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Congress Under The Microscope

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The November 13 broadcast of 60 Minutes, which featured a piece by Steve Kroft about Congressional insider trading, gave some needed momentum to the effort seeking a ban on the practice.  I originally wrote about this activity in September of 2009:

A recent report by American Public Media’s Steve Henn revealed how the law prohibiting “insider trading” (i.e. acting on confidential corporate information when making a transaction involving that company’s publicly-traded stock) does not apply to members of Congress.  Remember how Martha Stewart went to prison?  Well, if she had been representing Connecticut in Congress, she might have been able to interpose the defense that she was inspired to sell her ImClone stock based on information she acquired in the exercise of her official duties.

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Mr. Henn’s report went on to raise concern over the fact that there is nothing to stop members of Congress from acting on such information to the detriment of their constituents in favor of their own portfolios.

In February of 2011, I discussed the subject again, including the history of Congressman Brian Baird’s introduction of  H.R.682, the “Stop Trading on Congressional Knowledge Act” (STOCK Act) in January of 2009.  On November 14, I was pleased to report that a conservative pundit – Peter Schweizer – a research fellow at Stanford University’s Hoover Institution – had joined the battle against Congressional insider trading:

A new book by Peter Schweizer – Throw Them All Out – deals with this very subject.  The book’s subtitle is reminiscent of the point I tried to make in my February posting:  “How politicians and their friends get rich off insider stock tips, land deals and cronyism that would send the rest of us to prison”.

On December 28, J.R. Dunn – consulting editor of the conservative American Thinker, enthusiastically weighed-in with a supportive review of Peter Schweizer’s book.  Beyond that, Dunn’s opening remarks addressed the greater problem:

Crony capitalism is the most serious current danger to the American community, a threat not simply to government or the economy, but to our very way of life.  It is the worst such threat since the trusts and monopolies of the early 20th century, and in much the same way. Cronyism is one of the major forces behind the establishment of the corrupt pseudo-aristocracy that has been taking shape in this country over the past two decades, a synthetic privileged class made up in large part of politicians, hustlers, and hangers-on who have become expert in exploiting the rest of us.

Fortunately, we have now reached a point where greater scrutiny is being used to investigate the manner in which Congress-cretins enrich themselves while in office.  David Richards wrote a great piece for the Daily Mail, which focused on the fact that over the past 25 years, the median net worth of a member of Congress has nearly tripled while the income of an average U.S. family has actually fallen:

Against a backdrop of a vast budget deficit and fears of the fragility of the economy, analysis by the Washington Post shows that the median net worth of a member of Congress has nearly tripled over 25 years while the income of an average U.S. family has actually fallen.

It calculated that their median net worth, between 1984 and 2009 and excluding home equity, rose from $280,000 to $725,000.

Over those same 25 years the wealth of the average U.S. family slipped from $20,500 from $20,600, a University of Michigan study shows.

The Daily Mail article went on to point out that members of Congress are actually doing significantly better than America’s most wealthy citizens – who are so zealously defended by critics of the Occupy Wall Street movement:

The New York Times’ report into the wealth of members of Congress found that they were also getting rich compared with affluent Americans.

It found that the median net worth of members of Congress rose 15 per cent from 2004 to 2010 as the net worth of the richest 10 per cent of the country remained for the most part flat.

This disparity between those they represent also translated into a wider gap in their experiences of the economy, the Post found.

It interviewed Gary Myers, the son of a bricklayer, a Republican who entered Congress in 1975. He said his experience of having worked as a foreman in a steel mill shaped his outlook and led him to vote in favour of raising the minimum wage and helped him to understand the need for workers to have a safety net.

‘It would be hard to argue that the work in the steel mill didn’t give me a different perspective,’ he told the Post. ‘I think everybody’s history has an impact on them.’

The same area is now represented by Republican Mike Kelly who was elected last year. After graduating he married the heiress to an oil fortune and took over his father’s car dealership where he had worked as a youngster.

