I’m with Senator Elizabeth Warren in agreeing that the ownership and trading of individual stocks by public officials in such sensitive roles shouldn’t be allowed. In fact, I’m struggling to generate a single argument in favor of letting such potential conflicts of interest arise.
The planned Fed overhaul comes after all 12 regional bank chiefs tendered their annual financial disclosure forms. Dallas Fed President Robert Kaplan revealed he’d bought and sold the iShares Floating-Rate Bond ETF, the value of which is highly sensitive to Fed policy deliberations.
Boston Fed chief Eric Rosengren, who has commented on the risks in commercial real estate, disclosed trades in real estate investment trusts.
What’s astonishing is that current Fed guidelines appear to have sanctioned the deals. Both Fed officials said they did nothing wrong, but have also pledged to offload their holdings by the end of this month — a belated recognition that, at the very least, it’s not a good look to have a portfolio that you could boost with a few public comments.
The regulations governing the personal financial affairs of public officials clearly need tightening. It’s just over a year since Ben Meng resigned as chief investment officer at the California Public Employees’ Retirement System, after approving an investment in a Blackstone Group Inc. fund while he owned a personal stake in the private equity firm.
Calpers has said it may demand that its next CIO, who hasn’t been appointed yet, sell any personal investments — which concedes that there was no existing requirement for officials of the $470 billion pension fund to relinquish their holdings.
In Germany, the finance ministry has had to refurbish its compliance systems for staff after what was perhaps the most egregious recent example of inappropriate stock-market speculation.
German regulator BaFin filed a criminal complaint with prosecutors in Stuttgart earlier this year against a member of its own staff alleging insider trading of Wirecard AG stock.
Wirecard collapsed in mid-2020 after acknowledging that 1.9 billion euros ($2.2 billion) in cash was probably a balance-sheet fiction.
Rather than do its job properly and investigate the firm’s finances, BaFin introduced a ban on short selling of Wirecard’s stock in February 2019, and filed lawsuits against journalists at the Financial Times newspaper who had revealed accounting irregularities at the payments firm.
It’s staggering to think that anyone on the regulator’s payroll might have thought punting Wirecard shares was acceptable.
In Norway, the central bank made Nicolai Tangen sever all ties with Ako Capital LLP as a condition for taking charge of the nation’s $1.4 trillion sovereign wealth fund a year ago. But that only came after pressure from lawmakers who argued that retaining a 43% stake in the $16 billion hedge fund he’d built in London posed a potential conflict of interest.
And yet, as late as March of this year, the central bank’s supervisory board questioned whether the arrangement would allow Tangen to repurchase Ako, prompting a clarification that the sale is irrevocable.
Tangen has said both that running the world’s biggest wealth fund is his dream job, and that he might not have applied for the role if he’d known he’d have to abandon Ako entirely.
Warren, the Democratic senator for Massachusetts, said she’s written to the 12 regional Fed presidents asking them to self-impose a ban on owning individual stocks.
It seems likely — and desirable — that the U.S. central bank will outlaw such trades. Other public institutions should follow suit. Sunlight may be the best disinfectant, but better not to allow any financial grime to accumulate in the first place.
Fed Faces Calls To Remove Officials Over Trades They Made While Setting Policy
Lobby groups Better Markets and Fed Up say Dallas Fed leader Robert Kaplan and Boston Fed leader should lose their jobs.
Two advocacy groups said two senior Federal Reserve officials who traded stocks and other investments while setting monetary policy should lose their jobs, while a former senior Fed adviser said one of the men should be fired and the other should take leave pending an investigation.
Federal Reserve Bank of Dallas President Robert Kaplan Federal Reserve Bank of Boston leader Eric Rosengren actively traded in markets in 2020, a year dominated by major Fed interventions to help save the economy during the coronavirus pandemic, according to financial disclosure forms recently made available by their banks.
The Fed said after the disclosures it would review its rules around trading rules by officials.
Better Markets, a group that pushes for tighter financial regulation; the left-leaning Center for Popular Democracy’s Fed Up campaign; and Andrew Levin, a former top Federal Reserve staff member and now a professor at Dartmouth College, are calling for the Fed to take action against Messrs. Kaplan and Rosengren.
