The big financial news story tonight is the unexpected resignation of Richmond Fed president Jeffrey Lacker, only six months before his term was due to end. Despite headlines like the one at the Wall Street Journal, Fed’s Lacker Resigns Over Leak, Dealing Blow to Bank’s Credibility, putting the damage to the bank’s reputation front and center, it looks as if the central bank and outside investigators have not come close to getting to the bottom of the matter.
The background is that, Medley Global Advisors, a firm that had its origins as a distressed debt investor but whose research unit is now owned by the Financial Times,1 published a note in 2012 that made no bones about being based on extensive inside information from the Fed. We’ve embedded it at the end of the post. It described what September Fed open market committee meeting minutes said, stating that they were not to be released until the next day, at 2:00 PM.
From a trading perspective, the big news was at the top: “The minutes will show…it will be unlikely that the labor market improvement will be substantial enough to stave off new Treasury purchases into 2013.” And in the sixth paragraph it describes how the Fed was likely to vote as early as December to stop the part of its MBS buying designed to counter the bonds being paid off (due to foreclosures, home sales, refis) and buy roughly $45 billion a month of Treasuries instead.
The amount of granular detail was stunning. For instance:
The committee will attach a predictive timetable outlining the duration of these purchases…The monthly MBS purchases of around $40 billion will continue along side the new program…Tomorrow’s minutes will reference a staff paper…The minutes will show the dovish majority was ready….[to make] open ended MBS and Treasury purchases as early as last month.
This is so specific that it comes of as if Medley either got its hands on an advance draft of the FOMC minutes or someone read it to her.
The report also describes, again in depth, how the decision process prior to the September meeting departed from established norms as well as voyeristic tidbits, such as that finalizing the text of the policy recommendations kept staffers up until after midnight.
Given how extraordinarily revealing this note was, Lacker’s departure is unsatisfactory. Specifically:
Either Lacker lied or the investigators aren’t even close to getting to the bottom of this. Lacker has admitted only to taking a call from the Medley analyst, supposedly having her run insider detail by him, and indirectly confirming it by not getting off the phone. From his resignation letter, which was released by law firm McGuireWoods, not the Richmond Fed:
During that October 2, 2012 discussion, the [Medley] Analyst introduced into the conversation an important non-public detail about one of the policy options considered by participants prior to the meeting. Due to the highly confidential and sensitive nature of this information, I should have declined to comment and perhaps have ended the phone call. Instead, I did not refuse or express my inability to comment and the interview continued. Additionally, after that phone call, I did not, as required by the Information Security Policy, report to any FOMC personnel that the Analyst was in possession of confidential FOMC information. When Medley published a report by the Analyst the following day, October 3, 2012, it contained this important detail about one of the policy options and I realized that my failure to decline comment on the information could have been taken by the Analyst, in the context of the conversation, as an acknowledgment or confirmation of the information.
This reads like the equivalent of a plea bargain, that Lacker and his lawyers negotiated him to ‘fess up to the most minimal breach possible provided he resign.
Alternatively, if Lacker is being truthful, it means that one or more additional people provided the information to the Medley analyst, Regina Schleiger.
The Fed appears to have engaged in coverup. From CNBC:
The Fed was criticized for not referring the leak to the Securities and Exchange Commission or the FBI. Instead, Fed General Counsel Scott Alvarez lead a Fed probe into the matter from October 2012 until March of 2013.
We’ve written before about Scott Alvarez, who lied shamelessly to the court in the AIG bailout trial. Lacker apparently felt he was at no risk in keeping mum during Alvarez’s internal investigation. That also suggests that it was unserious, as in Alvarez didn’t seek phone records. There could only have been a comparatively small number of people who would have had enough knowledge to provide the information to Medley, and if none of them admitted to the breach after being asked politely, the next response should have been to try to ferret out what had happened by other means. Alvarez and Lacker apparently hoped this would blow over.
Using new rules under Dodd Frank, the CFTC investigated and made a criminal referral to Department of Justice, which took it up. It was only when Federal investigators came calling and Lacker was at risk of prosecution for lying to Federal investigators that he admitted to speaking to Medley.
The Fed allowing staff, particularly members of the Board of Governors, to speak to hedgies and people who sell research to them is barmy. The Fed guidelines on staff contacts with the public kinda-sorta say that this sort of thing isn’t on. See, for instance, Item 6:
Staff will strive to ensure that their contacts with members of the public do not pro vide any profit-making person, firm, or organization with a prestige advantage over its competitors. They will consider this principle carefully and rigorously in considering invitations to speak at meetings sponsored by profit- making organizations and in scheduling meet- ings with anyone who might benefit financially from apparently-exclusive contacts with Federal Reserve staff.
