Epic Blackstone Trade Intrudes on Friendly Lunch With Blankfein

• Goldman, Blackstone are on opposite sides of clash over swaps • Controversy over deal tied to Hovnanian has gripped markets

Lloyd Blankfein and Jon Gray, two of the most powerful figures on Wall Street, sat down for lunch last month, just as tensions between their firms were ratcheting up.

It was a friendly chat between Blankfein, head of Goldman Sachs Group Inc., and Gray, heir apparent of Blackstone Group LP, that veered toward a thorny matter. At issue: a controversial trade involving credit-default swaps that has riveted players in the vast derivatives market -- and set Goldman and Blackstone on a collision course. ...