Does Goldman's hiring of Fed veteran Kaplan signal the Vampire Squid is back?

By Brett Arends

Kaplan, as head of the Dallas Fed and an FOMC member, was revealed to have been active in the stock market at the outset of the pandemic

The world is full of Goldman Sachs alumni.

And they can't all be tainted by financial scandal.

So you have to wonder why bank CEO David Solomon and the Goldman board picked Robert Kaplan, the scandal-hit former head of the Dallas Federal Reserve, as their firm's new vice chairman.

A cynic might wonder if the bank's leaders were trying to send the rest of the world a message.

Happy days are here again, maybe. Or: The Vampire Squid is back. That sort of thing.

It is surely just a coincidence that the Kaplan news was announced just after a federal judge at last put the long-running, $2.9 billion Malaysian bribery scandal to rest.

And just as Goldman Sachs shares (GS) were once again hitting new highs.

Kaplan, who'd previously had a two-decade tenure at Goldman, stood down as head of the Dallas Fed in 2021, after revelations about his stock-market dealings during the COVID-19 crisis sparked broad outrage.

Turned out he'd been trading in stocks, including high-risk airline and oil stocks, at the height of the panic, in March 2020. This was while he served not only as the boss of the Dallas Fed but as a voting member of the Federal Open Market Committee. Which meant he had intimate inside knowledge of what the government and the central bank were willing to do to bail the economy out.

An internal investigation by the Fed's inspector general found that Kaplan was also trading in stock options that spring, and had failed to meet disclosure rules.

Kaplan could not be reached for comment.

"During my tenure, I have adhered to all Federal Reserve ethical standards and policies," he said when he retired from his role at the Fed. "My securities investing activities and disclosures met Bank compliance rules and standards."

Goldman Sachs, when contacted for comment, directed us to a press release about the Kaplan appointment.

It also referred us to the report of the Fed's inspector general, which concluded that Kaplan's trades had not broken any Federal Reserve rules. "With regard to Mr. Kaplan, we did not find that his trading activities violated laws, rules, regulations, or policies related to trading activities," the report said.

Fair enough.

The inspector general's report, though, added, perhaps pointedly: "[W]e note that the rules in effect during the scope of our review did not sufficiently support public confidence in the impartiality and integrity of the policymakers and senior staff carrying out the public mission of the FOMC's work."

This isn't quite the same as saying, "When we realized Robert Kaplan's behavior was within the rules, we realized that the rules were a joke," but it is close.

Actually, the investigation revealed a further loophole. One reason Kaplan avoided breaking rules was that he made his trades on March 17, 18 and 19 of that year, and it wasn't until several days later, on March 23, 2020, that someone in the Fed thought to send out a notice to everyone telling them not to trade.

It's over 30 years since Warren Buffett outlined his famous principle about ethics in business, including in banking. "After they first obey all rules, I then want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper to be read by their spouses, children and friends," he said.

Kaplan and another Fed honcho under investigation at the same time, Boston bank boss Eric Rosengren, both quit following the revelations.

The central bank's chair, Jerome Powell, then admitted the institution needed to rebuild public trust, and the Fed dramatically changed its rules.

When Buffett was laying out his ethics rules, in testimony to Congress, he had just taken over the scandal-hit Wall Street bank Salomon Brothers. At the time, he also offered a message to the bank's employees. "Lose money for the firm, and I will be understanding," he said. "Lose a shred of reputation for the firm, and I will be ruthless."

Buffett understood that an organization's leaders set the tone for everyone else, in ethics - and everything else. Goldman Sachs's leaders are no dummies. So, presumably, they know the same thing.

-Brett Arends

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05-10-24 1252ET

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