What We Still Don’t Know About the Fed’s Leak Investigation

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. This week, the Fed for the first time put out asummary 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 reopened what House Finance Committee Chairman Jeb Hensarling, R-Texas, described as a criminal investigation into the leak. Sen. Elizabeth Warren, D-Mass., 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.

Q. 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.

Q. 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 Sept. 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.

Read on.

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