Naked Capitalism 04 Maggio 2009
The "all animals are created equal, but some are more equal than others" logic appears to operate in full force as far as Goldman is concerned. Violations of normal rules of conduct are not merely tolerated, but are asserted to be acceptable.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 after.
During that time, the New York Fed's chairman, Stephen Friedman, sat on Goldman's board and had a large holding in Goldman stock, which because of Goldman's new status as a bank holding company was a violation of Federal Reserve policy.
The New York Fed asked for a waiver, which, after about 2½ months, the Fed granted. While it was weighing the request, Mr. Friedman bought 37,300 more Goldman shares in December. They've since risen $1.7 million in value.
Last week, following questions from The Wall Street Journal, Mr. Friedman, 71 years old, disclosed he would step down from the New York Fed at year end. In an interview, he said he made the decision because the waiver letting him own Goldman stock and be a Goldman director expires at the end of the year. He added: "I see no conflict whatsoever in owning shares."
Jerry Jordan, a former president of the Fed bank in Cleveland, says Mr. Friedman should have stepped down once Goldman became a bank holding company in September and thus fell under the Fed policy barring stock ownership by certain directors of Fed banks. "Any kind of financial transaction at all by any of the directors is always a problem," Mr. Jordan said. "He should have resigned."
New York Fed officials say that to have forced Mr. Friedman off the board while it sought a Geithner successor would have deprived it of two leaders at a crucial time.
"Steve Friedman is a very capable chairman," said Tom Baxter, the New York Fed's general counsel, "and was the kind of person who we needed to head the search" for someone to succeed Mr. Geithner.
In Washington, the Fed's general counsel, Scott Alvarez, also says Mr. Friedman was needed during the New York Fed's transition.
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.
The regional Fed banks have three classes of directors: Class A, elected by member banks and representing them; Class B, elected by banks but representing the public; and Class C, representing the public but picked by the Fed. Under law, directors in Class C, including Mr. Friedman, and Class B can't be officers or directors of banks, and Class C directors like Mr. Friedman also can't own shares of banks. This means not of bank holding companies, either, by the Fed's interpretation of the 1913 law.
Mr. Baxter, the New York Fed general counsel, realized that the bank's chairman was now in violation of the Fed rules. But the institution had just lost another director, Richard Fuld Jr., a few days before the September collapse of the firm he led, Lehman Brothers Holdings Inc. So on Oct. 6, at the urging of New York Fed lawyers, Mr. Geithner asked the Federal Reserve Board for a waiver enabling Mr. Friedman to continue owning Goldman stock and serving on Goldman's board.
While Fed officials in Washington weighed the request, Mr. Baxter stayed in touch with a senior lawyer there, pushing for a decision, says a New York Fed official. This official says that in conversations with Mr. Friedman, who began voicing concern about the delays in December, Mr. Baxter suggested that the Fed policy should be considered to be in abeyance until the waiver came through.
Mr. Friedman's role grew more prominent in November after Mr. Geithner became the pick for Treasury secretary...
Mr. Friedman saw that Goldman's battered stock was trading below book value, or assets minus liabilities. On Dec. 17, he bought 37,300 Goldman shares at an average price of $80.78, a $3 million purchase, according to regulatory filings