The last SriKonomics piece focused on Federal Reserve decision-makers trading securities for their personal accounts even as they were making key monetary policy decisions. We learned over the past several days that the current head of the International Monetary Fund helped raise China’s investment attractiveness ranking when she was Chief Executive of the World Bank. The measure is a key indicator for companies making foreign direct investments in deciding where to put their money over the medium-term.
First for the Fed. Although its decision Wednesday to start tapering bond purchases later this year made headlines, less prominent was Chairman Jerome Powell’s response to a question during his press conference. His financial disclosure form showed that he owned municipal bonds in his personal portfolio when the central bank announced a purchase of munis in March 2020.
Yields on munis had risen substantially at the start of covid because of fear that local governments facing a falloff in tax revenues may not service their obligations. Fed’s purchase of munis lowered yields, benefiting among others, you guessed it, Chairman Powell! He admitted at his press conference last Wednesday that he continued to hold those securities — rather than sell them ahead of the Fed intervention or contribute the resulting capital gains to charity. So the Fed action averted a loss the Chairman would have incurred on his personal portfolio.
Justification? Fed’s own ethics advisors told him that it was okay to hold the securities!
The solution is not another in-house investigation — presumably of the type that cleared the Chairman of any ethical considerations. Regional bank rules similarly cleared Robert Kaplan and Eric Rosengren who were active traders during 2020 in securities that were significantly influenced by Fed action. In-house investigations typically clear the boss. What a surprise!
A better deterrent would have been a forced disgorgement of the relevant capital gains, and the subsequent management of the Fed officials’ portfolio in a blind trust — because, after all, even investments in indexes or exchange traded funds are susceptible to Fed action.
In the case of the World Bank, the official, Kristalina Georgieva, was found by an external law firm to have intervened to raise the China ranking even as she was trying to get the country’s support for increased capital for the Bank. The result was a higher ranking in the Bank’s index that measures ease of doing business than what the working group of analysts had determined. So if you depended on the Bank to provide an objective evaluation, tough luck!
Georgieva currently heads the International Monetary Fund. No accusation has been made of her similar intervening in IMF staff’s conclusions on country statistics. As a sovereign risk analyst, I have depended for over four decades on IMF statistics to evaluate the ability of countries from Argentina to Zambia to service external debt, allow foreign companies to repatriate profits, and maintain an orderly exchange rate system. Could my future efforts and those of other analysts be corrupted by undue intervention from senior officials? Is the deficit in the current account of the balance of payments of a member-nation actually much greater than the IMF says it is?
A positive in the World Bank case is that the investigation was performed by Wilmer Hale, a law firm, bringing to light conflicts of interest that influence global policy making. As an outside entity hired to perform the investigation, the law firm presumably had the ability to come to its own conclusions based on its study.
By contrast, Powell told us last week that investigation of Fed officials’ personal trades will be done by an in-house staff. I don’t expect much fireworks, do you?
Dr. Komal Sri-Kumar
President
Sri-Kumar Global Strategies, Inc.
Santa Monica, California
srikumar@srikumarglobal.com
@SriKGlobal
September 26, 2021
Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.
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