Courtesy of Pam Martens
Jeanna Smialek, Federal Reserve and Economy Reporter, New York Times
Federal Reserve Chairman Jerome Powell took a few wonky questions from various reporters at his press conference today and then Jeanna Smialek, Federal Reserve and Economy reporter for the New York Times, was called on. Smialek was the first reporter to lead the elephant in the room out into the open. The exchange went as follows:
Smialek: “Prior to recent media reports, were you aware of the kind of security buying and selling that [Dallas Fed and Boston Fed] Presidents Kaplan and Rosengren were participating in last year? And I wonder if you thought those were appropriate?”
Powell: “So, no I was not aware of the specifics of what they were doing. So let me just say a couple of things about this subject. We understand very well that the trust of the American people is essential for us to effectively carry out our mission. And that’s why I directed the Fed to begin a comprehensive review of the ethics rules around permissible financial holdings and activity by Fed officials. So those rules are in many respects the same as those for government agencies plus a number of things that apply specifically to us because of our business. One of those is — sort of three things I would point to in terms of specific restrictions: one is ownership of certain assets is not allowed and that’s bank securities and other things; secondly, there are times when we’re not allowed to trade at all or buy and sell financial assets – that’s the period immediately before and during an FOMC meeting; and, third, there’s regular disclosures. So everyone’s ownership and activities are all disclosed on an annual basis. So, I would have had to go back and read people’s financial disclosure to know what their activities have been. This has been our framework for a long time and I guess you’d say it’s served us well. The other thing you would say is it’s now clearly seen as not adequate to the task of really sustaining the public’s trust in us. We need to make changes and we’re going to do that as a consequence of this. This will be a thorough-going and comprehensive review. We’re going to gather all the facts and look at ways to further tighten our rules and standards.”
Let’s stop right there for a moment. As Wall Street On Parade reported earlier this morning, the Fed’s trading rules, to anyone who has ever held a trading license on Wall Street, are a joke (that you could drive a Bentley stretch limo filled with insider traders through). The Fed’s trading rules consist of 284 words that appear on page 14 (Attachment 4) of a Fed document called the “Program for Security of FOMC Information.” The document is devoid of even a single mention of any of the following types of trading that should be prohibited for Fed officials: shorting the market, using derivatives to mask one’s trading, trading in S&P 500 futures contracts (which can be leveraged by 95 percent and trade almost 24/7 on weekdays); trading when one is aware that the Fed is about to make a market-moving announcement, regardless of whether or not it’s around an FOMC meeting; trading in securities that the Fed is buying up; trading in and out of the same security or futures contract, giving the appearance of timing the market; and so forth.
Also, Powell included the fact that Fed officials have to make annual disclosures while simultaneously admitting that he was not aware of Dallas Fed President Robert Kaplan trading in and out of S&P 500 futures to the tune of millions of dollars in each transaction while also making over $1 million dollar trades in rate sensitive stocks like Amazon, Apple and Facebook. That Powell was not aware clearly indicates that the disclosures were meaningless until a Wall Street Journal reporter, Michael Derby, with apparently far more curiosity than Powell, decided to actually look at those disclosures and break the story on September 7.
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