The Quiet Scandal: Congress Plays The Market While They Make Our Laws

Nov 14 2011 Published by under Uncategorized

Last night on a CBS 60 Minutes report, Pelosi, along with John Boehner and a Republican representative from Alabama, were accused of “soft” graft — gaining unethically but not illegally from insider knowledge, stemming from research done by Peter Schweizer, a Breitbart editor and Palin speechwriter.

Schweizer’s research on soft graft mushroomed into last night’s CBS report. However that shouldn’t necessarily imply that there’s nothing to see here. The issue of our representatives trading on insider info has been reported by many others, among them Megan McArdle at the Atlantic, who cited various studies regarding the comparative market performance of congressional portfolios. The first study found their portfolios over-performed the market while a later study showed congress under-performing the market.

It’s possible that the later study simply doesn’t have all of the data, because according to a researcher cited in McArdle’s report, “(T)he forms still aren’t audited, and they’re woefully inadequate—for example, Eggers and Hainmueller say there’s no clear method for reporting short-selling, one of the major ways to profit from inside information.”

This is not a joke. No one audits their reports.

So, just because Schweizer has it out for Pelosi (he accused her in a previous book of not hiring union labor for her vineyard while ignoring the fact that it would have been illegal for her to discuss this in California as growers can’t form their own union – that has to come from the workers and further more, she paid higher than union wages) and is an editor for Breitbart doesn’t mean he doesn’t have a point. He does.

And the fact that our representatives are not prohibited from trading on the very stocks they legislate is an invitation for abuse, though it is ironically argued that if we prohibit wealth possibilities in the public sector we will be doomed to lose all the best people to Wall Street. A moment while you let that sink in.

So, yes, soft graft is a problem on both sides of the aisle. But the running narrative has been all about how awful Nancy Pelosi is and this has allowed a much more sinister mention of insider trading to go by largely ignored. The inference that, for example, Pelosi didn’t support credit card reform because of her Visa stock, is not substantiated. Let’s take look behind the scenes at Pelosi’s alleged graft. CNN reported:

Pelosi and her husband participated in an initial public offering of Visa in 2008, according to CBS. They bought 5,000 shares at the initial price of $44; two days later, shares were trading at $64, CBS said.

The network reported the investment came at the same time a piece of legislation that was opposed by credit-card companies was making its way through the House.

The inference is that Pelosi was bought off somehow, hence my issue with the Right’s (Fox/Breitbart, et al) conclusion. Because during the same time, she backed the Credit Cardholders’ Bill of Rights, a bill the financial industry was very unhappy with but that consumer advocates supported.

Media Matters reports:

“In the next Congress, the House and Senate passed and President Obama signed the Credit Cardholders’ Bill of Rights and the Dodd-Frank legislation, which included a stronger, more direct approach to addressing swipe fees,” the spokesman said.

In fact, Politifact reported that this law went a long way toward reforming the credit card industry:

In large part, the law fulfills Obama’s campaign pledge: It prevents creditors from imposing arbitrary rate increases on customers, it prohibits most rate increases meant to penalize consumers for late payments on unrelated accounts, and it requires companies to post credit agreements on the Internet, among other things.

I’m not going to defend the fact that Pelosi bought shares in Visa that soon after traded for more money, even though it doesn’t violate House rules — in fact, it’s absurd that our country is run this way. It should be a violation of House rules and the fact that it isn’t is an abomination of our trust and of democracy for the people. But the issue of congress gaining financially from inside information is not the same as congress being bought off. Furthermore, when it comes to allegations of insider trading, it’s tough to prove that Pelosi used insider knowledge regarding her Visa purchase. The obvious solution to this problem is to make congress use blind investments during their terms.

Pelosi is hardly alone in this matter. Joining her in this sort of “soft graft” is the current Speaker John Boehner and Republican Representative Spencer Bachus of Alabama. As it turns out, neither Pelosi nor Boehner are the worst offenders by a mile.

Speaker Boehner’s office denies that he was against the public option because he bought stock in private insurance companies. The point is that he bought private insurance companies after the public option was killed, which is a different way of phrasing the same event. However, it would be disingenuous to insinuate that he would have been for the public option under any circumstances, given the Republican Party’s hatred of social safety nets and their attempts to privatize everything. It makes sense that he bought the stocks because he guessed correctly that healtcare reform would make those stocks rise.

The only question I have for the Speaker is why he bought stocks in the healthcare industry when he was referring to healthcare reform as a “government takeover.”

While both Pelosi and Boehner’s trades are trades that could have been made by many people who closely follow politics, Dave Weigel from Slate rightly points the finger at Representative Spencer Bachus for making what are obvious and clear insider trades that should never be allowed by a member of congress. The fact that it’s legal does little to assuage the ugliness of a ranking member of congress profiting on the economic collapse of the country he’s supposed to be serving.

Rep. Spencer Bachus, then ranking member of the House Financial Services Committee, bet against the market as it collapsed in 2008. Schweizer finds “no less than forty options trades” in Bachus’s records from July 2008 to November 2008. The trades made him wealthier; almost nobody else had the information he had, and could have made them. Take this example, from the bottom of the collapse.

On the evening of September 18, at 7 p.m., Bachus received [a] private briefing for congressional leaders by Hank Paulson and Federal Reserve Bank Chairman Ben Bernanke about the current state of the economy. They sat around a long table in the office of Nancy Pelosi, then the Speaker of the House. These briefings were secretive. Often, cell phones and Blackberrys had to be surrendered outside the room to avoid leaks.

(Snip)

The meeting broke up. The next day, September 19, Congressman Bachus bought contract options on Proshares Ultra-Short QQQ, an index fund that seeks results that are 200% of the inverse of the Nasdaq 100 index. In other words, he was shorting the market. It was an inexpensive way to bet that the market would fall. He bought options for $7,846 on a day when the Dow Jones Industrial Average opened at 8,604. A few days later, on September 23, after the market had indeed fallen, he sold the options for over $13,000 and nearly doubled his money.

There are dozens of examples like this. On September 8, Hank Paulson gets a tip from GE about the company’s sluggish bond sales, on September 10, Bachus shorts GE options four times. It’s all legal, and Bachus is now the chairman of House Financial Services.

Now that, ladies and gentlemen, is what insider trading looks like. It’s despicable and should be illegal and Representative Bachus should not be allowed to remain as chairman of the House Financial Services.

Clearly not all members of congress take advantage of the insider knowledge they gain, or their portfolios would perform well above the market. But then, their disclosures aren’t audited in real time, so we have no way of knowing who is taking advantage of this loophole and who isn’t. That needs to change. But it should give us pause when we hear false equivalencies being made and the suggestion that they should all be thrown out. Neither Pelosi nor Boehner did anything remotely like the Republican representative from Alabama, Spencer Bachus.

Left out of this discussion is the fact that while Bachus, Boehner, Pelosi, et al have access to insider knowledge, the small time investor does not. So much for the memes of equal opportunity and the great “free” market system. What thinking American would invest their money in a system so ripe for corruption? If we can’t trust the markets, we won’t invest in them and that is bad for America.

McArdle comes to the sane conclusion that if we can’t get “members of Congress to report their transactions in real time, the way corporate insiders have to—and we can’t—then maybe they should have to put their holdings in a blind trust, as executive-branch officials like the Treasury secretary often must.”

Sounds fair to me.

Image: Inside The Lines

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