May 18, 2023

ICYMI: Experts Agree with Senator Warren on Fed Reforms for Independent Inspector General to Restore Public Confidence

Federal Reserve IG Admits to Financial Incentive to Overlook Wrongdoing Senator Warren Highlighted her Ongoing Push for Legislative Reforms to Increase Transparency and Accountability at the Federal Reserve

Washington, D.C. – Yesterday, chairing a hearing of the Senate Banking, Housing, and Urban Affairs Committee Subcommittee on Economic Policy, Senator Elizabeth Warren (D-Mass.) questioned Federal Reserve Inspector General Mark Bialek on conflicts of interest that prevent him from conducting effective oversight in the wake of several Fed ethics scandals and a culture of corruption that has taken hold at the Fed. Senator Warren also highlighted the urgent need to pass her bipartisan legislation to make the Fed IG a presidentially appointed, Senate-confirmed position.

Senator Warren also questioned a panel of academic experts on the regulatory and supervisory failures that contributed to the collapse of Silicon Valley, Signature, and First Republic banks. The experts agreed with Senator Warren that reforms like her bipartisan bills with Senator Rick Scott (R-Fla.), including their bill to bar executives from large banks from serving on Reserve Bank boards of directors and subject Reserve Bank directors to ethics and financial conflict of interest rules, would bring increased transparency and accountability to the Fed. 

Transcript: Strengthening Accountability at the Federal Reserve, Focusing on Lessons and Opportunities for Reform
U.S. Senate Committee on Banking, Housing, and Urban Affairs, Subcommittee on Economic Policy
Wednesday, May 17, 2023

Panel 1, Round 1 of Questions below and video HERE:

I want to say thank you for being here, Mr. Bialek. I appreciate you being here.

The Fed touches the lives of every family in America – from influencing whether or not they can afford to buy a home, keep a job, afford the interest rate on their credit cards, and know that the money in their checking account is safe. 

The Office of the Inspector General is essential to making sure the Federal Reserve does its job with integrity. The mission of the IG is to provide independent oversight of the activities of the Federal Reserve Chair and the Board, including by “conducting audits, investigations, and other reviews.” 

So let’s just set it up on the record here. We’ve talked some about it. Mr. Bialek, who appointed you as Fed IG?

Mr. Mark Bialek, Federal Reserve Inspector General: Former Chairman Bernanke.

Senator Warren: Okay and who has the power to fire you?

Mr. Bialek: A two thirds vote of the present Board of Governors.

Senator Warren: So it’s the Board of Governors and the Fed Chair, right? Together? 

Mr. Bialek: He’s part of the Board.

Senator Warren: So your job is to conduct independent oversight of the Federal Reserve Board, exactly the board that has the power to hire and fire you?

Mr. Bialek: As is the case with all DFE IGs.

Senator Warren: Well, but that is yours. I noticed that you said earlier that no one has tried to interfere with any of your investigations, but has there ever been a single day that you woke up not remembering exactly who has the power to hire and fire you?

Mr. Bialek: I don't think about that.

Senator Warren: Yeah, I’m sure you don’t. The Inspectors General at nearly all of the cabinet level agencies have a very different IG structure. Those IGs are nominated by the President and confirmed by the Senate—precisely so that they retain independence from the agency that they are obligated to oversee. They are not hired and fired by the head of the agency and board within the agency.

That’s why – 20 years ago – the Government Accountability Office specifically recommended that Congress make the Fed IG a Senate-confirmed position.

I think it is long past time that Congress finally acts, and I have bipartisan legislation with Senator Scott to do that. This language is also included in a bill I lead with Senator Tillis and Senator Lummis. 

But Mr. Bialek, you stated in a letter that you sent to Senator Scott and me a few weeks ago, that you opposed this legislation.  In it, you raise concerns that Senator Scott just highlighted as well that if the IG’s office becomes a Senate-confirmed position, there will be, “difficulty in attracting quality-candidates for the position” because, among other things, the salary would have to follow the executive pay scale for all those other cabinet level IGs – which would be about $200,000. So just so we get it on the record, how much is your salary, Mr. Bialek? 

