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« Berkshire Hathaway Chairman To Unemployed: "SUCK IT" (And "You Should Thank God" For Bank Bailouts) | Main | GAO Report: Federal Reserve Is Riddled With Corruption And Conflicts Of Interest, Stephen Friedman Is Targeted »

Is Stephen Friedman Guilty Of Insider Trading?

Was former New York Federal Reserve Chairman Stephen Friedman in possession of material, non-public information relating to AIG and Goldman Sachs, (where he served on the board of directors), and did he violate SEC rule 10b5-1 when he purchased 52,600 shares of Goldman stock on December 17, 2008 and January 22, 2009?

First we must determine whether the information in question does in fact meet the definition of 'inside information' as defined by the SEC.  In other words, was it material and non-public?

Under question was the knowledge that the U.S. government, through AIG would be paying Goldman Sachs 100 cents on the dollar for the settlement of derivative contracts Goldman had purchased from AIG.  In this case, the AIG payout and windfall to Goldman amounted to approximately $14 billion, with no strings.  No common, preferreds, or warrants.  Found money.

Goldman had just survived a global financial panic that forced Blankfein to solicit $5 billion of extremely expensive outside capital from Warren Buffett in order to remain solvent.  In this context, $14 billion from AIG meets any and all definitions of 'material.'

As we have learned from Hugh Son's phenomenal work at Bloomberg, there was an active effort by the NY Fed and its lawyers to keep the details secret, as they pressured AIG officials from disclosing the par payments in required SEC filings.

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican.

The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis. 

It was only after public outcry and intense congressional pressure that the counterparty payoff details were finally made public on March 15, 2009.

The next step is to determine if Stephen Friedman was actually in possession of this information when he made his purchases of Goldman stock.

Because of his role on the Goldman board and extensive communication with CEO Lloyd Blankfein (not to mention a career spent at Goldman building contacts throughout the organization), it is not plausible to believe that Friedman didn't have full knowledge of Goldman's large exposure to AIG.

Similarly, because of his then concurrent role role as Chairman of the Federal Reserve Bank of New York, which was in charge of the AIG counterparty negotiations, Friedman would have been completely aware of the following reported by Hugh Son:

  • The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps exploded.  The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

The actual facts of his shares purchases are straight-forward:

  • Stephen Friedman as a member of the board of Goldman Sachs and as Chairman of the Federal Reserve Bank of New York (concurrently), purchased 37,300 shares of Goldman Sachs stock on December 17, 2008 at an average price of $81 per share
  • On January 22, 2009, Friedman made a purchase of 15,300 additional shares of Goldman stock at an average price of $67 per share. 

The two blocks of stock have risen a total of $5 million in value.

It deserves mention that Friedman owned approximately 46,000 shares of Goldman Sachs common stock prior to these 2 purchases, and he was acting in violation of Fed policy in 2 different ways when Goldman became a bank holding company in September of 2008:

From the WSJ

  • The change created a problem. The Federal Reserve Act bars directors representing the public interest from owning bank stocks or being bank directors or officers.  Because Goldman had always been an investment bank, Mr. Friedman's board membership there and his ownership of about 46,000 Goldman shares, at that time, hadn't run afoul of this rule.  Now it did.

Not coincidentally, Friedman then showed his contempt for the situation by BUYING MORE SHARES while his waiver request was pending.  This is perhaps the most egregious aspect of the entire story as Friedman exacerbated his existing conflict of interest while he was in possession of material, non-public information that Goldman would be paid $14 billion through AIG.

A final, sordid detail is that he didn't disclose his purchases of Goldman stock to NY Fed lawyers:

  • The New York Fed's general counsel, Thomas Baxter Jr., defended Friedman's recent stock purchases, which occurred while the Federal Reserve was weighing his waiver request.  Yet, Thomas admits Friedman didn't check with the Fed, and Baxter told the Journal he was not aware of the purchases until the newspaper contacted him last month.


To recap:

  • The information was both material and non-public.
  • Stephen Friedman was in possession of this information (and some would say that his NY Fed's decision to pay counterparties at PAR actually CREATED the information in the first place).
  • Armed with this material, non-public information, Stephen Friedman purchased 52,600 shares of Goldman stock at a time when other market participants were EXPLICITLY not aware that Goldman would receive a $14 billion windfall from AIG, precisely because FED lawyers WERE PRESSURING AIG NOT to make such disclosures.

Conflicts of interest are all about the smell test.  And everything about Stephen Friedman's dealings at the NY Fed just plain stink.


Mr. Friedman didn't return a call to his office seeking comment on this story.

We are submitting this story to SEC investigators as well as Reps. Issa, Towns and House Oversight committee staff.



Listen to the final 90 seconds. 



Revisiting a Fed Waltz With A.I.G.

Fed Advice to A.I.G. Scrutinized

Chairman of N.Y. Fed Quits Amid Questions

Friedman's resignation letter



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Reader Comments (22)

We are submitting this story to SEC investigators as well as Reps. Issa, Towns and House Oversight committee staff.

Special thanks to Bloomberg writer, Hugh Son for his consultation to this story...thanks for taking my calls, Hugh.
Jan 19, 2010 at 8:38 AM | Registered CommenterDailyBail
To our readers, please help by sharing this story whereever you can...

