THE STENCH AT GOLDMAN SACHS GETS WORSE

I just re-read Grechen Morgenson's (NYT) October 2008 Article (http://www.nytimes.com/2008/09/28/business/28melt.html) from which the following is an excerpt:

"As the group, led by Treasury Secretary Henry M. Paulsen, pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

One of the Wall Street chief executives participating in the meeting was Lloyd C, Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests."

According to the WSJ live blog of the call which can be viewed here (http://blogs.wsj.com/deals/2009/03/20/live-blogging-the-goldman-sachs-aig-call/ ), a Goldman representative today said: "We [WSJ] ask if GS alerted the Treasury about the potential systemic risk in AIG’s fall. There were no meetings between Lloyd and Hank Paulson. Alerting people — we meet with our regulators regularly, and all through our big exposures, and our regulators were posted."

First off, this is inconsistent with what Morgenson was told last Fall. Morgenson is not a sloppy reporter. Second, I don't believe that Blankfein, who was apparently Paulsen's youger protege at Goldman, did not have any conversations about the big picture with his former boss. I just don't believe it.

Perhaps Barney Rubble and his cadre of Capital Hill financial experts should subpeona Blankfein and Paulsen to find out exactly what conversations occurred and when.

Why I am harping about this. Well the problem our beloved financial system is facing is a crisis of confidence first and foremost. The cronyism that allowed Goldman to avoid destruction last September is one of the many imperfections that will have to be exorcised before anyone (but Wall Street itself) will once again believe that Wall Street is something other than a rigged game.