For once we agree with Elizabeth Warren: the Massachusetts socialist sent a letter to the SEC asked the commission best known for Sucking Elon's C**k to investigate whether trades made by Fed officials, including (but hardly limited to) Kaplan, Rosengren and Clarida violated insider trading laws and asked the agency to determine the legality of "ethically questionable transactions" by three Fed officials.
As we reported over the weekend, late on Friday the Fed revealed that centrist Fed vice-chair Clarida had moved millions out of one mutual fund and into two other equity funds the day before Fed Chairman Jerome Powell issued a statement flagging a potential rate cut due to pandemic concerns, and sparking a major market surge.
While Clarida, formerly of Pimco, has kept radiosilence in the past few days, Kaplan and Rosengren have already resigned. And even though a Fed spokesman told Bloomberg that Clarida's 2020 transactions "represent a preplanned rebalancing of his accounts" the optics of doing such a "rebalancing" one day ahead of Powell's hint that mega QE is coming is hardly good judgment, and is at best insider trading.
In testimony before Congress on Sept. 28, Powell promised a revamp of Fed policies on how its leaders manage personal investments to minimize even the appearance of conflicts of interest. He conceded that the rules that allowed the trading by Messrs. Kaplan and Rosengren to occur aren't adequate to sustain the public's confidence, even though they appeared to satisfy each bank's existing protocols. A few days later the Clarida news dropped, making a mockery of any alleged Fed integrity.
"We understand now that we need to modify our practices, and we're in the process of creating ideas and recommendations for that," he said, referring to trading activities by Messrs. Kaplan and Rosengren. He didn't address Mr. Clarida's financial disclosures, which were released this past May and were first reported by Bloomberg News on Oct. 1.
Warren asked the SEC to look at the extent to which any trades were influenced by nonpublic information available to Fed policy makers and whether they violated provisions that bar such transactions.
The trading activities by all three men "reflect atrocious judgement by these officials," Warren wrote in her letter. Of Clarida, she wrote, "there is no justifiable ethics or financial rationale for him or any other government official to be involved in these questionable market machinations while having access to nonpublic information and authority over decisions that have extraordinary impacts on markets and the economy."
To be sure, Unlike Kaplan and Rosengren, Clarida wasn't actively trading in individual securities but still he bought a basket of equities all of which benefited extensively from the Fed's injection of trillions into the economy, and event which Clarida was certainly aware of. Furthermore, Powell's emergency announcement which took place one day after Clarida's Feb 27 rebalancing, sent stocks sharply higher.
Warren introduced legislation last year that would bar senior government officials from trading individual stocks, and Clarida's activities wouldn't run afoul of those proposed additional restrictions. The activity appears to be "exactly the kind of autopilot trade public officials are supposed to make," said Chris Low, chief economist at FHN Financial in a note to clients Monday. "Unfortunately for Clarida...the timing, coincidence or not, stinks."
Ironically, Warren - who has emerged as a major Powell critic - did not address the trading matter with Powell at last week's hearing, where she instead wasted all her time criticizing his record on bank regulation - where Powell has actually done a commendable job, after all he injected trillions in liquidity into the market precisely to stabilize the banks and hedge funds, and said she would vote against his confirmation if Biden nominates him for a second term as chair. Powell's efforts to loosen financial regulations imposed after the 2008 crisis "makes you a dangerous man to head up the Fed," she told the Fed chair during a purposefully theatrical exchange which made everyone watching it dumber.
Her full letter can be found here.