2009 Will Be Very, Very Bleak

Nouriel Roubini, 01.08.09, 12:01 AM EST

A detailed look at the current recession.

U.S. gross domestic product will continue to contract throughout 2009 for a cumulative output loss of 5% and a recession that will last close to two years.

Let us look at the picture in detail:

Personal Consumption
The resilient U.S. consumer started to give up the ghost in the third quarter of 2008, when for the first time in almost two decades, personal consumption contracted. With personal consumption making up over two-thirds of aggregate demand, the outlook for the U.S. consumer is at the center of the dynamics that will play out in the real economy in 2009.

In my view, personal consumption will continue to contract quite sharply throughout 2009 as a result of negative wealth effects from housing and equity market losses, the disappearance of home equity withdrawal from the second half of 2008, mounting job losses, tighter credit conditions and high debt servicing ratios (the debt to income ratio went from 70% in the 90s, to 100% in 2000, to 140% now). This retrenchment of the U.S. consumer will result in a painful rebalancing in the economy that will eventually restore the savings rate of a decade ago.

The wealth losses for households related to the fall in home prices are roughly $4 trillion so far, and are clearly bound to increase further as home prices continue to fall–eventually reaching the $6-8 trillion range (compatible with a 30-40% fall in home prices peak to trough). With a negative wealth effect of 6 cents on the dollar, the reduction in personal consumption could amount to a whopping $500 billion. And negative wealth effect from fall in equity prices–on the wake of a bleak 2009 for corporate profits–will also contribute to the contraction in personal consumption by an estimated $100 billion (compatible with a 25% contraction in the stock markets).

Housing Sector
The fourth year of housing recession is well on course.

Total housing starts have plunged from the 2.3 million seasonally adjusted annual rate peak of January 2006 all the way to the 625,000 SAAR of November 2008 (the last data point available), an all-time low for the time-series that started in January 1959. Single-family starts built for sale are down 75% from their Q4 2005 peak.

On the demand side, new single-family home sales are down 65% from their July 2005 peak. Both demand and supply of homes are therefore still falling very sharply, which does not bode well for inventories. Inventories are the mortal enemy of prices for any goods-producing sector, including housing.

Starts need to fall substantially below sales so that the excess supply in the housing market is reabsorbed. Inventories persist at record highs and the gap between one-family starts (for sale) and one-family sales is at levels that cannot promote a fast work-off of inventories. To put these numbers in perspective, compare this with a measure of vacant homes for-sale-only. Vacant homes for-sale-only were at 2.2 million in Q3 2008, an all-time high. In the decade between 1985 and 1995, it oscillated around 1 million units on average and 1.3 million units between 2001 and 2005. This implies that we have to deal with an excess supply that ranges between 0.9 and 1.2 million units, of which roughly 85% are single-family structures.

The sharp and unprecedented fall of starts might not have reached a bottom yet. In this economy-wide recession, weakness on the demand side is bound to persist, and we believe that supply will have to fall further, given also the great wave of foreclosures that is adding to the excess of supply in the market. I see starts falling another 20% from current levels and believe that home prices will not bottom out until the middle of 2010.

Labor Markets
With the continued credit crunch and significant cut-down in consumer and business spending, the monthly job losses will continue in the 400,000 to 500,000 and 300,000 to 400,000 range during the first two quarters of 2009 respectively, bringing the unemployment rate to 8% by mid-2009. The severe contraction in private demand until early 2010 will keep layoffs high and the unemployment rate elevated over 8%.

Economy-wide job cuts are expected, with big corporations and small enterprises, residential and commercial construction, financial services and manufacturing continuing to shed jobs at a strong pace. Moreover, with structural shifts in the economy since the last recession, job losses this time will be more severe in the service sector, including retail, business and professional services and leisure and hospitality. Unless the fiscal stimulus addresses the deficit problem for state and local government, job losses at the government level will also gain pace. In turn, income and job losses will further push up default and delinquency rates on mortgages, consumer loans and credit cards. Moreover, the loss of high-paying corporate and financial sector jobs will be a big negative for tax revenues over the next two years.

