Last September, Goldman Sachs Group (GS) came within days of going the way of Lehman Brothers. And were it not for the fact that a former Goldman CEO, Hank Paulson, was Treasury Secretary at the time and another former Goldman executive, Joshua Bolten, was the President's Chief of Staff, Goldman might not have gotten the injection of government-guaranteed debt that saved it from bankruptcy -- and fueled its $3.4 billion in second quarter profits.

On September 10, 2008, I was on CNBC's Power Lunch discussing whether Goldman would rescue Lehman Brothers from its perilous condition. Dennis Kneale thought that was a good idea. As for Goldman, not so much. What we didn't know then was that the same doom loop that caused Lehman to perish was working at Goldman as well -- so it was in no condition to do any rescuing.

What doom loop? What brought down Lehman was short sellers from hedge funds who were betting on a decline in its stock price as credit ratings agencies downgraded its debt. The downgrade forced it to come up with cash collateral for credit default swaps (CDS) that it didn't have. And the hedge funds decided to pull their money out of Lehman fast so it would not be tied up in a bankruptcy. The plunging stock and rapid cash withdrawals sent Lehman to the wood chipper.

After Lehman went under, Merrill Lynch decided it was next, so it sold itself to Bank of America (BAC). Goldman would have followed suit as its stock price tumbled from a high of around $200 down to $47. This drop in stock price made things tough for Goldman executives who had borrowed money using their stock as collateral to buy $55 million Nantucket spreads.

The banks were nervous about the drop in Goldman stock and were demanding cash that the Goldman executives didn't have. Fortunately, with the $85 billion rescue of AIG -- which had been brought down by the doom loop -- came a $12.9 billion payout to Goldman at 100 cents on the dollar for CDSs held with AIG. Other CDS policyholders got around 13 cents on the dollar. Without this cash, Goldman would have taken a $13 billion loss that could have wiped out its net worth.

But the real Goldman rescue came in November 2008 as its stock traded at $52. That's when Goldman got FDIC backing to issue $5 billion in extremely low cost debt. And today Goldman is using that and at least $20 billion more in taxpayer-backed debt to make trades that appear poised to let it pay record bonuses of $773,000 per employee in 2009 -- about a year after it nearly perished.

By paying back $10 billion in TARP equity and warrants, Goldman is free from government influence over its pay practices. But it remains heavily dependent on taxpayer-backed debt -- initially to rescue it from oblivion and now to take enormous trading risks on our nickel.

Nice work if you can get it!

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns AIG shares and has no financial interest in the other securities mentioned.


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