A great many people are up in arms about a Bloomberg News story detailing how the New York Fed, while Timothy Geithner was its president, forced AIG to pay 100 cents on the dollar to fulfill its credit swap obligations to various financial institutions.
The outrage stems mainly from the assumption that a bankrupt AIG should have been cutting deals to pay a lot less, rather than use taxpayer money to pay everything it owed to Goldman Sachs and all the rest. They scoff at the argument put forth by defenders of the move, who say that at a moment when the entire financial system appeared to be on the verge of crashing, making sure AIG's debts were paid in full was explicitly intended as an act that would calm the waters and restore some stability in the middle of full-scale financial panic.
We will be arguing about that point for a long, long time. But to me, that's not the real outrage contained in the Bloomberg article. The true eye-opener is the role played by Stephen Friedman, the former chairman of Goldman Sachs who was at that time serving as the chairman of the board of directors of the New York Fed. Not long after the decision to pay off AIG's debts in full, Friedman was buying stock in Goldman Sachs.
Friedman's role remains controversial. In December 2008, weeks after the payments to the banks were authorized in November, Friedman bought 37,300 shares of Goldman stock at $80.78 a share, according to SEC filings. On Jan. 22, he bought 15,300 more at $66.61.
Both purchases took place before the payments to Goldman Sachs were publicly disclosed under pressure from Senator Dodd in March. On Oct. 26, Goldman Sachs stock closed at $179.37 a share, meaning Friedman had paper profits of $5.4 million.
Jerry Jordan, former president of the Federal Reserve Bank of Cleveland, says Friedman should have resigned from the New York Fed as soon as it became clear that Goldman stood to benefit from its actions.
"It's an outrage," Jordan says. "He needed to either resign from the Fed board or from Goldman and proceed to sell his stock."
Hard to argue with that.