Layoffs are bound to continue thereafter as cost-cutting gains pace with the beginning of the (sluggish) recovery period in early 2010. Even as consumer demand might show some signs of recovery, firms, as in the past, will begin by hiring only part-time and temporary workers initially. The unemployment rate might peak at close to 9% in Q1 2010, almost two years after the recession began. However, the hiring freeze across industries that began in late 2007 will continue at least until 2010, causing discouraged workers to leave the work force and containing the extent of the spike in the unemployment rate. Further, the decline in labor utilization will add to the deflationary pressure in the economy. An aging labor force, lower capital spending and potential growth over the next few years might also result in lower productivity growth and an increase in the natural rate of unemployment.

Capital Expenditure
Firms have been drawing down inventories beginning in Q4 2008. As the slump in domestic and foreign demand and difficulty in accessing short-term credit persist over the next four quarters, business investment is bound to contract in double-digits throughout 2009. Industrial production, spending on equipment and durable goods will also remain in the red through 2009. Moreover, with a sluggish recovery in private demand even during 2010, firms will start building inventories and contemplate capital expenditure plans only at a slower pace.

Trade
Exports contraction that began in late 2008 will gain pace in 2009 as more and more emerging economies slip into slowdown following the G-7 countries. On the other hand, easing oil prices and secular downward trends in consumer spending and business investment will help imports to shrink. In fact, this might cause the trade deficit to contract in 1H 2009 since the contraction in imports might well exceed the decline in exports, thus containing any negative contribution of trade to GDP growth.

Dollar Outlook
The fate of the dollar in 2009 rests on the global growth outlook. After profit-taking on long dollar positions ends, and trading volumes pick up as investors return from their holidays, the dollar may temporarily recover its relative safe-haven status in H1 2009. Since markets have yet to fully appreciate the impact of the commodity slump and financial crisis on the rest of the world, risk appetite may collapse again on signs of a deeper- or longer than expected recession outside the U.S. Further de-leveraging of dollar-denominated liabilities could provide an additional boost to the dollar as a funding currency.

The bond-yield outlook could be a further source of strength: While the Fed is already at a zero interest rate policy, other central banks will cut rates further to stimulate growth, putting downward pressure on currencies like the euro.

Alternating with these upside risks to the dollar may be downside risks from 1) a supply crunch in commodities that lifts commodity prices and producers’ economies, and 2) the inability of the market to absorb increased Treasury supply at low yields.

Budget deficit to hit $1.2 trillion

You will need to help yourself

Related News

Economy seen shrinking 2.2 percent in 2009: CBO

CBO forecasts initial costs of financial bailouts

By Richard Cowan and Jeremy Pelofsky

WASHINGTON (Reuters) - The U.S. budget deficit will swell to a record $1.186 trillion in fiscal 2009 as the global recession saps the economy, congressional forecasters said on Wednesday, presenting a daunting challenge to President-elect Barack Obama who has said tough choices will be necessary.

The Congressional Budget Office also forecast the deficit will likely fall to $703 billion in the 2010 fiscal year which begins October 1, 2009, as the U.S. recession begins to ease in the second half of this year.

The budget gaps for both years likely will be significantly greater, however, as Washington prepares to deliver a jolt to the economy with a large economic stimulus measure.

The recession, which began in December 2007, has brought significant job losses and slashed consumer spending and government tax revenues. The economic downturn also was credited with helping Democrats win the White House in the November election, while also expanding their majorities in Congress.

“CBO anticipates that the current recession, which started in December 2007, will last until the second half of 2009, making it the longest recession since World War Two,” the nonpartisan budget analyst for Congress said.

CBO projected the U.S. economy will shrink 2.2 percent in 2009 before growing by a modest 1.5 percent in 2010. Additionally, unemployment will continue its steep climb, rising to 8.3 percent this year and hitting 9 percent in 2010.

Obama said on Tuesday he expects deficits around $1 trillion for years to come forcing tough budget choices as he takes the government reins on January 20.

Besides trying to fix the current recession, the most significant challenge Obama will face is how to control the rapid growth in the cost of federal retiree and health benefits amid an aging population. Democrats and Republicans have been putting off these tough decisions for years.

Obama has said he fears double-digit unemployment if Congress doesn’t act fast on an economic stimulus bill that he hopes would create or maintain 3 million jobs.

Demonstrating he intends to place added emphasis on fiscal matters, Obama announced on Wednesday he was appointing former Treasury official Nancy Killefer to oversee a budget and spending reform effort from the White House.

