$5 million profit on inside information and never punished.
Greg Palm, Goldman Sachs general counsel, took a call in his 37th-floor office at One New York Plaza. It was his old boss, Stephen Friedman, a former Goldman chairman who was then head of the audit committee of its board of directors. Goldman’s stock was down 65 percent from its 52-week high during an accelerating global financial breakdown.
Friedman, who had become chairman of the Federal Reserve Bank of New York that year, told Palm he wanted to buy. Palm says he couldn’t think of a reason why Friedman shouldn’t: Goldman had made the necessary disclosures in that day’s filings, Palm says.
Friedman, 72, who is still a Goldman director, bought 37,300 shares at an average of $80.78 each on Dec. 17. Five weeks later, he picked up 15,300 more at an average of $66.61. By yesterday, the stock had doubled to $133.76, giving Friedman a paper profit of $5 million.
Now, the U.S. House Oversight and Government Reform Committee is investigating Friedman’s stock purchases. It wants to know why he was permitted to buy stock in a bank he was regulating as chairman of the New York Fed.
Friedman held both that post and his Goldman board seat when the firm became a bank holding company in September 2008. The Federal Reserve Act forbids an official at the New York Fed in his position from also being a director of a bank or buying its stock.
The New York Fed sought a waiver from the Federal Reserve Board in September 2008 so that Friedman could keep his position there. Michele Davis, a spokeswoman for Friedman, says New York Fed general counsel Tom Baxter told Friedman that the rules were in abeyance while the waiver was pending.
“Therefore, Mr. Friedman’s purchases of Goldman Sachs stock were perfectly legal,” she says. The waiver was granted in January 2009.
Jerry Jordan, a former president of the Cleveland Fed, says the section of the Federal Reserve Act barring Friedman from owning bank stock or buying new shares could not be waived. “It was not allowed,” he says. “You can’t get permission to violate the law.”
Goldman Sachs’s ties to the New York Fed pose another potential conflict for Friedman, says James Cox, a professor at Duke University School of Law. Goldman was a prime beneficiary of the New York Fed-engineered bailout of American International Group Inc.’s bank counterparties, receiving, by its own count, $12.9 billion for the credit protection it held on mortgage- related securities. That figure was not publicly disclosed by AIG until March 2009 -- after Friedman had bought his shares.
“It raises an eyebrow in terms of what he knew about those payments,” Cox says.
Friedman resigned from the New York Fed on May 7, 2009, days after the Wall Street Journal reported his stock buying.
As the Friedman saga unfolds -- and Goldman’s regulatory and legal entanglements escalate -- the firm’s nine outside directors, who aren’t Goldman employees, are keeping mum.
I did a radio appearance on the Friedman story.
We were first to cover this story. Later in February, the Nation reported an investigation into Friedman's stock purchases had recently begun.
Why did the Federal Reserve Bank of New York (FRBNY), whose Chairman was Stephen Friedman (a Goldman Sachs board member who resigned from the New York Fed earlier this year when it was revealed that he had made $5 million by purchasing shares in GS with the knowledge that AIG would be paying counterparties at par and that Goldman would be getting a $13 billion windfall -- when no one else had this information) and whose President was none other than current Treasury Secretary Tim Geithner, why did this New York Fed choose to pay AIG's counterparties 100 cents on the dollar when AIG itself had been negotiating for steep haircuts with claimants, AND why did they then pressure AIG executives to keep quiet about the decision even discouraging AIG from disclosing the 'par-payments' to its shareholders in required SEC filings?