Mr. Bialek: It is an average of the current division directors and other executives in the agency – 

Senator Warren: I just need a dollar figure.

Mr. Bialek: – and their salary and bonus, and that comes out to $377,800 and some odd.

Senator Warren: Okay. So about $378,000 annually. You realize that makes you the highest-paid employee at the Fed? And in fact, one of the highest-paid officials in the entire Federal Government.  I understand why you wouldn’t want to give that up.  You’ve got a pretty cushy gig. You get paid a lot of money for it.  But I don’t believe that your self-interest should outweigh the importance of good governance and independent governance at the Fed.

There has been one scandal after another at the Fed for the last two years and these are a great example of why the Fed needs an independent watchdog to keep an eye on the agency.  We need to fix the Fed Inspector General to make sure that the office is truly independent and can do its job. 

Panel 1, Round 2 of Questions below and video HERE:

Senator Warren: Thank you, Senator Kennedy. Senator Kennedy, I want to follow up on something you did. I have another round of questions I want to do. But we’re talking about this compensation issue and the reason we’re talking about compensation is just basic conflicts of interest. It’s very hard to oversee somebody who can fire you. 

It’s very hard to point out that this is the person who engaged in wrongdoing if that's somebody who can turn around and fire you. But I want to raise a second point that came out in the question about how your compensation is calculated. I believe you said your compensation is the average of the other people whom you investigate, and it's their salaries plus their bonuses. So if your investigation finds they did really bad and stupid things that cause them not to get bonuses, what happens to your compensation?

Mr. Bialek: If there is a reduction –

Senator Warren: So you make less money if you find wrongdoing –

Mr. Bialek: That’s correct.

Senator Warren: – in the people you oversee. Do you think that creates conflict of interest?

Mr. Bialek: I don't honestly because I have been in the IG community for over 42 years. I'm not in this business to do anything but make sure that we properly – the 130 folks who work in the Office of Inspector General – properly oversee the work, the efficiencies of the Fed. And if we find improvements that need to be made, it’s our job to point them out. It doesn't matter to me one bit –

Senator Warren: Mr. Bialek, it's easy for you to say it doesn't matter to me one bit – how much I get paid – but you have to understand there are a lot of people around the country who look at the $378,000 salary that is one of the highest salaries in the Fed and one of the highest salaries in the federal government and says if your salary goes up, if you give everybody a gold star, and it goes down if you find a problem, and not see that as a structural conflict of interest. It doesn't have to be personal. It doesn't have to be to say that you're a bad person. It just says that we should not have both of those occurring in the same place. The person who is responsible for handing out the gold stars on whatever happened or handing out the you did a bad job should not have a direct financial stake and how that comes out.

Mr. Bialek: I understand your point, Senator. My only other comment would be that provision of the IG Act that sets up those two different pay systems for IGs – the PAS IG and the DFE IG – that was put into place in 1988 by Congress. There have been amendments to the IG Act since then and that issue hasn't been changed, but –

Senator Warren: Let me stop you there. Twenty years ago, the GAO came to Congress. Long before I was here. Long before Senator Kennedy was here and said change it because it's a mistake. They said change it so that you have an independent IG at the Fed and I think this is the reason why. 

So if I can, what I want to do is I want to talk about the ethics scandal while we still have you here. And that is in September 2021, reports revealed a shocking ethics scandal at the Fed.  Fed leadership at both the Reserve Banks and the Board of Governors had made stock and other financial trades at the same time that the Fed was taking extraordinary action to stabilize the economy during the COVID-19 pandemic.  

For example, former Fed Vice Chair Richard Clarida cashed out somewhere between $1 million and $5 million from a bond fund and put the money into stock funds exactly one day before Chair Powell publicly announced possible policy action that would significantly affect the value of those bonds and stocks.  

Make no mistake, this is the most severe ethics scandal in the Fed’s 110-year history.  Yet other than a few officials taking an early retirement, we have seen no accountability – not from Chair Powell and not from the Fed’s Inspector General—that’s you, Mr. Bialek.