But let us not forget that Yellen herself met twice with Medley, in person, in 2011 and 2012. But the central bank said that was OK…because the last meeting was in June, well before the leaked decisions took place in September and October, so she couldn’t be blamed for it.
The 2105 Wall Street Journal story discussing these incidents cited analysts trying to defend the practice:
Stephen Stanley, chief economist with Amherst Pierpont, has met with Fed officials and said they tend to say as little as possible. “It’s usually 95% someone like me talking and maybe 5% them, and most of their input is asking questions,” he said. “Usually the folks at the Fed, when they have those sorts of meetings, they have to be careful not to reveal too much.”
Let us not kid ourselves. The Fed gets top economics graduates for its research staff. They are perfectly capable of digesting data and also have access to the intelligence of the New York Fed trading desk. The idea that Fed governors have anything substantive to gain via these meetings, save a perverse idea that this amounts to some sort of transparency, is misguided. The analysts hope to gain a scintilla of insight that they can use to gain actual or apparent insight. The same Journal story showed that Medley treated this sort of access as a selling point:
Medley makes money by providing clients with information about policy developments in areas including central banks, energy markets and geopolitics. The firm says on its website it does this “by cultivating relationships with senior policy makers around the globe.”
And as a mere management consultant (at that point the blog didn’t have all that much traffic), back in 2007, a senior person at Medley, who was also a consultant to the Treasury for terrorist financing and mentioned he could get the ECB’s president Jean-Claude Trichet on the phone, was astonishingly gossipy the few times I saw him for drinks when there was no obvious commercial benefit, and a fair bit of was inside information. I wrote some of it up in late 2007. An astute reader recognized some of it as intel from the Fed, shorted Fed futures based on it and rode them all the way down through the Lehman phase of the crisis, making a six figure profit. So if someone who was merely in Medley’s outer circle was getting tradeable information, what have the clients been getting? In other words, the gaffe appears to have been that the Medley analyst and her boss had the bad judgment to give away so much detail in writing, as opposed to, say, in a conference call.
When the Europeans do this sort of thing, they are much more efficient. From a 2015 Wall Street Journal article:
Investors at a select dinner at a five-star London hotel on Monday were handed a roughly 12-hour head start over the rest of the market when a top European Central Bank official presented them with fresh details of the bank’s bond-buying program.
Fewer than 100 diners, including hedge-fund managers and other investors, heard ECB board member Benoît Coeuré explain that the bank would speed up the pace of bond purchases before the summer.
When the ECB made Mr. Coeuré’s comments public Tuesday morning, the euro tumbled while stocks and bonds soared.
Back to the US. It’s widely believed among finance professionals that the Fed is way too close to certain major institutions, such as Pimco, and they do, as one would expect, get an information advantage. However, given that l’affaire Medley was not with an institutional investor, those cozy arrangements appear to be under no threat.
1 Update. The original version of the post didn’t clarify that the Medley investing business continued to operate as Medley Capital after the research group was sold to the Financial Times. See here and here for more detail.
Medley Global Advisors' October 3, 2012 Report by CNBC.com on Scribd
Yves, you got some background wrong with Medley. The distressed debt investor was a later, and different iteration of the firm. This only involved the advisory.
No, Medley was started in 2005. The senior person I was having occasional drinks with in mid-late 2007, made clear Medley was having trouble finding and making good investments, as in the way they had set themselves up as an asset-based lender which led to adverse selection. One of the reasons he was talking to me was as someone who could help them kick the tires of deals they were looking at. The conversations went far enough that I met with Medley at their office with several people, including Richard Medley. And they’d clearly been this at this long enough to realize they’d made some mistakes, so it wasn’t as if he was talking with me contemporaneously with starting the effort.
Forbes confirms that they were in this business from the outset:
Now the post does say “distressed debt” rather than “asset based lending” and in retrospect, I should have been more specific. But they were lending to risky credits and the way hedge fund investors get slotted into sub-strategies (global macro, market neutral, event driven, etc), they’d be classified as distressed debt.
I recognize the leak involved only the research arm and never said otherwise. This happened in 2012 after the FT purchase. The FT is not running any investment funds.
