NYT Details Paulson/Goldman Contacts

A tip of The Audit’s hat to some old-fashioned muckraking in The New York Times yesterday. Gretchen Morgenson and Don Van Natta Jr. filed a Freedom of Information request for Paulson’s phone records and combined that with reporting inside the Bush Administration to counter Paulson’s spin on his involvement in the AIG bailout that helped his old firm. It’s good stuff.

Morgenson and Van Natta Jr.’s investigation uncovers details about the intense and disproportionate communication between Paulson and his alma mater during the week after he let Lehman Brothers fail but bailed out AIG, in the process making its counterparties—most especially Goldman Sachs—whole.

That week Paulson talked to Goldman CEO Lloyd Blankfein first, last, and by far most amongst Wall Street chieftains, some twenty-four times—including five times alone on the day after the AIG bailout. Two of those calls were made before Paulson got an ethics waiver.

As to that last matter, the Times is good to write that the markets were in full-fledged panic at the time. The paper notes this by saying up high that “financial regulators had to scramble very quickly last fall to address an unprecedented crisis. In those circumstances it would have been difficult for anyone to follow routine guidelines.”

But the closeness of the contact raises questions about the firm’s outsize influence in the halls of power. It sure doesn’t look good:

The calls between Mr. Paulson and Mr. Blankfein, especially those surrounding the A.I.G. bailout, are disturbing to Samuel L. Hayes, a professor emeritus at Harvard Business School and a consultant in the past for government agencies, including the Treasury Department.

“We don’t know what they talked about,” Mr. Hayes said. “Obviously there was an enormous amount at stake for Goldman in whether or not the A.I.G. contracts would be made whole. So I think the burden is now on Mr. Paulson to demonstrate that there was no exchange of information one way or the other that influenced the ultimate decision of the government to essentially provide a blank check for A.I.G.’s contracts.”

And despite what Paulson’s flack says, well:

Ms. Davis also said that Federal Reserve officials, not Mr. Paulson, played the lead role in shaping and financing the A.I.G. bailout.

But Mr. Paulson was closely involved in decisions to rescue A.I.G., according to two senior government officials who requested anonymity because the negotiations were supposed to be confidential.

What’s particularly nice about this piece is that the Times doesn’t let Paulson parse his way out of this entanglement. For instance, Paulson told Congress he “had no role whatsoever in any of the Fed’s decision regarding payments to any of A.I.G.’s creditors or counterparties.”

But the Times rebuts that in a critical passage:

But according to two senior government officials involved in the discussions about an A.I.G. bailout and several other people who attended those meetings and requested anonymity because of confidentiality agreements, the government’s decision to rescue A.I.G was made collectively by Mr. Paulson, officials from the Federal Reserve and other financial regulators in meetings at the New York Fed over the weekend of Sept. 13-14, 2008.

These people said Mr. Paulson played a major role in the A.I.G. rescue discussions over that weekend and that it was well known among the participants that a loan to A.I.G. would be used to pay Goldman and the insurer’s other trading partners.

So while Paulson may be telling the technical truth by saying he didn’t have any role in the specific handling of AIG’s counterparties, he’s offering a sliver of the story to obscure the larger truth.

As Dean Starkman told me this morning, though it might seem obvious by now that Goldman was talking to the government a lot, this stuff doesn’t just pop out of a toaster. Suspecting is one thing; knowing is another. It took a lot of hard work to nail this story down.

It’s a critical one in our understanding of how the crisis unfolded.

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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.