Tue. Oct 19th, 2021


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Senator Elizabeth Warren this week described Jay Powell, chair of the Federal Reserve, as a ‘dangerous man’ due to alleged weaknesses in bank regulation. The language was strong, but the evidence is weak: since the crisis in 2008, Fed supervisors have taken a relatively tough approach and US banks boast record capital levels.

If Warren wanted to follow the setting, a much better offensive line was available. Two local Fed presidents have just resigned following the announcement of their personal trading activities. The Fed is already vulnerable to the accusation that its large quantitative easing program has enriched asset holders more than ordinary employees. The fact that central bank officials not only benefit from large equity portfolios but also actively trade in securities that are sensitive to rate decisions is offensive.

Robert Kaplan, president of the Dallas Fed, spent part of last year selling and selling at least $ 1 million worth of shares in companies of Chinese technology giant Alibaba to US electric car maker Tesla, according to disclosures first highlighted by the Wall Street Journal. His Boston counterpart Eric Rosengren has done smaller transactions in real estate investment trusts and stocks, including Chevron and Pfizer. Both resigned this week, with Kaplan diverting attention from the investigation of his trade and Rosengren citing poor health.

It does not seem to have violated any rules, but it’s part of the problem. The Fed has said it will review its ethical policy, which currently bans ownership of bank shares but allows senior officials to trade other extensive trades.

This issue is not limited to the Fed. Many members of Congress are active traders. At worst, it included classic insider trading. Former Republican Rep. Chris Collins was jailed in 2020 after dumping shares in a pharmaceutical company whose CEO told him of poor clinical trial results. Those who escaped the sanction include lawmakers who sold stock after government briefings on the 2008 financial crisis and the 2020 coronavirus pandemic.

Dallas Fed President Robert Kaplan's Equity Portfolio

But also other legislatures where possible conflicts exist should be investigated. House Speaker Nancy Pelosi Became a meme among traders to disclosures showed a million-dollar bet on big tech stocks, apparently made by her husband Paul.

Warren himself looks at this impeccably. The senator publishes her tax returns on her website – last year the left-wing brand and her husband reported $ 882,322 in revenue. When she was elected to office in 2012, she owned only a single share, IBM, which she sold shortly thereafter.

The senator is one of several members of Congress sponsoring legislation to ban lawmakers and officials from trading in individual stocks. It should happen. Not only does this remove conflicts of interest, it can also bring benefits to those involved. When Hank Paulson becomes Treasury Secretary in the Bush administration, he sells half a billion dollars of Goldman shares, but is allowed to defer tax on capital gains.

More importantly, it will save officials from themselves. Kaplan’s profit and loss account is not disclosed. He may have traded expertly in and out of his positions. And he was definitely some 2020 winners under the leadership of Tesla, which rose 720 percent during the year. But the median performer in the Kaplan share portfolio rose 6%, less than the S&P 500, which was dragged down by losers such as Occidental Petroleum and Delta Air Lines. The most prominent financial officials in the country are supposed to know that trading individual stocks without inside knowledge is a bad idea.

Whether or not it seems like good financial management, Powell seems to understand it himself. He does not seem to be moving away during a boring meetings on monetary policy on a Robinhood account. His own disclosures shows no individual stock trading, only investments in a wide range of index funds and municipal bonds. Despite his ‘dangerous’ label, Powell plays safe.



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