So Mr. Bialek, you conducted an investigation of Fed officials’ stock trades at Fed Chair Powell’s request. Here we are a year and a half later, and I believe we’re still waiting for the results of your investigation into the Reserve Bank Presidents.  But last year you did release a four-page report about your investigation of key Fed Board members.  In that investigation, you found that former Vice Chair Clarida failed to report several trades in 2019 and 2020. Am I right so far?

Mr. Bialek: Yes.

Senator Warren: Okay. So you also found that trades involving Chair Powell’s family trust were made during a blackout period for the Federal Open Market Committee – the Fed’s monetary policymaking body – trades that should not have been made at those times under the Fed’s rules, correct?              

Mr. Bialek: Yes.

Senator Warren: Okay. So the rules say no trading during the blackout period: but Powell’s trust did exactly that. The rules say Fed governors must disclose all trades in a timely fashion: Mr. Clarida clearly did not. And yet your investigation –I’m going to quote you here – “did not find evidence” that your boss, Chair Powell, and Mr. Clarida violated the Fed’s rules.

That finding just makes no sense to me.  The actions of the Chair of the Federal Reserve and a governor of the Federal Reserve were unambiguously inconsistent with the Fed’s rules. You just said so, but you recommended no disciplinary action. No corrective action.

In addition to your conclusion that flies directly in the face of the facts, I also have concerns about what you left out of your investigation.

According to his financial disclosures, Chair Powell sold between $1 and $5 million worth of stock at the start of October 2020 – reportedly one of his largest trades ever – just as the stock market was beginning to tank.  This is suspicious timing, but you did not look into this trade as part of your investigation. Why not?

Mr. Bialek: If I can elaborate a bit more on this series of questions or issues that you’ve raised, Senator.

Senator Warren: Okay. Can you just answer this question, though first, so I don't get confused here? Why did you not investigate this trade? It’s not in your report?

Mr. Bialek: We investigated all trades made by both former Vice Chair Clarida and Chair Powell. We looked at each and every one of those trades. We reviewed the source documentation for those trades. We got into a level of–

Senator Warren: So you’re telling me these trades did not occur?

Mr. Bialek: No. I'm going to tell you that as it relates to Vice Chair Clarida, those four trades that were made that were not initially included on his 2019 and 2020 financial disclosure reports,  were left out. The resolution of that – we have to audit and investigate against criteria. The criteria is yes, they should have been included and they weren't. –

Senator Warren: Then how could you say there was no evidence that anyone violated the rules? It clearly violated the rules.

Mr. Bialek: The Office of Government Ethics, this is their form. The government ethics program throughout the executive branch is monitored by and set up by the Office of Government Ethics. Their approach is if someone leaves something out of a report, assuming as is the case here, that the trades were not prohibited trades, and they were not made during official blackout periods so the resolution is to include those on the subsequent report to make it a complete report for the next year. What Vice Chair Clarida did is he went ahead and amended those forms from 2019 and 2020 so he did more than what the Office of Government Ethics would have advised him to do.

Senator Warren: So when I asked you the questions, did they violate the rules? You say, yes, they violated the rules, but it turns out if you fix it later, you don't count that as violating the rules?

Mr. Bialek: That, Office of Government Ethics, that’s the case – and if I can, on Chair Powell’s charitable family trust that you mentioned, that is a matter where the financial advisors who handled that family trust, that charitable fund family trust for them, was notified of the blackout dates for the FOMC blackout period. 

They were asked to make – as they are every year towards the end of the year – to sell some assets so that the family trust can carry out its requirements to make charitable donations at that time of year. They admitted that it was their oversight, that they did the transaction a day or two after the blackout period began. The request was made before that. And it was their kind of error, their mistake, that allowed that to happen. There has to be an intent to misreport.

Senator Warren: We can get into the intent questions. You know, particularly when you're telling me about Clarida, for example, corrected this later. Yeah, he corrected it after you opened an investigation, which is just not exactly the moment that gives us all confidence. But I still didn't hear the answer to the question that I asked you here, Chair Powell sold between $1 and $5 million worth of stock at the beginning of October 2020 – one of his largest trades ever – suspicious timing, but you did not look into the trade as part of your investigation. I just want to understand why?

