In the latest installment of its valuable "USA Inc" series, the WSJ asks some important questions about NY Fed chair Stephen Friedman, former GS CEO and continuing Goldman board member, who not only continued to hold Goldman stock after GS became a bank holding company, a violation of Fed policy which the Fed eventually waived, but bought more Goldman shares while retaining his Goldman and Fed positions.
The Fed’s and NY Fed’s general counsels say the waiver was justified because they needed his expertise, particularly in the search for Geithner’s replacement at the NY Fed.
You remember Geithner – the tax cheat who now heads Treasury. I’ve already written on the “Apple rule” aspect of the Geithner confirmation – that the rules apparently only apply to the unpopular. Friedman, particularly his additional GS purchases, takes the issue into a new dimension.
Now, I understand the problem of forcing Friedman to sell his holdings in a market plunge when the conflict was created after he joined the NY Fed board. On the other hand, the stock ownership does create the problem of potentially conflicted decisionmaking on the Fed board, which is a reason why we have insider trading rules.
I’ve long argued for the property rights theory of insider trading liability, which is basically that firms ought to be able to make their own rules about use of their information. But our lawmakers don’t accept this approach. Anyway, this theory doesn’t apply to government servants. The argument that Friedman was needed on the Fed board is the sort of cost-benefit balancing we don’t allow private firms to make. Why should we allow the government to do it?
Friedman says he wasn’t involved in the Fed's decision to give AIG an $85 billion bailout, part of which was used to repay debts to Goldman. Well, maybe. But the rule against insider trading is supposed to be a prophylactic and its application doesn't depend on whether the insider participated in a particular corporate decision.
Even if there’s no problem with Friedman’s initial GS share position, the additional purchases are a different matter, particularly since Friedman never told the Fed about those purchases and never asked for a waiver.
Friedman says he bought the shares because they were “cheap.” What does that mean? In an efficient market, shares are “cheap” only if you know something. What did Friedman know? He bought shares in a bank while he was working for a branch of the agency that was running banking (not to mention the rest of the economy). Could he have known something?
As it turned out, Friedman bought the shares at prices ranging from $66 to $80/share which were trading at $127.08 on Friday, for an accrued gain of $2.7 million.
While Congress and the SEC are investigating those hedge funds, do you think maybe they could find some time for Mr. Friedman?
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