“It’s time for the Fed to do what leaders are supposed to do: Lead by example,” Better Markets president and chief executive officer Dennis Kelleher wrote in a letter sent to Fed Chairman Jerome Powell Tuesday.
Referring to what he called the “pandemic profiteering trading conduct” of Messrs. Kaplan and Rosengren, both should resign or be fired “for having lost the confidence and trust of the American people and, one would think, the Chairman of the U.S. central bank,” Mr. Kelleher said.
Mr. Kelleher said that as a regulator of financial institutions that has weighed in publicly about improving Wall Street culture, the Fed must live by those same standards.
“This is no time for the American people to lose confidence and trust in the Fed, which must be above reproach, not set the lowest bar for ethical and legal conduct,” Mr. Kelleher wrote.
Dartmouth’s Mr. Levin said, “President Rosengren should immediately resign or be removed from office” and “President Kaplan should take administrative leave pending the outcome of an external investigation of his trading activities.” The academic also worked at the central bank as special adviser to the Board on monetary policy strategy and communication from 2010 to 2012.
Mr. Levin said that in the case of Mr. Rosengren, trading securities tied to real estate even as these investments were directly affected by the Fed’s actions to help support the financial sector last year was egregious.
In the case of Mr. Kaplan, more information is needed, Mr. Levin said. The Dallas Fed leader, who worked for two decades at investment bank Goldman Sachs Group Inc. before leaving in 2006, has so far declined to provide full information on when and how much he traded across a wide variety of securities, some of which were in investments directly impacted by Fed policy choices, such as interest-rate and stock-market future funds.
“An external investigation can examine the timing of Kaplan’s stock transactions and determine whether those transactions could have benefited from his access to confidential market-sensitive information,” Mr. Levin said.
Both the Dallas Fed and the Boston Fed have said the trading undertaken by both men was in line with internal bank rules that prevent Fed leaders from owning stocks in banks and from trading around meetings of the Federal Open Market Committee meetings.
The trading by Messrs. Kaplan and Rosengren stood out among Fed officials’ disclosure forms, which showed varying levels of personal wealth and asset holdings.
Mr. Kaplan’s trading, which totaled many millions of dollars going back to when he started at the bank in 2015, dwarfed that of Mr. Rosengren, who has spent most of his working life at the Fed.
Some Fed watchers say the trading raises questions about who policy was designed to help. “There are a lot of reasons that working people are right to wonder if the Fed has their best interests in mind,” said Benjamin Dulchin, campaign director for Fed Up.
“These trades are only the most obvious reason, but it makes it harder for the Fed to do its job,” Mr. Dulchin said, adding if he were Mr. Kaplan or Mr. Rosengren, “I would resign.”
The Dallas and Boston Fed leaders said after the disclosure of their trading that they would sell all their stock holdings and move the money into cash or investment funds by the end of September.
Meanwhile, the Federal Reserve Board said it would review the rules that govern senior officials’ financial activities and make changes as it saw fit. A Fed representative cited this review in response to questions about the Better Markets letter.
“We operate under rules about what we’re allowed to trade and when we’re allowed to trade it, precisely because we don’t want to have the appearance of, you know, looking like we’re trading on inside information,” Cleveland Fed leader Loretta Mester told reporters on Sept. 10. When it comes to updating the Fed’s internal rules, she said “I wouldn’t have a problem” with taking a fresh look at what is allowed.
But the Better Markets group says the Fed’s plan is insufficient. In a letter to Mr. Powell sent on Sunday, before the group said the two officials should be fired, Better Markets called on the Fed for full disclosure of all aspects of trading by officials and senior staff and said the Justice Department, the Securities and Exchange Commission and the Fed’s Inspector General all need to “conduct thorough investigations of all such trading to determine whether any laws were broken.”
U.S. Audit Watchdog Adopts Rule To Help Implement New Trading Ban
Move follows passage of law banning foreign companies from the country’s exchanges if their auditors haven’t been inspected by American regulators.