‘GRIM EPITAPH’

House Budget Committee Chairman John Spratt, a South Carolina Democrat, said the new CBO deficit forecast represented “a grim epitaph for the Bush administration,” noting the budget surpluses the president inherited in 2001.

And while he supports Congress spending money to try to pull the country out of its economic recession, Spratt added, “We must try wherever possible to minimize the impact on the budget over the medium and long term.”

The huge budget deficits are in contrast to the roughly $455 billion deficit suffered last year — also a record — and do not count an economic stimulus plan that Obama and Congress will consider over the next month, which could total $775 billion or more over two years.

In the coming months, Congress also is also expected to be called on to approve tens of billions of dollars in additional funding for the wars in Iraq and Afghanistan. Already the administration has spent $857 billion on the two wars.

This year’s deficit also was worsened by an economic stimulus measure that Congress and President George W. Bush enacted a year ago that totaled $168 billion over two years.

The Bush administration, which began with large budget surpluses in 2001, has loaned hundreds of billions of dollars to help ailing financial institutions recover after they made risky real estate investments that went sour.

That bailout could end up costing the government $184 billion this year, CBO speculated, and another $5 billion next year. So far, the Treasury Department has spent only about half of the $700 billion in bailout money authorized by Congress.

CBO also estimated deficits over the next five years will total $1.972 trillion.

When Bush took office, the total U.S. debt was $5.7 trillion. It now stands at more than $10.6 trillion because of increased government spending coupled with lower tax revenues related to Bush’s tax cuts and the slowing economy.

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Its time for you to take control

Tuesday, January 6th, 2009

U.S. Banks Refuse to Detail How They’re Spending Federal Bailout Money

[This is the fifth installment of an investigative series in which Money Morning examines how U.S. banks are using federal bailout funds.]

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

After receiving hundreds of billions of dollars in taxpayer-funded federal bailout money, the biggest U.S. banks say they can’t track how that money is being spent.
Some of the banks are outright refusing to discuss the matter, a new study has found.

“We have not disclosed that to the public. We’re declining to,” Thomas Kelly, a spokesman for JP Morgan Chase & Co. (JPM) told The Associated Press, which surveyed 21 banks that received at least $1 billion in federal bailout money, and asked how that capital was being used. JP Morgan received a $25 billion infusion as part of the U.S. Treasury Department’s $700 billion Troubled Assets Relief Program (TARP).

As an ongoing Money Morning investigation has demonstrated, billions in U.S. bank rescue funds are financing buyouts worldwide - instead of lending at home. Some of those buyouts deals are being done in markets as far away as China. Meanwhile, credit remains tight here in the U.S. market, a situation that could be alleviated if only the banks made the bailout money available to consumers in the form of loans.

Money Morning was one of the first news organizations to really examine how TARP money was being misdirected, and wasn’t being deployed as originally intended. More recently, The AP has joined the journalistic posse and published several investigative pieces, including one that looked at executive pay at financial institutions that received bailout money.

Some experts - such as investing icon Jim Rogers - say that bailouts in general are bad deals. They’re even worse if they’re funded by taxpayers who don’t know how their money is being spent [A related story on Rogers' views about the U.S. banking-bailout initiative appeared last week in Money Morning. To access that story, please click here].
The bottom line: Banks won’t say how they’re using the bailout money. That refusal - coupled with the almost non-existent disclosure and oversight of the TARP program - means the country may well never find out how hundreds of billions of taxpayer dollars were spent.

Anatomy of a Survey

In its latest investigative offering, The Associated Press contacted 21 banks that received at least $1 billion in government money and asked four questions: How much has been spent? What was it spent on? How much is being held in savings? And what’s the plan for the rest?

According to The AP, none of the banks provided specific answers.

For instance, when Kevin Heine, a spokesman for Bank of New York Mellon Corp. (BK) - which received about $3 billion in TARP money - was asked how his institution was using the emergency infusion, he replied by stating that “we have not disclosed that to the public. We’re declining to.”

The words varied, but the basic message was the same from one bank to another. For instance, Barry Koling, a spokesman for SunTrust Banks Inc. (STI), the Atlanta, Ga.-based lender that received $3.5-billion in taxpayer cash, told the wire service that “we’re not providing dollar-in, dollar-out tracking.”

