THE INSIDERS' INNER SANCTUM

Yves has a solid take on the continuing special relationship between Goldman Sachs and . . . well, everyone in power. A highlight or two:

The "all animals are created equal, but some are more equal than others" logic appears to operate in full force as far as Goldman is concerned. Violations of normal rules of conduct are not merely tolerated, but are asserted to be acceptable.

Now admittedly, the latest news tidbit, of former Goldman co-chairman Steven Friedman staying on as chairman of the New York Fed after Goldman became a bank holding company, isn't as troubling as when current Goldman chief Lloyd Blankfein was the only Wall Street denizen to meet with Hank Paulson when the Treasury was deciding what to do about AIG. Readers may recall that Goldman had the biggest exposure to AIG and thus had the most to benefit from a course of action that would be generous to counterparties (who had chosen of their own cognizance to enter into contracts with the big insurer).

What is disturbing [] is the moral blindness of too many of the key actors, namely Friedman himself and some Fed officials.

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It's bad enough that Friedman owned Goldman shares while involved in policy discussions that would affect the bank. The fact that he went and bought more shares is breathtaking. Of course, this shows a huge deficiency in Fed procedures. Directors should be barred from trading stocks in any institution regulated by the Fed. While it is technically not inside information (you need to be an insider of the company in question, that is, have a fiduciary duty to its shareholders), it certainly raises the specter of trading on privileged information.

It would be a scandal if someone on the FOMC were to be found to be trading interest rate futures. Being party to discussions about regulatory policy (as in having advance knowledge of how things are likely to play out) means one similarly has advance knowledge of facts that investors would find important.

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Recall that in the waning days of the Bush Administration, it wasn't clear how bank friendly the new Administration would be. Even thought Geithner was Treasury secretary designate, there was some discussion in the press as to the divergent views within the Obama economic policy team, and whether that would create creative friction or conflict. Conflict (or having Volcker, who is not a fan of innovative finance, have a strong voice) could have kept bank valuations at bay.

Thus while Goldman's stock was arguably cheap, cheap stocks can get cheaper. One of the important inputs to the wisdom of going long would be knowing how bank friendly the new Administration's policies would be. To think that Friedman didn't have some insight into that question by virtue of his advantaged position is naive.

Check out the whole piece. Another factoid in a continuing, and sadly consistent, story.