Trading in Federal Reserve stocks is dangerous

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Senator Elizabeth Warren this week called Federal Reserve Chairman Jay Powell a “dangerous man” because of perceived weaknesses in banking regulations. The language was strong but the evidence flimsy: Since the 2008 crisis, Fed supervisors have taken a relatively harsh approach and US banks are posting record capital levels.

If Warren had wanted to attack the institution, a much better line of attack was available. Two regional Fed chairmen have just resigned after revelations about their personal business activity. The Fed is already vulnerable to the accusation that its sweeping quantitative easing program has enriched asset holders more than ordinary salaried workers. The fact that central bank officials not only profit from large equity portfolios, but also actively trade securities sensitive to rate decisions is offensive.

Dallas Fed Chairman Robert Kaplan has spent part of the last year buying and selling at least $ 1 million in company shares in Chinese tech giant Alibaba to U.S. electric car maker Tesla. , according to information first highlighted by the Wall Street Journal. His Boston Fed counterpart, Eric Rosengren, has made smaller transactions in real estate investment trusts and stocks, including Chevron and Pfizer. Both resigned this week, with Kaplan citing the distraction of the scrutiny of his trading and Rosengren citing poor health.

Neither seems to have broken the rules, but that’s part of the problem. The Fed has said it will reconsider its ethics policies, which currently ban ownership of bank shares but allow senior officials to conduct other important transactions.

This problem is not confined to the Fed. Many members of Congress are active traders. At worst, this has included classic insider trading. Former Republican Representative Chris Collins was jailed in 2020 after abandoning shares in a pharmaceutical company whose chief executive told him about poor clinical trial results. Those who escaped sanctions include lawmakers who sold shares after government briefings on the 2008 financial crisis and the 2020 coronavirus pandemic.

But also worth considering are other lawmakers where potential conflicts exist. House Speaker Nancy Pelosi has become a meme among traders after revelations showed multi-million dollar bets on major tech stocks, apparently made by her husband Paul.

Warren herself looks flawless about it. The senator posts her tax returns on her website – last year the leftist and her husband reported income of $ 882,322. When she was elected to power in 2012, she owned only one stock, IBM, which she sold shortly after.

The senator is one of many members of Congress to sponsor legislation prohibiting lawmakers and officials from trading in individual stocks. It should happen. Not only does this remove conflicts of interest, but it can have benefits for those involved. When Hank Paulson became Secretary of the Treasury in the Bush administration, he sold half a billion dollars in Goldman stock but was allowed to defer capital gains tax.

More importantly, it will save the officials from themselves. Kaplan’s income statement is not disclosed. He may have skillfully traded in and out of his positions. And he certainly had a few Tesla-led 2020 winners, which grew 720% over the year. But the median performance of the Kaplan stock portfolio rose 6%, less than the S&P 500, dragged down by losers such as Occidental Petroleum and Delta Air Lines. The country’s most prominent finance officials are said to know that trading individual stocks without inside knowledge is a bad idea.

Whether it is for appearances or for sound financial management, Powell himself seems to understand this. He doesn’t seem to hammer a Robinhood account in boring monetary policy meetings. Its own disclosures show no trading of individual stocks, just investments in a wide range of index funds and municipal bonds. Despite his “dangerous” label, Powell is playing it safe.


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