The Inspector General Investigating the Trading Scandal at the Fed, Reports to Fed Chair Jerome Powell, Whose Own Trading Is Dubious
By Pam Martens and Russ Martens: November 8, 2021 ~
Jerome (Jay) Powell, Chairman of the Federal Reserve Board
Fed Chair Jerome Powell was quick to refer an investigation into the Fed’s trading scandal to the Inspector General of the Federal Reserve. Notably, he did not refer the matter to the U.S. Department of Justice which has criminal prosecution powers.
Unlike the Inspector General of the U.S. Department of Justice, as well as more than 30 other Federal agencies, the Inspector General of the Federal Reserve is not nominated by the President of the United States and confirmed by the U.S. Senate. Instead, the Inspector General of the Federal Reserve is appointed by the “head” of the Federal Reserve Board of Governors; he reports to that same Board of Governors; and he can be terminated by them with a two-thirds vote.
The Inspectors General have been codified into law under 5a U.S. Code 8G which notes that “Each Inspector General shall report to and be under the general supervision of the head of the designated Federal entity, but shall not report to, or be subject to supervision by, any other officer or employee of such designated Federal entity.”
The Fed’s Board is supposed to consist of seven members (Governors). Currently, one seat is open. Thus, it would take only four votes to terminate the Inspector General.
Mark Bialek is the current Inspector General of the Fed and has been in that position since July 25, 2011. Bialek was appointed by former Fed Chair Ben Bernanke, the Fed Chairman who oversaw the secret $29 trillion bailout of Wall Street, fought the U.S. media for almost three years to keep the details of that bailout a secret, and then took a job at hedge fund, Citadel, after retiring from the Fed.
In addition to the trading scandal that forced former Dallas Fed President Robert Kaplan and former Boston Fed President Eric Rosengren to step down, at least three current members of the Fed’s own Board of Governors, including Chair Powell, have come under scrutiny for their trading activities.
There is some confusion in the law as to whether Jerome Powell, the Chairman of the Federal Reserve Board of Governors, is the “head” of the Fed or whether the full Board is the head, for purposes of hiring the Inspector General.
On the Federal Reserve Inspector General’s website, it notes the following:
“The Inspector General is appointed by the Chair of the Board of Governors.”
However, the Council of the Inspectors General on Integrity and Efficiency (CIGIE) appears to be believe that it’s the full Board of the Federal Reserve that should have the power to appoint the Inspector General, writing as follows:
“The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into law by President Barack Obama. It established, among other things, that designated Federal entities consisting of a Board or Commission, were to be considered heads of their agencies with respect to the appointment of those entities Inspector Generals. It also established that for removal of such an Inspector General, it would require a written concurrence of two-thirds of the Board or Commission.”
Notwithstanding this confusion in the law, it is clear that having the Fed’s own Inspector General — who reports to the Fed and can be fired by the Fed – in charge of an investigation into the trading scandal at the Fed is not going to satisfy the American people that an independent investigation has been conducted. So why engage in this time-consuming charade? Perhaps that’s the actual purpose – to kill time in the hope that the trading scandal will simply disappear from the headlines.
The Federal Reserve supervises the mega bank holding companies on Wall Street – the same banks that are being serially charged with serious crimes. The Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and Consumer Financial Protection Bureau (CFPB) also supervise various parts of these same mega banks. Curiously, each one of these regulators are known as “designated federal entities” and have the same structure as the Federal Reserve when it comes to how their Inspector General is hired and fired. None of these “designated federal entities” have their Inspector General appointed by the President of the United States and confirmed by the Senate. All of them have their Inspector General appointed by the “head” of their federal agency and all can be fired by two-thirds of their governing body.
Is this lack of independence a factor in the mushrooming corruption on Wall Street? It certainly could be a contributing factor. It could also be a contributing factor in scandals that have engulfed these federal agencies.
Consider what four former SEC lawyers have said about the SEC:
On March 27, 2014, a 28-year legal veteran at the SEC, James Kidney, delivered a speech at his retirement party that went viral. Kidney said the SEC had become an agency that policed “the broken windows on the street level” while ignoring the “penthouse floors.” Kidney explained that “On the rare occasions when Enforcement does go to the penthouse, good manners are paramount. Tough enforcement – risky enforcement – is subject to extensive negotiation and weakening.”
Kidney’s assessment of the leadership of the SEC came just three years after another SEC lawyer, Darcy Flynn, told Congressional investigators and the SEC Inspector General that for at least 18 years, the SEC had been shredding documents and emails related to its investigations — documents that it was required under law to save. Flynn told investigators that by purging these files, it impaired the SEC’s ability to see the connections between related frauds.
Earlier, on June 28, 2006, former SEC attorney Gary Aguirre testified before the U.S. Senate on the Judiciary on his travails at the SEC attempting to do the right thing for the American people. During his final days at the SEC, Aguirre had pressed to serve a subpoena on John Mack, the powerful former official at Morgan Stanley. Aguirre wanted to take testimony about Mack’s potential involvement in insider trading. Mack was protected — Aguirre was fired via a phone call while on vacation — just three days after contacting the Office of Special Counsel to discuss the filing of a complaint about the SEC’s protection of Mack.
On September 27, 2011, we got to see how the SEC’s Inspector General handled a whistleblower’s complaint about corruption within the SEC. On that date the SEC Inspector General released a report indicating that an anonymous attorney at the SEC had sent a letter to the Inspector General concerning the former SEC Director of Enforcement, Robert Khuzami. The whistleblower’s complaint centered on Khuzami’s handling of charges that Citigroup executives had intentionally misled public investors about its exposure to subprime mortgages, understating the amount by $37 billion in the fall of 2007. According to the Inspector General’s report, the whistleblower alleged that:
“…just before the staff’s recommendation was presented to the Commission, Enforcement Director Robert Khuzami had a ‘secret conversation’ with his ‘good friend’ and former colleague, a prominent defense counsel representing Citigroup, during which Khuzami agreed to drop the contested fraud charges against the second individual. The complaint further alleged that the Enforcement staff were ‘forced to drop the fraud charges that were part of the settlement with the other individual,’ and that both individuals were also represented by Khuzami’s friends and former colleagues, creating the appearance that Khuzami’s decision was ‘made as a special favor to them and perhaps to protect a Wall Street firm for political reasons.’ ”
The Inspector General’s report systematically whitewashed the claims against Khuzami, effectively sending the message to other SEC staff attorneys not to bother blowing any more whistles.
For a closer look at the insidious details of the trading scandal at the Fed, see our archive of articles. It’s long past the time for the Department of Justice to take over this investigation.
Editor’s Update: This morning, at 11:00 a.m., the Federal Reserve announced that Randal Quarles has submitted his resignation as a member of the Federal Reserve Board, effective at the end of December. Quarles had served as the Board’s first Vice Chair for Supervision. His term as Vice Chair for Supervision had expired in October but his 14-year term as a member of the Board of Governors had ten more years to run. This means that at the end of December there will be only five members of the Board of Governors of the Federal Reserve, unless President Biden is somehow able to get the Senate to confirm a new nominee before then. If the Fed has only five Board members, this means that it would take only three votes to fire the Fed’s Inspector General, since it takes two-thirds of the Board voting in consensus.