The Public Company Accounting Oversight Board on Wednesday adopted a new framework that would help it implement a law banning foreign companies from U.S. exchanges if their auditors haven’t been inspected by American regulators.
The U.S. audit watchdog, which regulates the audits of public companies, plans to use the framework to decide whether it can investigate or review a public audit firm in certain jurisdictions, such as China or Hong Kong.
The Securities and Exchange Commission, which oversees the PCAOB, could then require additional disclosures from the companies audited by those firms and take other actions, including issuing a trading ban.
The framework is set to aid the PCAOB in carrying out the Holding Foreign Companies Accountable Act, a law prohibiting certain foreign businesses from U.S. exchanges signed by former President Trump in December. It applies to cases in which the work of overseas auditors hasn’t been inspected by American authorities for three consecutive years.
The PCAOB inspects more than 200 non-U. S. audit firms in more than 40 jurisdictions every three years, but it can’t do so in China or Hong Kong. The Chinese government has for years resisted inspections of Chinese-company audits. The PCAOB can’t review audit documents based in China without approval from Chinese authorities.
The SEC intends to delist roughly 270 Chinese companies listed on U.S. exchanges by early 2024 unless they allow their auditors to be inspected, Chairman Gary Gensler said last week.
“I don’t believe China-related companies currently are providing adequate information about the risks they face—and thus the risks that American investors in these businesses face,” Mr. Gensler wrote in a Wall Street Journal op-ed.
China, meanwhile, is cracking down on certain companies as it seeks to reduce income inequality and trim corporate debt. Regulators over the past year have tightened rules on technology firms, real-estate developers and other sectors.
The country’s stock regulator is planning to ban companies with large amounts of sensitive consumer data from going public in the U.S., The Wall Street Journal reported last month.
The PCAOB said it would make assessments of audit firms based on factors such as timely access to certain documents and personnel and its ability to investigate potential violations of laws or standards.
That ability could hinge on, for example, a foreign government’s position on whether the watchdog can decide what potential violations it will investigate, the PCAOB said.
The board could determine its ability to inspect or review audit firms at a jurisdiction-wide level, affecting any firms based there.
It could also make such a determination about a particular audit firm—for example, if a foreign authority obstructs an inspection of only that firm as opposed to all firms in the jurisdiction.
Auditors, investors and academics, in letters to the PCAOB, were largely supportive of the proposal and the U.S. law. The rule benefits investors because it improves transparency and reduces regulatory uncertainty, said Jeff Mahoney, general counsel for the Council of Institutional Investors, which represents pension funds and other large money managers.
Company delistings could cause some investors to suffer losses and hurt U.S. capital markets that no longer serve as trading venues for companies from a major economy such as China, Mr. Mahoney said. Still, the law is necessary, he said.
“The alternative of letting one country ignore our federal securities laws is worse for investors and the capital markets in the long run,” he said.
The framework is set to go into effect upon SEC approval, the PCAOB said.
The U.S. Senate in June unanimously passed a bill, introduced by Sen. John Kennedy (R., La.), that would reduce the deadline for violating the trading ban to two consecutive years from three. The House has not yet voted on the bill.
Powell Says Fed Is Taking Questions About Officials’ Trading Very Seriously
‘No one on the FOMC is happy to be—to be in this situation,’ the Fed chairman said.
Federal Reserve Chairman Jerome Powell declined to voice clear support for the leaders of the Dallas and Boston Fed banks when asked about their recently disclosed stock trading and pledged to change the rules that allowed such market activity by policy makers.
Mr. Powell was responding to questions about stock trading by Dallas Fed leader Robert Kaplan and Boston Fed chief Eric Rosengren that was disclosed by their banks. The officials last year actively traded stocks and other investments, some of which are sensitive to changes in monetary policy, while helping to set central bank policy.
Mr. Kaplan’s trading totaled many millions of dollars. Mr. Rosengren’s was more modest but included housing-related investments that can be affected by central bank actions.
In a press conference after the Fed’s policy meeting, Mr. Powell was asked if he had confidence in the two regional Fed leaders to stay in their jobs.