No, Medley Global Advisors was started well before then. It predates 2000. Medley Advisors the credit hedge fund was started when Richard Medley sold the advisory firm to a Boston based VC in 2005. With nothing better to do he partnered with a distressed credit trader or 2 from JPM. The advisory firm was eventually bought by the FT. Regina only ever worked for the advisory firm.
The hedge fund didn’t sell “research” – the advisory firm did. There was no connection between the hedge fund and the research arm.
I am well informed on this subject and a fan of your blog.
Then how do you explain my contact, who was with the credit hedge fund (had an office on premises), regularly blabbing about an astonishing amount of central bank inside information, both from the ECB and Fed? It wasn’t at all a fit with the ambit being an asset-based lender. In other words, my experience doesn’t track with your account that there was no connection between the two operations as of 2007.
And to be clear, he didn’t have prior investment experience, so it was also far from clear what his role could have been at an asset based lender.
Plus going way back on the Internet, searching for items before 2005, there are links to pages where the URL now displays different content that raise questions. For instance:
Activist Investors – The Complete List – Fintel.io
Mar 1, 2003 – KERBY WILLIAM, 1. Land & Buildings Investment Management, LLC, 1. Dangdal International Group Co. Ltd, 1. Medley Capital Corp, 1. WU Yun Fai Ric, 1.
Still, Medley Capital Corp didn’t exist in 2003. I worked for MGA in 2003. I know that RM didn’t have investment experience – but I think what he brought to the Medley Capital table was “edge” and capital raising contacts/name recognition.
Of course, just because MGA was no longer owned by RM doesn’t mean there was no contact between the firms. But there was no ownership overlap and no official cooperation. All that said, I will check with a friend who was at Medley Capital.
“Let us not kid ourselves. The Fed gets top economics graduates for its research staff. They are perfectly capable of digesting data and also have access to the intelligence of the New York Fed trading desk. The idea that Fed governors have anything substantive to gain via these meetings, save a perverse idea that this amounts to some sort of transparency, is misguided. The analysts hope to gain a scintilla of insight that they can use to gain actual or apparent insight. The same Journal story showed that Medley treated this sort of access as a selling point:”
I think you are a little off here. I myself used to meet Fed officials regularly. I know all the players you mentioned in you piece. Check with Mr. Rosner who is also a Medley alum. Fed officials liked to meet to check the markets pulse. To get a sense of what the market was thinking. And to hear gossip from other central banks.
Also just because one Medley consultant gets something right doesn’t mean he had access to illegitimate information. Sometimes people get things right by luck, and sometimes by judgement. Sometimes, stuff is plain obvious.
Ironic in a way that Paul Richards is now Medley CEO. UBS had a lot of run is with the justice department. I guess he will have a lot of relevant experience.
You appear not to have read the embedded document or are choosing to mischaracterize it. The level of detail does not result from “getting it right” as in making a good guess. It discusses what will appear in the next day’s release of FOMC minutes in great detail, including things that are outside the purview of an analyst’s market oracle focus, like the new analysis that was to be appended to the document. Either the analyst got all that detail from inside sources or was acting as a fabulist with high odds of looking like an idiot if they’d imagined things incorrectly. You are seriously telling me Medley analysts are in the speculative fiction business?
And you forget that I spent years being hired by top investors, both hedge funds and Forbes 400 investors, to advise on investments. Wall Street research is massively overvalued. And why do senior Fed officials need market gossip? It’s irrelevant to the job their dual mandate. They’ve bought into the hype, which in turn puts them overly in contact with the financial community and distorts their priorities to favor the point of view and interests of Wall Street rather than the real economy. It’s one of the mechanisms of “cognitive intellectual capture” that economist Willem Buiter called them out for in 2008.
The only parties that might make use of that sort of intel are the guys on the trading desks at the NY Fed. And you get plenty just talking to your trading counterparties on the phone. I’ve sat on trading floors and listened in on the gabbing.
There is almost a “We want to sit at the cool kids lunch table” element to the Fed interactions, where they gaze across the divide at all that action on (and off!) the Street and wonder what is going on over there. It takes some effective policy-making and reiteration to disabuse staff of those notions.
Yes, the effect of interacting with people who usually wear costly suits has to have an impact in our plutocratic society. Ironically, the folks at the NY Fed have a bit of vaccination against that by working in a building whose interior is a lot like a Venetian palace.
Given the Venetian aspect, is there a Bridge of Sighs, or is it a Bridge of Size?
