09/17/2012 01:32 am ET Updated Nov 16, 2012

Four Years After the Financial Implosion, Questions Finally Begin to Be Asked

Finally, after four years of hesitation and stalling, U.S. regulators have begun an investigation of insider trading by those Wall Street executives who attended a private meeting with Treasury Secretary Henry Paulson.

According to the Wall Street Journal article, investigators are following up whether Mr. Paulson suggested at the meeting that the government was willing to rescue the sinking mortgage-finance agencies Fannie Mae and Freddie Mac.

The SEC investigators are only now looking into whether the firms traded on information that Mr. Paulson may have shared. The issue of insider trading from information emanating from Mr. Paulson's office was a focus of ruminations from this corner some four years ago.

First there was the virtually open-ended access to Mr. Paulson by Bill Gross, head of Pimco, the world's largest bond fund, as chronicled in the eye-opening New York Times article "For Hire: Bailout Adviser" and the subsequent and extraordinary bailout of Fannie Mae and Freddie Mac's subordinated debt. The Wall Street Journal labeled the event "Bailout for Billionaires" in a September 11, 2008 editorial. As the editorial proclaimed, "Investing rarely gets better than this: Buy paper you know carries a higher risk but also a higher return, and then have Uncle Sugar eliminate that risk so you can make a windfall profit." The result was a $1.7 billion payday, the then largest ever for Pimco. A post concurrent to the events, "The Bailout: The Bond Billionaires Piggybacking The American Taxpayer For Another Gilded Ride," ended with the admonition, "Wouldn't it be refreshing if someone in Congress asked a few hard questions?" To date, I do not believe anyone has.

But hard questions, perhaps until now, have been few and far between, and rarely to the core of the matters at hand.

Perhaps most egregious example is the single question not asked again and again -- what was the nature of the conversations between Treasury Secretary Hank Paulson and Goldman Sachs chairman Lloyd Blankfein? Between September 18 and 21, 2008, there were 19 telephone contacts between Blankfein and Paulson, as well as numerous telephone contacts between Blankfein and the then-president of the New York Fed, Timothy Geithner. The more-than-$180 billion that was pumped into AIG to keep it solvent included tens of billions to pay down exotic derivatives in full. Derivatives, before the government's rescue, were selling at less than 40 cents on the dollar. Was the highly significant tidbit of information that was made public after the bailout by Timothy Geithner, namely that the Treasury found that the prospect of AIG's failure posed a grave risk to the economy, ever whispered by Paulson or Geithner into Blankfein's ear?

Had that morsel of information been made available to Goldman Sachs at the time, it would have been worth tens of billions to Goldman, AIG's largest counterparty. Goldman's holdings, direct or indirect, of AIG credit-default obligations made up one third of the $62 billion counterparty trades on AIG's books. It would seem self evident that with knowledge of the Treasury's preordained policy to salvage AIG, AIG's trading partners would have resisted any modification of their counterparty contracts to levels representing the then-discounted real-time value. At one point, discussions took place between the trading partners to write down AIG's obligations to some 40 cents -- without success, as Goldman refused to budge. Was this refusal based on information of the Treasury's willingness to rescue AIG, information garnered in conversations with Paulson and Geithner? If so it would have been the ultimate insider tip-off. Was it? I do not know. All one does know is that the questions were never asked.

The Wall Street Journal report in Friday's paper comments that the inquiry comes amid an aggressive government crackdown on insider trading. Really?? After four year of hibernation? Perhaps we are witnessing a new definition of the word 'aggressive.'