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Blog Post | September 23, 2021

The Other Ethics Issues At The Fed Regional Banks

Ethics in GovernmentFederal ReserveRevolving Door
The Other Ethics Issues At The Fed Regional Banks

This post has been updated.

Federal Reserve regional bank presidents Eric Rosengren and Robert Kaplan filed disclosure forms in early September revealing they’d traded stocks affected by the central bank’s COVID-19 response efforts in 2020. Since then, journalists, pundits, and academics have discovered a new interest in the lax conduct of the heads of the U.S. central bank. Federal Reserve Chair Jerome Powell reportedly ordered a new inquiry into Fed practices the same week that the disclosures went public (which, conspicuously, Powell’s spokespeople only told reporters about after Senator Elizabeth Warren sent a letter on the subject to Fed officials on September 15, one week later). 

For our part, the Revolving Door Project sent Powell a letter last week urging him to immediately direct the Fed Board of Governors to ban individual securities trading for Fed policymakers, as well as place Rosengren and Kaplan on administrative leave pending the results of a fuller investigation.

As I highlighted previously, it’s unsurprising that these conflicts of interest flourished under Powell. He comes out of the Carlyle Group, a private equity firm whose entire business model for decades has been predicated on insider connections within the federal government and exploitation of the revolving door.

However, Kaplan and Rosengren’s scandals aren’t the only ethics questions surrounding the Fed leadership’s conduct which merit greater scrutiny. In particular, the regional bank presidents deserve deeper investigation; aside from ensuring regional financial and economic stability in their regions, the twelve banks are also each some of the most influential economic think tanks in the country. The data they do or don’t gather, and the studies they do or don’t undertake, have ripple effects across the entire economics profession, and thus, the public’s understanding of the economy.

As these stories develop, we will update this blog post with new information (and potentially, new scandals) related to ethical conduct at the Fed regional banks.

Tom Barkin’s McKinsey History: Overlooking Work for Purdue Pharma And Others

  • Federal Reserve Bank of Richmond President Thomas Barkin was the Chief Risk Officer for McKinsey before he joined the Federal Reserve in 2017. Prior to becoming Chief Risk Officer in 2015, he was the firm’s Chief Financial Officer. 
    • Barkin was appointed Richmond bank president after former president Jeffrey Lacker resigned after admitting to leaking market-moving, confidential information to a Wall Street newsletter.
  • During Barkin’s tenure as a C-Suite executive, in charge first of financial operations and then of commercial and reputational risks, McKinsey counseled numerous clients toward unethical or even illegal behavior.
  • In her lawsuit against Purdue Pharma, Massachusetts Attorney General Maura Healey provides evidence of McKinsey’s direct involvement in pushing the opioid manufacturer toward more and more harmful practices, as well as efforts to cover up its involvement.
    • McKinsey instructed Purdue sales representatives to emphasize Purdue’s “broad range of doses” — or in other words, to push the most expensive treatment, which was at the highest dosage.
    • McKinsey advised Purdue to tell doctors that opioids provide “freedom,” “peace of mind,” make patients less isolated and more optimistic, and give patients “the best possible chance to live a full and active life.” Prior to the opioid crisis, doctors had a strong norm against prescribing opioid painkillers in all but the most severe cases, due to their highly addictive nature.
    • Purdue staffers told executives that McKinsey was analyzing a decline in “tablets per Rx” down to the level of individual physicians. In a report to the Sacklers, McKinsey advised Purdue to direct sales representatives to the most prolific opioid-prescribing doctors, who wrote “25 times as many Oxycontin scripts” as other doctors. 
    • McKinsey instructed the Sacklers to fight back against DEA and DOJ efforts to curtail the illegal drug trade of fraudulent opioid prescriptions, because if pharmacies stopped filling illegitimate prescriptions it would hurt Purdue’s sales, especially for the highest-dosage forms of Oxycontin. McKinsey advised Purdue in the long term to develop a “direct-to-patient mail order” for Oxycontin, so that pharmacies wouldn’t act as a choke point to prevent illicit sales.
  • ProPublica reported in 2021 that McKinsey never informed the Food and Drug Administration that it was consulting with Purdue or any other opioid manufacturer. McKinsey advises the FDA itself on a broad range of its duties, including drug approval processes. This may violate federal procurement rules requiring government contractors to disclose any potential conflicts of interest. As Chief Risk Officer, making such disclosures and weighing such reputational and financial concerns would have been part of Barkin’s job.
  • The year after Barkin left McKinsey for the Federal Reserve, Kevin Sneader was named as the firm’s new CEO. The reputational fallout from McKinsey’s involvement in the Purdue Pharma scandal dominated Sneader’s tenure as CEO, even though all of McKinsey’s work for Purdue happened before Sneader’s time, back when Barkin was still in the C-Suite. In 2021, just three years later, Sneader was fired by the McKinsey board, which is made up of other McKinsey consultants.
    • Part of Sneader’s response to the Purdue scandals had been to place limits on whom McKinsey partners can and cannot advise. Some reporting suggests that pushback to this led to Sneader’s firing.
  • In recent years, McKinsey has also attracted a federal criminal investigation for its work advising bankrupt firms, as well as scrutiny for the inhumane practices it advised U.S. Immigration and Customs Enforcement to undertake, and its work laundering the reputations of authoritarian governments.