The Big Picture, Calculated Risk, and Mish's blog would be great places to share it...
Jan 19, 2010 at 8:40 AM | Registered CommenterDailyBail
Got buckshot?

Nice work on this, Steve.
Jan 19, 2010 at 8:45 AM | Unregistered CommenterJames H
thanks james...hopefully henry blodget will be publishing it in the next few minutes over at clusterstock...
Jan 19, 2010 at 9:04 AM | Registered CommenterDailyBail
Warren Buffett's $3 Billion Goldman Anniversary


it's a story NOT a cnbc video
Jan 19, 2010 at 9:25 AM | Registered CommenterDailyBail
Jan 19, 2010 at 9:26 AM | Registered CommenterDailyBail
Geithner’s Fed Told AIG to Limit Swaps Disclosure

Jan 19, 2010 at 9:27 AM | Registered CommenterDailyBail
AIG probe widens to include Paulson, Friedman

Jan 19, 2010 at 9:35 AM | Registered CommenterDailyBail
Hey DB, I saw Clawback got to The Big Picture already. I spread this around to Calculated Risk, Robert Murphy, Tom Woods, Econobrowser, Euro Pac Capital, Clusterstock's story on "Now Bernanke Welcomes Full Review of AIG Bailout" story. I am completely indiscriminate and sporadically shameless.
Jan 19, 2010 at 2:45 PM | Unregistered CommenterSonic Ninja Kitty
...and Ambrose Evans-Pritchard, Mish Shedlock, Salon.com editors, Philip Stephens of FT, Matt Taibbi, and The Dylan Ratigan Show.
Jan 19, 2010 at 5:49 PM | Unregistered CommenterSonic Ninja Kitty
wow, snk...that's outstanding..i've seen about 50 people come from Calculated Risk so far...i will look for the others...

what did you send to dylan ratigan...a llink to this story, i presume?
Jan 19, 2010 at 6:04 PM | Registered CommenterDailyBail
Who is the other guy, at first I didn't notice him.
Jan 19, 2010 at 8:18 PM | Unregistered Commentergobias
DB--re Ratigan: There's an email link on their 'Show' page. Yes, I emailed the link to today's story. I had also emailed the radio show announcement Sunday and yesterday's radio show link. I wrote very short and polite notes about what they were, but will definitely stop now (LOL) as they should have gotten the message.... Best of luck!

(Keep in mind, some of those are places where the comment got buried pretty deep. Some were emails to editors/producers.)
Jan 19, 2010 at 9:03 PM | Unregistered CommenterSonic Ninja Kitty
Nice work, SNK.
Jan 19, 2010 at 9:17 PM | Unregistered CommenterJames H
gobias...do a search for horizontal (rectangular) photos of friedman...at least 500 pixels wide...but lo-res...can't be more than 60 kbs...these are the parameters i have to deal with...

the pickings are slim...extremely thin...the best horizontal photo i could find happened to have bush in it...that means nothing to me...it could have goddamed bozo the clown in it and i would probably post it...get off my f*cking back, i'm serious...
Jan 19, 2010 at 9:18 PM | Registered CommenterDailyBail
thank you very much snk...it means a lot to the movement for truth and justice...i'm pretty sure there is an offer from ratigan's show to appear whenever i make it to new york (that's what his assistant wrote me at least), but i would like to do his radio show...abc sunday nights...i think an hour of screaming about this crap with ratigan might be cathartic...

maybe i'll contact them tomorrow and ask if he has guests all lined for this sunday night...
Jan 19, 2010 at 11:03 PM | Registered CommenterDailyBail
That's the spirit, DB!! You would be doing a huge favor for THEM, imho.

JamesH: Which part do you like best, the complete indiscriminateness or the sporadic shamelessness? :)
Jan 19, 2010 at 11:22 PM | Unregistered CommenterSonic Ninja Kitty
SNK, all of it. I've been posting off and on all day, but I'm just swamped with other stuff right now and haven't been to do all I'd like to. Glad someone's doing the legwork on this. You're awesome.
Jan 20, 2010 at 1:55 AM | Unregistered CommenterJames H
JamesH--Thanks, and good to know. A little drop of Fed blood in the water does start to unhinge the shark. Glad it's not too much.
Jan 20, 2010 at 8:19 AM | Unregistered CommenterSonic Ninja Kitty
Yeah Sonic. You're AWESOME!!!
Jan 20, 2010 at 9:35 AM | Unregistered Commentermark mchugh
There will be thousands of similar stories of corruption associated with people who are members of the Federal Reserve, congress and the senate. We are now totally controlled by the war mongers and money changers. They have created a system that no one could get elected without the massive dollars provided by the money changers and war mongers. We will continue to have our kids killed and all our nation stolen by the few. It is amazing how few are now the new royalty of our nation. The only thing we are missing is a king to make it official that we are back to the middle ages.
Oct 24, 2011 at 9:32 PM | Unregistered Commentertom dee
Evil trolls now control our nation and those appointed to watch them. Nothing will come of this.
Oct 25, 2011 at 9:03 AM | Unregistered CommenterAxel

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