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Powell orders ethics review amid trading scandal

Brian Cheung joins Brian Sozzi and Julie Hyman to break down Jerome Powell ordering a ‘comprehensive look’ into the ethics rules of the Fed after stock trading amongst Senior Fed officials raised alarms about conduct

Video transcript

[MUSIC PLAYING]

BRIAN SOZZI: The boss appears to be laying down the law. Fed chief Jerome Powell has ordered staff to review the central bank's ethics rules after several Fed presidents revealed large investments and stock trades. Yahoo Finance Fed correspondent Brian Cheung is here with the details. Brian?

BRIAN CHEUNG: Well, Brian, any time the Federal Reserve's code of ethics is in the news, it's probably not a good thing. And all of this swirling around the disclosure that we got from the Dallas and the Boston Fed presidents just a few weeks ago, detailing several multimillion-dollar transactions.

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You'll recall that Robert Kaplan, the head of the Dallas Fed, made investments over the course of 2020 in stocks like Delta, Chevron, Verizon, which is Yahoo's former parent company, Apple, including also a floating bond rate ETF. And all of that followed from another report from "Bloomberg" that said Boston Fed President Eric Rosengren made several large transactions in real estate investment trusts.

Now we're getting a follow up from the Federal Reserve Board. Keep in mind, the Federal Reserve Board sits on top in terms of the Federal Reserve System structure over the 12 Reserve banks across the country. And Fed Chairman Jerome Powell now saying that he wants to review the ethics rules across the system. This is a statement from a Fed spokesperson that I want to read to you, which I believe we have a full screen of.

Quote, "Because the trust of the American people is essential for the Federal Reserve to effectively carry out our important mission, Chair Powell, late last week, directed board staff to take a fresh and comprehensive look at the ethics rules around permissible financial holdings and activities by senior Fed officials."

And the fallout is continuing. There was actually the Revolving Door Project, which is a DC-based advocacy group, this morning calling for Powell to put both of the bank presidents on leave. It's unclear about whether or not he has the authority to do that. But it seems like headed into the Federal Reserve's next policy-setting meeting next Wednesday, the Fed does appear to be embroiled in what some sources have told me is a scandal, which is never a word you want to hear within the context of the independent central bank, guys.

BRIAN SOZZI: And not one you normally hear in the context of the independent central bank, Brian. But just to be clear, the two Fed presidents, they didn't break any laws, right?

BRIAN CHEUNG: They didn't break any laws. And for what it's worth, the disclosure that we got from both of those Fed presidents clarifies that they felt that those transactions were within the code of ethics at those Reserve banks. The way that the rules work for these Reserve banks, they have mostly identical language when it comes to their codes of conduct, is that you're not allowed, you're prohibited from trading, holding any shares or stake in financial services or bank companies, which means that you can't have shares in Bank of America or Goldman Sachs.

But outside of that, as long as the company in question is not a primarily banking organization or a depository institution, you are allowed to hold those types of stakes. Now, if it is a gray area situation, these bank presidents are supposed to clear it through an ethics officer that's at their Reserve Bank. But again, it seems like all these ethics officers at, at least the Boston and the Dallas Feds, appear to think that these transactions were OK.

But regardless, at the top level, even though. Jerome Powell says that-- rather that the Fed statement acknowledges that they may have been in line with the code of ethics at these Reserve banks, the optics of it are not good, which maybe reinforces some sort of more stringent application of these rules, which might suggest Powell could be advocating for maybe something tighter, which might look like, for example, an entire ban on all equity holdings or debt holdings of any publicly traded company.

So we'll see what happens out of this. Again, we'll see if there are also questions about it in that Fed presser next Wednesday.

BRIAN SOZZI: Definitely not a good look. Brian Cheung, thanks so much.