By Pam Martens and Russ Martens: May 16, 2023 ~
The pileup of conflicts of interests, ethical lapses, and overall moral turpitude at the Federal Reserve have resulted in a recent Gallup poll showing that confidence in the Federal Reserve Chair (currently Jerome Powell) has reached the lowest point in two decades of Gallup polling on this topic. Americans who have “a great deal” or “a fair amount” of confidence in the Fed Chair stands at just 36 percent according to the poll.
Tomorrow, the Senate Banking’s Subcommittee on Economic Policy plans to confront the ethically-challenged structure of the Fed head on. It is a given that there will be some fireworks during this hearing because the Chair of this Subcommittee is Senator Elizabeth Warren, who has labeled Fed Chair Powell “a dangerous man” and called out a “culture of corruption” at the Fed last August. (Warren, a former Harvard Law professor, has more than ample grounds to make these charges.)
While Powell will not appear as a witness at the hearing, the man in charge of investigating misconduct by Fed officials will. That man is the Fed’s Inspector General, Mark Bialek, whose own office deserves ethical scrutiny.
Unlike the Inspector General of the U.S. Department of Justice, as well as more than 30 other Federal agencies, the Inspector General of the Federal Reserve is not nominated by the President of the United States and confirmed by the U.S. Senate. Instead, the Inspector General of the Federal Reserve is appointed by the “head” of the Federal Reserve Board of Governors; he reports to the Fed Board of Governors; and he can be terminated by the Fed’s Board of Governors with a two-thirds vote.
Despite that clear lack of independence, on October 4, 2021, Powell referred the worst trading scandal in the then 108-year history of the Fed to Bialek, despite demands from watchdog groups for an insider trading investigation by the Justice Department and/or the Securities and Exchange Commission.
It took Bialek just nine months to clear Powell and former Fed Vice Chair Richard Clarida of violating “the laws, rules, regulations, or policies” while Bialek has remained mum for the past 19 months on the biggest suspect in the trading scandal, former Dallas Fed President Robert Kaplan. (See our reports: Robert Kaplan Was Trading Like a Hedge Fund Kingpin for Five Years while President of the Dallas Fed; a Dozen Legal Safeguards Failed to Stop Him and Dallas Fed President Kaplan Was Making Bold, Market-Moving Statements to Media During 2020 Crisis; the Same Year He Traded Tens of Millions of Dollars in Stocks and S&P 500 Futures.)
Bialek will appear as the sole witness on the first panel at this hearing. The second panel will have the following witnesses: Dr. Peter Conti-Brown, Associate Professor of Financial Regulation, Associate Professor of Legal Studies and Business Ethics at The Wharton School of the University of Pennsylvania; Dr. Paul H. Kupiec, Senior Fellow, American Enterprise Institute; and Ms. Mayra Rodríguez Valladares, Managing Principal, MRV Associates.
The Senate Banking Committee has been aware of grave ethical issues at the Fed for many years. In November 2014, its Subcommittee on Financial Institutions and Consumer Protection put then New York Fed President William Dudley in the witness seat after internal tape recordings at the New York Fed were released, showing a lap dog regulator afraid to take on a powerful Wall Street firm, Goldman Sachs.
The tapes were made by Carmen Segarra, a lawyer and former bank examiner at the New York Fed, a deeply-conflicted and bizarrely-structured regulator of the mega banks on Wall Street, which also operates two trading floors (one in New York and one in Chicago) and trades with the same Wall Street banks that it regulates. The New York Fed is, literally, owned by some of the biggest Wall Street banks and serially in charge of bailing them out. (See These Are the Banks that Own the New York Fed and Its Money Button.)
Segarra had charged in a federal lawsuit filed in October 2013 that she was told to change her negative examination of Goldman Sachs by colleagues at the New York Fed, who also obstructed and interfered with her investigation. According to her lawsuit, when she refused to alter her findings, she was terminated in retaliation and escorted from the Fed premises.
After having her lawsuit tossed by a Judge whose husband was representing Goldman Sachs, Segarra turned over her 46 hours of tape recordings to ProPublica’s Jake Bernstein and public radio’s This American Life, creating a media frenzy.
For more than a decade, Wall Street On Parade has written about a raft of conflicts of interest at the New York Fed. During 2007 and 2008, as Citigroup entered an intractable death spiral from off balance sheet debt bombs – in no small part because of the lack of proper supervision by the New York Fed — its President at the time, Tim Geithner, had been hobnobbing with Citi execs over 29 breakfasts, lunches, dinners and other meetings, according to his daily calendars.
On January 25, 2007, Geithner hosted former Citigroup Chairman and CEO, Sandy Weill, to lunch at the New York Fed. According to Geithner’s appointment calendar, Elise Geithner, his daughter, shared the chauffeured car to work with her father and then joined him at lunch with Sandy Weill.
Geithner went on to become Secretary of the Treasury and played a pivotal role in making sure that Citigroup was not allowed to fail but was instead bailed out by the taxpayer. Weill was one of Citigroup’s largest individual shareholders and retired a billionaire, selling a large chunk of his Citigroup stock before it collapsed in price. By the spring of 2009, Citigroup was a 99-cent stock.
Another Wall Street mega bank holding company supervised by the New York Fed, while also being one of the largest shareholders of the New York Fed, is JPMorgan Chase. In early 2012, as JPMorgan was making wild derivative bets in London using the insured deposits of its banking customers, its Chairman and CEO, Jamie Dimon, was sitting on the Board of Directors of the New York Fed. As the bank was being investigated by the New York Fed, Jamie Dimon continued to sit on its Board, serving out his two terms which ended in late 2012. The derivatives debacle became infamously known as the London Whale trades. JPMorgan Chase admitted to losing $6.2 billion of its bank depositors’ money.
The London Whale matter resulted in a scathing 300-page report by the Senate’s Permanent Subcommittee on Investigations.
One of the witnesses scheduled for tomorrow’s hearing, Dr. Peter Conti-Brown, is the author of The Power and Independence of the Federal Reserve. In Chapter 5 of the book, Conti-Brown makes a compelling argument that the 12 quasi-private regional Federal Reserve Banks are opaque and unaccountable at best, and, at worst, unconstitutional.
To that, we say, amen.