Two weeks ago, the nation’s most powerful regulators and bankers, led by Treasury Secretary Henry Paulson, huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

American International Group, the world’s largest insurer, was teetering. AIG needed billions of dollars to right itself and had suddenly begged for help.

The only Wall Street chief executive participating in the meeting was Lloyd Blankfein of Goldman Sachs, Paulson’s former firm. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was AIG’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials ended up bailing out the insurer for $85 billion.

A Goldman spokesman said in an interview that the firm was never imperiled by AIG’s troubles and that Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.

Yet, it is argued, the relationships between AIG and other firms, like Goldman, were complex, viral connections that proved to be astonishingly fragile.

In the case of AIG, the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly destroyed one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.

“It is beyond shocking that this small operation could blow up the holding company,” said Robert Arvanitis, the chief executive of Risk Finance Advisors in Westport, Conn. “They found a quick way to make a fast buck on derivatives based on AIG’s solid credit rating and strong balance sheet. But it all got out of control.”

The insurance giant’s London unit was known as AIG Financial Products, or AIGFP. It was run with almost complete autonomy, and with an iron hand, by Joseph Cassano, according to current and former AIG employees.

Last February, Cassano resigned after the London unit began bleeding money, and auditors raised questions about how the unit valued its holdings. By Sept. 15, the unit’s troubles forced a major downgrade in AIG’s debt rating, requiring the company to post roughly $15 billion in additional collateral — which then prompted the federal rescue.

Cassano, 53, did not respond to interview requests left at his London home and with his lawyer. An AIG spokesman also declined to comment.

When Cassano first waded into the derivatives market, his biggest business was selling so-called plain vanilla products like interest rate swaps. Such swaps allow participants to bet on the direction of interest rates and, in theory, insulate themselves from unforeseen financial events.

Ten years ago, a “watershed” moment changed the profile of the derivatives that Cassano traded, according to a transcript of comments he made at an industry event last year. Derivatives specialists from J.P. Morgan, a leading bank that had many dealings with Cassano’s unit, came calling with a novel idea.

Morgan proposed the following: AIG should try writing insurance on packages of debt known as “collateralized debt obligations.” CDOs were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.

Because the underlying debt securities — mostly corporate issues and a smattering of mortgage securities — carried blue-chip ratings, AIG Financial Products was happy to book income in exchange for providing insurance. After all, Cassano and his colleagues apparently assumed, they would never have to pay any claims.

Cassano and his colleagues minted tidy fortunes during these high-cotton years. Since 2001, compensation at the small unit ranged from $423 million to $616 million each year, according to corporate filings. That meant that on average each person in the unit made more than $1 million a year.

Goldman Sachs was a member of AIG’s derivatives club, according to people familiar with the operation.

Lucas van Praag, a Goldman spokesman, declined to detail how badly hurt his firm might have been had AIG collapsed two weeks ago. He disputed the calculation that Goldman had $20 billion worth of counterparty risk to AIG, saying the figure failed to account for collateral and hedges that Goldman deployed to reduce its risk.

Regarding Blankfein’s presence at the Fed during talks about an AIG bailout, he said: “I think it would be a mistake to read into it that he was there because of our own interests. We were engaged because of the implications to the entire system.” Van Praag declined to comment on what communications, if any, took place between Blankfein and Paulson during the bailout discussions.

A Treasury spokeswoman declined to comment about the AIG rescue and Goldman’s role.

Regardless of Goldman’s exposure, by last year, AIG Financial Products’ portfolio of credit default swaps stood at roughly $500 billion. It was generating as much as $250 million per year in income on insurance premiums, Cassano told investors.

For his part, Cassano apparently was not worried that his unit had taken on more than it could handle. In an August 2007 conference call with analysts, he described the credit default swaps as almost a sure thing.

“It is hard to get this message across, but these are very much handpicked,” he assured those on the phone.

Just a few months later, however, the credit crisis deepened. AIG Financial Products began to choke on losses — though they were only on paper.

In the quarter that ended Sept. 30, 2007, AIG recognized a $352 million unrealized loss on the credit default swap portfolio.

So began AIG’s downward spiral as it, its clients, its trading partners and other companies were swept into the drowning pool set in motion by the housing downturn.