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The Inspector General’s Report on JPMorgan’s London Whale Is a Guide to What to Expect from Its Probe of the Fed’s Trading Scandal

Courtesy of Pam Martens

Mark Bialek, Inspector General, Federal Reserve Board

Mark Bialek, Inspector General, Federal Reserve Board

The Office of Inspector General (OIG) for the Federal Reserve is conducting an investigation of the trading activities that led to the resignations of Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren on September 27. The trading of other Fed officials may also be under the microscope.

The OIG investigations are conducted by federal criminal investigators who have the power to “carry firearms, seek and execute search and arrest warrants, and make arrests without a warrant in certain circumstances.” The investigative findings can be referred to the U.S. Department of Justice for criminal or civil prosecution, if warranted.

In the case of Kaplan, the matter belongs in the hands of the Department of Justice right now. Despite having ongoing access to market-moving information throughout 2020, Kaplan was trading in and out of S&P 500 futures in individual trades of “over $1 million.” S&P 500 futures are used to make market-timing bets, something that no official of the Federal Reserve should ever be doing. (See Kaplan’s 2015 through 2020 financial disclosure forms here.)

The U.S. stock market is open from 9:30 a.m. to 4:00 p.m. (ET) Monday through Friday. But S&P 500 futures trade around the clock during weekdays. The E-mini S&P 500 futures contract is the most popular and liquid S&P 500 futures contract. It can be leveraged by as much as 95 percent. The E-mini trades continuously from 6 p.m. Sunday night through 5 p.m. on Friday evening (EDT), allowing someone who might wish to trade on inside information a much larger window of opportunity to do so than stock trading.

Kaplan appeared to have a trading relationship with Goldman Sachs, an entity supervised by the Federal Reserve. Kaplan had previously worked at Goldman Sachs for 22 years, rising to the rank of Vice Chairman.


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