Goldman Sachs fingers in Wall Street bailout?

I was struck by the fact that no-one in power seemed to have noticed that we were in economic trouble until their pockets were threatened, when all of a sudden they decided to pick ours.

So I was intrigued by the question as to whether Henry Paulson's Goldman Sachs background and connections had anything to do with his sudden discovery of the problem. (Or rather whether there were any smoking pistols). Seems pretty clear from the following timeline:

On Sept 14 Lehmans was allowed to go into bankruptcy, Merrill Lynch was in trouble, and AIG asked The Fed for $40b.

Over the weekend Sept 14-15, there were meetings at the New York Federal Reserve. Henry M. Paulson Jr., the Treasury secretary, attended as did Lloyd C. Blankfein, the chief executive of Goldman Sachs attended the weekend meetings.

On Sept 15 the Fed said no to AIG, the Dow Jones sank over 500 points.

On Sept 16 there was another high level meeting to discuss financial aid for A.I.G. which Henry Paulson did not attend, but Blankfein was the ONLY Wall Street chief executive who attended this meeting. The Fed changed its mind and gave AIG $85b.

Why let Lehman collapse, but first deny then save AIG?

Probably not the only reason, but my guess is not unrelated, Goldman Sachs was deeply threatened by an AIG collapse, though few people were aware of this at first. A Goldman spokesman, declined to detail how badly hurt his firm might have been had A.I.G. collapsed and Goldman’s chief financial officer, assured analysts on Sept. 16 that his firm’s exposure was “immaterial". But other stories have confirmed that GS was in danger. By one calculation Goldman had $20 billion worth of risk tied to A.I.G.

On Sept. 16 the government announced its two-year, $85 billion loan to A.I.G. What is notable is that the plan saved the insurer’s trading partners - such as Goldman Sachs - but decimated its shareholders.

A Treasury spokeswoman declined to comment about Goldman’s role in the A.I.G. rescue. However turn around again and suddenly Goldman had changed its regulatory status to help bolster its finances.

Regarding Mr. Blankfein’s presence at the Fed during talks about an A.I.G. bailout, Goldman's CFO 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.”

On Sept 18 Secretary Paulson went the next step and proposed the $700 billion to bailout 'the entire system'.