“Unfortunately, the recent focus on my financial disclosure risks becoming a distraction to the Federal Reserve’s execution of that vital work. For that reason, I have decided to retire,” Kaplan said in a statement Monday afternoon.
The departures are some of the most high-profile and sudden exits at the Federal Reserve System in the past few years. The revelations come at a consequential time for the economic recovery and the Fed’s own leadership.
Plus, Rosengren and Kaplan’s behaviors don’t help the Fed’s public perception, which is why Federal Reserve Chair Jerome H. Powell said last week that the central bank’s existing guidelines around financial activity “is now clearly seen as not adequate to the task of really sustaining the public’s trust in us."
“No one on the [Fed’s policy committee] is happy to be — to be in this situation," Powell said last week, when asked about the questionable trades by the two regional bank presidents.
Kaplan’s trading activity included 27 individual stocks, funds or alternative asset holdings, each valued at over $1 million, according to his investment disclosure form. Rosengren’s trading activities were on a smaller top-line scale. The investments ranged between the tens of thousands of dollars to hundreds of thousands of dollars, with none of the assets valued above $250,000.
But the holdings nevertheless drew scrutiny for stakes in four separate real estate investment trusts. Last year, Rosengren’s public speeches and remarks highlighted his concerns for the commercial real estate sector as the economy weathered the coronavirus recession.
After revelations of their behavior were made public, Rosengren and Kaplan said they would sell their stocks to avoid the appearance of a conflict of interest.
It may be too late to avoid the impression of a conflict of interest, some ethics experts say. Walter Shaub, a government ethics expert at the Project on Government Oversight, said that during a pandemic when millions of Americans lost their jobs and watched retirement savings plummet or faced eviction, “the public is understandably not in any kind of mood to give the benefit of the doubt.”
Shaub added that the Fed should put a stop to trading activity among its staff and that Congress should pass a law banning it altogether.
“Whether they acted innocently is beside the point here,” Shaub said. “They undermined public confidence, and they needed to go.”
Both Kaplan and Rosengren maintained that their trading activities were consistent with the Fed’s ethics rules. But the Fed opted to launch a formal review of its rules governing financial activity for officials.
“We need to make changes, and we’re going to do that as a consequence of this. This will be a thorough going and comprehensive review,” Powell said last week.
Rosengren had announced his retirement earlier on Monday, moving up a planned retirement date by nine months. His original plans to retire were for June 2022, when he turned 65 and hit the bank’s mandatory retirement age. Rosengren said that date was moved up so he could manage and care for a kidney condition.
The resignations mark the sixth and seventh sudden departures of regional bank presidents in roughly twenty years, according to Kaleb Nygaard, who has researched the history of Fed’s leadership and governing rules.
In 2017, Richmond Fed President Jeffrey Lacker resigned after revealing he’d shared confidential information with a financial analyst five years before. The leak involved details about a possible Fed policy option that had been discussed during one of the central bank’s meetings. That kind of information is kept quiet, as any intel about Fed meetings, policy decisions or other internal discussions have the power to move markets.
Biden has as many as four nominations to announce for the Fed board in the coming months, including whether he’ll reappointed Powell when his first term is up in February, or replace him. The White House, however, does not nominate regional bank presidents. Those decisions are made at the district level.
Kaplan has been president of the Dallas Fed since 2015. He previously worked at Goldman Sachs for more than two decades and became its vice chairman with oversight of the firm’s investment-banking activities. Kaplan was also professor at Harvard Business School before joining the Fed.
Rosengren has served at the Boston Fed for 35 years and, during the pandemic, was one of the key leaders running the Fed’s emergency lending facilities.
The Main Street lending program, for example, was run out of the Boston Fed and was set up to help cover loans for midsize businesses. But the $600 billion program was largely overshadowed by a delayed rollout, muted interest from banks and businesses, and onerous lending terms.
At the time, Rosengren called on Congress to help clarify whether the Main Street lending program could make riskier loans, which would have helped push more money out the door to companies trying to stay afloat.
Rosengren became the Boston Fed’s 13th president in 2007. Before being elevated to the top job, Rosengren ran the bank’s supervision, regulation and credit functions.
Kenneth C. Montgomery, who is the Boston Fed’s first vice president and chief operating officer, will fill in as interim president and chief executive, the Boston Fed said.
At the Dallas Fed, First Vice President Meredith Black will serve as interim president.