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September 30, 2008

Gretchen Morgenson talks — is anyone listening?


Ms. Morgenson, assistant business and financial editor and Pulitzer Prize-winning columnist at the New York Times is, in my opinion, one of the very best writers on business and finance in the English-speaking world.

As such, I was thrilled to see the Times give her article on the sudden implosion of Lehman Brothers and A.I.G. pride of place as the lead story on the front page of this past Sunday's paper. (It appeared online the previous day.)

And it was full of juice, so much so that I expected yesterday's papers to be full of references to the astonishing facts she brought to light.

Imagine my surprise, then, when a close reading of my usual load of pressed dead trees yielded nary a mention of what she revealed that had been, up to then, pretty much out of general view and hidden under various rocks.

    From the Times article:

    Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

    As the group, led by Treasury Secretary Henry M. Paulson Jr., 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.

    The only Wall Street chief executive 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.

    Goldman Sachs was a member of A.I.G.’s derivatives club, according to people familiar with the operation. It was a customer of A.I.G.’s credit insurance and also acted as an intermediary for trades between A.I.G. and its other clients.

    Few knew of Goldman’s exposure to A.I.G. When the insurer’s flameout became public, David A. Viniar, Goldman’s chief financial officer, assured analysts on Sept. 16 that his firm’s exposure was “immaterial,” a view that the company reiterated in an interview.

    Later that same day, the government announced its two-year, $85 billion loan to A.I.G., offering it a chance to sell its assets in an orderly fashion and theoretically repay taxpayers for their trouble. The plan saved the insurer’s trading partners but decimated its shareholders.

    Lucas van Praag, a Goldman spokesman, declined to detail how badly hurt his firm might have been had A.I.G. collapsed two weeks ago. He disputed the calculation that Goldman had $20 billion worth of risk tied to A.I.G., saying the figure failed to account for collateral and hedges that Goldman deployed to reduce its risk.

    Regarding Mr. Blankfein’s presence at the Fed during talks about an A.I.G. bailout, he said: “I think it would be a mistake to read into it that he was there because of our own interests. We were engaged because of the implications to the entire system.”

    Mr. van Praag declined to comment on what communications, if any, took place between Mr. Blankfein and the Treasury secretary, Mr. Paulson, during the bailout discussions.

    A Treasury spokeswoman declined to comment about the A.I.G. rescue and Goldman’s role. The government recently allowed Goldman to change its regulatory status to help bolster its finances amid the market turmoil.


In case you missed it:

"The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm."

"A Goldman spokesman said in an interview ... that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests."

"The government recently allowed Goldman to change its regulatory status to help bolster its finances amid the market turmoil."

I guess they must think we really are stupid to simply accept whatever we're told.

But surprise — Congress yesterday refused to drink the Paulson/Goldman Kool-Aid ... maybe, just maybe, those who voted against it had as much trouble swallowing as I did.

FunFact: Treasury Secretary Henry M. Paulson Jr. joined Goldman Sachs in 1974, rising to become CEO from 1994 to 1998 and adding the chairmanship in 1999, leaving in 2006 to take over the Treasury Department.

FunFact #2: Robert Rubin, Treasury Secretary under President Bill Clinton and intimately involved in the current bailout effort, worked at Goldman Sachs for 26 years, ultimately rising to Co-Chairman.

Stop Press

This just in at 1:03 p.m. today:

"Mr. Gingrich then capped his tepid endorsement with a call for Mr. Paulson's resignation, saying that 'having a former chairman of Goldman Sachs preside over disbursing hundreds of billions of dollars to Wall Street is a terrible concept and inevitably will lead to crony capitalism and the appearance of — if not the actual existence of — corruption.'"

You could look it up.

September 30, 2008 at 10:01 AM | Permalink


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Its amazing that there hasn't been more commentary. Its kind of like a forward being taken down in the penalty box -- its either a penalty kick or the forward should get a yellow card for diving. Either Paulson should be fired or Morgenson should be called to task. The silence is deafening.

Posted by: Ted Murphy | Oct 1, 2008 9:53:12 AM

Me, I get a kick out of how fast things went from "the economy is strong" to " holy sh!t we're DOOMED!" so fast that McCain couldn't keep up. Also love how just a couple of weeks ago Gramm assured us that the bad economy was all in our heads. Yeah? Well now it's in yours too, pal.

Add to that touches like how the $700B figure was just a random large number, and was not a final limit anyway but just a rolling amount, and how a clause inserted in the proposal specified that Paulson's actions would not be subject to review or court action of any kind and it all sure looks like stealing the silverware on the way out.

Of course I love how McCain was so indispensable that he simply had to drop everything to personally oversee the vote (even though he hadn't bothered to even read the *three whole pages* that the proposal was written on), and he took credit for its passage before the voted actually happened (even though it went down in flames, and more Republicans voted against than Dems, and no AZ Republicans voted in favor), and finally he pronounced the aftermath as "no time to place blame" even though he personally blamed Obama within the previous ten seconds.

Stay classy, John.

Posted by: tatiana | Oct 1, 2008 2:06:45 AM

This whole financial debacle reeks of cronyism. But then, that's the obvious. I wonder what the hidden is?

Great piece of reposting here Joe. Many thanks. I used to thing Robert Rubin was sort of ok. Now, with the Goldman Sachs resume, I'm not so sure anymore.

Posted by: Matt Penning | Oct 1, 2008 1:56:55 AM

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