Following AIG and Goldman: the Friedman case

Bloomberg and The Wall Street Journal are doing a good job of ignoring the unhelpful business press convention of not revisiting older stories and returning to the scene of the extraordinary AIG bailout.

The Journal’s Liam Pleven reports this morning that AIG is now getting back some of the collateral it had been forced to extend to Wall Street banks to which it sold insurance on collateralized debt obligations and other securities now that their value has started to rise again.

The paper rightly frames the issue not as great news for taxpayers but as raising more questions about decisions by the New York Federal Reserve Bank in the wake of the bailout, particularly its so-called Maiden Lane deals. When the NY Fed (and it’s important to remember which agency is leading here) first intervened with its then-$85 billion bailout, it merely (!) paid collateral to big Wall Street banks to reflect the crash in values of the securities it was insuring.

But as the Journal reminds us, two months later it decided to stop doing that and simply bought back the underlying securities it was insuring and did so at 100 cents on the dollar. The government set up a vehicle called Maiden Lane III (named after a street downtown) to do the deals. In doing so, it gave up any chance of getting back collateral if the securities rose again in value, which they’ve now done.

As the Journal reports:

The development highlights how the government’s decision last November to close out many of these trades aided big banks while costing AIG a chance to get billions of dollars more in collateral back in any rebound.

Ryan Chittum yesterday pointed to Bloomberg’s good follow, which starkly shows that AIG officials were fighting tooth and nail to protect their position, offering about 60 cents on the dollar, until New York Fed officials stepped in and agreed to make the counterparties, including Goldman Sachs, whole.

Joe Nocera did a nice retrospective parsing of Goldman’s benefits on Saturday.

Now Jon Weil today follows with another astute column, “Why the Goldman Sachs-AIG Story Won’t Go Away,” that asks the right questions:

But why the rush to pay the banks in full once Geithner’s team took over the talks? The public has never gotten satisfactory answers, notwithstanding that the government’s commitment to AIG now stands at about $182 billion.

(I suppose this is as good a point as any to mention that Goldman is an Audit funder. Read discussion here, here, and here.)

Both Bloomberg story and column get credit for at least mentioning the web of overlapping interests between former Goldman executives serving in the government, particularly the case of Stephen Friedman. As the Bloomberg news story said:

The [Maiden Lane] deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article.

In his resignation letter, Friedman said his continued role as chairman had been mischaracterized as improper. Goldman Sachs spokesman Michael DuVally declined to comment.

Strangely, Bloomberg calls Friedman a former Goldman chairman, which is true, but fails to mention that he remained a Goldman director while serving as chairman of the NY Fed.

That said, Bloomberg shows class here by crediting the Journal story from last May “USA Inc.: New York Fed Chairman’s Ties To Goldman Raise Questions,” written by Kate Kelly and Jon Hilsenrath.

In that May story, Friedman said the New York Fed’s board wasn’t involved in the New York Fed’s actions on AIG.

Mr. Friedman says that although directors were briefed occasionally on the actions the New York Fed took regarding AIG, that was just a courtesy. “The New York Fed board was not involved in the decisions to take any actions related to AIG,” he said.

That May Journal story and subsequent coverage of Friedman focused, understandably, on the technical conflict that occurred for Friedman when the Fed agreed to make Goldman a bank-holding company, and subject to Fed regulation. Coverage also focused on the Journal’s revelation that Friedman added to his personal, already substantial Goldman stock holdings in December while a awaiting a waiver on his new conflict as Fed chairman/Goldman Regulator. The waiver was subsequently granted. While Friedman’s additional stock purchase didn’t change anything in terms of his conflict—he still had one; it just got slightly bigger—its revelation was enough to force him out as Fed chairman. Fine.

But in retrospect, the Friedman case seems to have been a journalistic opportunity missed. His technical conflict as regulator/shareholder pale besides the spectacle of his heading an agency that ran point on a bailout of such historic proportions. Even if you accept Goldman’s position that there was no “bailout” per se, and few do, no one can dispute that there was a lot of money changing hands, and Friedman was on both sides. And even taking him at his word that the board wasn’t involved in AIG decisions, his seems to be the perfect case to illustrate a compromised regulatory culture on Wall Street in general and the lack of bright lines between Goldman’s interests and the government’s, in particular. In Friedman’s case, all lines were erased. The issue is a culture that allows the traipsing back and forth between public and private universes, overseeing (but not, he says, approving) the bailout and Maiden Lane deals, buying more shares, what have you. Who is fighting for the public? Friedman? No way.

It is breathtaking to think that in this culture, Friedman could be a NY Fed chairman and remain a Goldman director, and that this, according to government conflict rules, was okay. It’s not.

While business journalists sigh and roll their eyes about Matt Taibbi’s hyperbole about Goldman’s role in various bubbles and the bailout, their time is better spent exploring the real cultural, structural, and power-relational problems that plague Wall Street regulation. Clear windows onto the culture, like the Friedman case, don’t open very often.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.