Unresolved Allegations of Criminal Insider Trading Leaks from the Fed

A segment on yesterday’s Boom/Bust program, starting a 22:30, discusses the still-open inspector general criminal investigation into leaks from the Fed. As Ed Harrison recounts, the Fed had set up limits on meetings with officials in 2011 because former Fed staffers were profiting from these relationships. ProPublica broke the story. Huffington Post provides a summary:

The shocking leak constituted a serious breach of protocol at the normally secretive FOMC, the central bank’s main policymaking body. In October 2012, one day before the scheduled release of minutes from the Fed’s September 2012 meeting, elite clients of Medley Global Advisors, a political and economic policy intelligence firm, received valuable information about a coming innovation to the Fed’s long-established quantitative easing program. Quantitative easing attempts to stimulate the economy by keeping borrowing costs so low that businesses and households are induced to spend and invest.

Medley clients were sent a newsletter informing them of specific actions the Fed had contemplated at the meeting, such as tying the future direction of short-term interest rates to a 6.5 percent unemployment rate. The numeric thresholds of the Fed’s new policy were not publicly revealed until December 2012.

To make matters worse, an internal investigation was hidden from Congress. Huffington Post again:

The independent investigator charged with policing the Federal Reserve conducted a secret inquiry into the 2012 leak of a sensitive central bank decision, according to a person who was interviewed in the probe. It wasn’t disclosed to Congress….

Ben Bernanke had asked William English, secretary of the Federal Open Market Committee, and Scott Alvarez, the Fed’s powerful general counsel who is sometimes referred to as the “8th Governor” on the Fed’s seven-person board, to investigate the leak…

According to the person interviewed in the inspector general’s investigation, who spoke on the condition of anonymity, the probe included rounds of interviews conducted in 2013 and 2014. The IG, which acts as an in-house auditor but is supposed to remain independent of the central bank, has reported neither the inquiry nor the results in any of its regular semi-annual reports to Congress, which are publicly available. These reports serve as the unit’s accounting of its activities and enable the legislative branch to perform its oversight of the Fed….

Unlike many investigations, the existence of actual wrongdoing was not in dispute at the outset of the probe: The inquiry was tasked only with determining who was responsible.

Sen. Elizabeth Warren (D-Mass.) excoriated Federal Reserve Chairwoman Janet Yellen last month [February] over the central bank’s failure to publicize the results of English and Alvarez’s initial investigation, and demanded more information about the probe.

A June update from the New York Times:

J. W. Verret, a law professor at George Mason University, said the Fed should have referred the matter to law enforcement immediately because of the possibility that the leak amounted to insider trading. …

The review was conducted by William B. English, an economist who ran the Fed’s powerful monetary affairs division and served as the committee’s secretary, and Scott G. Alvarez, the Fed’s general counsel. The Fed’s 2011 policy for investigating leaks — formulated by a committee headed by Ms. Yellen, then the Fed’s vice chairwoman — had called for those two officials to conduct an “initial review” and then determine whether to request a full investigation. The results of that investigation would be reported to the Federal Open Market Committee, which consisted of the Fed chairman and other top monetary officials.

Instead, in March 2013, Mr. Alvarez and Mr. English reported to the committee that they had not been able to identify the source.

By then, the inspector general had received a tip about the leak, eliminating the need for Mr. Alvarez to request a full investigation.

Notice the reluctance of both stories to use the word “criminal” By contrast, consider this Bloomberg account from March:

House Financial Services Chairman Jeb Hensarling said he has been informed by the Federal Reserve’s inspector general that “there is currently an open criminal investigation” into the leak of confidential Fed information in 2012.

This segment is a reminder that the central bank has yet to make disclosures demanded by lawmakers. If nothing else, you need to see the face that Yellen makes when asked about it. Again, the relevant part begins at 22:30.

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  1. daniel

    Thanks for the post.

    Refreshing to hear that “Ben Bernanke had asked William English to investigate”. Some action in the court would be even more helpful than a blog post of a press article. Would that change the way the whole stuff operate? Of course not.

