Mere hours after last Wednesday’s Federal Open Market Committee (FOMC) meeting concluded—the first FOMC meeting presided over by new Federal Reserve (Fed) Chair Kevin Warsh—Michelle Bowman—the Fed’s Vice Chair for Supervision and the most powerful bank regulator in the country—traveled to New York to be the guest of honor at a private, invitation-only dinner hosted exclusively by Bank of America for a handful of its top Wall Street clients, including hedge funds and others who could greatly benefit from getting exclusive private access or information from a Fed official like Bowman. Reports indicate the dinner was arranged by and presided over by a former New York Fed official who now works at Bank of America, and that Bowman had at least two of her most senior staff from the Fed with her (an apparent example of the pernicious revolving door where former public officials use the contacts, knowledge, relationships, and influence from their public service to benefit their current private sector employers).
As if giving Bank of America and its selected Wall Street clients special access to her and her senior staff (presumably including those who were lawyers or lobbyists for some of those very financial institutions) were not enough, it was reported today that Bowman is implementing a sweeping reorganization of the Fed’s Division of Supervision and Regulation that includes creating a new senior “industry engagement” office intended to interact with banks. The reorganization comes alongside her effort to dramatically reduce the staff of the division by roughly 30 percent and a broader shift away from supervisory approaches that the industry has criticized. Effective supervision unquestionably requires communication with banks, but these actions, the symbolism, and timing are telling—just days after being the featured speaker at a private Bank of America client event, Bowman discloses her plans to the Fed staff (and leaked to selected media) that she is creating a formal office of “industry engagement” within the division charged with supervising those same institutions (like Bank of America).
Bank of America is the 2nd largest bank in the United States. It is so big and dangerous that it is very heavily regulated and supervised by the Fed—specifically by Bowman and her staff at the Division of Supervision and Regulation—to the point that on any given day, dozens of Fed staff actually work on site across the bank’s sprawling operations to ensure it is complying with the law.
Bowman’s (and her staff’s) appearance at a Wall Street bank’s private, insider special event promoting and providing exclusive access to the Fed’s most powerful regulator and a monetary policymaker is—at best—a serious lapse of judgment and likely violates the Fed’s ethics rules. However, it’s much worse than that because the timing is particularly egregious. New Fed Chair Kevin Warsh was sworn in on May 22nd, and he had not spoken publicly between then and the Fed press conference on June 17th, a period of almost 4 full weeks. Only Fed officials like Bowman and Fed staff knew what Warsh said during his first weeks on the job—they exclusively had a window into his thinking, senior Fed officials like Bowman most of all.
The value of such information to Bank of America and its clients cannot be overstated—such information (even if it’s just color or an offhand remark) is literally invaluable and gives them otherwise unattainable insights and a significant competitive advantage. It is simply shocking that any Fed official would do this, and that alone is a violation of the FOMC ethics policy, which states:
“Committee participants will strive to ensure that their contacts with members of the public do not provide any profit-making person or organization with a prestige advantage over its competitors. They will consider this principle carefully and rigorously in scheduling meetings with anyone who might benefit financially from apparently exclusive contacts with Federal Reserve officials and in considering invitations to speak at meetings that are sponsored by profit-making organizations or that are closed to the public and the media.”
Additionally, the Fed applies a very clear and strict set of policies during the “quiet” or “blackout period” which all members of the FOMC and certain senior Federal Reserve staff—which prominently includes Bowman—are prohibited from speaking in any way at any place with the public on monetary policy communications during that time. The policy is specifically designed to prevent Fed officials from discussing monetary policy or their views on macroeconomic developments in the ten days before the start of an FOMC meeting through midnight the full day after the meeting. Bowman’s appearance at the bank’s exclusive private dinner obviously occurred within the blackout period.
Bowman’s appearance and conduct at this event may be even worse than that. It was reported that “one person familiar with the event said Bowman mostly discussed regulatory policy” (emphasis added). Given her zeal in deregulating the banks she is supposed to regulate and supervise, that is no surprise. However, one of the Fed’s most important and consequential rulemakings regarding bank capital—which will significantly affect Bank of America and the select clients invited to the exclusive meeting—was still open for comments. During an open comment period, Fed officials (and those at all the financial regulatory agencies) are always extremely circumspect in what they say, usually no more than “we are in listening mode,” making no comments at all otherwise to the point of rudeness.
