We are so inured to tales of business
corruption that even a devastating expose in The Wall Street Journal no
longer shocks us. The fact that the chairman of the New York Federal
Reserve Bank made millions off his secret purchase of Goldman Sachs
stock, "in violation of Federal Reserve policy," as the WSJ put it, at
a time when the N.Y. Fed was ostensibly overseeing the antics of the
Wall Street firm, has barely registered a blip of outrage.
When N.Y. Fed Chairman Stephen Friedman
bought stock in the company that he once headed, and where he still
serves as a director, he was already in violation of Federal Reserve
policy and was hoping for a waiver to permit him to hold his existing
multi-million-dollar stock stash and to remain on the Goldman board.
The waiver was requested last October by Timothy Geithner, then the
president of the N.Y. Fed and now Treasury secretary. Yet, without
having received that waiver, Friedman went ahead in December and
purchased 37,300 additional shares. With shares he added in January,
after the waiver was granted, he ended up with 98,600 shares in Goldman
Sachs, worth a total of $13,330,720 at the close of trading on Monday.
Friedman was in violation of the Fed's
policy because, thanks in part to the urging of Geithner and the N.Y.
Fed, Goldman Sachs was allowed to become a bank holding company, making
it eligible for government bailout funds (an option that Geithner had
denied to Goldman rival Lehman Brothers). But that shift also put
Goldman under more rigorous banking regulations that required Friedman
as Class C director of the N.Y. Fed, a position in which he ostensibly
represents the public instead of the banks who dominate the board, to
step down as a Goldman director and divest his holdings. Instead, he
stayed on the Goldman board and added additional shares while waiting
for the Fed waiver. Nor did he inform the Federal Reserve of his
additional purchases last December, and the lawyers for the N.Y. Fed
didn't know about that purchase until the WSJ raised questions in
April. Friedman has made a profit of about $3 million on the additional
The significance of this conflict of
interest was summarized by the lead of the WSJ story: "The Federal
Reserve Bank of New York shaped Washington's response to the financial
crisis late last year, which buoyed Goldman Sachs Group Inc. and other
Wall Street firms. Goldman received speedy approval to become a bank
holding company in September and a $10 billion capital injection soon
In addition to that capital injection,
which at least carries some expectation of being repaid, Goldman
received an additional $8.1 billion that will not have to be returned
to taxpayers. This is a result of the bailout engineered by then-N.Y.
Fed president Geithner of AIG, which listed Goldman as its top insured
credit-swap customer. As Jerry Jordan, former president of the Fed Bank
in Cleveland, told the Journal in reference to Friedman's obvious
conflict of interest, "He should have resigned."
Unfortunately, this was not the view
during the reign of Geithner, who argued that Friedman needed to remain
chairman of the N.Y. Fed board to find a suitable replacement for
Geithner as he moved on to be secretary of the Treasury. Friedman chose
a fellow former Goldman Sachs exec for the job.
All of which calls into question the
unique power of Goldman Sachs over the U.S. government, as described in
another important, but largely ignored, article from The New York Times
last October headlined "The Guys From 'Government Sachs.' " Their power
is vast, no matter which party controls the White House. As the Times
noted, two leaders of Goldman Sachs-Robert Rubin, who co-chaired
Goldman with Friedman, and Henry Paulson-had become secretaries of the
Treasury in the Clinton and Bush administrations, respectively.
Under Paulson, the bailout of Wall Street
was dominated by Goldman Sachs alums, and as the Times noted, "Indeed,
Goldman's presence in the (Treasury) department and around the federal
response to the financial bailout is so ubiquitous that other bankers
and competitors have given the star-studded firm a new nickname:
That power continues unabated in the Obama
administration. Geithner is a protege of former Goldman Sachs chairman
Rubin. And it was therefore not surprising when he picked Mark
Patterson, a registered lobbyist for Goldman Sachs, to be his chief of
staff at the Treasury Department. That appointment was made on the same
day that Geithner announced new rules for limiting the influence of
registered lobbyists. Need more be said?