Janet Yellen pledges probe into recent market frenzy

The newly appointed Treasury Secretary will lead a meeting of top regulators on Thursday

Ms Yellen took office less than two weeks ago and is focused, among other things, on strengthening consumer protection. Reuters

Treasury Secretary Janet Yellen pledged to examine the recent frenzy in financial markets in an effort to ensure investors are protected, signaling the new administration’s focus on consumer financial interests after years of emphasis on deregulation.

“We really need to make sure that our financial markets are functioning properly, efficiently and that investors are protected,” Ms Yellen said in an interview on Thursday on ABC television’s “Good Morning America” before she leads a snap meeting of top regulators later in the day.

“We’re going to discuss these recent events and discuss whether or not the recent events warrant further action.”

Thursday’s meeting puts the newly installed Treasury chief in the spotlight after populist politicians from both sides of the aisle called for investigation of recent events. While the Securities and Exchange Commission is investigating for signs of fraud behind sudden surges in stocks including GameStop, others have drawn attention to trading curbs that some platforms imposed for smaller, retail investors.

The session will give the administration the chance to demonstrate that it’s attuned to the complaints about potential manipulation after two congressional committees moved to hold hearings, yet it’s unclear what action – if any – will result.

The gathering will include the heads of the Federal Reserve –formerly led by Ms Yellen – as well as the Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Reserve Bank of New York, which serves as the central bank’s main monitor of Wall Street.

“This is the first test for the Biden administration in the reorientation of consumer and investor protections,” said Christopher Campbell, a former assistant secretary of the Treasury for financial institutions from 2017 to 2018. The meeting telegraphs to the market that the administration “will play an active role in maintaining or upgrading consumer protections”, he said.

After President Donald Trump’s team focused on reducing regulatory burdens for the financial industry, Democratic lawmakers expect Mr Biden’s picks will be pushing for tougher enforcement and bigger fines for financial firms and executives accused of wrongdoing.

The prominence of Ms Yellen in leading the administration’s response isn’t without risk. She received more than $700,000 in speaking fees from Citadel, the financial empire run by billionaire Ken Griffin. Mr Griffin runs a hedge fund and controls Citadel Securities, a giant market making firm that executes trades for customers of broker-dealer Robinhood Markets.

Robinhood was one of the platforms that restricted trading in shares including those of video-game retailer GameStop, whose stock was propelled by what appeared to be an army of retail investors attacking the positions of hedge funds that had bet against it.

Ms Yellen took office less than two weeks ago with an agenda topped by strengthening the federal government’s Covid-19 rescue efforts, along with addressing deepening inequality and corraling the Treasury behind Mr Biden’s climate-change campaign.

But the spectacular clash between retail investors and powerful hedge funds pushing a handful of stocks in opposite directions put a premium on an official administration response. House Financial Services Committee Chair Maxine Waters is planning a hearing February 18, while incoming Senate Banking Committee head Sherrod Brown said he’ll hold a hearing but hasn’t set a date.

“Secretary Yellen believes the integrity of markets is important and has asked for a discussion of recent volatility in financial markets and whether recent activities are consistent with investor protection and fair and efficient markets,” the department said in a February 2 statement.

Larry Tabb, head of market structure research for Bloomberg Intelligence, expects regulators will discuss several specific elements that played a role in the volatility, including possible market manipulation, capital rules for brokers, settlement cycles, short-selling and the use of options and derivatives.

While the SEC is the main overseer of equity markets, not the Treasury, president Joe Biden’s nominee for chair – Gary Gensler – hasn’t been confirmed. The Treasury chief has other influential roles, however, including as head of the Financial Stability Oversight Council and as the cabinet’s senior-most economic official.

Tony Fratto, who served at the Treasury and White House during the George W. Bush administration, noted that Treasury secretaries can frequently use the bully pulpit when seeking regulatory change.

“They have the authority and the mandate to try to nudge not just policy, but regulation and supervision, in the direction they think is best for the country,” said Mr Fratto, a co-founder of Hamilton Place Strategies in Washington.