The Breakdown - Two Fed Presidents Resign After Embarrassing Trading Revelations

Episode Date: September 29, 2021

Today on “The Breakdown,” NLW explores traditional financial system actors behaving badly, including why two Fed presidents are retiring early after revelations that they were actively trading stocks at the height of last year’s market crisis. He also covers: A new WSJ investigation that found 131 federal judges had broken the law by not recusing themselves from cases where they had a financial interest The latest macro issues around Evergrande, inflation and more More crypto companies leaving China for good  This episode is sponsored by NYDIG. - NYDIG, the institutional-grade platform for Bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. - Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Cooper Neill/Bloomberg/Getty Images, modified by CoinDesk.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, September 28th, and we are having one of our grab bag days. There's a ton of things happening, some of which are extraordinarily frustrating. And so, without any further ado, let's just dive right in. First of all, I'd love to start with a couple stories from the hypocrisy files. Crypto and Bitcoin are industries that are constantly lambasted by outsiders as being some

source of corruption or criminality, something that is in many cases or in many views irredeemable because of that criminality. This seemed for a while to be a fud that was perhaps consigned to the past, but with the return of Janet Yellen in her new role as the Treasury Secretary, speaking about it constantly every time she gets a chance to talk about how crypto is used for crime and blah, blah, blah, blah, blah, it has made something of a resurgence. This despite the fact that every on-chain analysis shows that a minuscule part of the overall market is actually used for criminal transactions. An example of this narrative discussion comes from CMS holding this morning. He retweeted an associated press story that said, a dozen far-right entities took in Bitcoin worth more than

9 million in just over four years, AP found. That money is all but out of reach of banks, courts, and regulators. So let me say this first and clearly, fuck Nazis. I don't think anyone has any problem with that. The issue is the relative size of this 9 million compared to the overall volume of Bitcoin in the crypto industry as a whole. As CMS put it when he retweeted, it's a $2 trillion asset class. This is basically saying usage for these narratives is close to zero over a four-year transactional weighted basis. When someone asked for the explain it like I'm five version of that tweet, he said, it's like saying one grain of sand is bad on a beach and therefore the beach in entirety is a problem. This is the type of thing that happens every single day.

There really are still so many people if you survey the crypto critics on Twitter, for example, who really say in a bald-faced way that this is just a tool for criminals. Meanwhile, let's turn our attention to the traditional financial system. Here's today's banner Wall Street Journal piece. 131 federal judges broke the law by hearing cases where they had a financial interest. The judges failed to recuse themselves from 685 lawsuits, from 2010 to 2018, involving firms in which they or their family held shares, a Wall Street Journal investigation found.

Now, there's plenty of room for indignation, but one area where you're not going to be able to get fired up is around partisan politics. The jurist came from basically every president from Lyndon Johnson all the way up to Donald Trump. To give a flavor of the type of thing that was going on, here's an example. Quote, at an Ohio-based appeals court, Judge Julia Smith Gibbons wrote an opinion that favored Ford Motor Company in a trademark dispute while her husband held stock in the automaker. After she and the others on the three Judge Appalate panel heard arguments, but before they ruled, her husband's financial advisor bought two chunks of Ford's stock. each valued it up to 15,000, for his retirement account, according to her disclosure form. These aren't big multimillion dollar things. They're $15,000 here, $25,000 here, $50,000 here.

But the size doesn't really matter. It's about the principle. Another quote from WSJ. The journal found 61 judges or their families not only holding stock in companies that were plaintiffs or defendants in the judge's courts, but also trading the stocks during cases, end quote. So that means actively trading during the cases, no way to say that you just didn't realize what was going on. And here's the really frustrating part two. Quote, judges offered a variety of explanations for the violations. Some blamed court clerks. Some said their recusal list had misspellings that foiled the conflict screening software. Some pointed to trades that resulted in losses. Editor's note, that's my favorite excuse. Others said they only had nominal roles, such as confirming

settlements are transferring cases to other courts, though there is no legal exemption for such work. This is a story about the absolute banality of corruption. And of course, like I said, not all these cases are the same, not all these violations of the principles and the letter of the law here are the same. There are degrees. There are variances. There's probably genuine accidents all the way to serial repeat offenders. But ultimately, when it comes to the law and when it comes to ethics and principles, it doesn't matter how small any one of these individual acts was. As the journal put it, the hundreds of recusal violations found by the journal breach a bedrock principle of American jurisprudence. No one should be a judge of his or her own cause. Congress first laid out that

principle in 1792 to guarantee litigants an impartial judge and reassure the public that courts could be trusted. This podcast is sponsored by Nydig, a firm that's making Bitcoin accessible, to banking customers on Main Street and Wall Street alike, as part of their mission to bring Bitcoin to the people. Find out more at nidig.com slash nlw. That's NYDIG forward slash NLW. Now on to our second traditional system, not really better than what you say crypto is story. Two, count them two. Federal Reserve presidents are retiring after being embarrassed by revelations of stock trading during the peak of the crisis last year. Boston Fed President Eric Rosengren and Dallas Fed President Robert Kaplan. Rosengren is set to leave this week and Robert Kaplan will be gone by October 8th.