“In terms of having confidence and that sort of thing, I think no one is happy,” Mr. Powell said. “No one on the [Federal Open Market Committee] is happy to be—to be in this situation, to be having these questions raised. It’s something we take very, very seriously.”
The Fed has said it is reviewing its ethics rules and Mr. Powell on Wednesday said, “This is an important moment for the Fed and I’m determined that we will rise to the moment and can handle it in ways that will stand up over time.”
He added, “I’m very reluctant to get ahead of the process and speculate…When we have things to announce we’ll go ahead and do that.”
All 12 regional Fed bank leaders were approved earlier this year for new five-year terms. Fed governor Lael Brainard, who ran the process, said at the time it was rigorous.
But Mr. Powell on Wednesday said the financial disclosure forms weren’t on his radar and explained that the forms didn’t play a role in deciding then whether the officials would stay in their positions, as they all did.
“I was not aware of the specifics of what they were doing,” Mr. Powell said. Taking a look at the financial disclosure statements “has not been part of the process,” which instead has focused on broader leadership questions. “I wouldn’t blame the people who conduct that review” for being unaware of the trading, he said.
Last week, the Fed said it would undertake a formal review of the ethics rules that appeared to green light the regional presidents’ trading.
While those codes advise senior leaders to avoid activities that would suggest any conflict of interest, they largely prohibited officials from buying bank stocks and limited trading around Federal Open Market Committee dates.
“We understand very well that the trust of the American people is essential for us to effectively carry out our mission, and that’s why I directed the Fed to begin a comprehensive review of the ethics rules around permissible financial holdings and activity by Fed officials,” Mr. Powell said Wednesday.
Messrs. Kaplan and Rosengren have defended their actions as consistent with their respective bank’s code of conduct policies, but said they would sell off individual stocks they own to avoid any appearance of a conflict of interest.
They have turned down multiple requests for interviews to discuss their trading activity.
While the Fed board in Washington is part of the government, the 12 regional banks exist somewhere between public and private spaces.
While overseen by the Fed, they are owned by member banks, have boards composed of private citizens, and their leaders are paid substantially more than Fed governors.
The regional Fed banks collect economic intelligence and their leaders participate in setting monetary policy. Additionally, the New York Fed implements monetary policy, and other regional Fed banks, like Boston, have played key roles in operating emergency-lending efforts.
The leaders of the banks are privy to inside information on monetary policy as a result of their work.
Boston Fed Leader Rosengren Announces Early Retirement Amid Trading Controversy
Eric Rosengren, who will retire Sept. 30 citing health reasons, is one of two central bank officials in the spotlight over trades made while setting monetary policy.
Federal Reserve Bank of Boston President Eric Rosengren will retire Thursday, about nine months early, citing health reasons, as the veteran policy maker was navigating a controversy over his trading in the financial markets.
Mr. Rosengren, 64 years old, said in a statement released by the Boston Fed that he was leaving as he had qualified for a kidney transplant to deal with a long-running condition.
The move accelerates the timing of Mr. Rosengren’s mandatory retirement from the bank next year after 35 years of service at the institution. In most cases, regional Fed leaders must retire at 65, and Mr. Rosengren was due to leave the bank next June.
His retirement follows the recent disclosure that Mr. Rosengren traded stocks and other investments while also helping to set monetary policy. Mr. Rosengren’s trading, along with more significant trading by Dallas Fed leader Robert Kaplan, alarmed some central bank watchers.
Recently disclosed information from the Boston Fed showed that Mr. Rosengren, who would have held a voting role on the rate-setting Federal Open Market Committee next year, had traded stocks and other investments related to the real-estate industry last year.
Disclosure forms for Mr. Kaplan showed many millions of dollars in trading in stocks and investments such as stock market futures and interest rate funds taking place since he became leader of the Dallas Fed in 2015.
While central bank disclosure forms require officials to provide dates for trading, Mr. Kaplan’s form referred to “multiple” dates and his bank has declined to provide any transaction dates.
Messrs. Rosengren and Kaplan said that while their trading was consistent with internal central bank rules, to avoid any conflicts of interest they would sell their stockholdings and move the money into cash or diversified mutual funds.
