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.

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.

In the meantime, the New York Fed made its now-infamous decision–on November 9, 2008–to pay AIG counterparties like Goldman Sachs, Bank of America and Merrill Lynch full value for insurance on mortgage-backed securities that had tanked when the housing bubble burst. It was a $62 billion deal, and Goldman was the greatest domestic beneficiary, receiving an estimated $13 billion. Goldman had been locked in a dispute with AIG since 2007 over the value of those securities–a dispute New York Times reporters Gretchen Morgenson and Louise Story described as "one of the most momentous in Wall Street history"–until the Fed stepped in and sided with Goldman.

Despite demands from Congress and the media, neither the Fed nor AIG disclosed the names of the banks or the amount of money each had received through the bailout until March 15, 2009, when AIG finally did so. While the public was left in the dark, Friedman nearly doubled his Goldman holdings by purchasing 37,300 shares for about $3 million. Friedman made that purchase on December 17, 2008, just over a month after the Fed decided to pay Goldman and the other banks full value for the insurance on mortgage-backed securities. Since he had yet to receive the waiver, his purchase of additional shares occurred at a moment when he was still prohibited from owning the shares he already possessed and was thus out of compliance with Fed policy.

On January 22, 2009–just one day after the Federal Reserve granted Friedman the waiver–he purchased another 15,300 shares of Goldman. According to the Wall Street Journal, the "million-dollar purchase brought his holdings to 98,600 shares." On March 16, 2009–one day after the public was finally told the identities of the banks and the amount of money each had received from the Fed–Goldman was trading at approximately $94 per share. A week later the stock price had risen to just under $112. As of late February Friedman had gains of approximately $4.2 million on those post-bailout stock purchases.

The fact that Friedman’s actions augmented rather than diminished the conflict of interest was not lost on members of the House Oversight Committee. "At a time when Mr. Friedman was prohibited from owning Goldman Sachs stock, he proceeded to buy 37,000 more shares of it anyway," says committee chair Edolphus Towns. "That strikes many Americans as unjust, unwise and unfair."

At the hearing, Representative Lynch also homed in on that fact. "Here’s the problem," said Lynch. "As a member of the board of governors you’re making decisions on matters that directly affect Goldman Sachs, and you’re a former shareholder, current shareholder, and then you buy 37,000 more shares of that company that you’re overseeing?"

"Yeah," replied Friedman.

After the hearing Lynch told me that Friedman was "obviously in a position of extreme conflict and was given full opportunity for inside trading."

"I mean, think about it," Lynch said. "He asks for a waiver; he knows there’s a conflict. Then he gets the information that the Fed is going to pump this money into AIG and the positions are going to be covered 100 cents on the dollar. And so with that information, what would you do? Buy another 37,000 shares, baby."

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.