Bowman and other Fed officials are expected to be excessively reticent to avoid providing nonpublic insights or creating the appearance that favored market participants are receiving privileged access. That uniform practice—experienced by Better Markets in more than 500 rulemakings—is very important to ensure that no one has an unfair advantage or secret information or insights during the comment period, which is supposed to collect the public’s input on the rulemaking untainted by any agency influence. Given one of Bank of America’s invited guests reportedly asked Bowman about monetary policy after being expressly informed that she could not discuss that subject, it is very difficult to believe that Bowman wasn’t at least asked about the pending capital rules and may well have discussed them—which would be a very serious breach of the rulemaking process.
Bowman’s attendance at the dinner is a serious ethical failure that the Fed’s senior officials, like Bowman and the Fed itself, cannot be allowed to wave away with boilerplate assurances about technical rule compliance. Bowman has claimed she was following the Fed’s ethics rules and didn’t share her views on interest rates or monetary policy. However, even if true, the right question to ask is:
Why the Fed’s Vice Chair for Supervision—its top bank supervisor and regulator—attended and spoke at a Wall Street bank (one of the largest banks she directly regulates) and its private client audience (which have innumerable large financial interests in everything the Fed does and everything Bowman says and does) on the very same evening the new Fed Chair gave his first press conference, the Fed announced its much anticipated policy decision, and during an open comment period when the Fed was actively considering major changes to its regulations on capital requirements that will directly impact them?
The answer, unfortunately, is that this type of ethical blindness, indifference, and arrogance is all too common at the Fed and among too many Fed officials. That’s not a surprise given the Fed’s repeated unwillingness to take action regarding far too many ethical and legal violations at the Fed over the years. Instead, the public gets spin and excuses about misconduct that gets covered up with no transparency, oversight, or accountability. The result is a troubling, very cozy relationship between the Fed and Wall Street’s biggest banks, hedge funds, and other large financial institutions, where insider access and special treatment are just part of how things work at the highest levels of the Fed. Bowman has knowingly compounded all those problems by hiring as her senior staff a troika of Wall Street’s top lobbyists/lawyers whose conflicts of interest, or at a very minimum appearance of conflicts of interest, are obvious.
And remember, we only know about this otherwise secret exclusive event at Bank of America due to the excellent reporting by Nick Timiraos at the Wall Street Journal. The public, in fact, has no idea how many other similar meetings Bowman, her staff, or other Fed officials and staff have had with Wall Street’s banks and other financial institutions.
The Fed Has Covered Up Far Too Many Ethics Violations
The Federal Reserve Board and Reserve Banks have a documented and recurring pattern of ethics failures at their highest levels.
In 2020 and 2021, as the pandemic was killing scores of Americans, the country was in an unprecedented lockdown, unemployment skyrocketed, economic activity plummeted, and fear was gripping the country, the Fed responded by reducing interest rates to near zero and launching several emergency lending and credit programs that often moved markets dramatically. Shockingly, at the same time, multiple senior Fed officials were actively trading in their personal accounts for their personal financial benefit. The Fed’s own ethics officer had specifically warned senior officials in March 2020—at the outset of the pandemic—that the Fed’s anti-trading policies applied and that personal trading should stop. Instead of knowing better or heeding the specific warning, multiple Fed officials, including Dallas Fed President Kaplan, Boston Fed President Rosengren, and Vice Chair Clarida, engaged in significant trading activity that raised serious questions about insider knowledge, conflicts of interest, and insider trading at the Fed. More recently, Atlanta Fed President Bostic and Governor Kugler also engaged in trading that has raised ethical concerns.
Even worse than the trading by those five senior leaders and their resignations after the trading scandals were revealed was the response by former Chair Jay Powell. Rather than taking swift disciplinary action or requesting a genuinely independent investigation, Powell minimized if not misstated and mischaracterized the conduct, inaccurately attributed it to outdated policies, and directed his employee—the Fed’s Inspector General (IG)—who was appointed by Powell, who reported to Powell, and whose very high salary was set by Powell —to investigate after Powell himself publicly stated that the Fed’s own policies were to blame, not the Fed officials themselves. In other words, Chair Powell set up the IG to either confirm his boss’s public repeated statements or publicly state that his boss was wrong and his public statements were inaccurate, at best. Better Markets detailed all of that here and called for a full independent investigation and for a public accounting of the numerous trading scandals. None of that happened.