Some banks actually admitted that they simply didn’t know where the money was going.

For instance, a spokesman for the Birmingham-based Regions Financial Corp. (RF) said the company is not tracking how it is spending the $3.5 billion in TARP money that it received.
“We manage our capital in its aggregate,” said Regions spokesman Tim Deighton.

These answers - or lack thereof - highlight both the secrecy surrounding the TARP program, as well as the lack of oversight by Congress. Given that the entire TARP program is worth at least $700 billion - roughly the equivalent of the economy of The Netherlands - those aren’t small issues.

About half of the $700 billion was earmarked for bailouts. But because the U.S. financial crisis was escalating so quickly - and because the Bush administration pushed Congress to approve the TARP plan quickly - Congress attached virtually no strings to the bailout funds. The Treasury Department has been using the money to buy stakes in key U.S. banks, allegedly hoping that the infusion of cash would enable them to heal themselves and start lending again.

As the deepening U.S. credit crisis has shown, that hasn’t happened.

No Oversight, No Accountability

There has been no accounting of how banks spend that money. Lawmakers summoned bank executives to Capitol Hill late last year and implored them to lend the money - instead of hoarding it, spending it on executive bonuses, or for buyouts to get bigger. But there’s no process in place to guide this. And there are no consequences for banks that fail to comply with what U.S. lawmakers are asking.

Even worse: There’s no vehicle that enables taxpayers to find out what banks are doing - at least, not yet.

“It is entirely appropriate for the American people to know how their taxpayer dollars are being spent in private industry,” Elizabeth Warren, the top congressional watchdog overseeing the financial bailout, told The AP. Stating that it takes “a lot of nerve not to give answers.”

Warren said her oversight panel will try to force the banks to say where they’ve spent the money. But she also noted that she was quite surprised to learn that she even has to ask for that information.

“If the appropriate restrictions were put on the money to begin with, if the appropriate transparency was in place, then we wouldn’t be in a position where you’re trying to call every recipient and get the basic information that should already be in public documents,” Warren said.

In fact, the due diligence on the legislation that created TARP was so lax that lawmakers didn’t realize until much later that the bill they passed actually managed to create a potentially illegal tax loophole that grants banks a tax-break windfall of as much as $140 billion. Lawmakers were furious - but possibly powerless, afraid that a full-scale assault on the tax change could cause already-done deals to unravel, in turn causing investor confidence to do the same.

“Those are legitimate questions that should have been asked on Day One,” said U.S. Rep. Scott Garrett, R-N.J., a financial services committee member who opposed the bailout as it was being pushed through Congress. “Where is the money going to go to? How is it going to be spent? When are we going to get a record on it?”

Buyouts Not Bailouts

Nearly every bank questioned - including Citigroup Inc. (C) and Bank of America Corp. (BAC) - recipients of some of the largest TARP infusions - responded to AP inquiries with generic public relations statements explaining that the money was being used to strengthen balance sheets and to continue making loans to ease the credit crisis.

As a Money Morning story detailed Friday, BofA just finalized its buyout of Merrill Lynch & Co. Inc. (MER), creating the largest U.S. bank - as well as the biggest challenge yet for longtime BofA Chief Executive Officer Kenneth D. Lewis. And Wells Fargo & Co. (WFC) completed its $12.7 billion purchase of Wachovia Corp. (WB) - outbidding Citigroup Inc. (C) and making a massive bet that it accurately quantified the still existing risks in Wachovia’s huge portfolio of mortgage and real estate loans.

Those were just the latest in a long series of buyout deals being funded at least partly by TARP money, the ongoing Money Morning investigation has shown.

In response to The AP survey questions, a few banks detailed company-specific programs, such as a JP Morgan plan to lend $5 billion to nonprofit organizations and healthcare companies over the next year. Marshall & Ilsley Corp. (MI), said the $1.75 billion bailout infusion it received allowed the Wisconsin-based bank to temporarily stop foreclosing on homes, said Senior Vice President Richard Becker.

This “foreclosure moratorium” will run through the end of March, the bank announced in December.

No Real Answers

But no bank provided even the most basic accounting for the federal money. Some even said that the money couldn’t be tracked.

The bailout money “doesn’t have its own bucket,” said Bob Denham, a spokesman for North Carolina-based BB&T Corp. (BBT).

