On a summer evening in 2007, a Goldman Sachs salesman sent a courtesy email to an AIG Financial Products exec that read: “Sorry to bother you on vacation. Margin call coming your way. Want to give you a heads up.”
“On what,” the brief email reply said 18 minutes later. The answer, one minute later: “20 bb [billion] of supersenior.”
The next day Goldman Sachs presented AIG with an invoice demanding $1.8 billion in collateral on $21 billion [the email mentioned $20 billion, but what’s a billion dollars among trading buds?] of AIG super-senior credit default swaps that Goldman owned.
According to the Financial Crisis Inquiry Commission Report (p. 244), from which this anecdote is taken, “AIG’s models showed there would be no defaults on any of the bond payments that AIG’s swaps insured.” But Goldman had its own model, showing losses of about 15% in the subprime mortgage bonds backing its CDS.
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That little heads-up email likely ruined the AIG exec’s vacation. As for Goldman, it wisely purchased $100 million in new credit default swap contracts against the possibility of an AIG default on the same day it presented its demand for collateral.
So began the first, but not last, collateral call on AIG, leading up to the firm’s September 2008 insolvency, when it was inundated with collateral calls on CDS contracts it could not pay. The CDS contracts required the insurer to post collateral at exactly the time when losses made that impossible.