A Federal Reserve Finger Wag for Congress
Ever since Ben Bernanke took over as Chairman of the U.S. Federal Reserve, the often shadowy but incredibly powerful financial institution has taken major steps toward being more transparent. Last week, in the wake of the Senate's passage of the STOCK Act -- which The Fool has strongly advocated -- the central bank made another step towards being more open by giving the public a peek at the personal financial disclosures of the Fed banks' presidents.
For the curious, there are notable tidbits aplenty that can be unearthed in these previously secret filings, from the sizeable gold stash that Dallas Fed president Richard Fisher owns, to the curiously modest net worth of Richmond's Jeffrey Lacker. And though only the Fed's Atlanta branch had posted the filings online, The New York Times gets two thumbs up from this Fool for putting all the filings -- all 596 pages of them -- online.
For proponents of the STOCK Act, though, there's one Fed president's filing -- personal financial disclosures along with pages upon pages of internal communications, waiver discussions, and notes on Federal Reserve conflict of interest policy -- that stands out from the rest.
William Dudley, come on down
William Dudley is the president of the Federal Reserve Bank of New York and the vice-chairman of the Fed's Open Market Committee, the powerful Fed committee that meets periodically to set targets for the bank's key interest rates. Dudley was appointed in early 2009 when the former N.Y. Fed president, Tim Geithner, was tapped to be the nation's Treasury Secretary.
According to internal communications released by the N.Y. Fed, in late 2008 -- before he took the bank's top spot -- Dudley owned roughly $100,000 in General Electric (NYS: GE) stock and $1,200 in AIG (NYS: AIG) stock.
To be clear, Dudley wasn't buying or selling shares of either. In fact, a review of the three years' worth of personal financial disclosures reveals a fairly unexciting personal portfolio for the banker. In 2008, he reported no transactions; in 2009, his transactions were all in funds like Vanguard's Intermediate-Term Tax Exempt Municipal Bond Fund and Total Stock Market ETF; and his "trading" in 2010 was similar, with three of his four transactions in Vanguard funds.
Considering the size of Dudley's positions in GE and AIG, it's also noteworthy that Dudley sports a significant personal bankroll. Though the asset-value ranges in the Fed's filings make it impossible to precisely ascertain exact any individual's net worth, analysis by The New York Times puts the low end of Dudley's personal wealth at $8.6 million.
But the simple fact that Dudley owned GE and AIG at all suddenly became an issue in late 2008, as the financial system's seizure intensified. On September 16 of that year, AIG was extended an $85 billion bailout by the Fed. Meanwhile, GE, thanks to its huge financial arm, was suddenly facing worries similar to those of the country's major financial institutions.
It's not the only potential conflict of interest that Dudley ran into after joining the Fed. For instance, his holdings of Treasury Inflation Protected Securities (TIPS) became an issue because of the Fed's key role in interest-rate targeting. His defined-benefit plan from his former employer -- Goldman Sachs (NYS: GS) -- was also called into question. That plan paid him $124.38 per month.
I'll save you the gory details -- and if you want them you're welcome to visit the NYT's file stash -- but the bottom line is that these issues set off a flurry of internal back-and-forth over the permissibility of these assets. The diligence included, in the case of the TIPS, the Fed having one of its PhD economists do a full report, including regression analysis, to determine whether Dudley's position could allow him to unduly profit from that position.
In the end, Dudley was given waivers for the positions he owned, though he agreed to hold his TIPS to maturity to minimize perceived conflicts and sell his AIG shares at an agreed-upon date. He also opted to donate the proceeds from the AIG sale to charity.
Congress, listen up!
Zeroing in specifically on Dudley's ownership stakes in AIG and GE, we see a lot of internal review and discussion over what were both stable ownership positions and, in the case of AIG in particular, really a very small amount of money. But they went through all of that because when you're wielding the kind of power that the Fed does and are privy to the kind of information that bank presidents are, it's important to make sure that power and information access aren't being used for illegitimate personal financial gain.
Now compare that to what goes on in Congress. As we reviewed in our report, Congress members are required to annually file personal financial disclosures, but not only is there often a significant lack of clarity in those filings, but there's also nobody reviewing, let along challenging, Congress members on their personal financial dealings.
This is far more than an academic matter. When we reviewed the trading records of Congress members between September 1 of 2008 and October 3 of 2008 -- right at the same time that Dudley was being grilled over his AIG and GE ownership stakes -- we found that they made at least 318 trades in financial stocks during that period worth around $6.7 million. That tally included 51 trades in nearly $1 million worth of GE and AIG alone.
And bear in mind, this covers just Congress members who were trading AIG and GE securities. Dudley merely owned shares of GE and AIG. If we extended our analysis to include the number of Congress members who simply owned financial stocks during that period, the numbers would have spiked.
For instance, neither the House Majority or Minority leader showed up in our analysis because they didn't trade any financial stocks during the timeframe we looked at. However, as of October 3 2008, Eric Cantor owned shares of General Electric, while Nancy Pelosi owned both GE and AIG.
The art of doing the right thing
It's no secret to voters just how powerful Congress is, and with such a privileged position comes access to important and valuable information. From the data we analyzed, it's impossible to determine whether Congress members are actually trading on inside information, but the bottom line is that we need to have a system where that isn't even a question.
The STOCK Act was resoundingly passed in the Senate and is now headed to the House of Representatives. However, we are still concerned that the trip from concept to passed law may water down this legislation and impair its effectiveness -- we've already seen some of that in the Senate's amendments to the bill.
In terms of issues facing our nation, in many ways this may seem like a small one. But in order for us to have the functioning government that we need in order to work toward a more prosperous future, voters need to have trust in their representatives and the system -- and that's an ingredient that's been seriously lacking lately. It's time for Congress to buckle down and get tough on itself so that it can move on, putting its best foot forward in addressing the big issues that are weighing down the country.
At the time this article was published Fool contributorMatt Koppenhefferdoes not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting hisCAPS portfolio, or you can follow Matt on Twitter@KoppTheFoolorFacebook. Motley Fool newsletter serviceshave recommended buying shares of The Goldman Sachs Group. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Fool'sdisclosure policyprefers dividends over a sharp stick in the eye.
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