A Favor to Goldman Sachs?

How come the Federal Reserve and Treasury Department let the investment bank Lehman Brothers fail last September but gave the insurance company A.I.G. $85 billion two days later? Did the government go to bat for A.I.G. because it owed billions to Goldman Sachs, Treasury Secretary Henry Paulson’s old firm?

In its lead editorial (Dec. 15) the New York Times notes that federal officials first said they let Lehman fail because they thought the financial system could withstand its downfall. Later they changed their story and said it was the law that prevented them from acting on Lehman’s behalf. The Times, which supports the bailouts, wonders whether the revised story is “an attempt to deflect public attention from what could go down in history as an epic blunder.”

But perhaps the explanation is that the feds knew Goldman Sachs, Merrill Lynch, Morgan Stanley and other firms had lent A.I.G. billions and would sink with it without the government bailout. The Times notes that Goldman Sachs CEO Lloyd Blankfein “was the only Wall Street executive at a meeting at the New York Federal Reserve on Sept. 15 to discuss the A.I.G. bailout.”

The Times thinks Timothy Geithner, president of the Federal Reserve Bank of New York and President-elect Obama’s nominee for Treasury Secretary, has some explaining to do. It writes, “Mr. Geithner should be asked at his confirmation hearing to explain which firms were threatened by an A.I.G. collapse, in what amounts and how those entanglements justify an ongoing bailout. Mr. Geithner must also explain how such entanglements came to be the norm on his watch.”

See CRC’s October 2008 Foundation Watch for more on Goldman Sachs.

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