Cook firing takes the Fed into the unknown

President Donald Trump’s unprecedented move to fire Federal Reserve Gov. Lisa Cook Monday is likely to kick off a high-stakes legal battle over the exact contours of the central bank’s independence, and that battle will likely hinge on whether past actions can disqualify a board member from their current office. 

Trump posted a screenshot of a letter addressed to Cook Monday evening informing her that she was “terminated” from her post due to allegations that she claimed primary residence on two mortgage applications in 2021, before she served on the Fed Board of Governors. Cook said through her attorneyMonday evening that she will not resign and is expected to challenge Trump’s termination in court. 

The crux of that potential suit, according to several legal experts, is whether Cook can be removed “for cause” for an alleged action that took place while she was a private citizen. She was appointed by President Joe Biden to serve on the Federal Reserve in 2022 and confirmed in May of that year, making her the first Black woman to serve on the Fed board.

Scott Alvarez, adjunct professor at Georgetown University Law and former general counsel at the Federal Reserve, said there is much uncertainty regarding how the removal “for cause” can be applied in this case.

“Does the ’cause’ have to be somehow related to your job? In this case, it’s something that happened before she was nominated to the Fed and has nothing to do with her job responsibilities,” said Alvarez.

Richard Horn, co-founder of law firm Garris Horn LLP and former counsel to the Consumer Financial Protection Bureau, said that because the timeline of the alleged occupancy fraud is before Cook joined the Fed, courts could find a reason why the allegations as described don’t amount to “cause” for termination.

“Courts could potentially say that the ’cause’ provision doesn’t cover this type of activity outside of the board position, or activity before being appointed,” Horn said.

Legal experts are also questioning whether the vetting process Cook underwent before her confirmation as a Federal Reserve governor indicates the issue was previously reviewed and deemed not disqualifying. Alvarez and others noted that “pretty good vetting” is done for candidates before they’re nominated and again before they’re confirmed.

“So that’s part of the question: after you’ve been through that vetting with Congress and the Senate says, ‘We’re okay,’ can that past charge be brought up?” Alvarez said. “I just don’t know the answer to that. That’s a novel question of law, that’s one the courts will have to decide.”

In a weekly blog post, Peter Conti-Brown, associate professor of financial regulation at the University of Pennsylvania, wrote it is likely the Biden White House and the U.S. Senate received these applications.

“If that’s true, then the only very clear qualification required for a Fed governor — to be appointed by the president and confirmed by the Senate — is already satisfied, and this error is old news,” he wrote.

Trump fires Fed Gov. Lisa Cook ‘effective immediately’

President Trump posted a letter on social media addressed to Federal Reserve Gov. Lisa Cook, informing her that he was terminating her due to allegations of mortgage fraud. The move is likely to tee up an unprecedented legal fight over the Fed’s independence.

Regarding the allegations, Horn added that while there seems to be a “whole lot of smoke,” the available evidence does not necessarily yet point to “a fire.”

“Her intent is a factual question, and we’ve seen no evidence regarding her intent at the time of application,” Horn said. “It’s still possible she has a defense, and she’s indicated she plans to fight this, so she probably has something to say about it.”

Details surrounding the alleged misconduct are limited. The allegations came to light after a criminal referral was filed by Federal Housing Finance Agency Director Bill Pulte last week, alleging that Cook claimed two homes as primary residences on separate mortgage applications in 2021.

On Monday evening, Trump posted a letter around 8 p.m. EST addressed to Cook stating: “… you are hereby removed from your position on the Board of Governors of the Federal Reserve, effective immediately.”

The next expected step for Cook will likely be filing a lawsuit to obtain a restraining order, allowing her to stay on the Federal Reserve Board until the case can be resolved in court.

Cook’s attorney, Abbe David Lowell, founder of Lowell & Associates, said they will challenge Trump’s decision to fire the Fed governor.”We will take whatever actions are needed to prevent his attempted illegal action,” Lowell said in a statement.

Ryan Levitt, a white-collar crime attorney at Benesch, said that the investigation into whether Cook committed mortgage fraud should be an open-and-shut case.

“There’s a level of simplicity to this. Mortgage fraud is not complicated by any stretch of the imagination,” Levitt said. “It’s one of those few areas where you still need to have a wet signature and you still have to have documents notarized, which means someone has to stand in front of you.

“If there’s a notary stamp and her signature on it, there’s going to be a witness saying, ‘Yes, she signed both of these documents,’ and the documents will say whether the places are her primary residence or not,” he added.

But whether the allegations are true is less important than whether the allegations, even if true, amount to a fireable offense for a member of the Fed board, whose members have long been afforded a wide berth from political interference. The expected legal challenge, therefore, will very likely make its way to the Supreme Court, which has been highly skeptical of independent regulatory agencies in recent years but has also carved out a distinct difference between the standards it holds for the Fed versus other agencies. 

Conti-Brown, writing in a separate blog post Tuesday, said that any sense of how the Supreme Court will rule on the question of what counts as “cause” is inherently speculative, but noted that statutes governing other agencies — notably the Federal Trade Commission, Office of Special Counsel and National Transportation Safety Board — specifically cite “inefficiency, neglect of duty or malfeasance in office” as the standard for removal. That tradition could well serve as a guide for the high court when deciding this case, Conti-Brown said.

“Other statutes have defined the term with greater reference to that office: cause means ‘inefficiency, neglect of duty, or malfeasance in office,'” Conti Brown said. “My sense — speculated, to be sure — is that the Court will review Trump’s attempt to fire Cook through that lens.”

Alvarez said the removal of Cook by the president shows he is “willing to do anything to create vacancies on the Fed and put his own people in.”

“And he’s willing to use rumors and things that people say without proof, in order to get control of the Fed,” Alvarez added. “So that’s a discouraging sign. It’s also broader than the Fed, right? I mean he’s been using this mortgage allegation thing against other people as well.”

Michael Strain, director of economic studies at the American Enterprise Institute, declined to comment on Cook specifically but said it is problematic if the “president is rooting through government records in order to find a reason to fire Fed governors,” noting this can stifle independence.

“It is a threat to the independence of monetary policy. It is an abuse of power on the part of the president,” Strain said. “And it could really deter high-quality people from accepting those jobs, which would be to the detriment of the American people.”