There is a decade-long pattern here: (1) ethics concerns arise from trading issues by a top Fed official; (2) the official offers technical compliance defenses for his or her conduct; (3) the official resigns and leaves the Fed; (4) there is no independent investigation or fulsome public disclosure of the facts; (5) there is no actual accountability at the Fed or of Fed officials; and (6) the Fed provides the public with spin and PR while sweeping the conduct under the rug and moving on.
Regime Change and Insider Information
Last week’s FOMC meeting was the first chaired by Kevin Warsh, who has made it clear he plans to pull back on public communications—including shorter statements, no dot plot disclosures, and fewer press conferences and less explanation. The explicit logic is that a “quieter” Fed can hear better market signals rather than influence them. Leaving the merits of these potential changes aside, a quieter Fed creates a perverse outcome for insider access: when officials like Warsh say less in public, a private word, wink, suggestion, or statement from another senior policymaker like Bowman becomes much, much more valuable.
Beyond monetary policy and interest rates, Bowman is currently leading a sweeping and reckless deregulatory agenda that directly affects Bank of America and its bank clients’ capital requirements, stress testing, and supervisory actions. That context—a top regulator meeting with regulated entities at an event that is explicitly about giving clients exclusive private access to her—is precisely what ethics rules are designed to address.
The largest banks—the ones the Fed should regulate and supervise most intensively, like Bank of America—have persistent, privileged access to the Fed’s most senior officials through exactly these kinds of private, insider access dinners and events. In fact, events like the dinner, which are marketed for access to Fed officials, amplify the already significant information asymmetries and relational bonds that shape how bank regulation actually functions—often to Wall Street’s benefit and Main Street’s detriment.
The Fed’s rules often can be argued to technically permit these types of things, which itself is part of the problem. But it is only part of the problem: the bigger problem is the lack of leadership as well as a reflexive view that the Fed should do anything to maintain the public perception albeit pretense of probity and integrity.
Part of the problem, however, is that the Fed’s ethics framework was built around a conception of conflicts of interest that is narrower than the reality of how influence operates at the highest levels of financial regulation in Washington. While Bowman could have in fact said nothing about monetary policy, interest rates, the FOMC’s newfound communications strategy, or new Fed Chair Warsh, the bank executives and clients at the dinner received something that community banks, consumer advocates, and the public do not have access to: direct, private access to the Fed’s top regulator (and her senior staff) on the night of a key FOMC decision where, among other things, the Fed’s communication strategy has been previewed to change radically from the past.
To understand how truly outrageous this is, Bowman has not testified alone before Congress during her tenure as Vice Chair for Supervision; her appearances to date have all been alongside other witnesses, thereby depriving the public’s representatives in Congress of direct and unimpeded questioning of her. Thus, Bank of America and its clients at the private dinner enjoyed a degree of direct access to the Fed’s top bank regulator that the members of the Senate Banking Committee and House Financial Services Committee have not had at an open public meeting of those committees.
It Is Past Time to Hold the Fed and Its Officials Accountable
The Fed operates with extensive independence from the rest of the government, controls the most powerful economic levers in the world, and supervises institutions whose failures can devastate the broader economy and wipe out the lives and livelihoods of tens of millions of Americans, as happened in 2008. That power demands a correspondingly rigorous—and rigorously enforced—ethics framework designed and built to eliminate misconduct and conflicts of interest, including even the appearance of conflicts of interest.
More broadly, the Fed should explicitly prohibit all of its employees from attending private, client-focused events hosted by financial firms they supervise. That prohibition should occur at all times, not just during blackout periods or open comment periods on rulemaking. It should require prompt public disclosure of all meetings and engagements between Board-level officials (and their senior staff) and representatives of regulated institutions—regardless of when and where they occur. It should also establish a genuinely independent ethics oversight body.
The Fed’s credibility rests on the public’s confidence that its decisions are made free from the influence of the very institutions that profit from its actions and those that it is supposed to regulate, supervise, and hold accountable in the public interest. Every private dinner, every invite-only client event, and every unanswered question about what was said and to whom at such engagements further corrodes that waning confidence and trust in the Fed. Americans deserve a Fed that works for them—not one that reserves its most valuable access for Wall Street insiders.
It is long past time that the Fed be introduced to genuine and meaningful transparency, oversight, and accountability.
No posts
Comments
Nothing yet. Say the first thing.
Sign in to join the conversation.