By Steve Eder and Sakthi Prasad
NEW YORK/BANGALORE (Reuters) -Goldman Sachs Group Inc
The dominant Wall Street firm said in its annual shareholder letter that it did not intentionally "bet against" securities in the mortgage market during the financial crisis, dismissing suggestions that it unfairly made money by placing bets against its clients.
In the letter introducing its annual report, Goldman also defended its relationship with the bailed-out U.S. insurer American International Group Inc
Even so, Goldman did acknowledge that it and every other financial institution benefited from the rescue of AIG.
'DISINGENUOUS' EXCUSES
The letter, signed by CEO Lloyd Blankfein and Gary Cohn, president and chief operating officer, also addressed criticism about overly generous pay. It marked Goldman's most thorough effort yet to rebut a rising chorus of criticism over the past year as the bank enjoyed a year of record profits after benefiting from various government programs and policies.
"As a market maker, we execute a variety of transactions with clients and other market participants ... which may result in long or short risk exposures to thousands of different instruments at any given time," the company said in the letter.
Goldman said it did not generate enormous revenue or profit by betting against residential mortgage-related products.
Goldman said it bought protection on super-senior collateralized debt obligation (CDO) risk from AIG only as part of a trading relationship.
"This protection was designed to hedge equivalent transactions executed with clients taking the other side of the same trades," Goldman said.
Many banks, including Goldman, were among the recipients of tens of billions of federal bailout dollars that were funneled through the insurer at the height of the crisis, saving them from potential losses and causing a public uproar.
The bank said its total exposure on the securities on which it bought protection was roughly $10 billion and it held about $7.5 billion in collateral from AIG. The remainder was covered through other hedges entered with various counterparties.
"If AIG had failed, we would have had the collateral from AIG and the proceeds from the Credit Default Swap (CDS) protection we purchased.
Therefore, we would not have incurred any material economic loss," Goldman said.
Janet Tavakoli, president of Chicago-based Tavakoli Structured Finance, said Goldman knew more about the derivatives transactions with AIG than it has let on. She said its letter amounted to public relations spin.
She said it was "disingenuous" for Goldman to claim that it was merely doing "what others were doing" and that "it didn't know any better."
PAY-FOR-PERFORMANCE
The Goldman executives also addressed the widespread attention over the firm's pay practices since the financial crisis. Goldman last year was on pace to pay out record compensation in 2009, topping $20 billion, but changed course at the end of the year, instead paying $16.2 billion.
The move came after a public uproar about how Wall Street firms were setting aside billions of dollars to pay their employees soon after U.S. taxpayers committed hundreds of billions of dollars to rescue the banking industry.
"We have not been blind to the attention on our industry and, in particular, on Goldman Sachs, with respect to compensation," the executives wrote, adding, "our approach to compensation reflected the extraordinary events of 2009."
Goldman said in a regulatory filing last month that its bottom line could be affected by negative publicity.
Goldman's annual letter to shareholders and its defensive tone were in sharp contrast to a confident letter penned by JPMorgan Chase & Co
Goldman's eight-page letter might be too little too late because the damage has already been done, said Walter Todd, a portfolio manager at Greenwood Capital.
"I don't put much stock in the letter," Todd said. "It is kind of meaningless at this point.
(Reporting by Sakthi Prasad in Bangalore and Steve Eder in New York; Editing by Jon Loades-Carter, Dave Zimmerman and Matthew Lewis)
