The Fed Responds to Report that Fed Chair Powell Traded During FOMC Blackout Periods

 

The Fed Responds to Report that Fed Chair Powell Traded During FOMC Blackout Periods

By Pam Martens and Russ Martens: February 11, 2022 ~

A Fed spokesperson has provided Wall Street On Parade with a detailed response to our article yesterday, which documented that trades were made in accounts in which Fed Chair Jerome Powell had a financial interest during a Federal Open Market Committee (FOMC) meeting in 2015 and another in 2019. Fed officials are clearly prohibited from trading before and during FOMC meetings because that is when they have insider, market-moving information.

Below is the full statement from the Fed spokesperson. Following the statement, we will explain its many, serious flaws.

“Chair Powell has not traded during FOMC blackout periods. The transactions that were reported occurred in family trusts over which he had no control. Chair Powell is not a trustee and did not direct or control the trades. He relinquished his previous role as a trustee in 2012 when he joined the Federal Reserve as a Board Member.

“These transactions were regular trades for the purposes of the trust, e.g., raising money for donations under the terms of a charitable trust. The trust is legally required to make certain charitable donations every year. In practical terms, this means that transactions must occur in order to free up funds for those donations.

“The trust financial advisor was advised of our blackout periods and was directed to avoid transactions during those blackout periods. Although they were aware of the FOMC blackout dates, the advisor mistakenly made some transactions during some blackout periods. These transactions were reported as part of his publicly available financial disclosures, which have been available regularly every year since he joined the Board. They are available to anyone through the Office of Government Ethics website, OGE.gov.”

Flaw Number 1: The 2015 trades occurred in “Powell Family Trusts” 3 and 4; the 2019 trades occurred in the “Powell Family Trust 3.” Powell’s financial disclosure forms, which he signed, define what has to be reported under “Part 7, Transactions” as follows: “Part 7 discloses purchases, sales, or exchanges of real property or securities in excess of $1,000 made on behalf of the filer, the filer’s spouse or dependent child during the reporting period.” Thus, Powell or someone in his immediate household had an interest in the assets being sold during two separate FOMC meetings. The assets were not held in Blind Trusts, so Powell – who has a law degree – should have been on top of what was happening in these accounts.

Flaw Number 2: Powell signed an Ethics Agreement in 2017 where he agreed to the following:

“If I have a managed account or otherwise use the services of an investment professional during my appointment, I will ensure that the account manager or investment professional obtains my prior approval on a case-by-case basis for the purchase of any assets other than cash, cash equivalents, investment funds that qualify for the exemption at 5 C.F.R. § 2640.201(a), obligations of the United States, or municipal bonds.”

It follows, logically, that Powell would do the same thing for sales transactions, i.e., give his approval on a “case-by-case basis.”

Flaw Number 3: The statement regarding the need to raise cash to fund charitable donations is not convincing. Many wealthy individuals gift appreciated securities to charity, obtaining a tax advantage in doing so. Regardless, in both 2015 and 2019, waiting one extra day to make the trades would have avoided running afoul of the Fed’s prohibition on trading during the blackout period around FOMC meetings.

Flaw Number 4: Powell signs all of his financial disclosure forms, including those for 2015 and 2019. Why didn’t he notice that there were trades listed that occurred on FOMC meeting dates and issue a timely public apology?

Flaw Number 5: According to the Congressional Research Service, this is the prescribed procedure at the Fed that is supposed to prevent the problems outlined above, as well as those of the three Fed officials that have resigned over their own trading scandals since last September:

“Financial disclosure reports from covered officials, including the original entrance reports and the annual reports filed by May 15, are to be reviewed by supervisory ethics personnel to identify potential ethics and conflict problems, and to resolve any conflict of interest issues that may be raised by the ownership of certain assets by a particular public official. Remedial action which may be required by ethics officials to resolve identified conflicts of interest with respect to certain assets may include divestiture, establishment of a qualified blind trust, procurement of conflict of interest waivers, specific written recusal instruments, and requests for voluntary transfer or reassignment.”

It was not an Ethics Officer at the Fed who disclosed to the public the fact that trades in Powell’s accounts occurred on an FOMC meeting date. It was an activist group called Occupy the Fed.

In fact, the General Counsel and Ethics Officer of the Dallas Fed, Sharon Sweeney, allowed Dallas Fed President Robert Kaplan to trade in and out of “over $1 million” S&P 500 futures contracts from 2015 through 2020. These types of contracts can be used to make directional bets on which way the stock market is going to move. They trade during and after the stock markets in the U.S. have closed – almost continuously from Sunday evening to Friday evening. (See our report: 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.)

