Disclosures report that at least two of the US Federal Reserve’s 12 regional bank presidents (Kaplan and Rosengren) used inside knowledge of central bank policy decisions to enrich themselves through millions of dollars in individual stock trades since 2020. The profits were on top of the $183,000 average annual salary received (2019 number).
After public criticism from a few high-profile commentators, the offending actors issued statements saying they would sell all of their individual stock holdings by the end of the month to avoid “even the appearance of any conflict of interest.” So far, there is no requirement that they step down from their positions, disgorge the millions in profits gained or stop trading index funds that benefit from Fed policies intentionally aimed at boosting equity valuations.
Current Fed Chair Jerome Powell is widely expected to be reappointed by the Biden administration this month. “Private Equity” Powell is a former investment banker and partner at private equity firm Carlyle Group. According to his 2019 financial disclosure, Powell’s net worth was $55 million with much of his capital with Goldman Sachs (a bank the Fed is supposed to supervise) and BlackRock in their exchange-traded funds. In 2020, BlackRock was selected by Powell’s Federal Reserve to buy some $750 billion in bonds on behalf of the Fed (with taxpayer money) as well as buy shares in its own junk bond ETF. See more details from Wall Street on Parade in Fed Chair Powell Has Upwards of $11.6 million invested with BlackRock, the firm that will manage a $750 billion corporate bond bailout program for the Fed.
On November 13, 2019, testimony before Congress, Chair Powell said: “Congress has given us an important degree of independence so that we can effectively pursue our statutory goals based on facts and objective analysis. We appreciate that our independence brings with it an obligation for transparency and accountability.”
Clearly, Federal Reserve members interpret the principle of Fed independence as them being free from government influence with no corresponding responsibility to remain arm’s length and unbiased in their policy decisions. This indefensible interpretation flies in the face of centuries of jurisprudence around public duty, principles of equity, and codes of conduct for other politically appointed adjudicators.
Here is an excerpt from Ethical Principles for Judges:
Given the independence accorded judges, they share collective responsibility to promote high standards of conduct. The rule of law and the independence of the judiciary depend primarily upon public confidence…Only by maintaining high standards of conduct will the judiciary (1) continue to warrant the public confidence on which deference to judicial rulings depends, and (2) be able to exercise its own independence in its judgements and rulings. In short, judges should demonstrate and promote high standards of judicial conduct as one element of assuring the independence of the judiciary.
…In general, a judge should not preside over a case in which he or she has a financial or property interest that could be affected by its outcome or in which the judge’s interest would give rise in a reasonable, fair-minded and informed person, to reasoned suspicion that the judge would not act impartially. This general rule applies whether the interest is itself the subject matter of the controversy or where the outcome of the case could substantially affect the value of any interest or property owned by the judge, the judge’s family or close associates.
The Federal Reserve Codes of Conduct for their employees is more specific:
“It is indispensable to the proper functioning of, and the maintenance of public confidence in, the Federal Reserve Bank of Richmond (“Bank”) and the Federal Reserve System (“System”) that every employee perform his or her duties with honesty, integrity and impartiality, and without improper preferential treatment of any person. Each employee has a responsibility to the Bank and to the System to avoid conduct which places private gain above his or her duties to the Bank, which gives rise to an actual or apparent conflict of interest, or which might result in a question being raised regarding the independence of the employee’s judgment or the employee’s ability to perform the duties of his or her position satisfactorily.“
There is no question that these rules should bar central bank insiders and other government policymakers from trading securities for their own accounts. At a minimum, if they want the job, salary and opportunities it affords after office, they should be required to place any financial assets in a blind trust during their engagement. It is not that we need new rules. But as former 25- year SEC prosecutor James Kidney has noted, “If you have regulations and don’t enforce them, who gives a damn?”
It was John F. Kennedy who said, “We, the people, are the boss, and we will get the kind of political leadership, be it good or bad, that we demand and deserve.”
It’s down to us.
