Lael Brainard left her seat as second-in-command of the Federal Reserve Board of Governors to become the Director of the White House’s National Economic Council last month. This leaves a vacancy on the Board of the most powerful central bank on earth, and a further vacancy for the powerful Vice Chair position. One of the rumored names in the mix is Seth Carpenter, the chief economist at Wall Street megabank Morgan Stanley.
The conflict of interest here would be self-evident. The Fed is Morgan Stanley’s most direct regulator — the bank submits resolution plans in case of failure to the Fed, needs the Fed’s permission to acquire other companies, and has to show the Fed its balance sheets regularly as part of the Fed’s stress testing regime. Morgan Stanley is also a globally systemically important bank, or G-SIB, which means the Fed is in charge of making sure that Morgan Stanley isn’t too interconnected with the rest of the global financial system, lest a few bad bets destroy the whole world economy.
Morgan Stanley is currently under investigation by the Securities and Exchange Commission over its “block trading” practices during the collapse of Archegos Capital Management, a onetime multibillion-dollar family investment firm. Archegos had heavy exposure to ViacomCBS. In March 2021, Morgan Stanley was trying to sell a new round of ViacomCBS stock issuances to potential investors. When investors didn’t bite, the bank turned around and issued a margin call on Archegos, which triggered its collapse. That, in turn, caused Morgan Stanley to acquire Archegos’ ViacomCBS stock, which it started selling at a much lower price via block trades.
The question is whether the bankers who issued the margin call also knew that their peers were struggling to sell the ViacomCBS stock. No matter what the investigation ultimately turns up, it’s a classic case of a Too Big To Fail bank also being a Too Big To Manage bank. If their chief economist suddenly becomes one of their top regulators, the conflicts of interest will only multiply — as will the potential for criminal acts and bad practices to be casually swept under a rug.
Carpenter came to Morgan Stanley in 2021 after four years as the chief economist at UBS, another massive bank regulated by the Fed. Before that, he spent a year at Rokos Capital Management, a British investment management firm.
Before he went to Wall Street, Carpenter spent 14 years as a Federal Reserve economist, where Former Board of Governors Chairman Ben Bernanke reportedly mentored him. He was the Acting Assistant Secretary for Financial Markets at the Treasury Department during the last three years of the Obama administration — he’d been tapped for the permanent job, but Senate Republicans took his nomination hostage as an opportunity to grandstand about a leak at the Fed years earlier. There is no evidence Carpenter was involved in said leak.
It’s perhaps understandable for someone who’s been through that frustrating situation to choose to leave public service and get rich on Wall Street. But spending the Trump years, and half of Biden’s first term, in the beating heart of American financial capitalism necessarily means that Carpenter is not the same person he was when he left Washington. When interacting with Morgan Stanley officials trying to get their colleagues off the hook for regulatory violations, he’ll be having to say “no” to his former colleagues, with whom he perhaps hopes to work again after this time in government. Wall Street lobbyists know better than anyone in Washington that the temptation not to anger a potential future employer is a powerful tool for influencing regulators. And we know that Wall Street banks lobby the Fed extensively.
Nor is it as simple as just having Carpenter recuse from Morgan Stanley-specific matters (not that ethics rules at the Fed have been especially well enforced lately anyway.) What about when Goldman Sachs, or JPMorganChase, or Wells Fargo officials make similar arguments that might create precedents applicable to Morgan Stanley? Or when an issue applies to big banks as a collective, such as developing the annual stress tests?
Recusal is not a meaningful solution to a problem that would be entirely of Biden’s making. Regulators with known conflicts of interest should not be nominated for jobs — people should be appointed for jobs if they can do the whole thing, not just a few ethically permissible parts of it, Swiss cheese-style.
Of the tens of thousands of qualified macroeconomists in this country, it shouldn’t be that hard to find one who has not literally had his checks signed by Wall Street. President Joe Biden should find a different candidate for the Fed than Seth Carpenter.
PHOTO CREDIT: “Morgan Stanley Headquarters” by Ajay Suresh is licensed under CC – BY – 2.0