Last December, ProPublica reported that confidential information from the Federal Reserve Board committee that sets the nation’s monetary policy had been leaked to a private investor newsletter in 2012. Last week, the Fed for the first time put out a summary of its investigation into the leak—one that raises new questions about how the matter was handled.
The leak has become a focus of bipartisan criticism in Congress because of concerns about the Fed’s internal controls and whether the leaked information, involving deliberations by the Federal Open Market Committee, could have provided an unfair advantage to investors who received the newsletter.
The Fed’s inspector general recently re-opened what House Finance Committee Chairman Jeb Hensarling (R-Texas) described as a criminal investigation into the leak. Senator Elizabeth Warren (D-Massachusetts) has said a key concern is whether the Fed’s initial investigation “was conducted appropriately.”
Questions prompted by the Fed’s summary are below. We put them to the Fed and its inspector general, but both declined to comment.
Why didn’t the Fed immediately refer the newsletter leak to the Securities and Exchange Commission or FBI, as it has done in previous cases?
In the past, the Fed has brought in outside agencies to investigate leaks. Not this time.
The Fed said its investigation of the leak began in early October 2012, lasted until mid-March 2013, and included interviews with about 60 individuals as well as review of emails and other communication. The inquiry, led by Fed General Counsel Scott Alvarez and Board Secretary William English, looked not only at the leak to the newsletter, published by Medley Global Advisors, but also into information reported in an earlier story by the Wall Street Journal.
“Nearly everything” reported by Medley Global had appeared first in the Journal, according to the Fed’s summary of its own inquiry.
The summary said the Journal’s story was based on information from numerous Fed board members, reserve bank presidents, and staffers, but that any disclosures about confidential matters “appeared to be unintentional or careless” and did not involve details of monetary policy proposals or actions.
In contrast, “only a few Federal Reserve personnel covered in the review reported having contact” with Regina Schleiger, who wrote the Medley report. Alvarez was unable to determine who was responsible for the leaked information in the newsletter, according to the summary.
Outside agencies have investigated previous leaks at the Fed’s request. In 1996, a Reuters reporter quoted an unnamed senior Fed official in a story that identified the number of regional Fed presidents who wanted to raise a key interest rate. Then-Fed Chairman Alan Greenspan asked for FBI assistance.
In April 2013, a Fed congressional liaison mistakenly emailed a full draft of FOMC minutes a day early to 154 people, including Congressional staff, trade groups, and banks. The Fed contacted the SEC and the Commodity Futures Trading Commission to try and determine if any trading had taken place based on the minutes.
As Hensarling explained in a March 13 letter to Federal Reserve Board Chairwoman Janet Yellen: “Anyone disclosing such information would be subject to possible criminal insider trading liability.”
In both earlier leak situations, once it was clear that a leak had taken place, outside agencies were immediately brought into the picture. Yet in the Medley leak, there’s no evidence that Alvarez considered doing so or reached out for consultation.
How can the Fed conclude that the Wall Street Journal article and the Medley Global report contain nearly the same information?
A side-by-side comparison of the Journal’s story from September 28 and Medley Global’s newsletter casts doubt on the contention that “nearly everything” in it had already appeared in the newspaper.
The Medley report was focused on what direction the open market committee was headed over the next few months based on discussions by the leadership. Schleiger’s “special report” was titled “December Bound,” and her predictions for what the Fed would do after the September meeting turned out to be accurate. The newspaper story was backward looking. It focused on then-Chairman Ben Bernanke’s efforts to corral members of the committee in the lead up to the meeting.
The Medley report had specifics that the Journal did not. Schleiger revealed that a new program of monthly Treasury purchases, to replace an expiring one, would be about $45 billion. The Medley newsletter also pinpointed the exact unemployment threshold favored by the leadership—6.5 percent—at which the committee would consider initiating a tightening of monetary policy. Schleiger also included colorful details that few would know—like the fact that some monetary affairs staffers stayed up past midnight working on the policy proposals ahead of the meeting.
Why didn’t general counsel Alvarez refer the matter to the Fed’s inspector general?
Under its information security policy, Alvarez and the Fed secretary are required to perform a review in the event of a leak. According to the summary, the inspector general informed Alvarez in early March 2013 that it had begun its own inquiry. That was before Alvarez finished his examination and forwarded his report to the Federal Open Market Committee in mid-March.
According to the security policy, based on the initial review, it’s up to Alvarez to decide whether to go to the inspector general “to perform an investigation of the incident.” In this case, it appears that Alvarez decided the Fed itself would do the investigation. The Fed summary says staff contacted 300 individuals, requested and obtained “personal contacts, emails, and phone conversations,”and interviewed about 60 people. Neither the summary nor the security policy details what criteria, if any, should trigger involving the inspector general.
What caused the inspector general to re-open the case and turn it into a criminal inquiry?
According to the Fed’s summary, the inspector general’s original inquiry focused only on the leak to Medley. At some point, it reached a dead end. What new information became available that was not obtainable in 2013 remains a mystery. ProPublica reported on March 11 that the IG had re-opened the investigation.
The Fed’s summary said “only a few” people in a position to know confidential FOMC information had contact with Medley’s reporter Schleiger. How many are “only a few”?
The Fed’s summary does not say whether one person may have spoken with Schleiger more frequently, nor does it describe the circumstances of any conversations. The Fed’s inquiry covered contacts between June 1, 2012, and October 3, 2012. It does not specify how many people had contact with Schleiger in the pivotal month after the September FOMC meeting and before the leak was published—one day before the committee’s meeting minutes became public on October 4.
The Federal Reserve’s summary hasn’t quelled Senator Warren’s desire to figure out what happened. Last Tuesday, her office released a statement saying she “will continue to work with the Federal Reserve and the Inspector General to determine how the leak happened, whether the investigation was conducted appropriately, and whether the Fed has taken the appropriate actions needed to ensure that these kinds of leaks don’t happen again.”
Both Hensarling and his Senate counterpart, Senator Orrin Hatch (R-Utah) have previously written strongly worded letters to Yellen and the Fed’s inspector general requesting more information about the leak investigation. Spokesmen for both committees declined to comment on the Fed’s investigation summary.