Supervisory ethics personnel at the Fed also did not stop Fed Chair Powell from having upwards of $25 million of his family wealth managed by BlackRock while the firm was given three no-bid contracts by the Fed.

The Fed is not some mom and pop shop in Dubois. It’s the central bank of the United States with a current balance sheet of $8.9 trillion, 98 percent of which American taxpayers are on the hook for. It’s also in charge of supervising the most dangerous megabanks in the United States, which continue to be serially charged with crimes against the investing public while the Fed continues to bail them out.

Do we really want a man at the helm of this sprawling institution who can’t even own up to his failure to police his own trading activities?

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Activist Group Reports that Fed Chair Powell Traded During FOMC Restricted Periods: We Fact-Checked It and It’s True

 

Activist Group Reports that Fed Chair Powell Traded During FOMC Restricted Periods: We Fact-Checked It and It’s True

By Pam Martens and Russ Martens: February 10, 2022 ~

Fed Chair Jerome Powell Testifying Before Senate Banking Committee, November 30, 2021

An anonymous activist group called Occupy the Fed reported in a Substack article on Sunday that Fed Chair Jerome Powell traded on the final day of a Federal Open Market Committee (FOMC) meeting on April 29, 2015, when he was a Fed Governor, and also on the final day of an FOMC meeting on December 11, 2019, when he was Fed Chair. 

Powell’s trading directly violates the Fed’s written policy which prohibits trading “during the period that begins at the start of the second Saturday (midnight) Eastern Time before the beginning of each FOMC meeting and ends at midnight Eastern Time on the last day of the meeting.” The FOMC meetings are typically when the most sensitive and market-moving information occurs at the Fed, including votes on hiking or lowering interest rates and other confidential actions.

Dallas Fed President Robert Kaplan, Boston Fed President Eric Rosengren and Fed Vice Chair Richard Clarida have resigned over their own individual trading scandals and not one of them has been charged with anything as directly in violation of Fed policy as trading on the very day the FOMC is in session.

We fact-checked the Occupy the Fed report by downloading the dates of all FOMC meetings from 2015 through 2020 and comparing them to the trading transactions listed on Powell’s financial disclosure forms filed with the Office of Government Ethics (OGE) for years 2015 through 2020. We can verify that Powell traded on April 29, 2015 and on December 11, 2019. Both were the final day of the FOMC meeting. (You can read the minutes of those respective FOMC meetings here and here.)

The charts below show what Powell sold on those dates. We have eliminated any purchase transactions to avoid any possibility that the Fed would claim that these were made for dividend reinvestment purposes.

The FOMC meets eight times a year, roughly every six weeks. Multiply that by the six years of financial disclosures that the OGE has made available for Powell and you have a total of 48 FOMC meetings. Multiply the 48 meetings by two, since the FOMC meets for two days, and Powell had 96 opportunities to screw up and accidentally trade on an FOMC meeting date. But it happened on only two days during that six-year span of time – according to what we know thus far. And in both the years of 2015 and 2019, highly unusual activities were occurring at the Fed.

The year 2015 would mark the first time that the Fed had raised interest rates since it slashed them to the zero-bound range in 2008. There was a great deal of media talk in April regarding what was going to happen in various markets when the Fed raised its benchmark Fed Funds rates. The Fed didn’t raise its benchmark rate until December 17, 2015. 

The year 2019 marked the beginning of an unprecedented, emergency repo lending operation by the Fed. While the Fed made public that the repo loans were being provided to its 24 primary dealers, only the Fed knew that six large trading houses on Wall Street were getting the lion’s share of those loans. One of the six was Goldman Sachs. On December 11, 2019, the final day of the FOMC meeting, Powell sold between $115,000 and $300,000 of two Goldman Sachs proprietary mutual funds. The funds are listed as “GS” rather than Goldman Sachs on his financial disclosure forms. (See chart below.)

According to the Fed’s own H.4.1 report, on December 11, 2019, the same day that Powell dumped between $167,000 and $430,000 of predominantly stock mutual funds and ETFs, the Fed had an outstanding balance of $212.95 billion in emergency repo loans that had been used to prop up trading houses on Wall Street, including Goldman Sachs.

A larger question in all of this is why Powell is even allowed to be holding Goldman Sachs proprietary funds since Goldman Sachs is supervised by the Fed.

The Occupy the Fed report also makes the following charge against Powell:

“Instead of providing specific dates for the majority of his transactions, Powell improperly groups trades of like securities behind the phrase ‘Multiple’ on every OGE form he has filed.”

A report last year in the Washington Post indicated that a Fed spokeswoman had indicated to them that these “multiple” transactions “were for automatic dividend reinvestments – essentially transactions on autopilot and not subject to individual decisions.”