Lack Of Oversight In Main Street Lending Program: Multi-Million Dollar Loans Of The Public’s Money To Crime Boss’ Family

  • The Philadelphia Inquirer reported in late August that a Scranton-area bank had handed out the single largest loan in the Main Street Lending Program ($50 million) to a resort owned by trusts for the bank owner’s children and grandchildren.
    • The bank owner himself, Louis DeNaples of FNCB Bank, had previously given up his own ownership in the casino to resolve organized crime charges.
  • The Main Street Lending Program was established to help small- to midsize businesses weather the COVID-19 pandemic, but had few enrollees due to initially setting minimum loan amounts far higher than what firms could afford to take on or repay, including an initial minimum loan size of $500,000.
  • The Fed and the Treasury chose to exempt the Main Street Lending Program from rules which normally forbid banks from lending federal money to businesses owned by their directors.
    • As the Inquirer wrote, “If borrowers default, it’s mostly the public’s money — not the bank’s — that runs the risk of not being repaid.”

Robert Kaplan’s Stock Trades: Trading Companies Which Benefited From The Fed

  • Federal Reserve Bank of Dallas President Robert Kaplan disclosed multiple stock trades worth over a million dollars in his financial disclosure forms.
    • This included many trades in sectors directly affected by the Fed’s bond-purchases and lending facilities in the wake of the COVID-19 pandemic, including airlines and fossil fuels.
  • Kaplan would have personally voted on market-moving Fed policies throughout 2020, as a member of the 2020 Open Markets Committee.
  • Kaplan’s stock purchases include many fossil fuel firms. This is especially relevant both to Texas’ own oil economy, and to significant pressure upon the Fed to center climate concerns in its policies. Climate activists criticized the Fed for including fossil fuel firms in its lending and bond purchases in 2020, despite many fossil fuel firms having been indebted long before the COVID-19 crisis.
    • The Fed’s fossil fuel bond purchases led the industry to its two biggest years of bond issuance. The fossil fuel industry is better off than it was before the emergency lending program.
    • Kaplan reported over $1,000,000 each in asset holdings in Chevron, Enterprise Products L.P., EOG, Marathon Petroleum, and Valero Energy in 2020.
    • Enterprise Products, EOG, and Valero Energy are all headquartered in Texas.
  • Kaplan also reported multiple trades of greater than $1 million in S&P 500 futures, as detailed by the investigative website Wall Street On Parade. He was also exposed to S&P 500 fluctuations through an S&P ETF. 
    • Using futures, Kaplan would have been able to bet on whether the S&P 500 index would move up or down after the closing bell, which is when the Fed makes most of its market-moving announcements. 
    • From January 1 to April 30, the S&P 500 moved from down 30 points to up 10, in large part due to Fed emergency lending and rate cuts.

Eric Rosengren’s Stock Trades: Buying REITs Invested In The Same Product As The Fed

  • Federal Reserve Bank of Boston President Eric Rosengren disclosed between $50,000 – $250,000 worth of stock in Annaly Capital Management, a real estate investment trust (REIT) which primarily buys and sells mortgage-backed securities.
    • Throughout 2020, Rosengren reported purchasing Annaly stock in January and then again in February, then selling Annaly stock in October and November.
  • The Fed has purchased billions of dollars worth of mortgage-backed securities during the COVID-19 crisis, including $580 billion in the two-month span between March and April 2020 alone. 
    • This backstopped and bid up the value of these products, making Annaly Capital Management’s holdings more profitable.
  • In January 2020, Rosengren reported purchasing stock in Two Harbors Investment Corp, which is also a REIT which buys and sells mortgage-backed securities. He reported selling this stock in September 2020.
  • Similarly, Rosengren purchased stock in Invesco Mortgage Capital, another REIT which trades mortgage-backed securities, in January 2020. He sold stock in Invesco in September, and then again in November.

PHOTO CREDIT: “File:Marriner S. Eccles Federal Reserve Board Building.jpg” by AgnosticPreachersKid is licensed under CC BY-SA 3.0

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