What can we learn about ethical leadership from Stephen Friedman?

I wasn't terribly excited that we taxpayers are being forced to bail out large financial companies, but I understand the need to stabilize the bread and butter commercial banking business that was derailed by high risk investment banking.  But the latest news that the New York Fed Chairman, Stephen Friedman, profited from trading Goldman Sachs stock is the latest example of preferential treatment of people who are politically connected.

Here are some quick facts on the situation:

  • He retired as chairman of Goldman Sachs in 1994, after a 28-year career.
  • He is currently a member of the board of directors at Goldman Sachs.
  • According to the Wall Street Journal, Goldman's competitor, Lehman Brothers, was allowed to fail last fall, causing a global banking meltdown, while Friedman was lobbying the Fed to turn Goldman into a regulated bank holding company, making Goldman eligible for $10 billion in federal bailout funds (read: "taxpayer money").
  • Fed rules barred Friedman from owning shares in any bank, or serving on a bank's board of directors.
  • Friedman bought shares in Goldman Sachs stock in December.
  • In January, after the purchase of Goldman shares, the Fed made an exception for Friedman, allowing him to own bank stocks.
  • Friedman has profited $1.7 million from his trading of Goldman stock.

Remember the extensive media coverage of AIG's lavish broker sales conference to pump up sales? Remember how quickly Congress passed a 95% income tax for AIG executive bonuses in response to public outrage?  Friedman's problem is much bigger, because insider trading is illegal.  The SEC routinely screens, investigates and prosecutes people suspected of insider trading.  You and I would go to jail if we profited even a smaller amount from insider trading.

Will Stephen Friedman be prosecuted, or even lose his job? I'm not holding my breath.  To me, the bigger issue is the message it continues to send students at business schools around the country, where too little of ethics and morality are taught.  We are teaching them that making money is goal #1, and that there are ways to easily make excessive money if we have the right connections.  If this recent economic crisis doesn't reform what we teach future business leaders, we can expect more problems in the decades ahead when prosperity returns, and today's pain is long forgotten by our children and grandchildren.  The real shame in this financial crisis is not that it happened in the first place, it's that we won't learn from our moral mistakes.