Mr. Bialek: We did look into that trade. The trade was not prohibited, nor was it made during the blackout period. If I can, if I can add, I acknowledge that our investigative report lacks the kind of detailed analysis that would kind of close these perceived gaps that you're alluding to, Senator, but it was intentional, while we pursue these other closely related and ongoing ethics investigations of the Federal Reserve Bank officials, so I absolutely agree that the allegations of improper trading and ethics violations are disturbing and they are alarming. I agree with you wholeheartedly, but we have to conduct a thorough independent investigation –

Senator Warren: You’ve had a year and a half. You did not call out the trades that we can see. Let us just put it this way. This is not strong oversight. In fact, it is not even competent oversight. It looks like – to anyone in the public – that you gave your boss a free pass and that's just not going to cut it here. And even today, a year and a half later, the Fed continues to stonewall Congress, stonewall the public on the underlying information about these trades. This is not acceptable and this is why we are pushing for an independent IG.

Panel 2, Round 1 of Questions below and video HERE:

Senator Warren: I appreciate all of your testimony. This is really important and thoughtful. If we can, I'd like to dive deeper into some of the findings in the Fed’s post-mortem of Silicon Valley Bank’s collapse. The report made clear that the Fed failed every step along the way, from the Board of Governors at the very top to the San Francisco Fed bank examiners on the ground who were unwilling or unable to force SVB to fix its problems before the bank blew up.

Let’s start at the top, with the Board of Governors – this is the body where bank rules are written and then communicated down to the Reserve Banks to enforce. 

One of the four causes of SVB’s failure that the Fed’s report identifies is the 2018 law that Republicans – with the help of some Democrats – passed. This law severely weakened the guardrails that Congress put in place after the 2008 financial crisis to ensure that greedy banks never again crashed the economy. That was certainly the intent. 

Dr. Conti-Brown, you’re an expert on financial regulation and the Fed. According to the Fed’s Vice Chair Barr’s report, how did the passage of that law – let’s just call it S. 2155, that’s what we call it around here – how did the passage of S. 2155, this bill that Congress voted on, lead to SVB’s failure?

Dr. Peter Conti-Brown, Class Of 1965 Associate Professor Of Financial Regulation, Associate Professor Of Legal Studies & Business Ethics, The Wharton School of the University of Pennsylvania: Thank you, Senator Warren. The provision in 2155 that refers to changing the asset classes is only about five pages long. It's very short and it doesn't contain a mandate: Fed, thou shalt not supervise these banks. What it does is create a system that wasn't placed under Dodd Frank that for a bank to grow above $50 billion or above $100 billion, they knew that there would be significant regulatory and supervisory costs. Those costs went away because what Congress did is say anything below $250 billion is wiped clean. If you want to put it back, you’ve got to go through a process. That's what they said to the Fed. And so for Silicon Valley Bank, which was hovering right below $50 billion at the time, that was just a massive neon light saying grow, grow, grow. 

So that was one way. And when they grew so fast, so far on both liabilities and on assets, they couldn't diversify and so that led to flighty deposits that rendered them sensitive on the funding side. And it led to under diversified assets, which led to the collapse in this interest rate environment. The other thing that it did is send a very pointed direction. And as a historian of bank supervision, I'm currently writing a 600-page history of bank supervision that I'm nearly completing, I can tell you this is exactly the way Congress works. It writes laws, and it says, this is the way we want you to use the tools, even when it doesn't say, thou shalt or thou shalt not. And that's exactly the way the title four of the law is written. It's to say, pull back on this regulation and give a green light for massive and undiversified growth.

Senator Warren: So the Fed report says that Congress told the Fed to deregulate, and that's what you're saying. This is the message that was delivered. The Fed heard that message loud and clear, and then it used that message to open up and start to deregulate even further throughout the Fed system. The result, according to the report, is that S. 2155 and the Fed’s tailoring that it took in response  “impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.” And I think that's consistent with your testimony. Is that right? Dr. Conti-Brown?