Financial disclosure statements showed that they both held and traded financial assets during the Fed's market interventions. If you'll remember last year, the markets tanked starting in March as the country shut down and central banks around the world led by the Fed got involved in markets in completely unprecedented ways. Kaplan specifically conducted multiple $1 million or more transactions. Keep in mind, these guys both cleared the Fed's rules and ethical guidelines. In fact, that's probably part of why people have been so pissed. Powell was asked about this recently and gave a very practiced political answer,

saying no one on the FOMC is happy to be in this situation, to be having these questions raised. It's something we take very, very seriously. I'm determined that we will rise to the moment and handle it in ways that will stand up over time. But they didn't handle it. These guys just resigned of their own accord with no issue, no punishment, no apology. Rosengren didn't even acknowledge these accusations, saying that he was retiring for a health issue. Robert Kaplan at least admitted it was because of these issues, although without any acknowledgement of the moral questions underlying. Quote, unfortunately, the recent focus on my financial disclosure risks be coming to distraction to the Federal Reserve's execution of that vital work.

For that reason, I have decided to retire. Honestly, on this one, Travis Kling just nailed it. He tweeted this morning, don't ever forget the Fed had two presidents, air quotes, quit yesterday because of how damning the evidence of their insider trading was. And Gensler doesn't want you to get 4% on a crypto savings account. Now, holding aside my indignation for a second, there are two other interesting implications of these Fed president resignations. One has to do with the composition of the Fed itself. These are two of the nine more hawkish Fed officials. Remember, at the last, FOMC, nine of 18 favored raising rates in 2022. That includes both Rosengren and Kaplan. That number was up

from seven in June, so at least for a while again, there are potentially more Fed officials who favor rate hikes starting in 2023 than there are who favor rate hikes starting in 2022. A second implication is that it may ease pressure on Powell's re-nomination. Jerome Powell's term ends in February, and there are a lot of debate swirling around about whether Biden will give him a second term or perhaps switch to someone who's more aligned with the Democrats, such as Lael Brainerd. This is exactly the type of scandal that could have pushed one direction or the other. Final couple notes while I'm on the macro, as it is a macro shapes everything sort of day. A couple headlines that give you a sense of what's going on. Bloomberg says stocks, futures drop amid spike in treasury yields. The Wall Street Journal says

debt ceiling standoff distorts short-term treasury market and CoinDesk writes Bitcoin gold under pressure as dollar tracks U.S. Treasury yields higher. So what's going on? Well, there are tons of the politics around the debt ceiling. I discussed the silliness in some ways of the debt ceiling a couple days ago, but just taking this on the face of it, Republicans blocked a bill that would suspend the debt ceiling until December of 2022 and keep the government operating past the end of its fiscal year on September 30th. To get a sense of what the political calculation is here, Bloomberg writes, the GOP maneuver sets the stage for a protracted debate over debt the Republican lawmakers' hope will help them portray Biden's expanded child tax credits, paid family leave, and new benefits for

Medicare recipients as out-of-control government spending. An eventual Democrat-only vote to raise the debt limit would provide fodder for election attack ads. There are also, meanwhile, continued questions of China's credit issues in Evergrand. Nothing big new other than the People's Bank of China has pledged to ensure a, quote, healthy property market and also to protect homebuyers. Today was the PBOC's eighth day of liquidity injections, the longest stretch since last December. Finally, of course, there are concerns about tapering and inflation. In testimony on Monday, Powell said that inflation is likely to stay high in the coming months. The Wall Street Journal writes, Mr. Powell acknowledged that there are risks that price pressures

are higher than anticipated or more enduring. The Fed would raise interest rates if sustained higher inflation were to become a serious concern. Powell and Yellen are both slated to testify before Congress today. By the way, one more macro thing that shows just how truly insane things are out there right now, U.S. home prices are up 19.7% in July, the 14th straight month of accelerating prices. Of course, presented a loan that's just an individual crazy data point, but it's just such a high, wild number that I wanted to share. All right, last before we close out today, I wanted to just follow up on our story from yesterday

with China. For those who haven't listened yet, at the end of last week, the People's Bank of China sent out a notice that seemed to put even more restrictions than ever before on crypto trading in the making it potentially a crime for Chinese citizens to be working with exchanges, even offshore exchanges that cater to Chinese users. We discussed yesterday how Huobi and Binance had both stopped accepting new Chinese users and how Huobi had actually said that they would be sunseting all existing Chinese users as well. While 24 hours later, at least 18 firms are leaving China as well or are reportedly now inaccessible in the country. These reports come in part from

Chinese media, which suggests that they're trying to really reinforce the story that this is real. Exchanges like Bitmart and Bickey have left, also CoinGecko, Coin Market Cap, and Trading View are all blocked in the country now. The B-pool, Ethereum mining pool has also shut down operations after the crackdown. Finally, starting in a couple weeks, Alibaba will halt sales of not only crypto mining equipment, but also any hardware and software or tutorials even related to mining. So clearly, China banning itself from Bitcoin and crypto continues unabated. And the question remains what sort of ripple effects this will have, particularly with regulators and other parts of the world. All right, guys, anyways, like I said,

a bit of a macro day, a bit of a grab bag day. But I hope that you are having a great start to your week. I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace. Hello, listeners. If you're a financial advisor, manager, or CFA looking to learn more about Bitcoin, investment strategies, and tools to share with your clients, then you're invited to attend CoinDesk's Bitcoin for Advisors event on October 6th. It's a fully virtual event experience designed for advisors by advisors who have found ways to get compliance ready in order to add Bitcoin advising to their practices. You can head over to coindesk.com slash events to secure your complimentary registration today. That's coindesk.com slash events where you can register for free.

We'll see you on October 6th and thanks for listening.