In the fall of 2007, Goldman Sachs (GS) CEO Lloyd Blankfein called American International Group (AIG) CEO Martin Sullivan because conversations over how much AIG owed them on declining credit default swaps had turned testy. “What’s going on here? There’s noncommercial behavior going on here, and it’s generating some bad will,” Blankfein said, according to his interview with the Financial Crisis Inquiry Commission released last week. The clash between Goldman and AIG represents the deepest struggle of the financial crisis – the inability of one of the most established powerhouses of Wall Street and one of the most exposed financial institutions in the world to agree on a call for deteriorating derivatives, known as credit default swaps. In the years prior, these swaps had become the credit enhancement of choice among ??investment banks, who relied on the cheap insurance popularly provided by AIG to make mortgage-backed securitization more economical. By the height of the bubble, AIG had written $79 billion in over-the-counter swaps protection on super-senior tranches of these securities, according to the FCIC report. By the summer of 2007, Goldman held $21 billion of these swaps. In July 2007, Goldman, which was watching the values of these holdings fall, sent their first margin call for $20 billion in credit default swaps, essentially asking for their payout. In a raw interview with the FCIC, Blankfein describes Goldman as a firm constantly seeking to balance its exposure by either selling the swaps it did have from AIG or hedging against the company when problems arose between the two companies. “At the time I became aware that they were behind on delivering on their margin calls I was aware that we had CDS to protect ourselves against that,” Blankfein said. That exposure Goldman was attempting to hedge was the difference between its margin call and what AIG was posting, or telling Goldman what it would pay. Goldman took other action, shorting those very bonds, which a swap essentially does, Blankfein said. When asked point blank if Goldman ever shorted AIG stock, Blankfein replied that he didn’t know. The firm even had the option to short the equity risk in those swaps deals, which itself was a risky move and could cause further losses if the market turned around. But the market never did. And the fighting between Goldman and AIG employees over what Goldman was owed deepened. “When I first heard about it, I shrugged because it’s AIG,” Blankfein said. “But at some point someone let me know that the calls were kind of tough, and at one point it was suggested to me that I should call the CEO of the company,” which he did. The FCIC report reveals the outrage within AIG offices at Goldman’s firm stance on its values, too. Tom Athan, a managing director at the firm told the FCIC that Goldman “was not budging” and relented details of his desperate measures taken during a conference call with Goldman executives in August 2007. “I played almost every card I had, legal wording, market practice, intent of the language, meaning of the [contract], and also stressed the potential damage to the relationship and GS said that this has gone to the ‘highest levels’ at GS and they feel that . . . this is a ‘test case,” Athan said in the report. Blankfein said in his interview that the problems at AIG never fully clarified in his mind until it was too late. “What didn’t occur to me at that time is that they didn’t have the money to pay,” Blankfein said. “Even now in hindsight I’m not sure they knew they were having liquidity problems. I thought they were just being stubborn about their marks.” Margin calls at AIG rose by the tens of billions of dollars until its crash. In September 2008, the U.S. government took AIG over with a $85 billion loan from the Federal Reserve Bank of New York, one of the largest in the nation’s history that included payouts to those still owed money on the swaps purchased, including Goldman. The firm received $14 billion in payments from the swaps it purchased from AIG. Still, Blankfein doesn’t consider the matter resolved. Goldman still had $2.5 billion in margin calls it thought AIG owed them, and on the day before being taken over AIG sent the bank a $600 million payment. “I don’t think the dispute was resolved. It was just ‘this is very hard, let’s get what you can’,” Blankfein said. “Money is always coming in in dribs and drabs.” Write to Jon Prior. Follow him on Twitter: @JonAPrior