In the last two months a huge scandal has broken out in the US Federal Reserve. I am going to be breaking down all the details for you in this video. WATCH NOW
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VIDEO SUMMARY
If you watch my channel, you know that I am generally very supportive of the US Federal Reserve and the US dollar. But a scandal has broken out with multiple leaders in the organization making stock trades on insider information. This is so horrible, and a lot of people are watching this very closely.
Let us go over what has happened.
Last month, two Federal Reserve regional presidents resigned in the midst of a scandal over their financial disclosure forms. These positions are very influential on setting economic policy, and they are required to disclose their financial transactions every year. The two officials were Boston Fed President Eric Rosengren and Dallas Fed President Robert Kaplan.
Let me show you exactly what happened. Here is the Financial disclosure form for Robert Kaplan from last year. The first section is Schedule A. You can see that he owns enormous amounts of individual stocks in companies. Many over $1M.
This already is an ethical conflict of interest. We see under Schedule A that he owns over $1M shares in both Chevron and Delta Airlines. And the amount he actually owns is going to be well over $1M, because you can see that from dividends alone he made over $500k. Do you think he will be incentivized to make economic policies that would be good for the oil industry and the airlines? Potentially at the expense of the American people? This form shows that he has a significant financial interest in these individual companies. But it goes further than that. Section B shows that he bought and sold over $1M in shares of both Chevron, Delta Airlines, and many more. This is an enormous amount of transactions. It sure looks like he is spending more time trading his personal stock portfolio than doing his job at the Fed. And this is during the same time as the pandemic crisis gripping the nation. The nation’s economy is falling apart and this guy is trading his stocks.
This is what the scandal is about. Both Eric Rosengren and Robert Kaplan’s financial disclosure forms show they were trading millions of dollars of stocks in individual companies. This is insider trading. They are trading based on information not known by the greater market. When you are working at the Fed, you are actually taking actions that affect the stock prices of these companies. These people knew what was going to happen. When they make certain statements, the market goes up. When they make other statements, the market goes down. And they can use that knowledge to make money.
CNBC Fed Presidents resign: https://www.cnbc.com/2021/09/09/feds-rosengren-to-sell-individual-stock-portfolio-to-address-ethics-concerns.html
Let me explain why insider trading is so bad. Free markets require a fair playing field. Everyone needs to know the same information so that markets can set prices. If someone is gaming the system, it means that someone is getting screwed. There is always someone on the other end of a stock sale. If one person knows some secret information that guarantees they will make money, that means the other person is a sucker and is going to lose money. When these things happen, people lose confidence in the market, and no one wants to invest, because no one wants to lose their money. Markets have to be fair, or they do not work.
In this case, we have the elites at the head of the Federal Reserve gaming the system. They are the people who are supposed to protect the economy. We are talking about millions of dollars of stock transactions, that were probably traded with ordinary Americans who then got screwed.
No one has suggested that what these Fed Presidents did was illegal. It seems that technically they followed all the laws in these transactions, but what they did was not right and it was not ethical. These people knew better. I am just an ordinary accountant, and I even know you are not supposed to do this. When you are a leader in an organization, you cannot trade stocks on information related to your organization that only you know about. That is insider trading. No one is saying that you cannot have investments as the leaders of these organizations, but you can do it in a way that does not create a conflict of interest.
These two Fed Presidents were the start of the scandal, but it has gotten worse. This month it was revealed that Vice Chair Richard Clarida moved between $1-5M from bonds to stocks the day before Chair Jerome Powell issued a statement about policy actions during the pandemic.
So just imagine, these people are working together on a response to the Pandemic. Richard Clarida knows that Jerome Powell is going to make a statement regarding his efforts to boost the economy, and Richard buys an enormous amount of stock the day before the announcement.
Just to be clear, the Fed has released a statement saying that Richard’s trades were pre-planned and he did not know anything. The other Fed Presidents said their resignations were for medical reasons. You can believe that or not, but the scandal gets worse.
The Federal Chairman himself is in the cross fires of this scandal. Jerome Powell sold between $1-5M of stock in an index fund. This happened conveniently right before the market tanked when it lost 6% of its value. Jerome Powell is not as bad as the others because at least he was selling an index fund and not individual stocks. But it is still horrible. Why is he trading his personal stock portfolio? This is an enormous stock sale. It gives him an economic incentive for the market to go down. If he just sold, he wants the market to go down, so that he can rebuy the stock at a better price. So ordinary Americans are struggling to make it through the Pandemic, and the Chair of the Federal Reserve, who is supposed to be looking out for the economy, is betting against the stock market.
