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Reports have surfaced from Wall Street about the relationship between the Federal Reserve Bank of New York and Goldman Sachs (NYSE: GS). Before we go into the relationship, let's take a look at what has taken place at GS thus far. Late last year, GS received rather quick approval to become a bank holding company and received an injection of $10 billion in capital soon after the approval. There is nothing suspicious about this relationship, until you learn that the New York Fed's chair Stephen Friedman was on GS's board at the time -- and held a large amount of GS stock. Flat out, this is a violation of the Fed's policy.
Furthermore, Friedman purchased more than 37,000 shares of GS in December -- while the Fed was considering GS's request for a waiver. Since Friedman purchased the shares, they have increased $1.7 million. The potential inappropriate behavior doesn't stop there. Friedman, who was overseeing the search for a new New York Fed president (he is stepping down at year's end), . . . chose a former GS exec.
Friedman contends that none of these events involved any conflicts, as his job at the New York Fed isn't a policy-making role. He also notes that he purchased the GS shares because they were "very cheap." While Friedman sees "no conflict whatsoever," former Cleveland Fed president Jerry Jordan feels that Friedman "should have resigned." Not surprisingly, Timothy Geithner had no issue with Friedman when this took place, noting that forcing Friedman out would have taken two leaders out of the mix during a crucial time.
Maybe nothing fishy took place, maybe. Nevertheless, the general public will view any moves like this with a jaded eye, simply because there is an appearance of inappropriate behavior. Furthermore, confidence in the big banks is low, and the timing of the move and Friedman's windfall could make matters worse. Of course, the public perception doesn't matter, as both Geithner and Friedman see no issues -- and those are the only two opinions that really matter.
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