Ongoing Congressional investigations into the AIG bailout have put the incestuous and murky relationship between the Federal Reserve and Wall Street in the spotlight–and put Treasury Secretary Timothy Geithner and Fed chair Ben Bernanke in the hot seat. Calls for Geithner’s resignation regularly reverberate inside the Capitol, and Bernanke’s recent reappointment was opposed by thirty senators, including Republican John McCain and independent Bernie Sanders. Critics from both sides of the aisle fault Geithner and Bernanke for mismanagement, unnecessary secrecy and undermining Congressional oversight. But neither of them has been the target of questions about gaming the system for personal financial gain.
That distinction belongs to Stephen Friedman, the former chairman of the board of the New York Federal Reserve Bank and a member of the board of directors of Goldman Sachs. Through those two posts, Friedman may have had access to privileged information about the extent of Goldman’s exposure to AIG and the opportunity to profit from the Fed’s bailout of the beleaguered insurance giant. 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."
But if Friedman and Baxter were hoping to extinguish scrutiny over Friedman’s Goldman buy and limit any collateral damage to the Fed, it looks like they are out of luck. In late January, House Oversight Committee chair Edolphus Towns called in Geithner, former Treasury Secretary Henry Paulson, Baxter and Friedman to testify about the AIG bailout. Friedman’s Goldman deal was a significant line of inquiry.
And now, at least one member of the committee, Massachusetts Representative Stephen Lynch, is calling not just for continued Congressional investigation but for other enforcement agencies to look into possible insider trading and other matters surrounding the AIG bailout. In an interview with The Nation, Lynch said that he intends to meet with the SEC to see "whether or not they might be helpful with this." Lynch also suggested that the Justice Department’s Financial Fraud Enforcement Task Force should be investigating Friedman’s Goldman purchases as well.
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.