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"Hold my Beer:" Steve Friedman Shows What Fed Insider Trading Really Is


Recently two Fed presidents, Eric Rosengren of Boston and Robert Kaplan of Dallas were forced to resign.  Before discussing the circumstances surrounding their resignations, it is useful to examine their backgrounds because they give insight into the two types of people who dominate the Federal Reserve - academics and Goldman Sachs alumni.  Rosengren is a PhD economist and has never held a job in private industry.  He started with the Fed in 1986, a year before he completed his PhD, and never left.  Kaplan is a Harvard MBA who spent more than 20-years at Goldman Sachs.  He was a partner when Goldman went public, and was thus able to 'monetize' the hard work others had invested in building the Goldman brand when it was a private partnership.  He left Goldman with his millions to teach at the Harvard Business School where his specialty was, get this, leadership!  After a few years at Harvard, Kaplan was named the president of the Dallas Fed in 2015. 

Their resignations were prompted by criticism resulting from the disclosure of their investments and associated trades.  They had made trades when the Fed was engaged in all sorts of extraordinary market interventions.  Moreover, the trades these senior Fed officials were making stood to benefit from the Fed interventions.  As bad as the actions of Rosengren and Kaplan might be, they pale in comparison to those of another senior Fed official, Steve Friedman, during the height of the financial crisis. 

Steve Friedman has an undergraduate degree from Cornell and a law degree from Columbia.  He had a long career with Goldman Sachs - including several years as co-chairman where he served with another Ivy-league educated lawyer and paragon of business virtue - Robert Rubin.  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 - while chairman of the NY Fed’s board of directors -  apparently became aware of Tim Geithner’s then secret decision to bailout 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.  In just a few months, these 50,000 shares of stock would yield approximately $3-million dollars in trading profits.  By almost anyone’s standard, these stock purchases and the enormous profits they produced were exclusively the result of inside information.                  

The example of Steve Friedman in late 2008 and early 2009 says much about how ethics in the traditional sense has no place in what passes for “business as usual” on Wall Street.  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.  Instead, Friedman’s actions, and their tacit approval by the Federal Reserve Bank of New York, have everything to with the system of crony capitalism that the unholy alliance of the financial services industry, politically connected insiders and the Federal Reserve have created in capitalism’s place.

In May 2009, Friedman’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.  (The exact same course of action taken by Rosengren and Kaplan)   Unbelievably, upon Friedman’s resignation, Lawrence Baxter, then the NY Fed’s general counsel and presumably someone who would have the most basic understanding of insider trading statutes, stated,
“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.” 

With this sort of attitude coming from the NY Fed's general counsel its completely unremarkable that the highest profile arrest for insider trading made by the federal government during the 2000s was Martha Stewart.  (By the way, the U.S. attorney who prosecuted her; James Comey)



Peter Schmidt
November 14, 2021
Sugar Land, TX

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