He told the paper he believed he was overtaxed already and that unemployment benefits made some people less willing to look for employment.

On the other hand, there is one Congressman’s investment portfolio, which is being criticized for other reasons.  In fact, I’m sure that many investment analysts are having a good laugh as they read Jason Zweig’s recent posting for his new Total Return blog at The Wall Street Journal:

Yes, about 21% of Rep. Paul’s holdings are in real estate and roughly 14% in cash.  But he owns no bonds or bond funds and has only 0.1% in stock funds.  Furthermore, the stock funds that Rep. Paul does own are all “short,” or make bets against, U.S. stocks. One is a “double inverse” fund that, on a daily basis, goes up twice as much as its stock benchmark goes down.

The remainder of Rep. Paul’s portfolio – fully 64% of his assets – is entirely in gold and silver mining stocks.  He owns no Apple, no ExxonMobil, no Procter & Gamble, no General Electric, no Johnson & Johnson, not even a diversified mutual fund that holds a broad basket of stocks.  Rep. Paul doesn’t own stock in any major companies at all except big precious-metals stocks like Barrick Gold, Goldcorp and Newmont Mining.

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Rep. Paul appears to be a strict buy-and-hold investor who rarely trades; he has held many of his mining stocks since at least 2002. But, as gold and silver prices have fallen sharply since September, precious-metals equities have also taken a pounding, with many dropping 20% or more.  That exposes the risk in making a big bet on one narrow sector.

At our request, William Bernstein, an investment manager at Efficient Portfolio Advisors in Eastford, Conn., reviewed Rep. Paul’s portfolio as set out in the annual disclosure statement.  Mr. Bernstein says he has never seen such an extreme bet on economic catastrophe.  “This portfolio is a half-step away from a cellar-full of canned goods and nine-millimeter rounds,” he says.

There are many possible doomsday scenarios for the U.S. economy and financial markets, explains Mr. Bernstein, and Rep. Paul’s portfolio protects against only one of them:  unexpected inflation accompanied by a collapse in the value of the dollar.  If deflation (to name one other possibility) occurs instead, “this portfolio is at great risk” because of its lack of bonds and high exposure to gold.

At least Congressman Ron Paul is authentic enough to “place his money where his mouth is” when criticizing Federal Reserve monetary policy.

As election year progresses, the current trend of “turning over rocks” to investigate the financial dealings of those in Congress could make things quite interesting.


 

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Congressional Sleaze In The Spotlight

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Last February, I wrote a piece entitled, “License To Steal”, concerning a certain legal loophole which allows members of Congress to trade stocks using “insider information”:

On January 26, 2009, Congressman Brian Baird introduced H.R.682, the “Stop Trading on Congressional Knowledge Act” (STOCK Act).  The bill was intended to resolve the situation concerning one of the more sleazy “perks” of serving in Congress.  As it presently stands, the law prohibiting “insider trading” (e.g. acting on confidential corporate information when making a transaction involving that company’s publicly-traded stock) does not apply to members of Congress.  Remember how Martha Stewart went to prison?  Well, if she had been representing Connecticut in Congress, she might have been able to interpose the defense that she was inspired to sell her ImClone stock based on information she acquired in the exercise of her official duties.  In that scenario, Ms. Stewart’s sale of the ImClone stock would have been entirely legal.  That’s because the laws which apply to you and I do not apply to those in Congress.  Needless to say, within six months of its introduction, H.R.682 was referred to the Subcommittee on the Constitution, Civil Rights, and Civil Liberties where it died of neglect.  Since that time, there have been no further efforts to propose similar legislation.

At a time when the public is finally beginning to understand how our elected officials are benefiting from a system of “legalized graft” in the form of campaign contributions, more attention is being focused on how the “real money” is made in Congress.  A new book by Peter Schweizer – Throw Them All Out – deals with this very subject.  The book’s subtitle is reminiscent of the point I tried to make in my February posting:  “How politicians and their friends get rich off insider stock tips, land deals and cronyism that would send the rest of us to prison”.

