Invested Interests

For a Wall Streeter or a corporate executive – and those folks who receive tips from them – when it comes to information on public stocks that impacts their value that is not available to the public, buying and selling those shares (including puts, calls, options, warrants, etc.) is flatly illegal. The “insider trader” is liable for big fine, an obligation to return the resultant profits and, to make this ever-so-much-more-interesting, it is a felony with substantial time in a federal penitentiary as a potential parting gift (thank you, Martha Stewart!). This statutory restriction has been with us for a pretty long time, and it is one of the few playing field levelers that widely investigated and enforced by the feds.

Yet despite years of trying to get a statute on the books that would prevent such anomalies, there was one class of Americans that had, until very recently, absolutely no restrictions on its ability to trade based on one more category of inside information including pending legislation and Congressional investigations, etc. – Congress itself. Finally, earlier this year, an embarrassed Congress passed the Stock (“Stop Trading on Congressional Knowledge”) Act that now prevents lawmakers and all senior federal workers from making financial trades based on information they have obtained from their oversight work.

The Washington Post (June 24^th) did a post-mortem on how Congressmen and women fared with this inside information during the financial meltdown. It isn’t a very pretty picture, but the startling days of the fall and winter of 2008 are where this most recent self-serving orgy was most evident. “In January 2008, President George W. Bush was scrambling to bolster the American economy. The subprime mortgage industry was collapsing, and the Dow Jones industrial average had lost more than 2,000 points in less than three months.

“House Minority Leader John A. Boehner became the Bush administration’s point person on Capitol Hill to negotiate a $150 billion stimulus package... In the days that followed, Treasury Secretary Henry M. Paulson Jr. made frequent phone calls and visits to Boehner. Neither Paulson nor Boehner would publicly discuss the progress of their negotiations to shore up the nation’s financial portfolio… On Jan. 23, Boehner (R-Ohio) met Paulson for breakfast. Boehner would later report the rearrangement of a portion of his own financial portfolio made on that same day. He sold between $50,000 and $100,000 from a more aggressive mutual fund and moved money into a safer investment… The next day, the White House unveiled the stimulus package.

“Boehner is one of 34 members of Congress who took steps to recast their financial portfolios during the financial crisis after phone calls or meetings with Paulson; his successor, Timothy F. Geithner; or Federal Reserve Chairman Ben S. Bernanke, according to a Washington Post examination of appointment calendars and congressional disclosure forms… The lawmakers, many of whom held leadership positions and committee chairmanships in the House and Senate, changed portions of their portfolios a total of 166 times within two business days of speaking or meeting with the administration officials. The party affiliation of the lawmakers was about evenly divided between Democrats and Republicans, 19 to 15.” The Post.

“Sen. John F. Kerry (D-Mass.), who married Teresa Heinz of the ketchup fortune, had the highest value of overlapped trades — between $42 million and $86 million — in companies registered to lobby before him. Kerry said he does not have any conflicts, because he has no control over the assets in his and his wife’s family trusts.” The Post, June 23^rd. “A ‘60 Minutes’ report last year singled out [Democratic House leader, Nancy] Pelosi, as well as several other lawmakers, suggesting she and her husband profited from an initial public offering from Visa at the same time Congress was weighing imposing new regulations on the credit card industry… Pelosi defended herself immediately following the report, touting her record of being tough on that industry. And a Pelosi aide defended the transaction …, saying there was no preferential treatment, and that the IPO was among the largest in history, with the Pelosis purchasing just a portion of their holdings at the initial price.” The Hill, February 7^th.

The aggregated numbers from the Post’s analysis (reported on June 23^rd) are staggering: “One-hundred-thirty members of Congress or their families have traded stocks collectively worth hundreds of millions of dollars in companies lobbying on bills that came before their committees, a practice that is permitted under current ethics rules… The lawmakers bought and sold a total of between $85 million and $218 million in 323 companies registered to lobby on legislation that appeared before them, according to an examination of all 45,000 individual congressional stock transactions contained in computerized financial disclosure data from 2007 to 2010.”

Interesting history lesson, Peter, but so what? How does this make any difference now that the Stock Act has passed? The abstract lesson is that no matter how obvious it might be for those in charge – be they corporate, financial or government mavens – to act in society’s best interest and avoid at least “looking bad” in the eyes of the public, unless there are strict and accountable laws and regulations in place to curb such “bad behavior,” they just don’t. The notion that we don’t want or need regulations to govern business, that there are too many burdens on business in this country and businesses will do what’s right anyway, fails to acknowledge human nature and does not differentiate between cumbersome obligations – usually bureaucratic permits and red tape for routinely obvious operations – and elements where society itself is harmed by conflicts of interest, inside and unfair trading and dangers that threaten our very lives (like environmental rules).

I’m Peter Dekom, and that which you do not regulate properly can denigrate your life or even kill you.