Denham said taxpayer money wasn’t used in BB&T’s recent purchase of a Florida insurance company. When asked how he could make such a statement - after stating that TARP money couldn’t be tracked - said BB&T would have made that deal even without the infusion.

Interestingly, a spokesman for BB&T told the Charleston (W.V.) Daily Mail newspaper just before Christmas that the bank doesn’t like the federal government’s $700 billion financial rescue plan - and actually didn’t want to participate - but took the $3.1 billion because competitors are participating and because the Treasury Department urged it to.

According to the newspaper, BB&T - the largest bank in West Virginia - has been asked how it justifies participating in the federal government’s Troubled Asset Relief Program, or TARP, in light of BB&T Chairman John A. Allison IV’s promotion of the late author Ayn Rand’s philosophy of free market capitalism.

The reticence banks displayed when it came to discussing their use of TARP money bordered on the absurd. Most banks wouldn’t even say why they were keeping the details secret.
“We’re not sharing any other details. We’re just not at this time,” Wendy Walker, a spokeswoman for Dallas-based Comerica Inc. (CMA), which received $2.25-billion from the government, told The AP.

One didn’t even want to say they wouldn’t say, the wire service reported.

Heine, the New York Mellon spokesman who said he wouldn’t share spending specifics, added: “I just would prefer if you wouldn’t say that we’re not going to discuss those details.”
Morgan Stanley (MS) offered to discuss the matter with reporters on condition of anonymity. When The AP refused, Morgan Stanley spokeswoman Carissa Ramirez sent the wire service an e-mail saying: “We are going to decline to comment on your story.”

Lawmakers say they want to tighten restrictions on the second half of the TARP money, the yet-to-be-released block worth $350 billion. U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. said the federal department is trying to build up its monitoring of bank spending.

“What we’ve been doing here is moving, I think, with lightning speed to put necessary programs in place, to develop them, implement them, and then we need to monitor them while we’re doing this,” Paulson said at a recent forum in New York. “So we’re building this organization as we’re going.”

But that may all be too late, says Garrett, the New Jersey Republican congressman. Indeed, it’s entirely possible that U.S. taxpayers will never get a clear answer on where hundreds of billions of dollars went.

[Editor's Note: The ongoing financial crisis has changed the investing game forever, making uncertainty the norm and creating a whole set of new rules that will help determine who wins and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive.

Money Morning Investment Director Keith Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation." But Fitz-Gerald brings more than a realization - and an understanding - to the table, here. After a decade of work, he's also developed a new computerized trading model based on a mathematical concept known as "fractals." This system allows him to predict price movements of broad indexes, or individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and this new market environment.]

AIG Faces $10 Billion

Get Ready You will Need some Financial Coaching For Boomers

in Losses on Bad Bets

By SERENA NG, CARRICK MOLLENKAMP and MICHAEL SICONOLFI

American International Group Inc. owes Wall Street’s biggest firms about $10 billion for speculative trades that have soured, according to people familiar with the matter, underscoring the challenges the insurer faces as it seeks to recover under a U.S. government rescue plan.

The details of the trades go beyond what AIG has explained to investors about the nature of its risk-taking operations, which led to the firm’s near-collapse in September. In the past, AIG has said that its trades involved helping financial institutions and counterparties insure their securities holdings. The speculative trades, engineered by the insurer’s financial-products unit, represent the first sign that AIG may have been gambling with its own capital.

The soured trades and the amount lost on them haven’t been explicitly detailed before. In a recent quarterly filing, AIG does note exposure to speculative bets without going into detail. An AIG spokesman characterizes the trades not as speculative bets but as “credit protection instruments.” He said that exposure has been fully disclosed and amounts to less than $10 billion of AIG’s $71.6 billion exposure to derivative contracts on debt pools known as collateralized debt obligations as of Sept. 30.

AIG’s financial-products unit, operating more like a Wall Street trading firm than a conservative insurer selling protection against defaults on seemingly low-risk securities, put billions of dollars of the company’s money at risk through speculative bets on the direction of pools of mortgage assets and corporate debt. AIG now finds itself in a position of having to raise funds to pay off its partners.

