Insider Trading, Congress-style

Jeff  Carter
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Posted: Nov 15, 2011 12:01 AM

60 Minutes profiled the insider trading in Congress last night. It wasn’t shocking to me. Academic studies have shown it for a long time.

For an elected official to have more money after they get into office than before they got there isn’t surprising. If they are invested in the stock market passively, and the market goes up, they should have more money. However, elected officials are making outsized returns.

It doesn’t surprise me. One CME ($CME) board member, Jackie Clegg, unloaded all their stock at the top of the market. She happened to be married to Democratic Senator Chris Dodd. Also worked for a hedge fund. Guess anyone that didn’t sell was just stupid for not reading the “tea leaves”. When an elected officials significant other makes a move, you ought to follow them no questions asked.

In the melt down, it was revealed that Spencer Bachus of Alabama, the Head of the Financial Services Committee in the House of Representatives today, shorted stocks after a meeting and profited handsomely from it. At the time, he was the ranking minority member of the committee. Tea Party supporter Andrew Brietbart has called for his resignation.

In mid September 2008 with the Dow Jones Industrial average still above ten thousand, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were holding closed door briefings with congressional leaders, and privately warning them that a global financial meltdown could occur within a few days. One of those attending was Alabama Representative Spencer Bachus, then the ranking Republican member on the House Financial Services Committee and now its chairman.

Schweizer: These meetings were so sensitive– that they would actually confiscate cell phones and Blackberries going into those meetings. What we know is that those meetings were held one day and literally the next day Congressman Bachus would engage in buying stock options based on apocalyptic briefings he had the day before from the Fed chairman and treasury secretary. I mean, talk about a stock tip.

While Congressman Bachus was publicly trying to keep the economy from cratering, he was privately betting that it would, buying option funds that would go up in value if the market went down. He would make a variety of trades and profited at a time when most Americans were losing their shirts.

Here is the whole 60 Minutes segment.

Democrats have actually been proven to be better traders than Republicans. Democrat Nancy Pelosi, while she was Speaker of the House, traded on legislation that was pending through the House.

And former House Speaker Nancy Pelosi and her husband have participated in at least eight IPOs. One of those came in 2008, from Visa, just as a troublesome piece of legislation that would have hurt credit card companies, began making its way through the House. Undisturbed by a potential conflict of interest the Pelosis purchased 5,000 shares of Visa at the initial price of $44 dollars. Two days later it was trading at $64. The credit card legislation never made it to the floor of the House.

A cool $100g for Nancy. Chump change, or are we the chumps?

As an independent trader that risks his own capital, my family’s capital, I cannot begin to describe to you how offensive the insider trading scandal in Congress is. However, because they write the rules, it’s legal. It’s disgusting.

It disgusts me more than the Wall Street insider trading scandals because everyone knows that the stock game is rigged via regulation in the banker’s favors. You don’t expect a Congressman or Senator to be worrying about their portfolio when they are debating legislation.

Question. How many Senators and Congressman bought stock in Boeing before they were awarded the new tanker contract? Recall that it was originally awarded to Airbus. Then, it was switched.

Trading stocks has become a totally corrupt game. The banks and hedge funds lobbied so that they could pay for, and internalize order flow. The fat cats like Democratic supporter George Soros pay for inside information and trade on it. The SEC side of the game is rigged. With the advent of mechanization, the markets should be more transparent. Instead they are less transparent and the public doesn’t even see what’s going on.

Imagine what a Congressman could do with a USDA grain futures report the days before it was released. The only good news is sometimes in the futures market, the market doesn’t react like you think it should. lest the folks at the CFTC decide to start to cash in on the game.

The politicians are making such great ROI, it’s no surprise that they won’t legislate against it. I call it criminal. They call it doing business.

I remember one time years ago, I wound up in a back room at The Capitol Grille in Washington DC. Myself and two other futures traders were asked to come have a conversation with a Senator. He wanted to know about then first lady Hillary Clinton’s cattle trades. Hillary made $150,000 trading cattle through a broker. I doubt seriously if Mrs. Clinton was calling the trading shots. It’s harder to make 150k on your first trade in the cattle market than it is to win the lotto. The Senator said he was going to “crucify her” when she testified before a committee. If you recall, that’s when she testified, “I don’t recall.”.

None of us knew anything specific about the first lady’s trades. At the time she made the trades, the record keeping was so sloppy that there was no way to audit them. (Today the audit trail is down to the second) Later in my trading career, I met some guys that worked on the desk that processed her trades. What they did was take the good fills and allocate them to her account. The little people got the bad fills. Her broker with Refco made sure she got taken care of.

Mr. Senator said he had a broker at the NASDAQ that took care of him. I queried, “Surely Senator, you are making the trading decisions on that account, aren’t you?” The other gentlemen with cigars in the room chuckled.

“#*&^ that.”, the Senator said, “He sends us a check.” Everyone laughed.

We left the room. Felt like I needed to get a shower to clean off.

Washington stinks. The corruption isn’t confined to one party or another. Obama is President, and is one of the top crony capitalists in the world. You think he doesn’t give his biggest donors the wink and the nod? Think again. Obama is from Illinois, the citadel of crony capitalism. It was perfected here. Most of our ex-governors are doing time, and the illicit activities of alderman are legendary.

Corruption isn’t just defined to the stock market. For all the Democrats out there that were outraged that VP Cheney met with Halliburton in the White House and discussed oil policy, where is your outrage when Obama meets with union officials and members of his staff craft their strategy and message? Where is your outrage over scandals like Solyndra? Or, is the end goal of green energy greater than the means to get there?

There are some honest politicians out there. I think that the current Speaker of the House, John Boehner, came out looking very ethical in this expose. His assets are in a blind trust, and he talks to his advisor once a year. That’s the way it should be. But, we ought to audit everyone of them, and their staff too.

Transparency is nice. I don’t think Speaker Boehner is against transparency. However, he knows what can politically be done and what can’t. Without public outrage, he can’t move a bill. Too many members from both parties are making too much money to restrict themselves.

Politicians are no different than any other human. They are trying to do the best that they can for their family. They act in their own self interests. They ought to be able to invest, and get a rate of return on their money. However, that account should be invested in a no-load mutual fund that replicates the S&P 500($ES_F), or all assets put into a blind trust. All communication with the trustee would be public immediately upon it happening. Their lawmaking decisions would be economically aligned with the growth of the S&P 500($SPY), without making special legislation that they could trade off of. Generally, what’s good for the entire S&P is good for the entire market.

As public figures, we ought to know what fund they choose so that we can see if they are steering business or legislation to benefit one fund manager over another.

Trading is extremely risky business. But with all the bullshit that goes on in the stock market these days, a lot of the favored few take the risk right out of it. But, they still keep the return.

When you see an elected official on television, wouldn’t it be nice to know what they are invested in before they spoke? When analysts or traders are on television, they have to reveal their stock or bond holdings, or any positions they might have in currencies or commodities. How many Democrats had positions on insurance or health care stocks before the vote on Obamacare? How many people craft legislation and trade on it?

In times like these I am always reminded of a couple of phrases. Benjamin Franklin when asked what they did inside Independence Hall said to the effect, “You have a Republic, if you can keep it.” Now you see why it’s so hard to keep. “The best disinfectant is sunlight.” Supreme Court judge Louis Brandeis said that once. They both were right.