So, with respect to whether Medley analysts are in the speculative fiction business, I have to say yes, on occasion. Richard Medley certainly was occasionally.
As for reading the embedded document you are right. However I was familiar with the story from around the time it happened and know some of the protagonists personally(not Dr Lacker). I wasnt disputing your characterization of the Medley story but rather this element.
“And as a mere management consultant (at that point the blog didn’t have all that much traffic), back in 2007, a senior person at Medley, who was also a consultant to the Treasury for terrorist financing and mentioned he could get the ECB’s president Jean-Claude Trichet on the phone, was astonishingly gossipy the few times I saw him for drinks when there was no obvious commercial benefit, and a fair bit of was inside information. I wrote some of it up in late 2007. An astute reader recognized some of it as intel from the Fed, shorted Fed futures based on it and rode them all the way down through the Lehman phase of the crisis, making a six figure profit. ”
Im trying to figure out who it was from your description but its not obvious. But either way, yeah, he might have gotten lucky. Its true that Medley-ites are very gossipy people. But that is the job after all.
If you think about the economics of the “markets intelligence” business, then its pretty obvious that its not unrelated to astrology. Credibility is everything, but you couldnt possibly be expected to be right ALL the time. Sometimes one might try and capitalize from good guesses.
This guy was on the credit side, not the advisory side. And I ran only one bit of gossip from him. The ECB and other Fed gossip was accurate too.
The bigger point is he was with the asset lender (had an office, I went in there before a small group meeting to be checked out as a possible consultant to them). So why would a guy like this be up to his eyeballs in central bank intel if there was no relationship with the advisory business as of then, as you claim?
Well my primary argument is that the VC firm buying MGA is a matter of public record. See link below.
However a Richards gonna Richard. He had plenty of personal contacts and he lived for that kind of thing. Plus who at the firm he founded would not take his call? I will go away and ask my Medley Capital contact just in case. But I’m pretty sure.
But if you don’t believe me ask Rosner. He was there too.
I didn’t address your point on why the Fed needs to talk to Medley. Well first of all I agree with you. There isn’t really any pressing need or strong argument. However playing devils advocate, if I was a Fed official I would like to know how the world looked from outside. I think too many of their annecdotes come from wall street, and not enough from the unions, but there is a case for interfacing with the world. Of course there is also the transparency argument. Publications charging 15k a month should have access just like publications charging $2.5 per day. But you know all that. There was always a question mark over the space. Remember that GS economist who went to jail? . There is a line, and it’s easy to cross it in equities. However it wasn’t always so clear where the line was in fixed income or fx.
That said, this instance looks over line to me. But the while thing is a questionable business model.
“Yellen herself met twice with Medley, in person, in 2011 and 2012. But the central bank said that was OK…because the last meeting was prior to the leak, so she couldn’t be blamed for it.”
Read this a few times but am still confused. I can only assume you meant AFTER the leak. Right?
Will clarify in the post. The leak of FOMC minutes about the September board meeting took place on October 2, the day before their public release. Yellen’s 2012 meeting was in June, way before the events that were leaked took place.
Just before (as in single days) SNB dropped the CHF/EUR floor, a rumor was going on that SNB called all Swiss banks on the weekend to notify them they were going to do so, and let them position themselves. I know of at least one institution (and a third rate at that) that acted on the rumor literally hours before SNB acted and saved itself a large amount of money.
It would have explained why few institions lost much money on the floor being dropped.
Well, why wouldn’t they tell their own banks ?
And there were public hints if you knew where to look (I didn’t…).
I guess Trump was already going to appoint a new governor, but I wonder if this gives him leverage to put in someone more aligned with his philosophies. Whatever the hell those are.
To drain the swamp…and fill it up with trash (it would make a nice park).
To drain the swamp…and fill it up with trash (it would make a nice park).
He’s looking for a GOP dove who won’t crush whatever fiscal stimulus he can get out of congress. My money is on Kashkari.
This incident reminds me of Mervyn King’s refusal to socialise with the City apart from Lord Mayor dinners and trade association conferences.
Some in the City felt that informal lines of communication were necessary, even the twitch of the governor’s eyebrows over a meal. King felt that the authorities had become too cosy with the City and, in his case, preferred to watch cricket and tennis and visit where he was born and raised (Buckinghamshire, Yorkshire and the West Midlands).
Total corruption from top-to-bottom.
There will be hell to pay, eventually.
So everyone walks with money in hand. just another white collar something,