The fresh $10 billion bill is particularly challenging because the terms of the current $150 billion rescue package for AIG don’t cover those debts. The structure of the soured deals raises questions about how the insurer will raise the funds to pay the debts. The Federal Reserve, which lent AIG billions of dollars to stay afloat, has no immediate plans to help AIG pay off the speculative trades.

The outstanding $10 billion bill is in addition to the tens of billions of taxpayer money that AIG has paid out over the past 16 months in collateral to Goldman Sachs Group Inc. and other trading partners on trades called credit-default swaps. These instruments required AIG to insure trading partners, known on Wall Street as counterparties, against any losses in their holdings of securities backed by pools of mortgages and other assets. With the value of those mortgage holdings plunging in the past year and increasing the risk of default, AIG has been required to put up additional collateral — often cash payments.

AIG’s problem: The rescue plan calls for a company funded largely by the Federal Reserve to buy about $65 billion in troubled CDO securities underlying the credit-default swaps that AIG had written, so as to free AIG from its obligations under those contracts. But there are no actual securities backing the speculative positions that the insurer is losing money on. Instead, these bets were made on the performance of pools of mortgage assets and corporate debt, and AIG now finds itself in a position of having to raise funds to pay off its partners because those assets have fallen significantly in value.

The Fed first stepped in to rescue AIG in mid-September with an $85 billion loan when the collateral demands from banks and losses from other investments threatened to send the firm into bankruptcy court. A bankruptcy filing would have created losses and problems for financial institutions and policyholders all over the world that were relying AIG to insure them against the unexpected.

By November, AIG had used up a large chunk of the government money it had borrowed to meet counterparties’ collateral calls and began to look like it would have difficulty repaying the loan. On Nov. 10 the government stepped in again with a revised bailout package. This time, the Treasury said it would pump $40 billion of capital into AIG in exchange for interest payments and proceeds of any asset sales, while the Fed agreed to lend as much as $30 billion to finance the purchases of AIG-insured CDOs at market prices.

The $10 billion in other IOUs stems from market wagers that weren’t contracts to protect securities held by banks or other investors against default. Rather, they are from AIG’s exposures to speculative investments, which were essentially bets on the performance of bundles of derivatives linked to subprime mortgages, commercial real-estate bonds and corporate bonds.

These bets aren’t covered by the pool to buy troubled securities, and many of these bets have lost value during the past few weeks, triggering more collateral calls from its counterparties. Some of AIG’s speculative bets were tied to a group of collateralized debt obligations named “Abacus,” created by Goldman Sachs.

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The Abacus deals were investment portfolios designed to track the values of derivatives linked to billions of dollars in residential mortgage debt. In what amounted to a side bet on the value of these holdings, AIG agreed to pay Goldman if the mortgage debt declined in value and would receive money if it rose.

As part of the revamped bailout package, the Fed and AIG formed a new company, Maiden Lane III, to purchase CDOs with a principal value of $65 billion on which AIG had written credit-default-swap protection. These CDOs currently are worth less than half their original values and had been responsible for the bulk of AIG’s troubles and collateral payments through early November.

Fed officials believed that purchasing the underlying securities from AIG’s counterparties would relieve the insurer of the financial stress if it had to continue making collateral payments. The plan has resulted in banks in North America and Europe emerging as winners: They have kept the collateral they previously received from AIG and received the rest of the securities’ value in the form of cash from Maiden Lane III.

The government’s rescue of AIG helped prevent many of its policyholders and counterparties from incurring immediate losses on those traditional insurance contracts. It also has been a double boon to banks and financial institutions that specifically bought protection on now shaky mortgage securities and are effectively being made whole on those positions by AIG and the Federal Reserve.

Some $19 billion of those payouts were made to two dozen counterparties just between the time AIG first received federal government assistance in mid-September and early November when the government had to step in again, according to a confidential document and people familiar with the matter. Nearly three-quarters of that went to French bank Société Générale SA, Goldman, Deutsche Bank AG, Crédit Agricole SA’s Calyon investment-banking unit, and Merrill Lynch & Co. Société Générale, Calyon and Merrill declined to comment. A Goldman spokesman says the firm’s exposure to AIG is “immaterial” and its positions are supported by collateral.

As of Nov. 25, Maiden Lane III had acquired CDOs with an original value of $46.1 billion from AIG’s counterparties and had entered into agreements to purchase $7.4 billion more. It is still in talks over $11.2 billion.