The Fed said recently that it would undergo a review of its ethics rules and make changes as needed.
The central bank nevertheless faced calls for the two men to step down. Critics say the trading raised questions whether the men were setting monetary policy with the nation’s well-being in mind, or were acting for personal profit.
While the regional Fed bank ethics rules prohibited ownership of banks stocks and limited senior leaders’ trading around FOMC dates, they also called on central bankers to avoid even the whiff of impropriety with their investing activity.
After last week’s FOMC meeting, Federal Reserve Chairman Jerome Powell declined to voice clear support for the two Fed leaders. “No one on the [FOMC] is happy to be—to be in this situation, to be having these questions raised. It’s something we take very, very seriously,” Mr. Powell said then.
In the Boston Fed statement announcing Mr. Rosengren’s retirement, Mr. Powell said “Eric has distinguished himself time and again during more than three decades of dedicated public service in the Federal Reserve System,” adding that “he led the Fed’s work in managing several emergency lending facilities in two separate periods of economic crisis.”
The statement said Mr. Rosengren “hopes to improve his health condition and eventually be able to explore areas of professional interest and contribution, in the future.”
A search for Mr. Rosengren’s successor is under way, the statement said.
Federal Reserve Bank of Dallas President Robert Kaplan will retire on Oct. 8 in the wake of embarrassing disclosures earlier this month about unusual trading activity.
“Unfortunately, the recent focus on my financial disclosure risks becoming a distraction,” Kaplan said in a statement emailed by the Dallas Fed. “For that reason, I have decided to retire.”
His announcement came hours after the Boston Fed said Eric Rosengren will retire on Thursday.
Rosengren Exit May Give Fed Board More Sway in Picking Successor
Eric Rosengren’s announcement Monday that he’ll step down early as president of the Federal Reserve Bank of Boston will bring intense scrutiny to the search for his replacement, and may shift more influence in that process to the central bank’s Washington leadership.
The Federal Reserve Board “will play a much greater role in this just because of the reputational risk on both diversity and ethics,” said Derek Tang, an economist at LH Meyer, a policy analysis firm in Washington.
Rosengren, 64, said Monday he’ll depart Sept. 30, more than nine months ahead of his mandatory retirement at age 65. He said the decision was tied to health concerns, revealing that he had qualified for a kidney transplant in June 2020.
The announcement followed embarrassing disclosures earlier in September about unusual trading activity last year by Rosengren and Dallas Fed chief Robert Kaplan. The transactions didn’t violate the Fed’s ethics code that prohibits trades during certain time periods and bars holdings in regulated financial institutions.
Still, they prompted Fed Chair Jerome Powell to initiate a review of those rules, as the purchases occurred at a time when the Fed was buying multiple assets to support the economy.
Rosengren and Kaplan have each pledged to divest of individual stocks and other controversial holdings by Sept. 30.
Boston’s board chair, Christina Paxson, the president of Brown University, saluted Rosengren’s leadership over the past 14 years in a statement released by the Boston Fed. Regarding the trading issue, however, she hasn’t responded to requests for comment via telephone and email. Directors of the Dallas Fed declined to comment, according to a bank spokesman.
Paxson will be leading the search for Rosengren’s successor. Unlike members of the Board of Governors, who are nominated by the U.S. president and confirmed by the Senate, regional Fed presidents are selected by that bank’s board of directors.
The boards typically include regional business leaders and members from the non-profit sector. Board members who work for banks supervised by the Fed are excluded from the process of selecting new presidents.
Boston Fed spokesman Joel Werkema didn’t immediately respond to questions about the search and selection process.
In recent years the appointments of new regional Fed presidents have attracted increasing scrutiny over whether they add to the diversity of the central bank’s top ranks.
Raphael Bostic, the Atlanta Fed chief, became the first Black regional president in 2017, more than 100 years after the system’s establishment in 1913. Among the 12 current regional presidents, just three are women and two represent ethnic or racial minorities.
The growing pressure has, in turn, prompted the Fed’s Board of Governors to become more deeply engaged in the search and selection process. In the wake of the trading scandal, that pressure may only increase.
