Questions linger over former NY Fed Chairman Stephen Friedman's insider purchase of Goldman shares.
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Was former New York Federal Reserve Chairman Stephen Friedman in possession of material, non-public information relating to AIG and Goldman Sachs, (where he served on the board of directors), and did he violate SEC rule 10b5-1 when he purchased 52,600 shares of Goldman stock on December 17, 2008 and January 22, 2009?
First we must determine whether the information in question does in fact meet the definition of 'inside information' as defined by the SEC. In other words, was it material and non-public?
Under question was the knowledge that the U.S. government, through AIG would be paying Goldman Sachs 100 cents on the dollar for the settlement of derivative contracts Goldman had purchased from AIG. In this case, the AIG payout and windfall to Goldman amounted to approximately $14 billion, with no strings. No common, preferreds, or warrants. Found money.
Goldman had just survived a global financial panic that forced Blankfein to solicit $5 billion of extremely expensive outside capital from Warren Buffett in order to remain solvent. In this context, $14 billion from AIG meets any and all definitions of 'material.'
As we have learned from Hugh Son's phenomenal work at Bloomberg, there was an active effort by the NY Fed and its lawyers to keep the details secret, as they pressured AIG officials from disclosing the par payments in required SEC filings.
“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican.
The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis.
The next step is to determine if Stephen Friedman was actually in possession of this information when he made his purchases of Goldman stock.
Because of his role on the Goldman board and extensive communication with CEO Lloyd Blankfein (not to mention a career spent at Goldman building contacts throughout the organization), it is not plausible to believe that Friedman didn't have full knowledge of Goldman's large exposure to AIG.
Similarly, because of his then concurrent role role as Chairman of the Federal Reserve Bank of New York, which was in charge of the AIG counterparty negotiations, Friedman would have been completely aware of the following reported by Hugh Son:
- The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps exploded. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.
