Fed Watchdog Clears Former Policymakers of Trading Misconduct

The Federal Reserve’s internal watchdog has concluded a lengthy investigation, clearing two former policymakers, Robert Kaplan and Eric Rosengren, of legal wrongdoing in their 2020 personal trading activities. 

A Thorough Examination Unveiled

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The report revealed that Robert Kaplan, then president of the Dallas Fed, executed multiple transactions exceeding $1 million during the onset of the pandemic. 

Kaplan Assures No Wrongdoing

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Kaplan’s spokesperson stressed his adherence to ethical standards, stating, “He conducted his investment activities in accordance with the rules and policies of the Federal Reserve System.”

No Violations, But Ethics Are Questionable

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Despite the watchdog’s realization that no federal laws or rules were breached, it still revealed the inadequate rules in place at the time, citing an “appearance of a conflict of interest.” 

Government to Take Action Despite No Wrongdoing

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Within the central bank, the saga has forced government officials to reshape the questionable ethical standards and allow more oversight by Congress. Although no direct violations were found, government officials felt a need to take action.

Retirement After The Scrutiny

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Both Kaplan and Rosengren retired in 2021 following the release of their 2020 financial disclosures. Kaplan’s statement upon resignation showed his commitment to compliance: “His trading activities and disclosures met bank compliance rules,” the statement said.

Difficulties in Investigation Noted

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As Aaron Klein, a senior fellow at the Brookings Institution, noted, “It’s hard for an IG, who’s not independent of the chairman, to investigate activities of direct reports of the chairman.” 

Calls For Structural Reform

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“The Fed IG needs structural reform and reports like this undermine confidence in the faith of the Federal Reserve system,” Klein argued.

Missing Information Scrutinized

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Kaplan’s failure to disclose the days on which his trading activities were reported, was not a violation of law, however, the report said the missing information would have “provided a more comprehensive understanding of his trading activities.”

Impact on Public Confidence

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Although no wrongdoing was found, the Watchdog report didn’t hold back from berating Kaplan and Rosengren as they destroyed public confidence in the central bank. 

Demands for Reform

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Senators Warren and Rick Scott were called upon to introduce the new legislation advocating for structural reforms, with Warren not holding back in her scrutiny of the Central Bank.

“Culture of Corruption”

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Senator Elizabeth Warren, a vocal critic, raised concerns about “a culture of corruption” and introduced legislation to subject the Fed’s regional banks to federal public disclosure laws.

Scrutiny Results in Legislative Response

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New legislation will be put in place to ensure that Congress can keep a watchful eye over the central bank, which they hope will prevent the Federal Reserve from repeating acts of controversy.

Professor Blames The Rules

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Kathryn Judge, a Columbia Law School professor, pointed out, “The disparity of the public response and the IG’s seemingly accurate conclusion that the trades complied with the rules as they existed is a clear testament to the woeful inadequacy of the rules that were in place.”

Public Scrutiny On The Horizon

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“Just because they have been cleared by the IG doesn’t mean they have been cleared by the public or their peers,” Judge also noted.

Lessons Learned

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As former New York Fed President Bill Dudley said, “Certainly, the appearance of a conflict is a bad thing because it can undercut the credibility of the central bank,” suggesting a need for stricter ethical regulations.

Market Impact

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The scandals triggered a comprehensive overhaul of the Federal Reserve’s trading rules in 2022. These new rules, as Dudley notes, are “far better than what we had before.”

Rules Change Explained

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The inspector general’s report has revealed to the world the flaws in the laws. The central bank has now acknowledged this by changing the rules to bar top officials from buying individual stocks and bonds.

Public Response

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The public’s response, disparate from the report’s conclusion, raises questions about the effectiveness of existing regulatory frameworks. Senator Warren’s legislative initiatives reflect an ongoing demand for change in the system.

Future of Federal Reserve

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Everyone seems to be in agreement that a reform was needed, and with Congress overlooking the ins and outs of the Federal Reserve, this so-called “culture of corruption” will hopefully start to be eradicated.

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The post Fed Watchdog Clears Former Policymakers of Trading Misconduct first appeared on Thrift My Life.

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The content of this article is for informational purposes only and does not constitute or replace professional financial advice.