Dr. Conti-Brown: Yeah it is.

Senator Warren: Okay so let me just then come over. Ms. Rodriguez Valladares, you have decades of experience working as a bank examiner and training bank examiners. You’re the one down on the ground with these folks who are making the calls with the banks every day. Do you agree with Vice Chair Barr's conclusion that S. 2155 promoted a less assertive supervisory approach? 

Ms. Mayra Rodríguez Valladares, Managing Principal, MRV Associates: Yes, very much so. And former Vice Chair Randall Quarles made it very clear before the American Bankers Association in the quote that I read that he really saw that Congress wanted these specific steps and all of that is part of how, you know starting at the top, that tone, it filters all the way down to the different kinds of supervisors and examiners. And the tailoring rules meant that Silicon Valley Bank, for example, did not have to do a lot of incredibly important things like really measure from a market perspective, interest rate risks and the banking book, for example. It didn't have to do stressed liquidity coverage ratios. And so because it didn't have to do them, it didn't have to report them to the regulators or to the market. And that's incredibly important, because if the regulators miss it, but it then comes out in an annual report or pillar three, then the market can discipline the banks. And all of that, unfortunately, was missing precisely because of those tailoring rules.

Senator Warren: So the loosening ends up having a multiplier effect, that once you loosen a little bit, you lose other discipline in the system. Is that a fair way to describe what you just said?

Ms. Rodríguez Valladares: Yes, absolutely. And not only that, but then all of the appointees at the Fed, at the FDIC, and the OCC as well, obviously, that was a totally different tone. When I used to go to banks, right after Dodd-Frank was signed, I would see the bankers with all of the different compliance, all the rules, earmark, they took them seriously. So did the bank examiners. And that, after 2018, really disappeared. The tone changed.

Senator Warren: Okay, so the tone changed. And here's another piece of it, I want to look at. Not only did the Fed use the political cover that Congress gave it and moved in the direction of weakening the rules for big banks even further, the Fed itself was lobbying for the bill to weaken regulations the whole time. Fed Chair Powell testified in favor of it. According to press reports, the Fed’s general counsel may actually have even drafted it.

Now, the members of Congress who voted for S. 2155 and the banking industry that lobbied for it now argue that the Fed had discretion to continue to apply stronger rules to banks like SVB – they just chose not to. I agree, the Fed should have used its authority to apply stronger rules to banks with more than $100 billion in assets. That’s why I called on Fed Vice Chair Barr to use that authority immediately now and I’m glad that he has committed to do that. 

But you don’t get to write the law that shoves the Fed in a strictly deregulatory direction and then turn around and say, Gee we wish they hadn’t deregulated.

Dr. Conti-Brown, do you think the big banks and the people calling on the Fed to deregulate would have supported the Fed’s decision – take yourself back to 2018 – would they have supported the Fed’s decision to use its discretion to strengthen rules for the banks with more than $100 billion in assets if they had decided to do that once S. 2155 had been passed? 

Dr. Conti-Brown: It’s inconceivable that they would have supported a move such as that. And I would go further still. In the 20th century, the 110 years of the Fed has been in existence, unlike say the SEC or the EPA, regulated entities under the Fed rarely, if ever, sue it. And that is for a lot of complex reasons – bank supervision was related to it. I – this is a counterfactual, but I'd bet my eyeteeth that we would have seen some very significant litigation. The reason I think that is because Title IV is written in a way consistent with DC circuit legal doctrine, to invite litigation. And the reason is because it contains like a seven part test, that if you want to tread into the $100 and $250 billion range, you're entitled to do so but you have to consider all of the following. And we have seen, after the financial crisis with the SEC, similar kinds of language struck down by the courts. And so I think that the banks subject in this counterfactual to that kind of regulation would have not called their bank examiners for a conversation, they would have called their lawyers to launch litigation.

