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.

It was only after public outcry and intense congressional pressure that the counterparty payoff details were finally made public on March 15, 2009.

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.

The actual facts of his shares purchases are straight-forward:

Stephen Friedman as a member of the board of Goldman Sachs and as Chairman of the Federal Reserve Bank of New York (concurrently), purchased 37,300 shares of Goldman Sachs stock on December 17, 2008 at an average price of $81 per share

On January 22, 2009, Friedman made a purchase of 15,300 additional shares of Goldman stock at an average price of $67 per share.

The two blocks of stock have risen a total of $5 million in value.

It deserves mention that Friedman owned approximately 46,000 shares of Goldman Sachs common stock prior to these 2 purchases, and he was acting in violation of Fed policy in 2 different ways when Goldman became a bank holding company in September of 2008:

From the WSJ

The change created a problem. The Federal Reserve Act bars directors representing the public interest from owning bank stocks or being bank directors or officers. Because Goldman had always been an investment bank, Mr. Friedman's board membership there and his ownership of about 46,000 Goldman shares, at that time, hadn't run afoul of this rule. Now it did.

Not coincidentally, Friedman then showed his contempt for the situation by BUYING MORE SHARES while his waiver request was pending. This is perhaps the most egregious aspect of the entire story as Friedman exacerbated his existing conflict of interest while he was in possession of material, non-public information that Goldman would be paid $14 billion through AIG.

A final, sordid detail is that he didn't disclose his purchases of Goldman stock to NY Fed lawyers:

The New York Fed's general counsel, Thomas Baxter Jr., defended Friedman's recent stock purchases, which occurred while the Federal Reserve was weighing his waiver request. Yet, Thomas admits Friedman didn't check with the Fed, and Baxter told the Journal he was not aware of the purchases until the newspaper contacted him last month.

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To recap:

The information was both material and non-public.

Stephen Friedman was in possession of this information (and some would say that his NY Fed's decision to pay counterparties at PAR actually CREATED the information in the first place).

Armed with this material, non-public information, Stephen Friedman purchased 52,600 shares of Goldman stock at a time when other market participants were EXPLICITLY not aware that Goldman would receive a $14 billion windfall from AIG, precisely because FED lawyers WERE PRESSURING AIG NOT to make such disclosures.

Conflicts of interest are all about the smell test. And everything about Stephen Friedman's dealings at the NY Fed just plain stink.

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Mr. Friedman didn't return a call to his office seeking comment on this story.

We are submitting this story to SEC investigators as well as Reps. Issa, Towns and House Oversight committee staff.

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Listen to the final 90 seconds.

Sources:

Revisiting a Fed Waltz With A.I.G.

Fed Advice to A.I.G. Scrutinized

Chairman of N.Y. Fed Quits Amid Questions

Friedman's resignation letter