Goldman Sachs Group Inc. documents, released by Senator Chuck Grassley, show that the investment banking and securities firm paid out $4.3 billion of American taxpayer money to foreign companies.

The foreign companies received the money as a reimbursement from Goldman Sachs for losses on investments in credit default swaps. These swaps were initially sold by AIG to Goldman Sachs, who in turn sold them to customers including foreign banks and companies. When the government, to the tune of $182.5 billion, bailed out AIG, Goldman Sachs was the recipient of $12.9 billion of that money indirectly. Much of the bailout money “given” to AIG consisted of funds used to pay its obligations to its Wall Street trading partners on credit default swaps, with Goldman Sachs being the biggest recipient.

Well, what is a credit default swap? A credit default swap is a contract in which party A agrees to pay party B a series of payments, and in return party B gives insurance on the default of a credit instrument, whereby if the credit instrument (such as a loan) were to go into default, party B would pay party A the value of the loan.

It turns out that Goldman Sachs also owned credit default swaps on AIG as well, meaning that if AIG defaulted, Goldman Sachs would be insured. In a series of questions directed at Elizabeth Warren and the Congressional Oversight Panel, Senator Grassley made it clear that those who insured Goldman Sachs were not in the position to honor the credit default swaps at the time of the bailouts, which can only indicate that Goldman Sachs was, indeed, aided directly by the bailouts. This is the case because Goldman Sachs would not have been properly leveraged and hedged against an AIG default without the funds from the CDS’s.

So, the question that arises out of all of this is why are U.S. taxpayers indirectly bailing out foreign entities for the bad investment decisions they made? Let’s look at the scenario again.

AIG sold protection against credit instrument defaults to Goldman Sachs, who in turn sold it to foreign entities. Goldman Sachs proceeded to buy protection against the default of AIG, but that protection was not reliable as the financial integrity, at the time of the bailout, of those issuing the protection was not sound (Citibank and Lehman Brother’s among the top issuers). AIG received a bailout from the U.S. government because the high number of defaults on credit instruments put too much financial strain on AIG to honor all of its credit default swaps. Goldman Sachs was then paid the obligations owed by AIG, which in turn are paid to foreign entities.

Because of Goldman Sachs’ insufficient hedge against AIG, a result of their own miscalculation of the financial sustainability and ability of the insurers of AIG to pay up, they benefitted directly from the bailout. So, what the taxpayer essentially paid for with the bailout funds was the nullification of risk to these investors in credit instruments. This confusing web of hedging and risk reduction by Goldman Sachs prompted this question by Senator Grassley to the Congressional Oversight Panel, “Can you please explain how ensuring that these institutions were paid in full, rather than required to suffer the consequences of the risks that they took, benefited the U.S. taxpayer?”

I hate to break it to you Senator, but I highly doubt that a taxpayer bailout, especially one of this magnitude, could ever be explained, let alone justified, by a scenario riddled with themes of investor protection and political manipulation. I hope the foreign entities are enjoying the money we sent them. But, hey, at least Goldman Sachs’ investment rating is still sound. I know that is what Americans really care about.

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