Public Officials Shouldn’t Be Allowed to Day Trade

(Bloomberg Opinion) -- The U.S. Federal Reserve will review its rules governing personal investments after two policy makers disclosed transactions that raised both eyebrows and issues of potential impropriety. I’m with Senator Elizabeth Warren in agreeing that the ownership and trading of individual stocks by public officials in such sensitive roles shouldn’t be allowed. In fact, I’m struggling to generate a single argument in favor of letting such potential conflicts of interest arise.  

The planned Fed overhaul comes after all 12 regional bank chiefs tendered their annual financial disclosure forms. Dallas Fed President Robert Kaplan revealed he’d bought and sold the iShares Floating-Rate Bond ETF, the value of which is highly sensitive to Fed policy deliberations. Boston Fed chief Eric Rosengren, who has commented on the risks in commercial real estate, disclosed trades in real estate investment trusts.   

What’s astonishing is that current Fed guidelines appear to have sanctioned the deals. Both Fed officials said they did nothing wrong, but have also pledged to offload their holdings by the end of this month — a belated recognition that, at the very least, it’s not a good look to have a portfolio that you could boost with a few public comments.

The regulations governing the personal financial affairs of public officials clearly need tightening. It’s just over a year since Ben Meng resigned as chief investment officer at the California Public Employees’ Retirement System, after approving an investment in a Blackstone Group Inc. fund while he owned a personal stake in the private equity firm. Calpers has said it may demand that its next CIO, who hasn’t been appointed yet, sell any personal investments — which concedes that there was no existing requirement for officials of the $470 billion pension fund to relinquish their holdings.

In Germany, the finance ministry has had to refurbish its compliance systems for staff after what was perhaps the most egregious recent example of inappropriate stock-market speculation. German regulator BaFin filed a criminal complaint with prosecutors in Stuttgart earlier this year against a member of its own staff alleging insider trading of Wirecard AG stock.

Wirecard collapsed in mid-2020 after acknowledging that 1.9 billion euros ($2.2 billion) in cash was probably a balance-sheet fiction. Rather than do its job properly and investigate the firm’s finances, BaFin introduced a ban on short selling of Wirecard’s stock in February 2019, and filed lawsuits against journalists at the Financial Times newspaper who had revealed accounting irregularities at the payments firm. It’s staggering to think that anyone on the regulator’s payroll might have thought punting Wirecard shares was acceptable.

In Norway, the central bank made Nicolai Tangen sever all ties with Ako Capital LLP as a condition for taking charge of the nation’s $1.4 trillion sovereign wealth fund a year ago. But that only came after pressure from lawmakers who argued that retaining a 43% stake in the $16 billion hedge fund he’d built in London posed a potential conflict of interest.

And yet, as late as March of this year, the central bank’s supervisory board questioned whether the arrangement would allow Tangen to repurchase Ako, prompting a clarification that the sale is irrevocable. Tangen has said both that running the world’s biggest wealth fund is his dream job, and that he might not have applied for the role if he’d known he’d have to abandon Ako entirely.

Warren, the Democratic senator for Massachusetts, said she’s written to the 12 regional Fed presidents asking them to self-impose a ban on owning individual stocks. It seems likely — and desirable — that the U.S. central bank will outlaw such trades. Other public institutions should follow suit. Sunlight may be the best disinfectant, but better not to allow any financial grime to accumulate in the first place.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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