Frederic Bastiat, Ron Paul, Steve Friedman and the AIG Debacle
Frederic Bastiat said, "when plunder becomes a way of life for a group of men in society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it." Stephen Friedman is the personification of Bastiat's observation. The manner in which Friedman capitalized on his privileged position as chairman of the NY Fed to earn millions from the collapse of AIG is the best example of this.
After working for a few years as a lawyer, Friedman had a long career with Goldman Sachs - including several years as chairman. Friedman served as co-chair with another Ivy league educated lawyer, Robert Rubin. (Friedman's law degree was from Columbia and Rubin's from Yale.) The incongruity of lawyers like Friedman and Rubin running an investment bank like Goldman Sachs is not the issue here. Instead, the issue is how someone with a law degree and experience as a securities lawyer could engage in the obvious conflict of interest that Friedman did.
In November 2008, Friedman - then as chairman of the NY Fed’s board of directors - apparently became aware of Tim Geithner’s (1) then secret decision to bailout all of AIG’s derivative trading partners. This decision resulted in a $14-billion windfall for Goldman Sachs – exactly the sort of thing that would move Goldman’s stock price when it became public information. In December, Steve Friedman purchased 37,300 shares of Goldman stock at a price of $80.78. In January 2009 he purchased another 15,300 shares at a cost of $66.61. By almost anyone’s standard, these stock purchases and the enormous profits they would eventually produce were exclusively the result of inside information. (2)
In May 2009, Freidman’s Goldman Sachs trades became public knowledge after the Wall Street Journal published a brief article questioning Friedman’s ties to both Goldman and the New York Fed. Friedman had been around Wall Street long enough to realize that discretion is the better part of valor and resigned from the NY Fed. Unbelievably, upon Friedman’s resignation, Thomas Baxter, the NY Fed's general counsel, offered his opinion on Friedman's purchase of Goldman stock. Baxter stated, in the NY Fed's official pressure release no less,
“And with respect to Steve’s purchases of Goldman shares in December of 2008 and January of 2009, which have been the object of some attention lately, it is my view that these purchases did not violate any Federal Reserve statute, rule or policy.” (3)
A viewpoint considerably different from the morally vacuous precincts of the NY Fed was voiced by Jerry Jordan, the former president of the Federal Reserve Bank of Cleveland. Jordan spoke for many when he remarked, “It’s an outrage. He (Friedman) needed to either resign from the Fed board or from Goldman and proceed to sell his stock.” To anyone outside Wall Street, Friedman clearly took advantage of inside information to profit from his trade in Goldman stock. (By May 2009, Friedman’s Goldman shares had already yielded over $3-million in profit.) Nevertheless, charges were never brought against Friedman.
The fact that an experienced securities lawyer like Friedman would engage in these trades, and the failure of the Federal Reserve Bank of NY to do anything about them, is strong evidence that what transpires on Wall Street has almost nothing to do with free market capitalism or even simple, common decency. Instead, Friedman’s actions, and their tacit approval by the Federal Reserve Bank of New York, are evidence of the system that Bastiat warned us about. It would be a mistake to think that this type of corruption is limited to Wall Street or finance. Indeed, Friedman's positions of power were hardly limited to finance or banking. Friedman was also chair of the Columbia University board of trustees and sat on the board of the Council of Foreign Relations, (CFR). (Friedman's co-equal in moral bankruptcy and his co-CEO at Goldman, Robert Rubin, was chairman of the CFR!!)
Speaking to Congress on July 09, 2002 - years before the AIG debacle or the global financial crisis, Ron Paul said,
"To condemn free market capitalism because of anything going on today makes no sense. There is no evidence that capitalism exists today. We are deeply involved in an interventionist-planned economy that allows major benefits to accrue to the politically connected of both political spectrums. One may condemn the fraud of the current system, but it must be called by its proper names - Keynesian inflationism, interventionism and corporatism." (4)
Sounds to me like Ron Paul would have gotten along very well with Frederic Bastiat.
Sugar Land, TX
August 23, 2020
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2. While not a lawyer myself, a good working definition of 'inside information' would be 'information not available to the public that could have a material impact on the stock price.'
3. "Stephen Friedman Resigns as Chairman of the NY Fed's Board of Directors," Federal Reserve Bank of New York, Press Release, May 07, 2009 https://www.newyorkfed.org/newsevents/news/aboutthefed/2009/oa090507
4. Jeffrey R. Hammond, Ron Paul vs. Paul Krugman, 2012, p. 27