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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.

*   *   *

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.

*   *   *

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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License To Steal

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People are finally beginning to understand how our elected officials are benefiting from a system of “legalized graft” in the form of campaign contributions.  Voters have seen so many politicians breach their campaign promises while providing new meaning to the expression “follow the money”, that there now seems to be a resigned acceptance that political payoffs are an uncomfortable fact of life.  Worse yet, most people aren’t aware of another loophole in the law allowing Congress-cretins to make real money.

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.

Here is a summary of the most important provisions of the “Stop Trading on Congressional Knowledge Act”:

Amends the Securities Exchange Act of 1934 and the Commodities Exchange Act to direct both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to prohibit purchase or sale of either securities or commodities for future delivery by a person in possession of material nonpublic information regarding pending or prospective legislative action if the information was obtained:  (1) knowingly from a Member or employee of Congress; (2) by reason of being a Member or employee of Congress; and (3) other federal employees.

Amends the Code of Official Conduct of the Rules of the House of Representatives to prohibit designated House personnel from disclosing material nonpublic information relating to any pending or prospective legislative action relating to either securities of a publicly-traded company or a commodity if such personnel has reason to believe that the information will be used to buy or sell the securities or commodity based on such information.

Back in September of 2009, a report by American Public Media’s Steve Henn discussed the investment transactions made by some Senators in September of 2008, after having been informed by former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, that our financial system was on the verge of a meltdown.  After quoting then GOP House Minority Leader John Boehner’s public acknowledgement that:

We clearly have an unprecedented crisis in our financial system.    .   .   .

On behalf of the American people our job is to put our partisan differences aside and to work together to help solve this crisis.

Mr. Henn proceeded to explain how swift Senatorial action resulted in a bipartisan exercise of greed:

The next day, according to personal financial disclosures, Boehner cashed out of a fund designed to profit from inflation.  Since he sold, it’s lost more than half its value.

Sen. Dick Durbin, an Illinois Democrat, who was also at that meeting sold more than $40,000 in mutual funds and reinvested it all with Warren Buffett.

Durbin said like millions of others he was worried about his retirement.  Boehner says his stock broker acted alone without even talking to him.  Both lawmakers say they didn’t benefit from any special tips.

But over time members of Congress do much better than the rest of us when playing the stock market.

*   *   *

The value of information that flows from the inner workings of Washington isn’t lost on Wall Street professionals.

Michael Bagley is a former congressional staffer who now runs the OSINT Group.  Bagley sells access and research. His clients are hedge funds, and he makes it his business to mine Congress and the rest of Washington for tips.

MICHAEL Bagley: The power center of finance has moved from Wall Street to Washington.

His firm is just one recent entry into Washington’s newest growth industry.

CRAIG HOLMAN: It’s called political intelligence.

Craig Holman is at Public Citizen, a consumer watchdog.  Holman believes lobbyists shouldn’t be allowed to sell tips to hedge funds and members of Congress shouldn’t trade on non-public information.  But right now it’s legal.

HOLMAN: It’s absolutely incredible, but the Securities and Exchange Act does not apply to members of Congress, congressional staff or even lobbyists.

That law bans corporate insiders, from executives to their bankers and lawyers, from trading on inside information.  But it doesn’t apply to political intelligence.  That makes this business lucrative.  Bagley says firms can charge hedge funds $25,000 a month just to follow a hot issue.

BAGLEY: So information is a commodity in Washington.

Inside information on dozens of issues, from bank capitol requirements to new student loan rules, can move markets.  Consumer advocate Craig Holman is backing a bill called the STOCK Act.  Introduced in the House, it would force political-intelligence firms to disclose their clients and it would ban lawmakers, staffers, and lobbyists from profiting on non-public knowledge.

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.

Take a look at the list below from opensecrets.org concerning the wealthiest members of Congress.  In light of the fact that these knaves are able to trade on “inside information” you now have the answer to the following question from the opensecrets website:

Congressional members’ personal wealth keeps expanding year after year, typically at rates well beyond inflation and any tax increases.  The same cannot be said for most Americans.  Are your representatives getting rich in Congress and, if so, how?

Here is the Top Ten List of the Richest Members of Congress from opensecrets.org:

NAME               MINIMUM NET WORTH    AVERAGE   MAXIMUM NET WORTH

Darrell Issa (R-Calif) $156,050,022      $303,575,011    $451,100,000

Jane Harman (D-Calif)  $151,480,522    $293,454,761   $435,429,001

John Kerry (D-Mass)    $182,755,534     $238,812,296   $294,869,059

Mark Warner (D-Va)     $65,692,210       $174,385,102   $283,077,995

Jared Polis (D-Colo)     $36,694,140        $160,909,068   $285,123,996

Herb Kohl (D-Wis)        $89,358,027           $160,302,011   $231,245,995

Vernon Buchanan (R-Fla)$-69,434,661    $148,373,160  $366,180,982

Michael McCaul (R-Texas) $73,685,086  $137,611,043  $201,537,000

Jay Rockefeller (D-WVa)  $61,446,018      $98,832,010   $136,218,002

Dianne Feinstein (D-Calif) $46,055,250    $77,082,134   $108,109,018

Jay Rockefeller’s position on the list is easy to understand, given the fact that he is the great-grandson of John D. Rockefeller.  How the first eight people on the list were able to become more wealthy than Jay Rockefeller should be matter of interest to the voting public.  In the case of  #10 — California Senator Dianne Feinstein  — we have an interesting situation.  As chair of the Senate Military Construction Appropriations subcommittee, she helped her husband, Iraq war profiteer Richard C. Blum, benefit from decisions she made as chair of that subcommittee.  In an article for bohemian.com, Peter Byrne discussed how Senator Feinstein was routinely informed about specific federal projects coming before her in which one of her husband’s businesses had a stake.  As Byrne’s article explained, the inside information Feinstein received was intended to help the senator avoid conflicts of interest, although it had the effect of exacerbating such conflicts.

“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 .   .   .


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