When Paulson Met Goldman: From Russia With Love

Last Updated Oct 20, 2009 6:06 PM EDT

Still dubious that former Treasury Secretary Henry Paulson showed favoritism toward Goldman Sachs, his former firm, during the financial crisis? Read on.

In his new book, NYT reporter Andrew Ross Sorkin, here via Felix Salmon, recounts Paulson's June 2008 meeting in Moscow with members of Goldman's board of directors. Why Russia? Apparently because the investment bank officials happened to be in town to huddle with Mikhail Gorbachev, perhaps to book up on the finer points of perestroika.

When Paulson learned that Goldman's board would be in Moscow at the same time as him, he had [Treasury chief of staff] Jim Wilkinson organize a meeting with them. Nothing formal, purely social -- for old times' sake.
For fuck's sake! Wilkinson thought. He and Treasury had had enough trouble trying to fend off all the Goldman Sachs conspiracy theories constantly being bandied about in Washington and on Wall Street. A private meeting with its board? In Moscow?

For the nearly two years that Paulson had been Treasury secretary he had not met privately with the board of any company, except for briefly dropping by a cocktail party that Larry Fink's BlackRock was holding for its directors at the Emirates Palace Hotel in Abu Dhabi in June.

Anxious about the prospect of such a meeting, Wilkinson called to get approval from Treasury's general counsel. Bob Hoyt, who wasn't enamored of the "optics" of such a meeting, said that as long as it remained a "social event," it wouldn't run afoul of the ethics guidelines.

Still, Wilkinson had told [Goldman chief of staff John] Rogers, "Let's keep this quiet," as the two coordinated the details. They agreed that Goldman's directors would join him in his hotel suite following their dinner with Gorbachev. Paulson would not record the "social event" on his official calendar--

"Come on in," a buoyant Paulson said as he greeted everyone, shaking hands and giving bear hugs to some.

For the next hour, Paulson regaled his old friends with stories about his time in Treasury and his prognostications about the economy. They questioned him about the possibility of another bank blowing up, like Lehman, and he talked about the need for the government to have the power to wind down troubled firms, offering a preview of his upcoming speech.

You don't have to be Fox Mulder, consumed with dark conspiracies, to question the propriety of this conclave.

Remember, the U.S. financial industry was already in flames when Paulson huddled with Goldman's board. And here's the top U.S. financial official, ignoring the queasiness of one of his chief deputies and of Treasury's general counsel, merrily breaking blinis with Goldman directors (in a foreign country, no less) a mere three months after the near death experience of Bear Stearns.

In the weeks before the government bailout of AIG and the demise of Lehman Brothers, Paulson also would communicate frequently with Goldman CEO Lloyd Blankfein, the two exchanging phone calls like a couple of overheated teens.

It's a disturbing scene. It also contradicts claims by current Treasury chief Tim Geithner that Goldman hasn't received preferential treatment.

"We have been forced to do just extraordinary things and, frankly, offensive things to help save the economy," Geithner told the WSJ in August, referring to government steps to halt the financial crisis. "I am completely confident that none of those decisions. . . had anything to do with the specific interest of any individual firm, much less Goldman Sachs."

If you say so, comrade.

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    Alain Sherter covers business and economic affairs for CBSNews.com.