Elizabeth Warren calls for investigation into Fed insider trading
Massachusetts Senator Elizabeth Warren on Monday called for an investigation into whether senior Federal Reserve officials engaged in insider trading in 2020, when some bought and sold securities that could have benefited from the central bank policy changes.
Ms Warren, a powerful lawmaker who sits on the committee that oversees the Fed, sent a letter to Securities and Exchange Commission Chairman Gary Gensler, asking him to review the transactions three central bank officials made in the year last.
Richard H. Clarida, vice president of the Fed, and two of the 12 regional presidents of the central bank – Robert S. Kaplan of the Federal Reserve Bank of Dallas and Eric S. Rosengren of the Federal Reserve Bank of Boston – delivered to transactions that have attracted backfire.
While most of the deals were not unusual for central bank officials, they took place in a year in which the Fed rolled out a massive market rescue program touching virtually every area. of finance. This may have given central bankers a unique insight into what might happen next with asset prices.
Ms Warren asked Mr Gensler to “determine whether any of these ethically questionable transactions may have violated the insider trading rules,” adding that the transaction reflected “atrocious judgment on the part of these officials and an attitude that personal profit is more important than that of the American people. confidence in the Fed.
Hours later, the Fed announced that it had entered into discussions last week with its Office of the Inspector General to initiate an independent review to determine whether transactions by senior officials complied with both the rules of ethics and the law. A Fed spokesperson said the central bank would agree and take appropriate action based on the findings of the review.
Jerome H. Powell, chairman of the Fed, told lawmakers last week that the Fed is reviewing presidents’ transactions to make sure they follow central bank ethics rules – but the fact that a body exterior also examines the activity reflects an additional seriousness. around the subject.
There is a reason for the vigorous response. Transactions by Fed officials last year shook confidence in a central bank that had been widely celebrated for its decisive response to the 2020 slowdown. They were also a spark that rekindled long-held skepticism about whether the Fed, which is tasked with overseeing critical parts of Wall Street and which attracts many of its financial sector officials, is serving itself and its friends or the general public.
Mr. Kaplan traded millions of dollars in individual stocks last year, and Mr. Rosengren traded real estate-related securities when he warned of problems in that market. Both officials resigned last week amid fury over their recent financial disclosures, though Mr Rosengren attributed his early retirement to health concerns.
Mr. Clarida went from $ 1 million to $ 5 million from a broad-based bond fund to broad-based equity funds on February 27, 2020.
The Fed said Mr. Clarida was performing a pre-planned portfolio rebalancing. He declined to comment on when the specific transaction was scheduled, but pointed out that Mr. Clarida made a similar transaction in 2019.
Holding large-scale investments is generally considered best practice for government officials, and it is not unusual for people to rebalance their portfolios. But the timing of Mr. Clarida’s transaction – first reported in his revelations in May – drew attention amid broader concerns about whether the Fed’s ethics rules are too lax. This is because it immediately preceded a period of aggressive political action by the Fed that supported the markets, which made people wonder if Mr. Clarida knew what was to come and had decided to ‘take advantage of it.
Mr Powell announced on February 28, 2020 that the Fed was closely monitoring the fallout from the coronavirus pandemic – the first step in a massive central bank bailout that would eventually push up stock prices.
Ms Warren called Mr Clarida’s 2020 decision inappropriate.
“There is no justifiable ethical or financial justification for him or any other government official to be involved in these dubious market machinations while having access to non-public information and authority over decisions that impact extraordinary in the markets and the economy, ”Ms. Warren wrote in her letter.
The trade activity that occurred among Fed officials in 2020 was not historically abnormal. Mr. Kaplan has traded stocks throughout his tenure. Former Fed Vice Chairman Stanley Fischer bought and sold individual stocks, its disclosures for 2016 have shown, and Fed governors often rebalance their portfolios on a large scale.
But the fact that the transactions took place in a year in which the Fed was so crucial to assets of all kinds fueled calls for new ethical rules at the central bank. The Fed intervened in municipal and corporate debt markets for the first time last year, expanding into areas that may not have been addressed under the bank’s existing restrictions. central.
Mr Powell ordered a review and overhaul of the central bank’s guidelines and practices, which the Fed says are in line with those recommended to government officials generally and in some cases more stringent. Ethics officials have said that given the special and increasingly extensive role the central bank plays in markets, there is likely a need for it to adopt more stringent limits.
The recent outcry over Mr Clarida’s trading in even large and boring funds – and demands to know what he knew when he made the decision to rebalance stocks – underscores why ethical practices probably need to change, a said Norman Eisen, principal investigator. at the Brookings Institution and White House Ethics Advisor to President Barack Obama.
“Due to the extraordinary influence of senior Fed officials in bond and equity markets, these questions are legitimate,” Mr. Eisen said. “This underlines, once again, the need for special rules from the Fed.”
Mrs. Warren announcement last week, she objected to Mr. Powell’s re-appointment to the Fed for a new executive term when his expires early next year. She cited his regulatory background, not ethical issues, as its rationale, calling him a “dangerous man” to have as the head of the central bank.
She noted in her letter Monday that “it is not clear why President Powell has not stopped these activities, which eat away at the confidence and effectiveness of the Fed.”