Pat Tommy and the Strange, Winding Tale of Reserve Trust

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Nothing encourages congressional regulatory scrutiny more than a good partisan scrape. Americans who are concerned that a small, Colorado-based fintech company may be receiving undue government favors can sleep through the night, knowing that Senator Pat Tommy (R-PA) is taking the issue with bulldog tenacity. are. This crusade is a bit surprising because Tommy, who is a ranking member of the Senate Banking Committee and is not running for re-election this fall, generally positions himself as a friend of financial innovation.

But, you see, the company in question—the Reserve Trust, neatly labeled “Stripe for B2B payments”—has important ties with major Democrats. Tommy’s has been raising questions about the Reserve Trust as far back as at least February, and to date the answers have been less than illuminating, even if the stakes are lower than Tommy’s hyperventilation.

Let’s start from the beginning: The Reserve Trust was founded in 2016, and very quickly applied for a “master account” at the Federal Reserve Bank of Kansas City, meaning the company had direct access to the Federal Reserve’s payment system. Will have access to, and may compromise, transactions with other member banks using Fed money. Very few fintech startups even bother to build such applications, as it is clear that they are not qualified. Reserve Trust is a State Chartered Trust; Master accounts are typically for federally accredited banks, savings and loan associations, and similar institutions that handle deposits. Unsurprisingly, the Kansas City Fed rejected the Reserve Trust’s application in mid-2017.

How Did the Reserve Trust Get a Fed Master Account?

Around that time, some politically interesting things happened. When Donald Trump took office, Sarah Bloom Ruskin stepped down as Deputy Treasury Secretary (at the time she was the highest-ranking woman in Treasury history, and had previously served as governor of the Federal Reserve Board) ). Ruskin began teaching at the University of Maryland, but also joined the board of the Reserve Trust and received equity as compensation. According to Tommy, soon after the Reserve Trust’s application was rejected, Ruskin called Esther George, the chairman of the Kansas City Fed. The following year, the Kansas City Fed reversed its decision and granted the Reserve Trust a master account—the first and apparently the only non-bank to achieve that status.

It all came to a head earlier this year, when Ruskin was named as the Federal Reserve’s bank regulator. The Kansas City Fed found itself under the fire of Congress, issuing a statement saying that the Reserve Trust had “changed its business model and that the Colorado Division of Banking defined state law in a way that meant [Reserve Trust] Meets the definition of a depository institution.”

It doesn’t matter much, as it seems the Fed has a fair amount of discretion in who it gives master accounts to, but as long as we’re keeping score: a) The Reserve Trust continues to call itself “Non-Depository, Colorado” as of today. Chartered Trust,” and b) the Colorado banking regulator called the Fed statement a “misrepresentation.”

Now who runs the Reserve Trust?

Ruskin left Reserve Trust in 2019, and in late 2020 sold his stock in the company for $1.5 million. This caused a headache for her husband, Representative Jamie Ruskin (D-MD), as she did not disclose anything about her company’s role until eight months after the sale, a violation of Congressional rules. (Ruskin has explained that his son committed suicide around the time the form should have been filed, but it doesn’t account for his failure to disclose his work for the company in previous years.) Sarah was a factor in Ruskin. withdrawing his nomination earlier this year.

But the story does not end here. This week, Tommy revealed that the Kansas City Fed has now canceled the Reserve Trust’s master account. The Observer reached out to the company for confirmation, and did not receive a response. However, the Fed master account was referred to prominently on the Reserve Trust’s Web site as recently as June 10; It has since disappeared and the site is now just a page about which little is known. Dennis Gingold, one of the company’s founders, told Bloomberg that he and other board members had sold their shares to QED Investors, one of the company’s biggest investors. One of QED’s partners, Amias Geretti, worked for Sarah Ruskin at the Treasury. When the QED led to the Reserve Trust’s Series A round in 2021, Geretti claimed that its relationship with the Fed was a major draw. No one, including Tommy, is offering a public explanation as to why the master account was apparently canceled, but it would be foolish to think Tommy would let the issue go.

At the same time, it’s worth stepping back and finding out what it all means.

Did the master account benefit the reserve trust? Absolutely. While this is the first thing the company says about itself in a long time, it attracted customers that might otherwise go elsewhere, which was undoubtedly a factor that helped the company raise $35.5 million. If it is repealed, it could be a fatal blow to the business.

Was Sarah Ruskin transparent about her contacts with the Kansas City Fed? No, although he never directly denied that he had contacted the Fed directly, he was given ample opportunity at the confirmation hearing to explain his role, which he sidestepped. It’s hard to imagine Ruskin ever getting Congressional approval for any other government role.

Was it Wrong for the Fed to Give the Master Account to the Reserve Trust? Morally or legally wrong? Maybe not. If, as seems possible now, the Fed has determined that a reserve is not trust-worthy, it certainly sounds stupid, but there are rules in place for handling these applications, and as long as they are followed, Until then there is not much one can do for the other- guess decisions. logically wrong? probably. Either the Fed gives such accounts to non-banks, or it gives them to some. The problem is that there will now be a lot of non-banks who think they at least qualify as reserve trusts. On Friday, a Wisconsin-based financial firm called Custodia filed a legal complaint against the Fed and the Kansas City Fed, arguing that they are illegally refusing to act on Custodia’s application for a master account.

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