Very little is known about the Occupy the Fed group that scooped mainstream media with this story other than that it appears to be a fairly new group. Its Twitter account shows that it was opened in January 2021. Its Substack account shows it began on January 17, presumably of this year since only two articles are listed. Under “Who are we” on the Substack account, the following description is provided:

“We’re a group of like-minded regular people (workers, professionals, seniors, savers and others) who are disgusted and fed up with systemic corruption at the Federal Reserve and the total perversion of our American capitalist democracy. We’ve taken no money from special interests. We are doing this on personal time and expense because we’ve had enough.”

We have reached out to the Fed’s communications office for an explanation of Powell’s trading on these two FOMC meeting dates. We’ll update this article if we receive a response.

Powell’s term as Fed Chair expired this past Saturday and he is currently serving as Chair Pro Tempore. President Biden has nominated Powell to serve a second four-year term as Fed Chair but that requires an up vote by the Senate Banking Committee and the full Senate. Those votes have yet to happen, making Powell the first Fed Chair in a quarter century to be serving in a Pro Tempore capacity.

This latest report from Occupy the Fed simply adds to the withering criticism around Powell’s leadership of the Fed. Senator Elizabeth Warren, who sits on the Senate Banking Committee, called Powell a “dangerous man to head up the Fed” over his record of weakening Dodd-Frank legislative protections covering Wall Street megabanks. Powell has also presided over the worst trading scandal in the Fed’s history. His cozy relationship with Blackrock while the Fed awarded them three no-bid contracts has also raised eyebrows. Adding to all of this is the general consensus that Powell has fallen way behind the curve on the inflation that is ravaging Americans’ ability to make ends meet.

Trust in the Fed has been seriously weakened under Powell. That is reason enough for President Biden to reconsider this nominee.

Editor’s Update: The Fed has provided a detailed response. See the response and our critique here.

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After Its President Created the Biggest Trading Scandal in Fed History, Dallas Fed Chair Calls Robert Kaplan’s Tenure “Great Leadership”

 

After Its President Created the Biggest Trading Scandal in Fed History, Dallas Fed Chair Calls Robert Kaplan’s Tenure “Great Leadership”

By Pam Martens and Russ Martens: January 18, 2022 ~

Thomas J. Falk, New Chair of the Dallas Fed Board of Directors

Last Thursday evening, at 5:00 p.m. Dallas time and 6:00 p.m. Eastern Standard Time, when millions of folks on the East Coast are sitting down for dinner, the Dallas Fed held a virtual Town Hall.

Given the fact that the President of the Dallas Fed, Robert Kaplan, had to step down in disgrace in September, after trading like a hedge fund kingpin in 2020 while simultaneously having access to confidential market-moving information as a voting member of the Fed’s Federal Open Market Committee (FOMC), there was a very good reason for the Dallas Fed to hold a Town Hall.

But stunningly, the tone-deaf Dallas Fed did not focus the Town Hall on how its Board and management had negligently supervised Robert Kaplan, allowing him to trade in and out of S&P 500 futures in over $1 million trades during a year of a national pandemic crisis. Instead, the Dallas Fed attempted a public relations stunt, and focused the Town Hall on how it wanted the public to engage in its search for a new President. It was clearly a Town Hall ginned up in an effort to quiet the pitchforks.

The Dallas Fed did not take one question on former President Robert Kaplan’s outrageous trading. It did not take one question on why its General Counsel and Ethics Officer, Sharon Sweeney, signed off on these trades. It did not take one question as to why the former and current Board Chairs, Greg Armstrong and Thomas Falk, respectively, lied to the American people in their official statement regarding Robert Kaplan severing his ties to the banks supervised by the Fed.

Instead, the newly appointed Chair of the Dallas Fed Board, Thomas Falk, called the tenure of Robert Kaplan at the Dallas Fed “great leadership.” We could hardly believe our ears. Fortunately, the Dallas Fed put up a video of the Town Hall so that we could double check what we heard. We’ve set the video clip below to the question from the moderator that triggered the “great leadership” response from Thomas Falk.

Falk had come under our radar previously. At the time the scandal hit last September, Falk was serving as Vice Chair of the Dallas Fed Board. He and the Chair at that time, Greg Armstrong, included the following false statements in their official announcement of Kaplan’s “retirement.”

“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.”

Both of those sentences are blatantly false. Kaplan was a sophisticated Wall Street veteran who previously worked at Goldman Sachs for 22 years, rising to the rank of Vice Chairman. He clearly knew that making directional bets on the market using S&P 500 futures, while simultaneously making market moving statements on television and sitting on inside information from the FOMC meetings, could subject him to criminal charges of insider trading.