Peter J. Boyer wrote an article for Newsweek, explaining how Peter Schweizer came about writing this book.  Schweizer is the William J. Casey research fellow at the Hoover Institution and as Boyer pointed out, Schweizer is considered by liberal critics as a “right wing hit man”.  It’s nice to see someone from the right provide us with an important treatise on crony capitalism.  The book exposes insider trading by both Democrats and Republicans – hell-bent on profiteering from the laws they enact.  Boyer’s essay provided us with some examples of the sleazy trades made by Congress-cretins, as described in Throw Them All Out.  Here are a few examples:

Indeed, Schweizer reports that, during the debate over Obama’s health-care reform package, John Boehner, then the House minority leader, was investing “tens of thousands of dollars” in health-insurance-company stocks, which made sizable gains when the proposed public option in the reform deal was killed.

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One of the more dramatic episodes in the book recounts the trading activity of Republican Rep. Spencer Bachus, of Alabama, who, as the ranking member of the House Financial Services Committee, was privy to sensitive high-level meetings during the 2008 financial crisis and proceeded to make a series of profitable stock-option trades.

Bachus was known in the House as a guy who liked to play the market, and in fact he was pretty good at it; one year, he reported a capital gain in excess of $150,000 from his trading activities. More striking is that Bachus boldly carried forth his trading in the teeth of the impending financial collapse, the nightmarish dimensions of which he had learned about first-hand in confidential briefings from Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke.  On Sept. 19, 2008, after attending two such briefings, Bachus bought options in an index fund (ProShares UltraShort QQQ) that effectively amounted to a bet that the market would fall.  That is indeed what happened, and, on Sept. 23, Bachus sold his “short” options, purchased for $7,846, for more than $13,000—nearly doubling his investment in four days.

Around the time Congress and the Bush administration worked out a TARP bailout, Bachus made another options buy and again nearly doubled his money.

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After the first briefing from Bernanke and Paulson, brokers for Democratic Congressman Jim Moran, of Virginia, and his wife sold their shares in 90 companies, dodging the losses that others who stayed in the market would soon face. Republican Rep. Shelley Capito, of West Virginia, sold between $100,000 and $250,000 of Citigroup stock the day after the first meeting, recording capital gains on Citigroup transactions in that rocky period.

Peter Schweizer’s analysis of the bipartisan culture of corruption on Capitol Hill reinforces one of my favorite criticisms of American government:  Our Sham Two-Party System.  The Republi-Cratic Corporatist Party owes its allegiance to no population, no principle, no cause – other than pocketing as much money as possible.  Just as there have been some recent “pushback” efforts by outraged citizens, Schweizer is now advocating a “Throw Them All Out” campaign.  This could have a potentially significant impact on Congress, because the term of office in the House of Representatives lasts for only two years.  Consider Schweizer’s thought at the close of the Newsweek piece:

“I was troubled,” he says, “by the fact that the political elite gets to play by a different set of rules than the rest of us.  In the process of researching this book, I came to the conclusion that political party and political philosophy matter a lot less than we think.  Washington is a company town, and politics is a business. People wonder why we don’t get more change in Washington, and the reason is that the permanent political class is very comfortable.  Business is good.”

I concluded my February 28 posting with this point:

“Inside information” empowers the party in possession of that knowledge with something known as “information asymmetry”, allowing that person to take advantage of (or steal from) the less-informed person on the other side of the trade.  Because membership in Congress includes a license to steal, can we ever expect those same individuals to surrender those licenses?  Well, if they were honest  .   .   .

A successful “Throw Them All Out” campaign would obviate the necessity of attempting to convince this Congress to pass the “Stop Trading on Congressional Knowledge Act” (STOCK Act).  If the next Congress knows that its political survival is depending on its passage of the STOCK Act, we might see it become law.


 

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