When Is Insider Trading Legal? The Strange Case of Stephen Friedman

There has been a lot of outrage about the the AIG bailout, but one particular aspect has been somewhat below the radar. Enter Matt Taibbi. Matt's latest expose at True/Slant (here) discusses the case of Stephen Friedman. The former chairman of the board of directors of the New York Fed bought more than 50,000 shares of Goldman Sachs (GS) stock following the takeover of AIG. In May, Friedman resigned from the NY Fed Board after it was disclosed by the Wall Street Journal that he had bought the stock.

Let's see, that's more than $2,500,000 capital gains as of October 2009. It has been more than a year, so Friedman is eligible for long term capital gains status, and Uncle Sam only gets 15%. After state income taxes, Friedman could net close to $2 million.

Earlier this week, Richard Teitelbaum and Hugh Son, writing at Bloomberg.com (here), described the sequence of events. On September 16, 2008, as AIG ran out of cash, the New York Fed provided $85 billion in cash to cover more than $62 billion in CDS exposures for AIG owed to member banks. Included in the mix was $13 billion for Goldman Sachs.

Friedman had more than one reason to have special insight into the potential windfall for GS in addition to information available to him as chairman on the NY Fed board. Friedman is also a former CEO of Goldman Sachs. Talk about insider trading - what about insider squared?

Knowledgeable people, such as Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm, says the government squandered billions in the AIG deal. These experts say that payment of full value for the CDS obligations is rare in transactions made at an arm's length. I guess when you are in a lover's embrace you are not at arm's length.

The Bloomberg article quotes Donn Vickrey of financial research firm Gradient Analytics Inc.

“In cases like this, the outcome is always along the lines of 50, 60 or 70 cents on the dollar,” Vickrey says.

One reason par was paid was because some counter parties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. “Some of those banks needed 100 cents on the dollar or they risked failure,” Vickrey says.

But then the stock purchased by Mr. Friedman would not have been so profitable.

Comments

[Swashbuckler:]

Inside information---material non-public (privileged) information. Madoff steals through fraud, and Friedman steals through inside information. No difference. Madoff goes to prison in disgrace, as he deserves. Friedman gets $2 mil and his reputation remains intact. To me, Friedman may as well have knocked off a liquor store or a gas station, although his take wouldn't have been as high. Our flawed justice system.

Oct 31 12:01 AM

[SAS70:]

Swash

This is exactly why I had no money in the market that is until the beginning of this year. To be honest the only reason I put any money in was my accountant who comes in once a week and uses a second computer in my office would occasionally get on her E Trade account and buy or sell stocks. It looked kinda fun and we both agreed that it was an historic time in the market so I started my own account.

Other than frankly gambling which is what I view my E Trade account as and the whole market in general. I would just as soon invest in upgrading one of our ovens or buying new forklifts. At least when I put money back into the company I can see it, it's real, it's tangible. The return on investment which is usually in decreased production times or increased quality is a much safer and usually higher than what I could get in this highly manipulated and insider traded market.

Oct 31 01:14 AM

[untrusting ...:]

We waste millions of dollars and years on Special Prosecutors going after politicans for shagging a staffer, or relatively small potatoes bribes. Yet when it comes to Wall Street ripping off tens or hundreds of millions, or even billions, we can't get the government to even investigate them much less prosecute them.

Elliot Spitzer may have been a womanizer and a hypocrite and a publicity seeking dog, but at least he was willing to go after some of the Wall Street manipulators. Only problem was he just got some money and none of them went to jail. Jail, jail, jail .... none of this will stop until they put some of them in jail and consfiscate most of their assets.

Oct 31 02:49 AM

[optionsgirl:]

It just goes to show you why regulation and regulators fail. Greed trumps honor. It's a corrupt system with corrupt leaders. Anyone who can, trades on insider information. It's been going on as long as there have been markets, public and private. It never has been a level playing field, and never will be. GS owns everybody. They're modern day "wise guys".

Oct 31 03:28 AM

[john s. gordon:]

'govt squanders billions'.
well the bush-cheney govt squandered billions (not to mention the mutilated troops) on their illegal iraq war but it took them 7 yrs to do it.
in the case of the AIG caper it was done in the blink of an eye.
> jack

Oct 31 09:53 AM

[HBWOW:]

On top of this GS story of grand white collar greed, again realize that
GS according to articles has over $40 trillion exposure of derivatives
and total assets of only $20 billion. AND WE THOUGHT THE EQYPTIANS WERE GOOD AT BUILDING PYRAMIDS. The Friedman
deal is but one of the many stones in one of the many GS
pyramids.

Oct 31 10:09 AM

[Graham and ...:]

Goldman Sachs is the new "Egypt." And out to enslave the rest of us. Thumbs up to you.


On Oct 31 10:09 AM HBWOW wrote:

> On top of this GS story of grand white collar greed, again realize
> that
> GS according to articles has over $40 trillion exposure of derivatives
>
> and total assets of only $20 billion. AND WE THOUGHT THE EQYPTIANS
> WERE GOOD AT BUILDING PYRAMIDS. The Friedman
> deal is but one of the many stones in one of the many GS
> pyramids.

