New York Fed Chairman Quits: Goldman Stock Purchases Revealed

May 8, 2009

(ChattahBox)—Stephen Friedman resigned from his position as chairman of the Board of Directors of the Federal Reserve Bank of New York, just days after a Wall Street article appeared raising serious questions about his potential conflicts of interest with Goldman Sachs, after making two Goldman stock purchases.

Friedman’s resignation letter, effective immediately, was decidedly unapologetic, claiming (whining) that his great public service stint serving on the NY Fed’s board wasmischaracterized as improper.”

Since the advent of federal bailouts and government involvement in Wall Street, it’s become apparent that Goldman Sachs’ tentacles seem to reach everywhere, straight from Goldman’s boardroom to the major players not only on the NY Federal Reserve Board, but also the U.S. Treasury. Both Hank Paulson and Robert Rubin, former Treasury Secretaries, were former members of Goldman Sachs and the list goes on.

Connections between Goldman Sachs and regulatory officials have become so prevalent that the question has been raised: Does Goldman Sachs run Wall Street and by extension the U.S. government’s financial agencies?

Back to the subject at hand; Stephen Friedman’s resignation from the board of the NY Fed. Friedman arrived at his position as Chairman of the NY Fed in January 2008, with all the requisite ties to Goldman. He ran Goldman in the 1990s; he still sits on the board of directors and owns Goldman stock.

Friedman served on Goldman’s board during his tenure as Chairman of the New York Fed board, one of several banks receiving substantial federal TARP funds.

During the highpoint of the financial collapse in the fall of 2008, Friedman worked closely with Tim Geithner, then president of the NY Fed in fashioning the bailout of AIG, which poured $8.1 billion of the TARP funds straight from AIG to Goldman.

But, Friedman’s most egregious actions involve his additional purchase of Goldman shares, totaling in the millions, during his time as Chairman of the NY Fed. Friedman came to his position at the NY Fed already owning a substantial stake of Goldman stock, but that apparently wasn’t enough for the wealthy Friedman.

Friedman’s ties to Goldman were bad enough, but he decided to make two additional Goldman stock purchases while serving as Chairman of the NY Fed, a quasi regulatory agency, where he served as a Class C public director, supposedly watching out for the public interest.

Even then, the stock purchases may have just raised eyebrows, but you see last fall Goldman was converted from an investment bank to a bank holding company, capable of receiving cash deposits, and that changed everything. The Federal Reserve Act prohibits Class C public directors from owning bank stocks or serving as directors or officers at banks. Friedman violated both of those rules, as soon as Goldman became a bank holding company.

Rather than immediately resign, a waiver was procured for Friedman by the NY Fed’s legal counsel, from the federal government, allowing Friedman to stay on at the NY Fed, while still serving on Goldman’s board and owning Goldman stock. The reason given; with the expected departure of Geithner to serve as President Obama’s Treasury Secretary, and other directors leaving, Friedman was needed on the NY Fed board.

Although they certainly raise conflict of interest concerns, such waivers are not uncommon with regional reserve banks. However, Friedman’s next action is the one that got him in hot water and it illustrates not only just how incestuous the relationship is between Goldman and the New York Fed, but also shines a light on the naked greed of many of these financial “Masters of the Universe.”

While waiting for his waiver to come through, Friedman purchased “more” Goldman stock. On December 17, he bought 37,300 Goldman shares at an average price of $80.78, totaling $3 million. At the time, Goldman’s shares were taking a tumble, trading well below book value.

Friedman’s waiver came through a month later on Jan. 21, granted by Fed Vice Chairman Donald Kohn. So, what did Friedman do then? Buy more Goldman stock of course!

The very next day, Friedman purchased an additional 15,300 of Goldman shares for $1 million dollars, at average prices ranging from of $66.19 to. $67.12. This second purchase brought his combined total of Goldman holdings to 98,600 shares.

Since Friedman’s purchases of Goldman stock, the stock prices have gone way up, lining Friedman’s pockets with gains of nearly $2.7 million. Goldman stock is now trading at approximately $127.08 a share.

So, let’s recap. Friedman, as Chairman of the NY Federal Reserve Board, was in violation of the Federal Reserve Act; the moment Goldman became a bank holding company. While waiting for a waiver from those rules, that specifically ban bank stock ownership by NY Fed directors, Friedman buys Goldman stock.

