By Pam Martens and Russ Martens: July 15, 2022 ~

Yesterday afternoon, Mark Bialek, the Inspector General of the Federal Reserve, released a memorandum clearing Fed Chair Jerome Powell and former Fed Vice Chair Richard Clarida of wrongdoing in the trading scandal that has engulfed multiple officials of the Federal Reserve.

Curiously, that memorandum came just one day after Senator Sherrod Brown, Chair of the Senate Banking Committee, and four other Democratic colleagues in the Senate, sent Powell a letter about the trading scandal. The letter suggested that Powell was hampering the investigation and took him to task for failing to put the force of law and a chain of command in place for the Fed’s newly upgraded trading restrictions.

Even more curious, the memorandum from the Fed’s Inspector General came just hours after Wall Street On Parade reported on Senator Brown’s letter and called attention to the fact that the trading scandal news broke more than 10 months ago and the public had been denied any findings from an investigation. We also called on the Inspector General to stop stalling and refer the matter to the criminal division of the U.S. Department of Justice.

The memorandum from the Inspector General makes clear that its investigation of former Dallas Fed President Robert Kaplan, former Boston Fed President Eric Rosengren, and potentially other senior officials at the regional Fed banks, is ongoing. Bialek writes in his memorandum:

“As stated above, our investigation of the senior Reserve Bank officials is ongoing. Because ongoing investigations are highly sensitive, and because the scopes of the two investigations are interrelated, we will provide a detailed analysis of both our investigations at the conclusion of our review regarding the senior Reserve Bank officials.

“We are also conducting an evaluation of the design and effectiveness of the Board’s new investment and trading rules as well as the Board’s and the Reserve Banks’ approach to monitoring personal investment and trading activities for possible conflicts of interest. We will notify you once our ongoing evaluation is completed.”

We were immediately struck by the phrase “the scopes of the two investigations are interrelated.” What could be interrelated between the trading of a Fed bank president in Boston and another Fed bank president 1700 miles away in Dallas?

One possible interconnecting link comes from our prior reporting that both Kaplan and Rosengren appeared to have had ongoing financial relationships with megabanks that are regulated by the Fed: Kaplan with Goldman Sachs and Rosengren with Citigroup’s Citibank.

Kaplan had previously worked for Goldman Sachs for 22 years, rising to the rank of Vice Chair. Wall Street On Parade asked Goldman Sachs if they were conducting the trading for Kaplan while he was President of the Dallas Fed and they refused to answer that very simple question.

Goldman Sach’s unwillingness to provide a forthright answer is problematic on multiple fronts. First, all of the Fed’s regional bank presidents are allowed to sit in on FOMC meetings, even when they are not voting members, thus having access to insider information. Kaplan was a voting member in 2020 – a year in which the Fed initiated a panoply of bailouts and Kaplan was making over $1 million trades in individual stocks as well as S&P 500 index futures. Kaplan was required to provide the dates of those trades on his financial disclosure forms but failed to do so.

Goldman Sachs has a large and sophisticated compliance department. If Kaplan was trading at Goldman Sachs, its compliance department should have had his account flagged as a potential source of insider information. No properly functioning compliance department on Wall Street would have allowed such a man to be trading in and out of S&P 500 futures contracts in lots of more than $1 million – or any size lots for that matter. (S&P 500 futures are used by speculators to make highly leveraged, directional bets on the market. S&P 500 futures extend the trading day to almost 24/7 from Sunday evening to Friday night.)

On September 27, 2020, the date that the Dallas Fed announced that Kaplan would be retiring (in the midst of the trading scandal), its Board Chairman at the time, Greg Armstrong, stated this in a press release: “Upon joining the Bank, Rob systematically sold all of his personal holdings related to financial institutions over which the Federal Reserve had regulatory oversight or were otherwise restricted. Rob also conducted his investment activities in accordance with the rules and policies of the Federal Reserve System.”

Neither of those statements are true. Kaplan continued to show holdings of proprietary investment products from “GS,” short for Goldman Sachs, on his financial disclosure statements. In addition, the type of trading done by Kaplan appears to be expressly prohibited by the Code of Conduct of the Dallas Fed. Appendix A on “Disqualifying Interests” of the Code of Conduct reads as follows:

“De minimis exemption for a matter of general applicability. An employee may participate in a particular matter of general applicability, such as rulemaking, where the disqualifying financial interest arises from ownership by the employee, his or her spouse or minor children of securities issued by one or more entities affected by the matter, if:

“(1) the securities are publicly traded, or are municipal securities, the market value of which does not exceed; (a) $25,000 in any one such entity; and (b) $50,000 in all affected entities;

“or (2) the securities are long-term federal government securities, the market value of which does not exceed $50,000.”

There was nothing de minimis about Kaplan’s trading of individual stocks. According to his financial disclosure form for 2020, when Kaplan was a voting member of the monetary-policy setting FOMC Committee of the Fed, Kaplan made “multiple” purchases and sells of greater than $1 million per transaction in 11 individual stocks. Three of those were interest-rate sensitive Big Tech stocks (Amazon, Apple and Facebook) that rose between 75 percent to 90 percent from their March 2020 lows, in no small part because of the interest rate cuts and other interventions of the Fed in 2020. In addition, Kaplan was trading in and out of S&P 500 futures in transactions of “over $1 million.”

Former Boston Fed President Eric Rosengren, who stepped down on the same day as Kaplan last year, had a joint trading account with his wife. According to his financial disclosure form, his wife had a $150,000 to $500,000 “Secured Loan for Investment” with Citigroup’s federally-insured bank, Citibank.

Citigroup is a Fed-supervised entity and received the largest bailout in U.S. history from December 2007 through June of 2010. That included $2.5 trillion in cumulative loans from the Fed according to the audit done by Congressional mandate by the Government Accountability Office. The Fed fought for more than two years in federal court to prevent that information from becoming public.

Rosengren’s financial disclosure form shows that all 68 of his purchases and sells in individual stocks and REITs (Real Estate Investment Trusts) in 2020 occurred in his joint account with his spouse.

After the Fed’s Inspector General released his memorandum yesterday afternoon, Senator Elizabeth Warren, who has been persistent in demanding answers from the Fed about the trading scandal, posted a Tweet with this statement: “The Inspector General found clear evidence of financial activity by Fed officials that wasn’t allowed or disclosed. This behavior by top economic policymakers shouldn’t be swept under the rug. We need accountability & stronger ethics rules to end conflicts of interest at the Fed.”