The American Prospect: https://prospect.org/economy/powell-sold-more-than-million-dollars-of-stock-as-market-was-tanking/
The Fed has now responded to this scandal. Jerome Powell has issued new rules for its leadership prohibiting them from owning individual stocks. They can now only hold mutual funds, and go through a more rigorous ethics check including a 45 day notice period before making transactions.
CNBC Fed response: https://www.cnbc.com/2021/10/21/fed-to-ban-policymakers-from-owning-individual-stocks-restrict-trading-following-controversy.html
If you want my opinion, there should be a six month waiting period before making stock transactions. These are wealthy people. They can afford to plan ahead six months before making a stock purchase. They are holding important positions where they are public servants. As a matter of respect for the people they serve, it should not be a problem for them to wait six months. Then there would not be any potential for them to game the system. If six months seems like too much uncertainty in a volatile market, you can always insure your transaction by purchasing options, so you end up with a price that you want.
What all of this shows is a culture problem at the Federal Reserve. It goes all the way to the top, where people are looking out for their own interests instead of doing their jobs. It is great that they put stronger rules in place, but it has shattered my confidence in Jerome Powell to lead this institution, an institution that is so important to all of our lives.
This has all come to light at a time when Jerome Powell’s appointment is coming to an end in three months. President Biden has to decide whether to nominate Jerome Powell to serve another four year term as the head of the Federal Reserve.
Since the scandal and this important decision for the President, it is worth taking a closer look at Jerome Powell. There are some interesting things about Jerome Powell. To start with, he is the most wealthy chair of the Federal Reserve. He is incredibly rich, which is one reason I do not understand why he had to make those stock trades. When he took the job in 2017 his assets were between $21 and $61 Million. Given his stock trades, those values are probably a lot more now. He is also not an economist which is unusual for the chair of the Federal Reserve. Instead he is an investment banker.
Let us look at his background. He earned a degree in Politics from Princeton and a Law degree from Georgetown in Washington DC. He worked in the Republican administration under George W. Bush. But most of this work experience is as a lawyer in New York and as an investment banker. So he is a lawyer, politician, and very rich investment banker. Let us contrast that with the last several heads of the Federal Reserve.
Paul Volcker. Chair from 1979-1987. Economist.
He was an economist. He attended Princeton where he wrote a Thesis on “The Problems of Federal Reserve Policy since World War II.” He then got a Masters in Political Economy from Harvard University. Then he studied at the London School of Economics.
He successfully tackled and corrected the worst inflation problems in US history. His great accomplishment was the suspension of gold convertibility.
Next, Alan Greenspan, Chair from 1987-2006. Economist.
He was an Economist. He attended New York University’s Stern School of Business earning a Bachelors in Economics and a Masters in Economics and a PhD in Economics.
Alan Greenspan is famous for successfully guiding the economy through the dot com bubble.
Next Ben Bernanke, Chair 2006-2014. Economist.
He is an Economist. He graduated from Harvard with a Bachelors in Economics and a Masters in Economics. He received a PhD in Economics from MIT. And he was a professor of Economics at Princeton and chaired the Department of Economics.
He is famous for successfully guiding the economy through the Great Recession and avoiding a near economic collapse.
Next, Janet Yellen, Chair from 2014-2018. Economist.
She is an Economist. She graduated from Brown University with a Bachelors in Economics. She received a Masters and PhD in Economics from Yale University She is famous for two things. 1) Under her four year span she achieved the lowest unemployment in the United states since 1970. 2) She stood up to President Donald Trump and said it would be wrong for him to weaken or repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act. Donald Trump fired Janet Yellen, and replaced her with Jerome Powell.
And that brings us to Jerome Powell. So let’s look at this list. Do you see a pattern here?
- Paul Volcker. Economist.
- Alan Greenspan. Economist.
- Ben Bernanke. Economist.
- Janet Yellen. Economist.
- Jerome Powell. Investment Banker.
These are all economists until Jerome Powell who is a rich investment banker who is using the Federal Reserve to trade stocks. Are you kidding me? Does anyone else see the problem with this? Why do we not have an Economist as the head of the US Federal Reserve? Here is what I think. I think Jerome Powell has done a good job. He has made some tough decisions and got the nation through the Pandemic. But with this scandal, I think it is time we move on to someone else. We have so many incredible Economists in this country. Let us put an Economist back as the head of the US Federal Reserve.
Leave a comment down below letting me know what you think!
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.