Senator Warren: Wow, that's a really powerful point about this. S. 2155 weakened the rules and the supervision for these banks like SVB and opened the deregulatory door for the Fed to drive a truck through – which, under Chair Powell, it immediately did. The change in the law and the tailoring the Fed pursued in response to that change “combined to create a weaker regulatory framework for a firm like SVB(FG).” And that is according to the Fed’s own report. 

So, look, I am very glad that Fed Vice Chair Barr has committed to using his existing authority to strengthen rules for big banks, but Congress needs to close that door for good. That’s why I’ve introduced a bill to repeal Title IV of S. 2155, which would undo the Fed’s deregulation of the biggest banks and ensure that we apply tougher rules to banks like SVB that have the power to threaten our banking system.  

Panel 2, Round 2 of Questions below and video HERE:

Senator Warren: I want to focus on the other part of the Federal Reserve System – and that is the regional Banks. 

Unlike the Board of Governors here in Washington, which is a public body with governors nominated by the President and confirmed by the Senate, the twelve Reserve Banks are private corporations overseen by private citizens—including a lot of bankers.  Even so, these private Reserve Banks are permitted to play a crucially important role in public policy, including voting on interest rates and supervising banks. 

In the case of Silicon Valley Bank, the San Francisco Fed was the regulator on-the-ground responsible for ensuring that SVB was managing its risk, but the SF Fed clearly failed to do so.  By the time SVB collapsed, it had 31 unresolved supervisory issues – triple the number of warnings that similar banks had, which was already too big.  It’s great the SF Fed sent those warnings, but what’s the point of sending warnings if there’s no follow up?  Do you think no one is paying attention? Why didn’t the SF Fed force SVB to address the problems that the San Francisco Fed had already identified? Not they needed to figure out some other stuff, the stuff they clearly knew.

Dr. Conti-Brown, I know that you’ve written a lot about the Reserve Banks, so let me ask you for a little background here and let’s get this on the record. Who are these private citizens who oversee the twelve Reserve Banks?

Dr. Conti-Brown: Well they hold an extremely important public trust, but they're not public officials. There are nine of them total for each Reserve Bank. But then also, there are Reserve Bank branches that consist of other boards that serve in a similar kind of role. For the Reserve Banks, these nine are divided into three classes: classes, A, B and C. Class A are the bankers themselves. They are folks like Greg Becker, who was the president of the SVB, who one minute would be sitting in the boardroom at SVB and then look at his watch and run over to the San Francisco Fed. Oh, I've got another board meeting to go to. 

The next three are non bankers, or at least not currently bankers, but they're also appointed by the bankers, supervised by the Fed. And Class C are to represent the public that are appointed by the Board of Governors. Historically, all nine of them were either recent bankers, current bankers or distant bankers. Class C, in the last 15 years or so, has been better diversified.

Senator Warren: So let me just get this straight. Two thirds of the people that oversee each of the Reserve Banks and handpick the leadership are elected by the very same banks that are regulated by the Reserve Bank and three of those people actually work at the bank, right? That’s how this works?

Dr. Conti-Brown: That’s right. Dodd-Frank did –

Senator Warren: – Because people wouldn’t believe this, you realize. 

Dr. Conti-Brown: People think it's a you're you're sending up quackers conspiracy theories, when you tell this. Hey, it's written in the Federal Reserve Act. And one change that was made by Congress in 2010, is that the Class A directors, these are the bankers who are currently working as bankers, can no longer vote on the appointment of the Reserve Bank president, but we don't know what they can say about it. And I've talked to some people who say, Oh, no, it's a very strict wall of separation. And others say no, they're constantly participating in the same kinds of discussions. As with nearly everything about Reserve Bank governance, the public has no idea.

Senator Warren: Right. Okay. So this chummy little group is making a lot of policy here and nobody else gets to see it. And you mentioned that one of the directors at the San Francisco Fed was Greg Becker, who was at that very moment was also CEO of SVB. In fact, Mr. Becker – I just want to draw the line – was a director overseeing the regulator that was supposed to oversee Mr. Becker’s bank.  And this is exactly at the time that SVB received 54 supervisory warnings from the SF Fed’s bank examiners—and the bank examiners – surprise, surprise – made no follow up to force SVB bank to change any of its practices.

