Masters in London
Tuesday, 20 Apr 2010 | 1:53 AM ET

AIG, the US government-controlled insurer, is considering pursuing Goldman Sachs over losses incurred on $6 billion of insurance deals on mortgage-backed securities similar to the one that led to fraud charges against the US bank.

Aig Headquarters
Aig Headquarters

AIG’s move over the deals that caused it a loss of about $2 billion is a sign that Friday’s decision by the Securities and Exchange Commission to file civil fraud charges against Goldman could spark actions from investors who lost money on mortgage-backed securities.

If AIG and others discover that their transactions had disclosure issues similar to those alleged in the SEC charges, they would be able to complain to the SEC, file a private lawsuit, or both, lawyers said.

People close to the situation said that AIG was reviewing deals to insure $6bn-worth of Goldman’s collateralised debt obligations in the run-up to the crisis. They added that AIG had yet to decide whether to take action. AIG and Goldman declined to comment.

Under a deal struck by AIG and Goldman last year, the bank agreed to cancel the insurance on some $3bn-worth of CDOs in exchange for keeping collateral worth about $2bn, according to people close to the situation. AIG is believed to have recorded a loss of about $2bn. The CDOs being reviewed by AIG are part of a family of securities known as Abacus. The SEC’s complaint is focusing on one of the Abacus deals that is not among the securities insured by AIG.

The decision to charge Goldman was reached after a party-line vote at the SEC, with chairman Mary Schapiro and the two other Democrats voting against the two Republicans, people familiar with the ballot said.

The regulators allege that Goldman hid the fact that Paulson & Co, a hedge fund that wanted to bet against the CDO, had influenced the selection of the loans that went into the security. The SEC further accuses Goldman of falsely representing to investors that Paulson would buy into the security. Goldman has vigorously denied all charges.

Superficial resemblance between the AIG deals and the security at issue in the SEC complaint would not be enough, lawyers said. Goldman would fight any claims by AIG, or any other parties, on other CDOs by arguing that each security had a different financial and legal structure, people familiar with the bank’s thinking said.

Simply failing to identify the investor taking a short interest in a CDO structure would probably not be enough to establish fraud either, people familiar with the SEC’s thinking said.

What makes the transaction targeted by the SEC complaint different is the allegation that Goldman actively misrepresented the role of Paulson to ACA, the independent portfolio selector. Two Democratic congressmen plan to ask the SEC to investigate dealings between Goldman and AIG.

In a letter they plan to send to the SEC, Elijah Cummings of Maryland and Peter DeFazio ask the watchdog to “evaluate the extent of any receipt by Goldman Sachs of fraudulently-generated AIG-issued credit default swap payments, and vigorously pursue the recovery of such payments on behalf of the US taxpayer”.

-- Additional reporting by Anna Fifield in Washington

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