The governor who will act as liasion with the Boston board during its search is Lael Brainard. She’s expected to push hard for more diversity.
“Rosengren’s resignation is an opportunity to get a more diverse set of views on the Federal Open Market Committee,” said Julia Coronado, president of MacroPolicy Perspectives. “It really should be a priority.”
The most recent presidential selections have attracted varying levels of criticism. While Bostic’s appointment in 2017 and Mary Daly’s selection in San Francisco in 2018 were welcomed, four other spots went to white men, three of whom were Fed insiders.
In 2015, the Philadelphia board picked one of its own members, Patrick Harker, for the top job. Also in 2015 Dallas chose Kaplan, a former Goldman Sachs executive. In 2018, Richmond tapped former McKinsey consultant Thomas Barkin and New York chose John Williams, then already president of the San Francisco Fed.
During its search, the New York Fed board claimed to put an emphasis on diversity and inclusion, said Claudia Sahm, a former Fed economist and senior fellow at the Jain Family Institute.
“Where did they end up?” she added. “With a white guy who grew up inside the Fed.”
Rosengren’s early retirement means there are now five seats on the Fed’s policy-setting committee that might see new occupants in the coming months. The Federal Open Market Committee consists of the seven-seat Washington-based Board of Governors and 12 regional bank presidents.
Of those held by Washington-based governors, there is one vacancy. Another will open when Vice Chairman Richard Clarida’s term as a governor expires at the end of January.
Vice Chair for Supervision Randal Quarles will see his leadership post expire in October and he is expected by many to depart the Fed when a successor is chosen. Finally, Powell’s post as chair will open in February and President Joe Biden hasn’t indicated whether he’ll reappoint him.
With Quarles, Clarida and Rosengren all viewed as centrist or moderately hawkish, their replacements could swing the committee somewhat more in favor of officials who would like to take their time in tightening monetary policy.
In their most recent set of interest-rate projections, the FOMC was evenly split between those who expect rates to stay near zero through the end of next year, and those who expect at least one hike before the end of 2022.
Redditors Are Right About The Unfairness Of The Market
It’s been a bad week for capitalism, with corporate insiders, judges and policy makers all playing fast and loose with the rules about personal investments.
A rallying cry of the day traders that hang out in Reddit Inc.’s stock market forums is that only by joining forces can they prosper in an environment inherently hostile to small investors. Recent events suggest their suspicion that the decks are stacked against them is justified – which is a terrible look for capitalism.
Daniel Taylor, a professor at the Wharton School, has amassed evidence of widespread insider trading by company executives, Bloomberg Businessweek reported this week. An investigation by the Wall Street Journal found that more than 130 U.S. federal judges failed to recuse themselves from 685 court cases involving companies in which they or their families had investments. And at the Federal Reserve, two policymakers have resigned amid a probe into their personal trading activity.
Wharton professor Taylor’s research has shown that corporate insiders consistently dumped holdings before official legal probes hurt their company’s shares, Businessweek reported. They also increased their buying and selling in the gaps between audit reports being produced for company boards and being made publicly available, and exploited rules governing scheduled trading schedules for profit.
His analysis suggests the existing regulations governing insider trading are inadequate. It also implies that the Securities and Exchange Commission is asleep at the wheel: The watchdog instigated only 33 insider trading cases last year and just 32 in 2019, the fewest in more than two decades, according to Businessweek.
Since 1974, federal law has explicitly prohibited U.S. judges from overseeing cases in which they or their immediate family have a “legal or equitable interest, however small,” the Journal reported earlier this week. But the newspaper found that in two-thirds of the cases in which judiciary members had a stake, the rulings would have benefited their finances.
At the U.S. central bank, Boston Fed President Eric Rosengren and Dallas Fed chief Robert Kaplan both resigned within hours of each other on Monday. Both had revealed questionable investing activity in their annual financial disclosures.
And while they said the trades were within the central bank’s rules, both are being scrutinized further. “We’re looking carefully at the trading that was done to make sure that it’s in compliance with our rules and with the law,” Fed Chairman Jerome Powell told the Senate Banking Committee.
