By Denny Gulino
WASHINGTON (MaceNews) – New rules goverinng how Federal Reserve officials handle their personal finances are now imminent as the Fed tries to get them in place before Congress imposes new rules of its own and meanwhile questions abound as to how the case of the Dallas regional bank president has been handled.
The loss of two Fed regional bank presidents on one day because of a common problem, as happened Monday with the announced resignations of Dallas Fed President Rob Kaplan and Boston’s Eric Rosengren, was unprecedented. The implications could extend to the tenure of Fed Chair Jay Powell, the policy independence of the central bank and the foundational structure of largely independent regional banks.
The two cases are distinguished by some important differences. Rosengren was set to retire in nine months anyway, and his exit was attributed at least partly to his acute kidney disease. Also his trading was much more limited in scope than that of Kaplan who leaves his job in 11 days. Rosengren leaves almost immediately.
It is still not known when exactly Kaplan executed his multi-million dollar trades last year which included those in stocks futures and rate funds. The disclosures immediately led to calls from several public interest groups and academics for various reforms. One congressional committee chair has already proposed banning all trading for Fed policymakers.
Fed technocrats have strained to remain apolitical while in office if for no other reason than to safeguard the central bank’s independence. Now that they find themselves blindsided by the multi-million dollar trading on an active basis reported by Dallas Fed’s Kaplan – while the Fed intervened in the markets last year – may have exposed a similar vulnerability.
The realization crystalized by Kaplan’s routine annual disclosures that the rules in place for decades are not adequate reflects on Fed governance overall, prompting Fed Chair Powell’s declaration last week and again in his latest testimony Tuesday that he intends to fix the problem through strong, definitive action.
Powell directly addressed the Fed’s challenge in his testimony Tuesday before the Senate Banking Committee after the panel’s chairman proposed to ban all trading by Fed policymakers, likely to be only the first such legislative proposals of many. Sen. Sherrod Brown’s proposal would mirror some of the restrictions generally imposed on executive branch officials but which Congress has failed to impose on itself.
“This is a blow to the image of the central bank,” Georgia Democrat Sen. Ralph Warnock said in posing his questions on the matter to Powell.
“Our need to sustain the public trust is the essence of our work,” Powell answered. “We want the public to understand we work for all Americans and so we don’t like having these concerns raised. It’s something that’s very, very concerning.”
Powell continued, “As soon as I learned of it, I directed our staff to undertake a review of our practices. We’ve had in place a set or practices around investments and trading and disclosure that seems to have worked for a long time – only it’s clearly, it’s really not working now.
“We understand that and we need to raise, modify our practices and we’re in the process of creating ideas and recommendations for that. That’s one thing we’re doing. We’re also looking carefully at the trading that was done to make sure it’s in compliance with our rules and with the law.”
Warnock then asked if there is a need for changes and Powell answered, “Yes, I’m 100% sure there is a need for those and there will be. I don’t know precisely what they will be but the appearance is just obviously unacceptable, even if that what appears to be the case, these trades were in compliance with the existing rules.
“That just tells you the rules, the practices and the disclosure needs to be improved and that’s what we’re working on. We will rise to this moment and address this forthrightly.”
Senator Warnock’s final observation on the subject was possibly somewhat ominous from the Fed’s point of view, however, offering to work with Chairman Brown on his initiative. “Confidence in the central bank is essential and I look forward to working with you on this issue and also working with Chairman Brown who is working on legislation,” Warnock concluded.”
Powell earlier was also asked another question that questioned the way regional banks operate somewhat independent of the headquarters Board. Did he favor having the regional banks to be forced to reply to Freedom of Information requests on trading and personal finances as are executive branch office holders. Powell said only he would like to reflect on that question before answering.
As Powell knows and his predecessors knew well, several members of Congress are always only too ready to exploit cracks in the Fed’s defense of its treasured monetary policy independence. Cracks once widened, can be very hard to repair.
Yet talking heads, such as CNBC’s Jim Cramer, Tuesday reflected a widespread sentiment that something has gone awry in the abupt resignation under pressure of such a well-respected and often outspoken voice as that of Fed veteran Kaplan. A guest on CNBC, that of Kaplan’s predecessor Richard Fisher, extended a generous assessment that Kaplan has done an even better job at the Dallas post than he did, nevertheless saying his departure was the right decision after Kaplan’s demonstrated poor judgment in maintaining such extensive trading during a crucial execution of Fed market-influencing purchases.
Others during the day pointed out Kaplan’s public stance has been to remove the proverbial punch bowl even faster than has been the Federal Open Market Committee consensus, in effect, arguing against his own portfolio that would presumably benefit from prolonged accommodation.
It is not known at this point whether Chair Powell directly influenced Kaplan’s decision to leave. It is not known if Kaplan agrees that he used bad judgement. It is too soon to know if the episode has damaged Powell’s own reputation to any extent just when White House officials are carefully weighing the plusses and minuses of reappointing him chairman before his term ends at the end of February.
In his post-FOMC meeting news conference last Wednesday Powell addressed his own situation. “I personally owned municipal securities for many years,” he said. “In 2019 I froze it. I’m holding all the securities, my wife and I, to maturity.”
Powell referred to the Fed’s asset purchases which last year came to include municipal securities for the first time as part of the central bank’s reinforcement of the financial system under pressure from the pandemic.
“Munis were thought to be a safe place for a Fed person to invest,” he continued, “because you thought the Fed would never buy municipal securities. Then comes the Covid crisis and I reversed that policy and I did it without hesitating.”
The financial market, he said, “was on the verge of collapse and it was time to go. And we did. We also checked with the office of government ethics who looked at it and said we didn’t have a conflict.”
Powell did not say how large are his family’s municipal securities holdings. ”It was a real coincidence I happened to pre-own these munis,” he said. “ I did it years ago. It was just an unforeseen event. I couldn’t sell them.”
Conflicts of interest have been a minefield of problematic situations in federal government for decades. The Wall Street Journal, for instance, Tuesday coincidentally published an investigative report that said more than 131 federal judges have violated U.S. law and judicial ethics by overseeing court cases involving companies in which their family owned stocks.
The Journal said that because of its disclosures 56 of the judges have directed court clerks to notify parties in 329 lawsuits that they should have recused themse3lves, potentially upending past rulings.
For government officials who leave office, the conflict landscape has been even more problematic and less a focus of regulation or law. When Trump administration Treasury Secretary Steven Mnuchin disclosed he had assembled $2.5 billion in investments in his new private equity firm and that the money was largely from Saudi Arabia contacts nurtured during his time in office, critics said there needs to be regulations that delay or proscribe such practices.
Kaplan, 64, prior to joining the Dallas Fed was senior associate dean of the Harvard Business School and had been a long-time executive and eventually partner during his 23 years at Goldman Sachs. His trades worth at least $1 million each were in 22 stocks and index funds.
His statement of resignation followed by half a day Rosengren’s announcement, and said, “The Federal Reserve is approaching a critical point in our economic recovery as it deliberates the future path of monetary policy,” his statement read. “Unfortunately, the recent focus on my financial disclosure risks becoming a distraction.”
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Contact this reporter: denny@macenews.com
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