Monday links - December 16, 2024

My thoughts on Michael Barr, Operation Choke Point, bank supervisor insider trading, Louis Armstrong, and riding bikes

[So much to love from this ChatGPT image about today’s blog, including that it thinks people park on the sidewalk in Washington DC, that it takes a decidedly YIMBY view of the DC skyline, and that that flag is larger than the building’s facade and still has a little buddy in miniature. You do you, ChatGPT, never change.]

1. Where the Fed’s Michael Barr goes from here, Kyle Campbell, American Banker, December 16, 2024

Vice Chair for Supervision Michael Barr has had an embattled term in this critical role. First came his appointment, the second choice of the Biden Administration after Sarah Bloom Raskin went down for controversial views on derisking “brown” companies from the banking system. Then came the 2023 regional banking crisis after he had been on the job for less than a year, and a very ill-advised pre-commitment to release a postmortem on a fixed timeline (my contemporaneous critique of that decision is here). Then, the doozy, the disastrous rollout of a Basel III proposal and an even worse backtracking of that original proposal (Here’s an explainer from my Brookings colleague David Wessel; here is my view on the politics of Basel.

Had Kamala Harris won reelection, Barr would likely have been reappointed to his role and had more time to sort out what a more successful policy and political agenda would be. With the new Trump Administration, some politicians are already spoiling for a legal clash. Kyle Campbell, one of the must-read financial journalists, has the linked profile of Barr, for which Barr sat, that is full of great insights about Barr’s legacy, his future, the politics of central banking, and more. (Full disclosure: I am quoted in the article).

2. Choke Point 2.0: Fact or fiction, crypto banking access set to change, Steven Stradbrooke, CoinGeek, December 16, 2024

Operation Choke Point 2.0 is the moniker given by crypto enthusiasts (and their political allies) for the undeniable practice of both banks and government regulators and supervisors to exercise caution about banking expansion in crypto in the early 2020s. The more aggressive version, per venture capitalist Marc Andreesen, is that this is a “partisan tool to kill legal businesses for political reasons” (as quoted in the linked article).

I am squarely on the side of the regulators and supervisors here, but not because I am anti-crypto. Indeed, I submitted an expert report in litigation on behalf of Custodia, a bank aimed at crypto, whose denial of a Fed master account I view as inconsistent with the aims of the Monetary Control Act of 1980 (the case—and Custodia’s loss at the district court—is discussed here).

I am on the side of the regulators because “derisking” overexposure to legal industries is as old as banking itself. Some people seem to take the view that banks should be permitted to do anything legal, that any effort by bank supervisors to nudge or even require banks to do more or less legal business is “un-American,” as CoinGeek quotes Andreesen as saying.

This characterization betrays an ignorance of banking history. Bank supervision is about shared risk management, and risk management means that sometimes risks have to be adjusted. When banks engage in blatantly illegal activity, the appropriate response is not for government to encourage less of that illegal activity, but to open enforcement actions against them. When banks engage in risky activity that is inappropriate for the risk profile they have—even if the risky activity is perfectly legal—it would be a dereliction of responsibility to simply defer to the banks to set their own course.

That banks were encouraged to limit exposure to crypto in spring of 2022, while the industry was going through a major correction, strikes me as a supervisory triumph, not a supervisory failure. We should see more such triumphs, not fewer.

Even so, I think this is all moot. It is crypto’s moment. I expect we will see a lot more crypto banking. We will also likely see a lot more crypto banking failure. My only hope is that we don’t see crypto banking bailouts.

3. Former Senior Manager of Federal Reserve Bank of Richmond Pleads Guilty to Insider Trading and Making False Statements, US Department of Justice, November 19, 2024

I am a bit late to this but it’s a doozy. A bank examiner at the Richmond Fed made a series of trades based on “confidential supervisory information” gained pursuant to his employment as an examiner. He lied about his activities on official forms, was caught, and now awaits sentencing.

There is a lot to unpack here, worthy of its own post, about the ethics of Fed trading (there was a major scandal in 2021 that resulted in two Reserve Bank presidents’ resignations, an inspector general report, and a major upgrade in the Fed’s code of conduct which now means that central bankers in the US have the strictest ethics requirements in all of government), about the laws of insider trading (not obviously applicable here, hence the failure of an insider trading prosecution in the indictment above), and about the nature of confidential supervisory information (the legal doctrine that governs the requirements that bank examiners cannot disclose what they learn through examination).

I’ll leave all that to the side and highlight only some research in progress with my brilliant co-authors Patrick Corrigan and Jeff Zhang. We have a couple of articles that will soon be circulating about the tensions between confidential supervisory information and other areas of law, principally securities law, consumer law, and administrative law. In one article, we explore the assertion that CSI is not “material” to investors and thus does not need to be disclosed under the federal securities laws. So sweeping a claim turns out to be…inaccurate. The insider trading case linked above is just further evidence (and gives us a kicker for one of the articles).

4. ‘Zat you Santa Claus? Louis Armstrong, 1953

We are in full Christmas bloom at the Conti-Brown household, an outcome I have been agitating for since Halloween. It is glorious. I love everything about it—the lights, the movies, the baking, the spirit of giving, the music, the ugly sweaters. Hands down, my favorite time of the year.

Except this morning after we got the kids out of the house, Nikki and I were sitting together having a lovely conversation about this and that with quiet music in the background when the BANG BANG BANG of ‘Zat you Santa Claus jumped out of our speaker and nearly killed us both. I thought the dishwasher exploded; Nikki thought the neighbors were shooting at us. What a wonderful world that song is not.

5. Roll With It: Philly Gran Fondo

I missed the first Philly Gran Fondo in September in part because I had never heard of Gran Fondos at that point. But I am now back from a spectacular week with my brother in Utah and Wyoming, where we biked, hiked, hunted, and talked for hours and hours. These adventures will definitely be the subject of a later post; suffice it to say I am hooked. We have already booked our next race, 70 miles in Greece, for early 2025.