May 19, 2022

At Hearing, Senator Warren Announces Strong Ethics Commitments from Federal Reserve Vice Chair for Supervision Nominee Michael Barr

Warren Previously Secured Strong Ethics Commitments from Fed Vice Chair Lael Brainard and Board Members Lisa Cook and Philip Jefferson

Video of Hearing (YouTube)

Washington, D.C. – Today, at a hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Elizabeth Warren (D-Mass.) announced that she had secured strong ethics commitments from Michael Barr, President Biden’s nominee to be Federal Reserve Vice Chair for Supervision. Barr confirmed that he would not seek employment or compensation – including as a result of board service – from any company that has a matter before the Fed, or any financial services company, for four years after he leaves government service.

Michael Barr joins Dr. Lael Brainard, Vice Chair of the Federal Reserve Board of Governors, and Dr. Lisa Cook and Dr. Phillip Jefferson, Members of the Federal Reserve Board of Governors, who also made ethics commitments to Senator Warren when they were nominated. These commitments demonstrate the strongest-ever ethics commitments by Fed officials to avoid conflicts of interest and close the revolving door between the Fed and the industries it regulates.

“The ethics standards that Michael Barr agreed to are the strongest ever agreed to by Federal Reserve Board nominees. They’re critical to ensuring that our financial regulators take the tough actions that are necessary to hold giant financial institutions accountable, safeguard the financial system, and protect our economy from another financial crash. I’ve fought for years to secure ethics commitments above and beyond current law from nominees of both Republican and Democratic administrations, and these commitments represent a historic agreement to prevent conflicts of interest and lock the revolving door,” said Senator Warren.

After Barr was nominated by President Biden, Senator Warren called on him to commit to higher ethical standards to prevent conflicts of interest and close the revolving door. Barr committed to Senator Warren to go beyond the Biden-Harris administration’s Ethics Pledge and recuse himself from matters involving former employers and clients for four years. He also indicated he did not intend to seek a waiver from these recusals. 

Following a scandal involving trading of stock and other securities at the Fed last year, Senator Warren called out the culture of corruption brewing at the Fed and raised concerns over conflicts of interest that have undermined public trust. Senator Warren has urged Fed Chair Jerome Powell and Fed leaders to adopt robust and comprehensive ethics guidelines, and has sought transparency related to Fed officials’ trades and changes to the Fed’s ethics policy . Senator Warren is a leader in the effort to impose strict ethics standards on senior government officials. Her Anti-Corruption and Public Integrity Act is the most ambitious anti-corruption legislation since Watergate. She has also worked to secure commitments from nominees — including FDA Commissioner nominee Dr. Robert Califf, Secretary of Defense Lloyd Austin, and other Department of Defense nominees — on ethics standards.

Transcript: Nomination Hearing
U.S. Senate Committee on Banking, Housing, and Urban Affairs 
Thursday, May 19, 2022

Senator Elizabeth Warren: Before I dive into my questions, I’d like to briefly address the ethical standards to which we hold our government officials.

Mr. Barr, you’re nominated to serve as one of the nation’s most powerful regulators. Ethics rules require you to divest your holdings in stocks and other investments, which include investments in at least half-a-dozen crypto-related companies, if you are confirmed. But I previously asked you if you would go further and make the same historic ethics commitments that several other Fed nominees have made. Will you commit not to seek employment or compensation – including as a result of board service – from any company that has a matter before the Fed, or any financial services company, for four years after you leave government service?

Michael S. Barr, Member And Vice Chairman For Supervision Designate, Board of Governors of the Federal Reserve System: Thank you, Senator Warren. Yes, I have committed to doing that and I will do that. 

Senator Warren: I very much appreciate that. You know, these commitments are important because one of the key challenges that all three of you will face if confirmed is crypto. 

Last week, the cryptocurrency market tanked – again. The latest crash was triggered by a run on Terra – until recently the third-largest so-called stablecoin by market cap. Turns out, it was not so stable.  If you put $1,000 into TerraUSD 10 days ago, while it was still being promoted as a safe bet, today you’d get $90 back.  

And Terra isn’t alone.  $1,000 invested in Bitcoin in November would be worth $438 today. In fact, the average investor who put money into this can’t-miss investment since last fall is underwater — a fact that the celebrity endorsers seem to have skipped over.    

But let’s talk about who really lost money. Not the rich folks. Not the insiders. No, it’s ordinary investors.  Online investor forums have been flooded with harrowing posts by people who feel they have nothing left and no way out, some with their life savings wiped out. You know, it smells a lot like 2008.  

So what I’d like to do is run through protections for ordinary investors in the crypto market and how they compare to protection in other financial markets.

So, Mr. Barr, if I can, let’s start with you. If I bought a company’s stock – even the most hyped up, junkiest one listed on the New York stock exchange – could I be reasonably confident that the company is following basic rules that protect against fraud, insider trading, and sloppy cybersecurity protocols?

Mr. Barr: Thank, you Senator Warren. The area of juridsiction obviously is within the expertise of the SEC but I think that is a reasonable basis for concluding that. 

Senator Warren: Okay, so there would be that protection, because right now, stablecoin and crypto token users aren’t getting that same protection.

Now some stablecoin boosters claim they’re safe because their stablecoins are backed by real assets like treasuries and cash, not fake tokens and an algorithm. But during last week’s market turmoil, Tether, the world’s largest stablecoin market cap, broke its dollar peg. And that was scary because it’s an open secret that Tether is not actually backed 1-to-1 by treasuries and cash like it claims. 

So Mr. Lizárraga, let me turn to you. If you invested in a money market fund, would you generally have confidence that the fund was actually backed by the liquid, high-quality assets that it claimed it was? 

Jaime E. Lizárraga, Member Designate, Securities and Exchange Commission: Thank you senator. Yes, SEC rules require money market funds to disclose their assets and to have those disclosures audited by independent third parties. 

Senator Warren: Alright, and now let’s compare that to stablecoins. Are stablecoins currently providing audited disclosures that allow verification that they’re backed by quality assets?

Mr. Lizárraga: To the best of my knowledge, no. 

Senator Warren: No. And in fact, asked why they wouldn’t produce audited financial disclosures, Tether’s executive said it’s because they don’t want to spill their quote “secret sauce.” I believe them — Tether doesn’t want investors to know what is, and what is not, backing up this so-called stable coin. And that is a gigantic red flag.

So, I’m going to do this really fast. Let me do one more. 

Mr. Uyeda if you wanted to buy stock for a company listed on the New York Stock Exchange, could you be reasonably confident that the exchange wasn’t trading against you, or had other conflicts of interest that could put you at a disadvantage?

Mark Toshiro Uyeda, Member Designate, Securities and Exchange Commission: Yes, exchanges have to have policies to mitigate or eliminate any conflics of interest. 

Senator Warren: Okay, very much unlike what happens in stablecoin.

So, you know, any investment involves risk – that’s how markets work. But a market without rules is theft. And right now, regular investors in stablecoins and crypto aren’t getting the baseline protections available in other financial markets. Count the ways that consumers can be cheated: no basic protections to protect against fraud, no review of cybersecurity, no audited financial disclosures, no protections against conflicts of interest, no cop on the beat to police market manipulation. 

There’s not even any assurance that the other person on the end of a transaction isn’t a terrorist, a money launderer, or a Russian oligarch on the sanctioned list.

I understand the three of you may differ on how to regulate the crypto market. But addressing these kinds of risks will be your responsibility. So while Congress is working to set up guardrails on crypto, I urge you to use the tools you already have at your disposal to protect investors, to protect our financial system, and to protect our economy overall.

Thank you.