Friedmanism at the Fed
Various spokespeople and others close to Friedman insist that everything he did was aboveboard and that he is a victim of a media frenzy and politicians with their own agendas. None of these people allowed their names to be used for this article. Friedman did not respond to an offer for an interview.
Friedman testified that he had consulted with Goldman counsel before the purchase in accordance with the firm's policy. He also said he was informed by New York Fed officials that "the rules were in abeyance" while the waiver was pending, so he could continue "chairing the board." But Friedman never informed the New York Fed of his intention to buy more Goldman shares, only of his existing ones. Fed officials there were surprised by both stock purchases as well as the size of the transactions, according to sources familiar with the matter.
An attorney for Friedman said he met any reasonable standard one could expect from an investor and that any financial impact from AIG payments to counterparties was reflected in Goldman's fourth-quarter earnings report, issued December 16, 2008. But that report does not disclose the amount of money Goldman received from the Fed. Moreover, Goldman has said repeatedly that the payments from AIG were "immaterial" because the firm had purchased insurance to cover any losses arising from an AIG default. But at a time when the financial system was on the verge of collapse, the value of that insurance could not have been certain.
"Goldman might have been fully hedged, but how good is that hedge if the counterparty in those hedges was not solvent or fully hedged and so on?" asks James Cox, a securities law expert and professor at Duke Law School. One of the parties must have been exposed, he says. "So would not knowledge that the first domino would not fall be inside information?"
Perhaps most significant, an attorney for Friedman confirmed that Friedman and other Goldman board members were briefed regularly in late 2007 and early 2008 regarding how much money AIG owed Goldman. This is an important piece of information because Friedman can't claim complete ignorance about how much money was at stake when AIG collapsed and thus how much the Fed's intervention would benefit Goldman. One question that Friedman still needs to answer under oath is: What exactly did you know about Goldman's exposure to AIG when you purchased 37,300 shares in December 2008 and another 15,300 shares in January 2009?
Goldman Sachs declined to comment when asked this very question. According to a Fed spokesperson, Friedman did not have access to confidential information regarding AIG stemming from his tenure on the New York Fed's board of directors. An attorney for Friedman wrote in an e-mail: "The facts demonstrate that Steve Friedman was not aware of any undisclosed material information relating to Goldman's exposure to AIG on December 17, 2008, when he purchased Goldman shares."
Another spokesperson directed me to Friedman's written Congressional testimony, in which he attempts to make the case that when he made his purchases, the public knew that Goldman had been paid full value on its contracts with AIG and that it was a good time to buy Goldman. He points to newspaper articles speculating that Goldman was one of AIG's counterparties and on the amount of exposure Goldman had to AIG. He cites financial analysts who rated Goldman stock a "buy." He quotes Goldman Sachs CFO David Viniar on public earnings calls in the third and fourth quarters of 2008 describing the firm's exposure to AIG as "immaterial" because of "risk management with appropriate hedging strategies."
Friedman's testimony reads: "At the time of my purchases, it was widely known and reported--through various public statements by Goldman Sachs officials, in numerous contemporaneous newspaper articles, in multiple investment analysts' reports, and in the November 10 Federal Reserve Board and AIG press releases...that Goldman Sachs was a counterparty to AIG and had been repaid at par on November 10."
But Friedman's claim--that newspaper articles, ratings from individual analysts and public statements from Goldman's CFO are the equivalent of being briefed on what Goldman said it was owed by AIG--rings hollow. The Fed and AIG press releases issued in November didn't reveal that the banks were paid full value. That information wasn't disclosed until SEC filings were released in December, and the identity of the banks and how much each received wasn't disclosed until March 2009.
And what of the Fed's role in all of this? If Goldman really was fully protected by hedging instruments--so that it had no exposure whatsoever to AIG--then why did the Fed pay full value on those securities?
"Friedman's explanation does raise questions about the full-payment justifications offered by Secretary Geithner and others," says Cox. "Namely, that to pay less would have caused losses throughout the system and create havoc."
"These [securities] are in the vortex--these are at ground zero of all this," says Lynch. "They've got huge positions. And what happens to Goldman if AIG is allowed to go into bankruptcy? The market was pricing those derivatives at 50 percent of value, yet they were paid 100 cents on the dollar. There's just no way in hell they would have received that in the bankruptcy process. So here's someone sitting here with this great inside knowledge and capitalizing on it. Maybe it's just too obvious."
The government was so intertwined with Friedman's stock purchases, one can imagine there is significant pressure to move past any questions about insider trading. That's why it's so critical that the Oversight Committee continue its investigation.
Finally, it's worth noting that before Friedman resigned, he finished his job as chair of the search committee charged with finding a replacement for Timothy Geithner at the New York Federal Reserve Bank: William Dudley, another Goldman alum.