Washington - Federal Reserve Chairman Alan Greenspan has rejected a plea from Rep. Henry Gonzalez, D-Tex., to require departing Fed officials to sign an agreement against divulging market-sensitive information.
Gonzalez made the appeal following reports that former Fed governor Wayne Angell, after going to work as chief economist for Bear, Stearns & Co., told clients that he believed most of the 12 Fed district banks wanted to increase the discount rate by 50 basis points. Fed officials subsequently raised the discount rate to 3.5% from 3% on May 17 in connection with a broader move lifting short-term rates.
Greenspan shot down the request by the chairman of the House Banking Committee in a letter that Gonzalez released yesterday.
Greenspan said nondisclosure agreements are "relatively rare" among government agencies and are not used by other financial regulatory agencies.
There are also "legal and practical issues" that would have to be dealt with in drawing up any new rules, Greenspan said. "There is no government prohibition on the use of experience and insight gained through government service, and there would be serious problems associated with imposing such a prohibition."
Gonzalez said he was disappointed with Greenspan's response, which followed an internal investigation of the matter by the Fed's office of inspector general. "The time is ripe for the Federal Reserve to reconsider its lackadaisical attitude toward placing restrictions on its departing employees," Gonzalez said.
Gonzalez also faulted the Fed for not releasing its report on the investigation. "The American taxpayers have the right to know if former senior officials of their central bank are misusing their authority and could be selling inside information," he said.
Brent L Bowen, the Fed's inspector general, declined to comment on the matter or even confirm that an internal investigation took place. Fed spokesman Joseph Coyne and Angell, through a spokesman in New York, also had no comment.
Angell, who left the Fed in February, first set up his consulting firm in Arlington, Va., and was charging clients $100 a minute to talk to him to get his views on monetary policy. He then joined Bear Stearns and, in a conference call in mid-April, told clients that eight out of the 12 Fed bank districts has already asked for an increase of 50 basis points in the discount rate.
Members of the Fed's Board of Governors have standing request on the discount rate before them each Monday at their regular weekly meetings. The information is closely held and is typically not released to the public unless the board votes to change the rate.
Angell was reportedly questioned in person by Bowen and replied that he made an educated guess about the number of Fed district banks seeking a rate increase. He denied passing on any insider information to market participants.
The inspector general's report apparently did not come to any definitive conclusions about Angell's actions. A statement issued by Gonzalez said the report did no directly charge any trading on insider information for profit.
But Gonzalez charged that Angell "knew at the time his employment ended that a specific number of Federal Reserve Banks had pending requests to increase the discount rate. This is clearly insider information."