A research paper has found “robust evidence” that for years some traders got early news of U.S. Federal Reserve rate announcements and then traded on it during the Fed’s media lockup.
The paper, covering September 1997 through June 2013, detected abnormally large price movements and imbalances in buy and sell orders that were “statistically significant and in the direction of the subsequent policy surprise.” The moves occurred during the window between when Fed announcements were supplied to the news media and when they were permitted to be released to the public, the authors write.
“Back-of-the-envelope calculations indicate that the aggregate dollar profits … range between $14 [million] and $256 million across the four markets that we examine,” the authors write.
Worth noting is the fact that the researchers examined trading trends associated with several different government reports over the same period of time, but only found trading anomalies in the “lock-up period” for Federal Reserve announcements of interest rate changes.
Zero Hedge blog notes that as early as 2007, there was evidence that Timothy Geithner, then head of the New York Federal Reserve, may have been tipping off banks to the direction of Federal Reserve discount rate changes.
Their conclusion, with which I wholly agree, is that if Geithner was tipping off one bank then he was tipping off all of them, and probably continued to do so during his tenure at the Treasury Department. It also seems clear that he was rewarded for leaking insider information by being promoted to Secretary of the Treasury. Goldman Sachs, JP Morgan Chase, and Citigroup were all in the top ten contributors to Barack Obama’s 2008 Presidential campaign; Goldman Sachs was the largest corporate contributor. Perhaps this explains why Democrat power players and financial executives were so excited about Geithner’s nomination. It appears that they got their money’s worth.
This is serious business, because it means that Too Big To Fail banks might have been raking in literally hundreds of millions of dollars in illegal profits that were essentially stolen from other traders and investors who did not have choice insider information.
However, it remains to be seen whether the Democratic Party’s venerable stable of working-man champions and Wall Street warriors will act on this information. I’m thinking specifically about Elizabeth Warren, who will certainly be caught between her “99%” populist appeal, and pressure from party superiors to be a team player, since Geithner is still connected to a lot of very powerful Democrats and was one of the most visible members of the Obama Administration.