Ms. Rodriguez Valladares, does the fact that the CEO of SVB was on the board overseeing the SF Fed, SVB’s regulator, raise questions for you about whether or not his presence on the board could have affected the strength of the SF Fed’s supervision? 

Ms. Rodríguez Valladares: Absolutely. He never should have been there and it is something that is of great concern. He himself yesterday when he testified mentioned that he frequently met with the president of the San Francisco Fed at least once a month, sometimes more frequently, and it's very, very difficult for examiners or anybody else that any of the district Feds to say anything that is going to be critical of one of the board members. That kind of mechanism doesn't exist and it's unfortunate that there still hasn't been a complete independent investigation of the SVP failure because there's a lot of documents that were missing. 

Normally what happens, you examine a bank, and you write about your findings, and you submit your notes, you submit all of your documentation to what's called an EIC, the examiner in charge, and then he or she will review it. And then there's various other layers of middle management at the district Feds that will look at those reports. So we the public have not seen wait a minute, those risks were identified at SVB, year after year. But what kind of middle management or anybody else got involved in the writing of the report. Also, in a little footnote in the CAMELS examination reports, it says that the person who wrote the report was chosen by the Board of Governors. And so what then is exactly the relationship of the Board of Governors, and the San Francisco Fed in this specific examination. So those details are very important.

Senator Warren: So it sounds like to me that this is clearly a case of the fox guarding the henhouse, and all the way through the system here. I want to note, this is not the first time. It's not like we pull back the curtain and are shocked to discover this happening in 2023. Back in 2008, JPMorgan’s CEO Jamie Dimon was sitting on the New York Fed board at the same time his bank was borrowing emergency funds from the Fed. And who was the chairman of the New York Fed Board at the time?  It was the former head of Goldman Sachs, who was serving on the Goldman Sachs board at the same time even as Goldman Sachs was borrowing billions from the Fed. And of course all this happened at the same time that the Fed banks were recommending to Congress to do a huge bailout for the giant banks. So this has obviously been going on for a long time.

After 2008, Congress took steps to address these gross conflicts of interest at the Reserve Bank boards, but clearly we’ve still got a long way to go on this. That’s why Senator Rick Scott and I introduced a bipartisan bill today that would prohibit big bankers from serving as Reserve Bank directors. It would also subject directors to ethics and financial conflict of interest rules. It would foreclose any opportunity for directors to interfere with the supervisory process.

You know, Dr. Kupiec? I'm afraid you're not going to get in on this. So if I can, I'll just turn to you and ask you. Do you think, if some of the legislation like the kind that Senator Scott and I have proposed – I don't know if you've had a chance to see it in any detail – but would it help some with these conflicts of interest?

Dr. Paul H. Kupiec, Senior Fellow, American Enterprise Institute: I have not read the legislation, but I would –

Senator Warren: I’m sorry, I didn’t mean to cold call you on that.

Dr. Kupiec: No, no. Well, I looked a little bit at the IG, which I think is a good idea. But I would point out that the other two banks that failed are not part of the Federal Reserve System. And Signature Bank had Barney Frank on its Board of Directors and Alphonse D'Amato, a former senator and head of the Banking Committee on its Board of Directors too. There's a lot of blame to go around. So that's not to say, Mr. Becker gets off the hook. But there are prominent connected people on lots of Boards of Directors –

Senator Warren: Is that a fair statement? We’ve got a lot of conflicts here?

Dr. Kupiec: It is. 

Senator Warren: Well, let me ask you, Dr. Conti-Brown. Would these reforms that Senator Scott and I have proposed help address conflicts of interest at the Reserve Banks and maybe strengthen a little public confidence in supervisory powers in these banks?

