Call for insider trading inquiry at US Fed as internal watchdog opens review

Fed vice-chair Richard Clarida and two of the central bank's 12 regional presidents engaged in transactions that have drawn blowback.
Fed vice-chair Richard Clarida and two of the central bank's 12 regional presidents engaged in transactions that have drawn blowback.PHOTO: AFP

WASHINGTON (NYTIMES) - Democratic Senator Elizabeth Warren called on Monday (Oct 4) for an investigation into whether top Federal Reserve officials engaged in insider trading last year, when some bought and sold securities that could have benefited from central bank policy moves.

Ms Warren, a powerful lawmaker who sits on the committee that oversees the Fed, sent a letter to the Securities and Exchange Commission chair Gary Gensler asking him to look into transactions that three central bank officials carried out last year.

Fed vice-chair Richard Clarida and two of the central bank's 12 regional presidents - Mr Robert Kaplan from the Federal Reserve Bank of Dallas and Dr Eric Rosengren from the Federal Reserve Bank of Boston - engaged in transactions that have drawn blowback.

While most of the trades were not unusual for central bank officials, they occurred during a year in which the Fed rolled out a wide-ranging market rescue touching practically every corner of finance. That may have given central bankers unique insight into what might happen next with asset prices.

Ms Warren asked Mr Gensler to "determine if any of these ethically questionable transactions may have violated insider trading rules", adding that the trading reflected "atrocious judgment by these officials, and an attitude that personal profiteering is more important than the American people's confidence in the Fed".

Hours later, the Fed announced that it began discussions last week with its Office of Inspector General to initiate an independent review into whether trades by senior officials complied with both ethics rules and the law. A Fed spokesman said the central bank will accept and take appropriate actions based on the review's findings.

Fed chair Jerome Powell told lawmakers last week that the Fed was looking into the presidents' trades to make sure they complied with central bank ethics rules - but the fact that an outside body is also reviewing the activity conveys an added seriousness around the matter.

There is a reason for the robust response. The trades Fed officials made last year have shaken confidence in a central bank that had been widely celebrated for its decisive response to last year's downturn. They have also been a spark that has reignited longstanding scepticism over whether the Fed, which is charged with overseeing critical parts of Wall Street and which draws many of its officials from the financial industry, serves itself and its friends or the public at large.

Mr Kaplan traded millions of dollars in individual stocks last year, and Dr Rosengren traded in real estate-tied securities when he was warning about problems in that market. Both officials resigned last week amid the furore over their recent financial disclosures, although Dr Rosengren attributed his early retirement to health issues.

Dr Clarida shifted between US$1 million (S$1.36 million) and US$5 million from a broad-based bond fund to broad-based stock funds on Feb 27 last year.

The Fed has said Dr Clarida was carrying out a pre-planned portfolio rebalancing. It declined to comment about when the specific transaction was planned but pointed out that Dr Clarida carried out a similar transaction in 2019.

Holding broad-based investments is typically considered best practice for government officials, and it is not unusual for people to rebalance their portfolios. But the timing of Dr Clarida's transaction - first reported in his disclosures in May - has garnered attention amid the broader concerns about whether the Fed's ethics rules are too lax. That is because it immediately predated a period of aggressive Fed policy action that propped up markets, causing people to question whether Dr Clarida knew what was coming and moved to profit from it.

Mr Powell announced on Feb 28 last year that the Fed was closely watching the fallout from the coronavirus pandemic - the first step in a wide-ranging central bank rescue that would ultimately push up stock prices.

Ms Warren blasted Dr Clarida's 2020 move as inappropriate.

"There is no justifiable ethics or financial rationale for him or any other government official to be involved in these questionable market machinations while having access to nonpublic information and authority over decisions that have extraordinary impacts on markets and the economy," Ms Warren wrote in her letter.