The New York Times’ Gretchen Morgenson wrote a great piece yesterday on how a tiny unit of AIG led to the downfall of its entire empire.

But perhaps the most interesting part of her reporting was that Lloyd Blankfein, who took over as CEO of Goldman Sachs when Henry Paulson went to the Treasury, was in the group of bankers and regulators who met to discuss whether to bail out AIG. If the insurer collapsed, it “threatened to leave a hole of as much as $20 billion in Goldman’s side.”

Wall Street is a tangle of influences and conflicts, but no firm has its tentacles in everything like Goldman Sachs. That’s always a fertile topic for exploration for financial reporters, but especially now when hundreds of billions of dollars are on the line.

Was the denial of a bailout to Lehman Brothers a big boo-boo that sent the financial markets to the edge of the cliff? Well, ok, they were already on the edge—now they’re hanging by their fingernails.

The Journal in an A1 story all but says yes, and here’s how the chain reaction spreads, fueled by those “weapons of mass destruction,” credit-default swaps (emphasis mine):

The reaction was most evident in the massive credit-default-swap market, where the cost of insurance against bond defaults shot up Monday in its largest one-day rise ever. In the U.S., the average cost of five-year insurance on $10 million in debt rose to $194,000 from $152,000 Friday, according to the Markit CDX index.

When the cost of default insurance rises, that generates losses for sellers of insurance, such as banks, hedge funds and insurance companies. At the same time, those sellers must put up extra cash as collateral to guarantee they will be able to make good on their obligations. On Monday alone, sellers of insurance had to find some $140 billion to make such margin calls, estimates asset-management firm Bridgewater Associates. As investors scrambled to get the cash, they were forced to sell whatever they could— a liquidation that hit financial markets around the world.

The press hasn’t been skeptical enough on the government’s insistence that it might actually make money on the bailout, as seen in this WSJ story.

So taxpayers face the risk of losing some part of the $700 billion—but could also turn a profit if the U.S. ends up selling those holdings for more than the purchase price.

Joe Nocera in the NYT says “financial Armageddon was warded off” by news of the government bailout plan on September 18 and feared that if a deal wasn’t reached by this morning, it would send us over the edge.

I agree with Nocera on the direness of the situation but think we still need more reporting that explains why that is. This is a bitter pill for all of us, but especially for the 99 percent of Americans out there who don’t pay serious attention to Wall Street everyday and who were blindsided by this. A roadmap of the potential calamity that awaits without a government intervention would make it easier to swallow.

And arguing as this guy does that Congress is wrong for debating the biggest bailout in history rather than rubber-stamping the Bush Administration’s plan, is just plain wrong.

If you'd like to help CJR and win a chance at one of 10 free print subscriptions, take a brief survey for us here.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.