On October 5, we sent an overnight letter to the home of Falk in Dallas. We advised him as follows:

“On Monday, September 27, under your name and that of the Chair, Greg Armstrong, the Board of Directors of the Dallas Fed released a statement to the press that included this sentence:

‘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.’

“This was a materially false statement since Mr. Kaplan’s financial disclosure forms indicate that he owned four proprietary products from Goldman Sachs long after he joined the Dallas Fed on September 8, 2015. (Goldman Sachs has been supervised by the Federal Reserve since September 21, 2008.)

“One of those Goldman Sachs products, the Exchange Place LP, appears on Mr. Kaplan’s financial disclosure form for years 2015 through 2020. The address of Exchange Place LP is Goldman Sachs’ headquarters at 200 West St. in Manhattan; the officers of Exchange Place LP are employees of Goldman Sachs; and the phone number for Exchange Place LP is Goldman Sach’s phone number.

“In addition, Mr. Kaplan uses the term ‘GS’ on his various financial disclosure forms next to three other proprietary products that were created and sold by Goldman Sachs: the Goldman Sachs Financial Square Money Market Fund; the Goldman Sachs Medium Term Managed Corporate Bond Account, and the Goldman Sachs Private Equity Fund 2000 (which does not publicly trade).

“First, I am asking for you to issue a retraction of the materially false statement that has been issued under your name.

“Second, I am asking that you have a staff member at the Dallas Fed email me the precise dates of each purchase and sell transaction that Mr. Kaplan transacted in 2020. The public is owed that information. As a former auditor, you can easily see that the Dallas Fed financial disclosure form requires that information and Mr. Kaplan simply replaced that required information with the word ‘Multiple.’

“All other regional Federal Reserve Bank Presidents complied with the requirement to provide the dates of their purchases and sells in 2020. Only Mr. Kaplan ignored this requirement.

“I have previously requested those dates from James Hoard of the Dallas Fed via email and received no forthcoming information.

“I look forward to your timely attention to these serious matters.”

We heard nothing further from Falk and the grossly false statement remains today on the website of the Dallas Fed. James Hoard, part of the Communications team at the Dallas Fed, continues to deny the media the dates of Kaplan’s trades, thus preventing the press from doing its job. At present, the public does not know if Kaplan was making millions of dollars of trades in S&P 500 futures, or tens of millions or hundreds of millions of dollars, in a year when the President of the United States had declared a National Emergency.

The Dallas Fed has also refused to say if Kaplan was shorting the market in 2020 (betting it would go down) in a year when 352,000 of his fellow Americans died from COVID-19 according to Johns Hopkins University.

The year 2020 presented a unique opportunity for a nimble trader to make huge gains (or losses) trading S&P 500 futures, which unlike the stock market, do not close at 4:00 p.m. EST but trade continuously from Sunday evening to Friday evening. At numerous times during 2020, the Fed was making dramatic market-moving announcements of interest rate cuts and the creation of a multitude of emergency lending facilities and taking other emergency measures. From January 1, 2020 through April 30, 2020, based in no small part on these Fed announcements, the S&P 500 Index gyrated from down 30 percent in late March to up 10 percent by the end of April.

As of last Thursday, Falk had no way to know if Kaplan will be charged with insider trading. Senator Elizabeth Warren has called on the SEC to open an insider trading investigation. Others have called on the Justice Department to open a criminal investigation. Neither the SEC nor the Justice Department disclose when an investigation has been opened. What is known is that the Inspector General of the Federal Reserve (who, unfortunately, reports to the Board of the Fed) has an ongoing investigation of the Fed trading scandal, which includes additional Fed officials besides Kaplan.

For Falk to attempt to prejudice these investigations by calling Kaplan’s tenure at the Dallas Fed “great leadership,” raises suspicions as to what his real motive is to be shilling for Kaplan.

Kaplan triggered the worst trading scandal in the 108-year history of the Fed. Newspapers around the world carried the story, bringing reputational damage to the U.S. central bank. Editorial boards of newspapers across the U.S. chastised the Fed for having such loose trading restrictions on its officials.

The Chair of the Federal Reserve Board of Governors, Jerome Powell, responded by releasing a draft set of new trading rules to be implemented. But at his confirmation hearing before the Senate Banking Committee on January 11, Powell told the Chair of the Committee, Senator Sherrod Brown, that the final rules had not yet been adopted.

Powell, himself, has come under questions about his trading activity, but the Senate is likely to confirm him for another four years as Chair of the Fed before the details of any government investigation into the trading scandal are released. This could set the Federal Reserve up for more distrust at a time when confidence in the institution has seriously eroded, according to polls.

The obvious conclusion to draw from all this is that it’s not just the trading rules for officials at the Fed that need to be radically restructured, but the institution itself is due for a serious restructuring by Congressional legislation.

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