As Long As We&#39;re Investigating Goldman Sachs Directors For Insider Trading...

Stephen Friedman

Now that Goldman Sachs director Rajat Gupta is under investigation for passing inside information to Galleon's Raj Rajaratnam, we might as well get to the bottom of what happened with Goldman board member Stephen Friedman during his tenure on the board of the New York Fed.

Basically what happened is that Friedman suddenly more than doubled his personal stake in Goldman in the middle of the financial crisis.

As chair of the New York Fed, Friedman wasn't supposed to sit on Goldman's board OR own Goldman stock, but Tim Geithner gave him a waiver to do both.

And now the question is... Did Friedman have some special inside information about the Buffett deal or Goldman Sachs' financial strength that wasn't in the public realm?

Given that he was a director of the firm, this seems at least plausible.

So perhaps the folks at the Justice Department looking into Gupta's behavior might want to take a peak at Friedman's, too.

Here's a good summary from Greg Kaufmann at The Nation:

While he was serving on both boards, Friedman purchased 52,600 shares of Goldman stock, more than doubling the number of shares he owned. These purchases have since risen millions of dollars in value--and raised allegations of insider trading.

Friedman's purchases were exposed by the Wall Street Journal in early May 2009, and within days he resigned as chair of the New York Fed. His resignation letter claimed that although he had acted "in compliance with the rules," the suggestion of impropriety had become a "distraction" from the important work of the Federal Reserve. In a press release, New York Fed executive vice president and general counsel Thomas Baxter also said that Friedman's acquisition of Goldman shares "did not violate any Federal Reserve statute, rule or policy."...

A full investigation would not only determine if Friedman violated the Fed's rules; it would also shed light on the arcane regulations and conflicts of interest that riddle the Federal Reserve system, an important public service, since Congress is debating whether the Fed should serve as the leading regulator of systemic risk in our economy. Indeed, what we already know suggests that even if Friedman acted "in compliance with the rules," the rules were inadequate and easily subverted and therefore did little to guarantee transparency and accountability.

That Friedman was simultaneously chair of the New York Fed and a board member of Goldman Sachs was itself a violation of Fed policy. As a "Class C" director who is on the New York Fed board to represent the public, Friedman was barred from being on the board of a bank holding company or even owning stock in a bank holding company. This policy came into play in September 2008, when Goldman converted from an investment bank to a bank holding company (the policy did not apply to investment banks). Friedman was not only on the board of Goldman but also held 46,000 shares in the company. So he had to make a choice: resign from the Fed or resign from Goldman Sachs and sell the shares he owned.

But Friedman did neither. Instead, to allow him to maintain his roles at the Fed and Goldman, New York Fed officials, led by then-president Geithner, asked the Federal Reserve board of governors in Washington for a waiver, which was granted on January 21, 2009.

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