In light of those embarrassing events in the U.S., you’d hope that every central bank in the world is currently getting busy reviewing the protocols governing what policy makers are allowed to do with their personal portfolios while in office.
You’d also hope that every central banker in the world is examining their investment activities and tappity-tapping a resignation letter if their pursuit of personal profit is at odds with the probity of their position.
Capitalism is still tarnished by the aftershocks of the global financial crisis, when the risks taken by private capital had to be bailed out by public funds.
And the growing prevalence of the fastest-growing companies staying off public markets and funding their expansion instead with private capital keeps them out of the portfolios of retail buyers, further stoking suspicion that the covenant between capitalism and society is asymmetrical and biased against individual investors.
When corporate executives, judges and policy makers line their own pockets by either bending or breaking rules designed to avoid even the appearance of impropriety, they do a disservice to society as a whole. “Most Americans today believe the stock market is rigged, and they’re right,” Wharton’s Taylor told Businessweek.
Sure, public officials have the same right to set aside income for their retirement or to pay school fees or even to buy sport cars or boats. But they can achieve those goals by putting their money into blind trusts or index funds or other financial products that don’t involve them selecting specific individual stocks of companies. Leave day trading to the day traders.
Federal Reserve Vice Chair Richard Clarida Traded Into Stocks On Eve of Powell Pandemic Statement
Federal Reserve Vice Chair Richard Clarida traded between $1 million and $5 million out of a bond fund into stock funds one day before Chair Jerome Powell issued a statement flagging possible policy action as the pandemic worsened, his 2020 financial disclosures show.
Clarida’s trades, described in forms filed with the government ethics office, show the shifting of the funds out of a Pimco bond fund on Feb. 27, 2020, and on the same day buying the Pimco StocksPlus Fund and the iShares MSCI USA Min Vol Factor exchange-traded fund in similar dollar ranges. For the year, he listed five transactions.
The following day on Feb. 28, a Friday, at 2:30 p.m., Powell took the unusual step of releasing a statement saying the virus poses “evolving risks to economic activity.” In the same statement, Powell said the Fed was “closely monitoring developments and their implications for the economic outlook.”
The Fed announced a half percentage-point rate cut on March 3 following an emergency meeting of the Federal Open Market Committee.
“Vice Chair Clarida’s financial disclosure for 2020 shows transactions that represent a pre-planned rebalancing to his accounts,” a Fed spokesman who was speaking on behalf of the vice chair said. “The transactions were executed prior to his involvement in deliberations on Federal Reserve actions to respond to the emergence of the coronavirus and not during a blackout period. The selected funds were chosen with the prior approval of the Board’s ethics official.”
The transactions are likely to further heighten scrutiny of the ethics rules and governance of the U.S. central bank after two regional Fed chiefs announced their departures following revelations about their trading activity last year. One of the presidents, Eric Rosengren of Boston, said his resignation was due to a serious health condition.
Clarida, a former executive at Pacific Investment Management Company LLC, was visiting faculty and students at Yale University in New Haven, Connecticut, the day of the trading, and not in his office in Washington. His calendar for the month shows a single phone call with a Board member on Feb. 27 at 4:45 p.m. after the market close, as well as numerous meetings with Fed staff on prior days.
The Fed spells out clear guidelines for trading activity by policy makers. Its Voluntary Guide to Conduct for Senior Officials says “they should carefully avoid engaging in any financial transaction the timing of which could create the appearance of acting on inside information concerning Federal Reserve deliberations and actions.”
It also says that they should avoid dealings that might “convey even an appearance of conflict between their personal interests, the interests of the system, and the public interest.”
February 2020 was a time of extreme moves in financial markets as investors reacted to the threat of the global spread of Covid-19. Stocks fell steeply and bond markets were in a powerful rally.
“The pandemic was spreading quickly and the economic outlook was evolving rapidly. That was not the appropriate time for top Fed officials to be making multi-million dollar changes to their portfolios,” said Andrew Levin, a Dartmouth College professor and former special advisor to the Fed’s Board. “The Fed should welcome an external review of all financial transactions made by Federal Reserve Board members last year.”