Ever since the first AIG bailout was announced, many have suggested that the whole thing was some kind of scandalous way for the government to shovel money to Goldman Sachs (GS). And given the prevalence of former Goldman bankers, like Hank Paulson, in important governmental roles, you don't need much hard evidence to paint the picture of a conspiracy.
For its part, the company has always claimed it was fully hedged, and in all likelihood, it profited wildly between its hedges and the money it received from the government via AIG.
But of all the AIG counterparties, Goldman may be the least scandalous.
See, as we've said, most of AIG counterparties were merely engaging in a form of regulatory arbitrage -- buying underpriced CDS in order to make their balance sheets look healthier. They knew that AIG could never afford to insure the entire banking system, but they were making an armaggedon bet, assuming that the government would bail out AIG. And that's what occurred.
As far as we know, Goldman was the only counterparty that wasn't banking on a bailout. Rather than assume they'd be bailed out when armageddon hit, Goldman actually took its AIG counterparty risk seriously and bought protection on it. That's what we'd like banks to be doing -- constantly monitoring the health of their counterparties, and spending their own money to hedge that risk.
As for the argument that Goldman didn't need the government money, since it was hedged, that's hogwash. If we're going to honor any of the CDS counterparties, we need to honor them all -- including hedge funds and hedged banks. Otherwise we'd simply be punishing banks for being responsible.