Oct 31 12:56 PM

[tommiegun:]

Liddy who took over as CEO of AIG had a large investment at GS as well, however, I don't think there was as much of an opportunity to benefit from the position as Freidman did when he was at the FED.

It was disappointing to find out that Geithner remained in the shadows of the financial crisis while influencing the payout to banks from the CDS gone bad for AIG. GS made out like a bandit.

He inaffect caused AIG to lose billions of dollars. As a democrat, I am interested in knowing how must Obama knew about Geithner before appointing him to Treasury chief, although if I remember correctly, he had tried to appoint a Republican to that position. Geithner wasn't his first choice.
.

Oct 31 03:01 PM

[tommiegun:]

I disagree with Bloomberg regarding the Maiden Lane ll and lll Investment vehicles set up to help AIG.

Those vehicles will ultimately yield the American tax payers a premium, and are currently liquidating debt given to AIG.

What Bloomberg does not say anything about is maiden Lane l set up help JPM acquire Bear Stearns, which was until recently under water for the FRBNY.

The Maiden Lane vehicles are pools of CDOs.

CDOs are now yielding better returns and some of the CDOs are being paid back to insurers like AIG and MBIA. They lost money last year and earlier this year.

According to the WSJ in articles dated 10/28/09 and 10/2909 AIG has been paid back billions of dollars. One of the payers was GS which paid AIG a billion dollars in the last few months.

In addition, Bloomberg reported in September that these once written off CDOs backed by sub-prime mortgages are now yielding better returns as the real estate market improves and they are able to sell these once toxic assets. Still these CDOs are not yielding 100% returns.

Oct 31 04:31 PM

[Swashbuckler:]

In the interest of being objective and impartial, john, when you throw up on bush-cheney, it probably wouldn't hurt to mention Chris Dodd, Barney Frank (Fannie, Freddie sewage), Speaker Nancy Pelosi (healthcare etc.), the late Edward Kennedy (everything he touched), and of course our current President, who is in the process of mortgaging the next five decades of this country via his socialist agenda and bought votes from his sacred unions. First cover those players in depth and then gripe some more about bush-cheney.


On Oct 31 09:53 AM john s. gordon wrote:

> 'govt squanders billions'.
> well the bush-cheney govt squandered billions (not to mention the
> mutilated troops) on their illegal iraq war but it took them 7 yrs
> to do it.
> in the case of the AIG caper it was done in the blink of an eye.

Oct 31 04:37 PM

[Swashbuckler:]

SAS70---You sound like my pop. I was in his store many years ago when a stockbroker cold called him on the phone. His reply to the broker, "If I was going to invest any money, I'd invest in my own damn company." click.


On Oct 31 01:14 AM SAS70 wrote:

> Swash
>
> This is exactly why I had no money in the market that is until the
> beginning of this year. To be honest the only reason I put any money
> in was my accountant who comes in once a week and uses a second computer
> in my office would occasionally get on her E Trade account and buy
> or sell stocks. It looked kinda fun and we both agreed that it was
> an historic time in the market so I started my own account.
>
> Other than frankly gambling which is what I view my E Trade account
> as and the whole market in general. I would just as soon invest in
> upgrading one of our ovens or buying new forklifts. At least when
> I put money back into the company I can see it, it's real, it's tangible.
> The return on investment which is usually in decreased production
> times or increased quality is a much safer and usually higher than
> what I could get in this highly manipulated and insider traded market.
>
>

Oct 31 04:43 PM

[davidbdc:]

What is mind boggling about this is that I would think that no one at the NY Fed in ANY position would be allowed to buy/sell stocks in any financial companies as part of their being employed.

This just strengthens the belief of many that the whole thing is rigged. And it shows that there is an "elite" mentality among many of our "leaders" (I'm using that term very loosely).......rules are meant to be dreamt up and implemented for us pions to follow.....but a different set of more flexible rules exist for the bureaucrats and elites that rule over us.

Oct 31 05:00 PM

[Steven Hansen:]

John, when we have laws which says anyone who is in public service or works for any gse must use blind investing methods - then the world will be rotating properly.

we all see america as basically corruption free, but based on volumes of money - we are the most corrupt on the planet.

time to look into the mirror.

Nov 01 01:01 AM

[Zmartmoney:]

Is this where Hope and Change kicks in???....(drum roll....)....no?....

Nov 02 10:10 AM

[Alan Wendt:]

to [e-mail]
date Fri, Oct 30, 2009 at 1:15 PM
subject insider trading complaint
mailed-by gmail.com


I wish to report an insider trade on the part of Stephen Friedman, who in December of 2008,
according to reports, bought 50,000 shares of Goldman Sachs stock while (a) holding confidential
information about the company regarding its viability and continued existence, and (b) occupied
a position of public trust.

Sincerely,
Alan Wendt

Nov 09 07:08 PM