Via WSJ, the NY Fed/Goldman Sachs relationship finally seeps out... at least a little bit. As much as I would love to sensationalize this story, there is a much larger picture that needs revealing. But this is certainly a start:

The Federal Reserve Bank of New York shaped Washington's response to the financial crisis late last year, which buoyed Goldman Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank holding company in September and a $10 billion capital injection soon after.

During that time, the New York Fed's chairman, Stephen Friedman, sat on Goldman's board and had a large holding in Goldman stock, which because of Goldman's new status as a bank holding company was a violation of Federal Reserve policy.

The New York Fed asked for a waiver, which, after about 2½ months, the Fed granted. While it was weighing the request, Mr. Friedman bought 37,000 more Goldman shares in December. They've since risen $1.7 million in value.

Using the argument that he does not actually decide Fed policy, Mr Friedman oversaw the search for a new NY Fed President after Tim Geithner's departure for the Treasury (we all know how that worked out), from which he found former Goldman alum William Dudley.

Still with me?

A former head of Cleveland Fed says Friedman should have stepped down as soon as Goldman became a bank holding company.

The NY Fed, naturally, disagrees claiming that lacking Geithner in position as President AND a vacant chairman position would have placed undue stress on the NY Fed. And it's all about them, of course.

The funniest part?

"Because he wasn't allowed to own the stock he had, the Fed doesn't consider his additional December purchase to be at odds with its rules at the time."

WHAT?! Because he'd already broken the rule we didn't care that he broke it some more? Really? That's the best the Fed could do on this?

Let us not forget, kids, that NY Fed handled the particulars of the AIG bailout, of which Goldman scored.

Yup.