Randall’s been off a couple weeks. Really in form in the Sept 13 issue of Barron’s. Leads off with Derick Jeter’s admission to the Baseball “Hall of Fame”. Next, Forsyth bemoans that similar honors have been denied baseball legends Barry Bonds (for steroid related crimes) and Pete Rose (for betting on games he was managing). From there Forsyth pivots into a couple apparent “conflicts of interest” by two fed officials who are (or have been) instrumental in setting monetary policy.
“However, in this age of legalized gambling, down to having betting windows at Wrigley Field, Rose's ban looks ridiculous, wrote Chicago Sun Times columnist Steve Greenberg this year. Assuming that everybody in the stands and betting on their phones from home have access to the same information, they can lose their money fair and square. Compare that to the actions permitted for Federal Reserve Bank presidents. This past week, The Wall Street Journal reported that Dallas Fed President Robert Kaplan actively traded stocks last year. And Bloomberg disclosed much the same about Boston Fed President Eric Rosengren, whose favored investments included estate investment trusts, a highly interest-rate-sensitive sector. Both said they had complied with their respective bank's code of conduct.”
Where are the markets headed? Forsyth isn’t sure. In a reference to Broadway’s Hamilton he says that if you’re not “In the room where it happens“ (a backhanded reference to the Fed officials) you’re at a distinct disadvantage when it comes to managing your own money.
Source: Up and Down Wall Street - Stocks Could Soon Correct. Or not. by Randall W Forsyth
(Taken from print edition. If you can locate an online version of Forsyth’s column please link it.)
Pg 6, UP & DOWN WALL STREET. What were those Fed Presidents (KAPLAN/Dallas, ROSENGREN/Boston) thinking when actively trading stocks? They said that their actions were legal, but they will stop and sell those stocks to avoid bad appearances.
“Dallas Fed president Robert Kaplan to sell off his holdings in stocks like Apple, Tesla and Amazon”
“The president of the Federal Reserve Bank of Dallas pledged Thursday to sell his holdings in individual stocks such as Apple, Tesla and Amazon by Sept. 30 after his trades totaling millions of dollars in 2020 became public this week. Kaplan and Boston Fed president Eric Rosengren released near-identical statements about their plans to divest their stock portfolios and reinvest in either diversified indexed funds or keep the proceeds as cash. In Kaplan’s case, his trades last year came while he was voting on critical monetary policy for the U.S. during the pandemic.”
“Kaplan, 64, was a voting member of the 12-member policy-setting Federal Open Market Committee last year. The committee rotates the policy-deciding votes among regional bank heads each year. This year, he’s not a voting member. That means he attends the eight yearly FOMC meetings and contributes to discussions but can’t vote. Rosengreen, a voting member this year, listed stakes in four separate real estate investment trusts and disclosed multiple purchases and sales in those and other securities last year. There is precedent for Kaplan and other Fed Presidents to trade stocks while serving on the committee.”
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When presidential appointees - who may be required or expected to sell the stocks/holdings that they acquired prior to government service or employment - they typically receive a temporary "safe harbor" on the realized gains that would otherwise be realized by that forced sale.
Believe/recall that the taxes on the gains are deferred until the replacement assets (those that they acquired as they began their government service) are sold.
Unclear if such a "safe harbor" (or temporary tax holiday) will apply in the case of Fed bank presidents Kaplan and Rosengren.
If they don't, and it can be shown that they traded on "insider" information, the SEC can force them to "give back" their trading gains, and can also impose penalties, etc.
Wiki link, with references, below. Check out 'Notes' at bottom of page for numerous references to various incidents.
Previously, Fed restrictions on Fed President stock trading had focused upon their trading in the stocks of regulated institutions, i.e., big banks, under the now quaint notion that bank stocks were the primary asset class influenced by the Fed's (regulatory) activities.
The Fed's COVID asset purchases - and Kaplan and Rosengren's trading activity - demonstrate the folly of the original trading restrictions.
FWIW, when Alan Greenspan was Fed Chairman (and already wealthy), his personal investments were primarily short term treasury bills, to avoid any apparent conflict of interest. Link to 1998 WSJ article below.
Greenspan Says His Investments Are in Short-Term Treasury Bills
By Jacob M. Schlesinger WSJ | Aug. 18, 1998
I think he's getting the problem backward. It's not that Rose might leverage nonpublic knowledge, say that some teammates were playing with hidden injuries, to make profitable bets. It's that Rose had the power and ability to change conditions so that bets he had made would pay off. He wasn't managing that many years after the Black Sox.
Okay, so trading/betting on nonpublic information is also a concern. The major problem though is not that someone makes a few bucks (or a few million bucks) off of public information, but that someone is motivated to manipulate the entire system.
Imagine if Powell had made sizeable investments that would pay off if interest rates rose - not based on private information - just public data that the economy was improving, inflation increasing, etc. Now suppose the economy goes into a tailspin, say Covid μ turns out to be more virulent, more resistant to current vaccines than currently believed. He would be tempted to, and likely have the power to raise interest rates anyway.
That's the bigger problem. Market manipulation rather than insider trading. The insider trading rules allow an exception for selling according to a predefined schedule. That protects against someone making use of insider information. But it doesn't protect against someone manipulating the system, knowing what is scheduled to be sold and when.
In fact, the SEC chair is currently considering beefing up this rule. Legislation not required.
Since 2012 when the STOCK Act was passed, Congress has been subject to more or less the same rules as everyone else. One can make the case that Congress should be subject to more stringent laws, and for that, legislation would be required.
Great point. Perhaps that aura of Rose as the relentless “grind-it-out” hustler we remember blinded some of us to the possibility you mentioned. For Pete to intentionally “throw” a game would be like ….. maybe Casey striking out in the ninth!
I’m afraid such shenanigans are more in play than we realize. Lost my hide wagering on some late night execution baseball this spring. (Dumb in the first place). Since the games count for little and yet are being wagered on by many, who’s to know if that starting pitcher really just “lost his touch” and walked 3 or 4 in the 7th? Or, did the manager send a reliever in late in the 9th who he knew to have a sore shoulder? And, much as I loved basketball, you have to wonder when a leading scorer fouls out with time remaining leading to a team loss or comes up limping and asks to be taken out early. I dunno. But gambling ain’t ever been the cleanest racket in town. Where there’s big $$ to be had, there’s always somebody scheming to take it.
Edit: In fairness to Forsyth, his approach is often “tongue-in-cheek” (and very effective). So need to cut him some slack on the Rose issue!
Yeah. I don’t know how Forsyth missed that. Since it’s not mentioned in the referenced article, I’d appreciate your starting a separate thread on the topic rather than using this thread as a foil.