Fed’s watchdog clears ex-officials Kaplan, Rosengren
But both were criticized for personal trades
The Federal Reserve’s internal watchdog cleared two former policy makers of legal wrongdoing in a years-long probe into their personal trading activity in 2020, but chastised them for undermining public confidence in the central bank.
Robert Kaplan carried out multiple $1 million-plus transactions when he was president of the Dallas Fed, at a time when the Federal Open Market Committee deployed a variety of large-scale operations to stabilize markets at the onset of the pandemic. Eric Rosengren, head of the Boston Fed at the time, made numerous trades in funds that were invested in mortgagebacked securities in 2020.
None of the trades violated federal law or broke any rules or regulations, the Fed inspector general said in a report released Monday, though it called the rules in place at the time inadequate and said the trading created an “appearance of a conflict of interest.” For Kaplan, the trades also created an appearance that he was acting on information gleaned from confidential policy deliberations, the report said.
Kaplan and Rosengren retired in 2021 soon after the release of their 2020 financial disclosures. Rosengren did not immediately respond to a request for comment.
A spokesperson for Kaplan pointed to his statement, released when he resigned in September 2021, that he adhered to all Fed ethical standards and policies, and that his trading activities and disclosures met bank compliance rules. The spokesperson also pointed to a statement from the Dallas Fed board at the time that said Kaplan “conducted his investment activities in accordance with the rules and policies of the Federal Reserve System.”
The trades and resulting probes have increased scrutiny and criticism of the Fed, and prompted bipartisan legislation that would bolster congressional oversight of the central bank.
The Fed revamped its trading rules in 2022, imposing sweeping restrictions on officials’ investing and trading activity. In its report Monday, the IG said the previous rules “did not sufficiently support public confidence in the impartiality and integrity of the policymakers and senior staff carrying out the public mission of the FOMC’s work.”
“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,” said Kathryn Judge, a Columbia Law School professor.
“Just because they have been cleared by the IG doesn’t mean they have been cleared by the public or their peers,” Judge said, adding that this can serve as a check against inadequate ethics rules.
The scandals increased attention from Congress on the Fed, with lawmakers questioning governance around reserve bank presidents, who are chosen by local boards in an opaque process. Fed governors, by contrast, are subject to Senate confirmation.
Senator Elizabeth Warren said in 2021 that the trading scandal raised concerns about “a culture of corruption” at the central bank, and said that she wouldn’t support Chair Jerome Powell for a second term as chairman. Warren has blasted the Fed for withholding information from lawmakers about the trades, and introduced bipartisan legislation to subject the Fed’s regional banks to federal public disclosure laws.
“The Federal Reserve is committed to upholding the highest ethical principles to maintain public confidence in the impartiality of its actions,” a Fed spokesperson said in a statement Monday. “The comprehensive new rules adopted in 2022 — including restrictions on the type, manner, and timing of investments, pre-clearance requirements, and a strict disclosure regime — guard against even the appearance of conflicts of interest. We continue to evaluate our rules and will update them as necessary.”
The trades by Kaplan and Rosengren in 2020 occurred during the pandemic, when the Fed was intervening directly in a broad array of financial markets to support the economy.
.Kaplan’s disclosure listed stock trades in securities such as Apple Inc. and an S&P 500 ETF. Rosengren’s trades happened as the Fed bought billions of dollars of mortgage-backed securities in an effort to backstop markets, a piece of its crisis-fighting arsenal that’s similar to what it did during the financial crisis in 2008 and after.
The Fed issued new ethics rules following the scandal to bar top officials from buying individual stocks and bonds, limit active trading, and require new appointees to divest certain assets before joining the Fed.
Those rules are “far better than what we had before,” former New York Fed President Bill Dudley said on Bloomberg Radio. “Certainly the appearance of a conflict is a bad thing because it can undercut the credibility of the central bank.”
Mark Bialek, the Fed’s inspector general, has faced scrutiny from some lawmakers, who argue his position comes with inherent conflicts of interest. The Fed’s internal watchdog is chosen by the Fed chair, and he reports to the Fed board in Washington.
Warren and Senator Rick Scott, a Florida Republican, have introduced legislation to make the IG position a presidential appointee, confirmed by the Senate.