Dr. Conti-Brown: My only reaction is to take the maybe out of that sentence. I think that it is almost circular to say that this would help with the conflicts. I just want to be clear, this is a moderate position. I would go much further. I would fire bankers from these boards entirely. And I recognize that there are politics here and there are interests involved. And so I think that the proposal from you and Senator Scott, which I have reviewed, does not go as far as I would like, but it does go but it does help to manage these questions and makes it so that when you tell someone who's interested in the wellbeing of our country, and it's financial system about these strange curiosities, the Federal Reserve Banks, it would help so much to be able to tell them that those with the largest banks do not participate in that governance.

Senator Warren: Right. And would you like to add something to this, Ms. Rodríguez Valladares?

Ms. Rodríguez Valladares: Yes, I've actually looked at both pieces of bipartisan legislation, and I am impressed with them. I agree with Dr. Conti-Brown that I think it would be a very good idea not to have any bankers at the boards. The skill sets that they bring can be found elsewhere and frankly, there's a danger of having too many bankers on the boards. You really need cognitive diversity. They would be much better served if they had somebody, let's say from an independent broker dealer that has nothing to do with the Fed, for example. They could have people there from the American Red Cross or such organizations that are experts at dealing with chaos and unexpected problems. You frankly, would need a scientist. 

So there's a lot of different skill sets. There's a lot of value in cognitive diversity. That's very, very important. And like these gentlemen, I concur with them, that an inspector general who would be appointed by the President and confirmed by the Senate would be a much, much better situation. It is very, very difficult to go tell the people with whom you're working and you see on a day to day basis that they're doing a bad job. And the minute that you hear the word bonus anywhere, it immediately means that your own salary depends on their performance, and so you can't call out wrongdoing in an independent way and you're not accountable to legislators.

Senator Warren: I appreciate that. 

Panel 2, Round 3 of Questions below and video HERE:

Senator Warren: If you all will bear with me, there's one more issue I want to make sure that we get covered and that is ensuring that the Fed and the Reserve Banks are more responsive to requests from Congress and from the public about information. Right now, despite their massively important role in shaping our economy, Federal Reserve Banks are exempt from the foundational transparency law, the Freedom of Information Act, or “FOIA”.

You all have relevant expertise and I just want to go down the line if I can on this. Do you agree that subjecting the Federal Reserve Banks to FOIA, just like the Fed Board, would help strengthen accountability of the Fed? Dr. Conti-Brown? 

Dr. Conti-Brown: Unequivocally, yes. 

Senator Warren: Dr. Kupiec?

Dr. Kupiec:  I testified yes.

Senator Warren: I heard you, but I wanted to get it on the record. And Ms. Rodríguez Valladares? 

Ms. Rodríguez Valladares: Because right now, banks only report relevant risk measures once a quarter, by the time that we all get that information, it's old. So yes, I definitely would support the FOIA.

Senator Warren: Good. In the first panel, the Fed IG – who is chosen by the Fed Chair, who answers to the Fed Board, and who can only be removed by the Fed Board – argued against making the Fed IG a Senate-confirmed position.

I think you all have answered this at different points, but I want to make sure I get this on the record. Do you agree with Inspector General that the Fed does not need a Senate-confirmed IG? Dr. Conti-Brown? 

Dr. Conti-Brown: I disagree with him in this.

Senator Warren: Yeah. Dr. Kupiec?

Dr. Kupiec:  I don’t think he made a strong case.

Senator Warren: Okay. And Ms. Rodríguez Valladares? 

Ms. Rodríguez Valladares: I disagree with him, as well. He didn't provide any evidence as to why particularly the role should be under the Fed.

Senator Warren: Yeah. The failure of Silicon Valley Bank and its crisis triggered an opportunity for Congress to finally bring greater accountability to the Fed, and we can do that from top to bottom.  This hearing has discussed multiple bipartisan bills that would strengthen oversight and transparency, eliminate conflicts of interest, and make the Fed work better for the American people.  It’s time to end the Fed’s culture of corruption.

Closing remarks below and video HERE:

Thank you very much. I want to thank you all for participating. I appreciate your well prepared opening statements. We’ll make them part of the record.

Questions for the record are due one week from today, Wednesday, May 24th.

For our witnesses: you’ll have 45 days to respond to any questions.  Thank you again.

And with that, this hearing is adjourned.