Collateral: Transformation & Optimisation

Philip McCabe

INTRODUCTION

Collateral damage

On July 27, 2007, Goldman Sachs called AIG for US$1.81 billion in collateral to cover mark-to-market losses on its credit default swaps (CDS) position. AIG had famously taken synthetic exposure on reportedly US$23 billion in mortgage backed securities that Goldman, ahead of most of the street, had decided to mark down in the wake of what it saw as a worrying cooling of the US housing market. By the end of September 2008 AIG had been called by Goldman for nearly US$13 billion¹¹ Losses due to covering the positions eventually amounted to nearly US$30 billion (McDonald and Paulson, 2014). in collateral and been bailed out by the US government. In a 2011 New York Times blog (Cohan, 2011), William Cohan reported that Joseph Cassano, the chief executive officer (CEO) of AIG Financial Products at the time was “blown away”, not by defaults, but by an unexpected call for collateral. At the time, AIG FP refused to part with the collateral and negotiated a lower figure. However, the subsequent increasing calls led directly to the eventual bail out of AIG and helped begin the long path to increased transparency, capital and collateral that are the hallmarks