And why would a NY Fed Chairman already in violation of Fed rules for owning stock of a bank holding company, purchase more of that stock, well before he received a waiver? Friedman bought the stock he said, because it was cheap. He also said, “I see no conflict whatsoever in owning shares.”

And why did Friedman immediately purchase additional Goldman stock before the ink was barely dry on his waiver, well because by then the stock was really, really cheap.

Financial analysts say Friedman should have resigned from his position as Chairman of the NY Fed board; the moment Goldman became a bank holding company. At the very least, Friedman should not have purchased “additional” stock to further enrich himself, while serving on the NY Fed board.

Thomas C. Baxter, the general counsel of the New York Fed, contends that Friedman’s two purchases of Goldman stock “did not violate any Federal Reserve statute, rule or policy.”

What’s interesting here, is before Friedman purchased the additional Goldman stock, he first consulted with the board at Goldman’s to check on the “timing” of his purchases. Friedman didn’t bother to inform the NY Federal Reserve Board of his purchases, however. In fact, the NY Fed only learned of the stock purchases, when they came to light in a Wall Street Journal article.

In light of Friedman’s behavior while Chairman of the NY Federal Reserve Board, his resignation is long overdue. He continue to denies his actions were improper, insisting his job as chairman of the New York Fed wasn’t a policy-making one, when the facts say otherwise.

Friedman was in the perfect position to be the beneficiary of information relating to Goldman’s financial status, both as a quasi regulator and a Goldman board member, and yet that didn’t stop him from purchasing Goldman stock.

But the question remains, if his departure will make a bit of difference to potential conflicts of interest of many of the major players on the NY Fed board.

The NY Fed’s new president, William Dudley was a former partner and managing director at Goldman Sachs and was the firm’s chief U.S. economist for a decade.

Dudley’s appointment to his position as president of the NY Fed was spearheaded by Friedman, who led the committee to hire a new president to replace Tim Geithner. And the beat goes on. When will it ever end?

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Comments

6 Responses to “New York Fed Chairman Quits: Goldman Stock Purchases Revealed”

  1. Topics about Stock » Archive » New York Fed Chairman Quits: Goldman Stock Purchases Revealed … on May 8th, 2009 12:11 pm

    […] Another fellow blogger created an interesting post today on New York Fed Chairman Quits: Goldman Stock Purchases Revealed …Here’s a short outline(ChattahBox)—Stephen Friedman resigned from his position as chairman of the Board of Directors of the Federal Reserve Bank of New York, just days after a Wall. […]

  2. Topics about New-york » Blog Archive » New York Fed Chairman Quits: Goldman Stock Purchases Revealed … on May 8th, 2009 2:36 pm

    […] Another fellow blogger added an interesting post on New York Fed Chairman Quits: Goldman Stock Purchases Revealed …Here’s a small excerpt(ChattahBox)—Stephen Friedman resigned from his position as chairman of the Board of Directors of the Federal Reserve Bank of New York, just days after a Wall. […]

  3. Topics about Last-words | New York Fed Chairman Quits: Goldman Stock Purchases Revealed on May 8th, 2009 10:30 pm

    […] Economist’s View placed an observative post today on New York Fed Chairman Quits: Goldman Stock Purchases RevealedHere’s a quick excerptReserve Bank of New York, just days after a Wall … Chairman of the New York Fed board, one of several … $67.12. This second purchase brought… […]

  4. Topics about Stock » Archive » New York Fed Chairman Quits: Goldman Stock Purchases Revealed on May 9th, 2009 7:50 am

    […] Ric & Debbie’s Place put an intriguing blog post on New York Fed Chairman Quits: Goldman Stock Purchases RevealedHere’s a quick excerptSo, what did Friedman do then? Buy more Goldman stock of course! … Goldman stock is now trading at approximately $127.08 a share. […]

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  6. D G on May 12th, 2009 5:31 pm

    Did he know anything about Goldman that wasn’t public information? I didn’t know what the fed was planning on doing on Dec 17th when he was busy buying stock. He knew. He knew that money was going to be given from the taxpayer to Goldman. Why hasn’t he forfeited all gains and been indicted? I don’t understand why the treasury secretary must sell all their holdings before they become secretary, but it is okay for the new york fed, who also sits on the board of GS, to trade willy nilly. This is one gigantic middle finger to everyone who trys to play by the rules, pay their taxes, and obey the law. Sounds like we should let our leaders lead and we should follow. Follow their lead. Quit obeying the law. Quit playing by the rules. And quit paying taxes. The government better step it up or prep for anarchy.

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