There were those, possibly including Tyler Durden, who complained loudly last September that Paulson was proposing a scheme in which the Fed and Treasury would pick winners and losers in the market.  Paulson was the former CEO of GS.  Surprise!  GS is a BIG winner.  Given that, it hardly would be surprising that the Fed and Treasury knew that this is what GS would do with the SLP provision and thought it was a good thing.

Thinking about this and about the perception of Goldman Sachs as being the dominant intermediary for program trading, I'd like to revisit what happened in the third week of September 2008.

On the weekend of September 13-14, Lehman Brothers and Merrill Lynch, respectively the 4th and 3rd "pure" investment banks in the US, were in talks brokered by the US treasury and the Fed to avert bankruptcy. Merrill Lynch was taken over by Bank of America. Lehman Brothers failed. This left Goldman Sachs and Morgan Stanley as the remaining two investment banks.

On Wednesday the 17th, the stock of Goldman Sachs lost about 15% and the stock of Merrill Lynch lost about 25%. There was also a run on both banks' prime brokerage businesses. Clients (such as hedge funds) who used MS and GS as intermediaries decided they didn't trust them to not collapse taking their portfolios down with them (like Lehman did) and started switching their portfolios to "supermarket" banks with broad retail and commercial banking operations such as Citi and JP Morgan.

It was then that Paulson and Bernanke went to Congress and told them that a meltdown of the entire financial system was looming.

On Thursday the 18th, Paulson introduced the TARP. As we soon found out, this was a 3-page plan drafted in huge haste, clearly in reaction to the events of the day before and not the result of a longer contingency planning process.

I wrote at the time that Paulson had acted to save GS's from a run on its prime brokerage business.

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.