    The very existence of a central bank with enormous monetary powder and massive QE-style market power is a recipe for market corruption. A recipe and even and invitation to it.

    Since such “asymmetries in information” – and access to liquidity and markets – are clearly the essence of WS trading, it is great to occasionally hear in the press that “former Fed staffers were profiting from these relationships”. Is that shocking? Sure. A plain mechanical consequence of the way the monetary system is built? Of course as well. Banana republic, yep per design.

    What about building stuff, inventing new tech… instead of instead of profiting of an “asymmetric casino”?

  2. Larry

    That face was great. A powerful person completely unprepared for a legitimate question. Thanks for linking the video.

  3. Chauncey Gardiner

    Appreciated Dow Jones reporter Pedro da Costa’s raising this matter with Yellen. From the look on her face, this was clearly not a pre-vetted question.

    Ed Harrison raises some very good questions: The Fed inquiry was dropped at the request of several members of the FOMC. Who were they, and why did they ask the inquiry be dropped? Why was this matter not referred to the FBI very early on?

    Evidently a third party that is independent of the Fed provided information about this matter that finally caused it to become a criminal investigation, not someone from the Fed itself. Appears the Fed was intent on covering this matter up. If so, who was responsible for that decision?

    I also agree with daniel’s observation above in the first comment. Although it is no excuse for criminal behavior, the design of the system itself makes it vulnerable to those who corrupt our public officials for private gain.

  4. Steven Greenberg

    The design of the system may not be an excuse for criminal behavior. However, if the system with a poor design is not fixed, then it needs to be fixed. If the Congress has the power to fix it, then they need to understand exactly what is broken. Instead of politely asking the Fed for information, someone should initiate a criminal probe into the cover up. As we have seen so many times, the cover up is a bigger crime than the initial criminal act. People get punished for the cover up more often than the crime. Why doesn’t congress put pressure on the executive branch to initiate an investigation? Do they all know by now who it is that they are all trying to protect? Who is it that made the most money from knowledge of the leaked info? How much money was made from the leaked info? Who received the leaked info and gave it out to the clients of the company?

  5. DJF

    During the 2008 financial crises didn’t the Fed/Treasury/Big Banks have daily meetings to pass around information? What else was this suppose to accomplish other then insider trading to support the banks?

    The banks were getting direct US policy information from the FED/Treasury so they would know which way the FED/Treasury was going to do and so the banks would know which way to bet.

    It was the same as with the 0% loans the banks were getting but the average person was denied, the banks got government information that only they received while the average person was left in the dark.

    The only reason this is not called corruption is because they call it policy.

  6. RUKIdding

    Thanks for the post and the link. From where I sit in peonville, this just looks the same old, same old criminal behavior that never ever gets addressed. Why doesn’t Congress ask the Exec Branch to initiate a criminal investigation? Oh I don’t know. Why doesn’t the sun shine at night? Because it doesn’t.

    NC is great for highlighting most of what’s really going on behind the scenes, and we all witness repeated criminal activities at the highest levels. And then what happens? Bupkiss, other then many of these same crooks and thieves get kicked upstairs into higher levels of policy making. Maybe one of the more egregious crooks in this gang will end Treasury Secretary. Surely his criminal pals would love that. No doubt with boodles cash passed around freely to our not-representatives in the District of Criminals.

    Will Yellen do anything? Why would she? What would be her motivations? She’ll try to sweep this under the carpet. Move along now, children. Nothing to see here…

  7. saltaire

    I am furious. Are there no honest government employees? Perhaps us little people just don’t understand how high level government employment works. Or how lower level government employment works. In my state the morning paper reports that state employees who have been receiving disability payments have been working other jobs with reportable income while continuing to collect disability pay. Now we’re not talking minimum wage greeter jobs here, more like jobs paying close to $200K/year. The state senate investigation has been told by Office of Labor Relations & the State Employees Bargaining Agent Coalition that “these issues were a matter for collective bargaining”. Most people would call these issues criminal. And so “The Beat Goes On”. Hello Greece!

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