Lawrence Summers

Fed candidate Don Kohn's Wall Street ties

September 17, 2013: 9:55 AM ET

Janet Yellen's rival for Fed Chair has connections to a hedge fund that made money off J.P. Morgan's London Whale fiasco.

130916123735-donald-kohn-620xaFORTUNE - Larry Summers' bid to replace Ben Bernanke as the next head of the Federal Reserve appears to have been derailed, at least in part, by his ties to Wall Street. Just this weekend, Summers pulled out of a paid speaking gig at an upcoming Citigroup (C) event. That was before bowing out of the race to become Fed chairman on Sunday completely.

Fed vice-chairman Janet Yellen is now seen as the frontrunner in this race. She won't have to face the same criticism. Yellen has never worked on Wall Street. Fed policy restricts her from accepting fees to speak at events sponsored by banks. Her latest disclosure form from the Fed shows no income outside of the Fed and her investments.

But that's not the case for another top contender for the job: Donald Kohn. Like Summers, Kohn has received fees for speaking at events sponsored by Wall Street firms. Kohn's main job is at the left-leaning think tank Brookings Institution, where he is a senior fellow. He has also received consulting fees from the Bank of England, reportedly advising on banking regulation and monetary policy.

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But other jobs have taken him closer to Wall Street. Kohn is a director of a company that is backed by money management firm Blackrock (BLK) and a derivatives-focused hedge fund run by former J.P. Morgan (JPM) executives. Kohn is also a senior economic strategist for Potomac Research Group, one of an increasing number of so-called political intelligence firms that serve hedge funds and have raised red flags among regulators. Kohn could not be reach for comment.

Kohn has spent most of his career at the Federal Reserve, starting as an economist at the Kansas City Fed in 1970. He rose up the ranks at the U.S. central bank, eventually becoming a Fed governor in 2002. From 2006 to 2010, he was the vice chairman of the Fed, which is the job Yellen has now.

After leaving the Fed in 2010, Kohn joined the speaking circuit, signing up with the Washington Speaker Bureau. That company's website lists Kohn as an economist and futurist. It says his fees are $40,000 and up per speaking engagement. In 2011, Kohn was interviewed by Charlie Rose at the annual meeting of the Securities Industry and Financial Markets Association, which is Wall Street's chief trade association.

Kohn is scheduled to speak next week at conference hosted by BCA Research, which, according to its website, is a macro economics research firm. Kohn is on a panel titled "The Costs and Consequences of Policy Extremism." Summers is also scheduled to speak at the conference, as is Nate Silver.

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According to a 2007 disclosure form, Don Kohn and his wife had an investment portfolio worth $1.6 million. All of his income, outside of the Fed, came from investments.

Kohn has never worked directly for one of the big Wall Street firms, but since leaving the Fed he has taken jobs that put him in contact with bankers and investment firms. Kohn is a director at AlliancePartners, which advises small and mid-sized banks on their lending portfolios.

AlliancePartners is headed by Lee Sachs, a former Bear Stearns banker who joined the Obama administration during the financial crisis. AlliancePartners' main investors are asset management firm Blackrock and hedge fund BlueMountain. The latter firm played a supporting role in J.P. Morgan's London Whale trading fiasco.

The hedge fund, which was founded by former J.P. Morgan traders, reportedly made about $200 million betting against the derivatives that J.P. Morgan was buying. A few months later, the hedge fund hired Jes Staley, who had been the head of J.P. Morgan's investment bank and, prior to the London Whale incident, was rumored to be the top contender to be the bank's next CEO. Another senior adviser to the firm: Larry Summers. A spokesperson at AlliancePartners said no one was available to comment about Kohn's role at the firm.

Kohn is also a listed as a senior economic strategist at Potomac Research Group. The firm's website says it helps "mutual funds, pension funds and hedge funds understand the impact of legislation and regulation on markets, industries and companies." Potomac Research was mentioned earlier this year in an article by The Washington Post that looked at how hedge funds and others tried to access information in advance of the passage of the Affordable Care act. One Obama official who worked on medicare issues and participated in conference calls with hedge funds later joined Potomac. No one at Potomac returned calls or e-mails requesting a comment about Kohn's role at the firm.

On Monday, Potomac's chief political strategist Gregory Valliere said in a research note that Yellen was "now the clear favorite," and that the president had no other option, which could be awkward next time he runs in to Kohn at a company get-together.

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None of this means that Kohn is out of consideration. Greenspan had been an investment banker long before getting the top job at the Fed. What really did Summers in was not his willingness to accept Wall Street paychecks, but how that seemed to confirm the notion that Summers would be willing to water down regulations enacted in the wake of the financial crisis. As Treasury Secretary in the Clinton administration, Summers was a leading proponent of deregulation.

Kohn's stance on regulation has been more mixed. On Monday, at a pre-scheduled Brookings event, Kohn said he was skeptical Dodd-Frank would help us avoid another financial crisis, and said that the laws that regulate money market funds, which provide short-term financing for banks and other firms, needs to be strengthened.

In the end, given the way markets are these days, it will probably be quite hard for Obama to find someone both qualified to head the Federal Reserve who hasn't at some point gotten a check from a Wall Street firm, other than, ya know, Janet Yellen.

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