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AIG Document Reveals CDO Losses Behind Collapse

Merrill, Deutsche and Goldman collected collateral on CDS holdings as AIG’s was hit by massive losses on CDO’s.

At the Congressional hearing on the bailout of American International Group in January, a document was placed on the record that revealed that the banks that underwrote collateralized-debt obligations also profited on credit-defaults swaps purchased from AIG, reports Bloomberg. The banks, which included Merrill Lynch, Deutsche Bank, and Goldman Sachs, collected collateral on CDS holdings as AIG’s was hit by massive losses on CDO’s.

In last month’s hearing Representative Darrell Issa brought the document forward, prompting questions about whether the banks had “insider knowledge about the quality of the loans bundled into the CDO’s,” with one analyst calling the arrangement “uncanny.” The document has made public the magnitude of the securities losses, some of which were as high as 75 percent of their notional value. Goldman was the largest underwriter of the CDO’s, minting $17.2 billion of the $62.1 billion in CDO’s that AIG insured, followed by Merrill at $13.2 billion and Deutsche at $9.5 billion. The late disclosure has angered analysts who now are accusing the Federal Reserve Bank of New York of “suppression,” calling the situation a “coverup.”

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