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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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Congress Could Be Quite Different After 2012 Elections

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They come up for re-election every two years.  Each of the 435 members of the House of Representatives is in a constant “campaign mode” because the term of office is so short.  Lee White of the American Historical Association summed-up the impact of the 2010 elections this way:

On Tuesday, November 2, 2010, U.S. voters dramatically changed the landscape in Washington.  Republicans gained control of the House and, although the Democrats retained control of the Senate their margin in that body has been reduced to 53-47.

*   *   *

Clearly the most dramatic change will be in the House with new Republican committee and subcommittee chairs taking over.

Voter discontent was revealed by the fact that just before the 2010 elections, the Congressional approval rating was at 17 percent.  More recently, according to a Gallup poll, taken during April 7-11 of 2011, Congressional job approval is now back down to 17 percent, after a bump up to 23 percent in February.  Of particular interest were the conclusions drawn by the pollsters at Gallup concerning the implications of the latest polling results:

Congress’ approval rating in Gallup’s April 7-11 survey is just four points above its all-time low.  The probability of a significant improvement in congressional approval in the months ahead is not high. Congress is now engaged in a highly contentious battle over the federal budget, with a controversial vote on the federal debt ceiling forthcoming in the next several months.  The Republican-controlled House often appears to be battling with itself, as conservative newly elected House members hold out for substantial cuts in government spending.  Additionally, Americans’ economic confidence is as low as it has been since last summer, and satisfaction with the way things are going in the U.S. is at 19%.

At this point, it appears as though we could be looking at an even larger crop of freshmen in the 2013 Congress than we saw in January, 2011.  (According to polling guru, Nate Silver, the fate of the 33 Senate incumbents is still an open question.)

One poster child for voter ire could be Republican Congressman Spencer Bachus of Alabama.  You might recall that at approximately this time last year, Matt Taibbi wrote another one of his great exposés for Rolling Stone entitled, “Looting Main Street”.  In his exceptional style, Taibbi explained how JPMorgan Chase bribed the local crooked politicians into replacing Jefferson County’s bonds, issued to finance an expensive sewer project, with variable interest rate swaps (also known as synthetic rate swaps).  Then came the financial crisis.  As a result, the rate Jefferson County had to pay on the bonds went up while the rates paid by banks to the county went down.  It didn’t take long for the bond rating companies to downgrade those sewer bonds to “junk” status.

JPMorgan Chase unsuccessfully attempted to dismiss a lawsuit arising from this snafu.  Law 360 reported on April 15 that the Alabama Supreme Court recently affirmed the denial of JPMorgan’s attempt to dismiss the case, which was based on these facts:

Jefferson County accuses JPMorgan of paying bribes to county officials in exchange for an appointment as lead underwriter for what turned out to be a highly risky refinancing of the county’s sewer debt, which caused Jefferson County billions of dollars in losses.  According to the complaint, JPMorgan, JPMorgan Chase and underwriting firm Blount Parrish & Co. handed out bribes, kickbacks and payoffs to swindle the county out of millions in inflated fees.

JPMorgan claimed that only the Governor of Alabama had authority to bring such a suit.  I wonder why former Alabama Governor Bob Riley didn’t bother to join Jefferson County as a party plaintiff, making the issue moot and saving Jefferson County some legal fees, before the case found its way to the state Supreme Court?

Joe Nocera of The New York Times recently put the spotlight on another character from Alabama politics:

Has Spencer Bachus, as the local congressman, decried this debacle?  Of course – what local congressman wouldn’t?  In a letter last year to Mary Schapiro, the chairwoman of the S.E.C., he said that the county’s financing schemes “magnified the inherent risks of the municipal finance market.”

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Bachus is not just your garden variety local congressman, though.  As chairman of the Financial Services Committee, he is uniquely positioned to help make sure that similar disasters never happen again – not just in Jefferson County but anywhere.  After all, the new Dodd-Frank financial reform law will, at long last, regulate derivatives.  And the implementation of that law is being overseen by Bachus and his committee.

Among its many provisions related to derivatives – all designed to lessen their systemic risk – is a series of rules that would make it close to impossible for the likes of JPMorgan to pawn risky derivatives off on municipalities.  Dodd-Frank requires sellers of derivatives to take a near-fiduciary interest in the well-being of a municipality.

You would think Bachus would want these regulations in place as quickly as possible, given the pain his constituents are suffering.  Yet, last week, along with a handful of other House Republican bigwigs, he introduced legislation that would do just the opposite:  It would delay derivative regulation until January 2013.

As Joe Nocera suggested, this might be more than simply a delaying tactic, to keep derivatives trading unregulated for another two years.  Bachus could be counting on Republican takeovers of the Senate and the White House after the 2012 election cycle.  At that point, Bachus and his fellow Tools of Wall Street could finally drive a stake through the heart of the nearly-stillborn baby known as “financial reform”.

On the other hand, the people vested with the authority to cast those votes that keep Spencer Bachus in office, could realize that he is betraying them in favor of the Wall Street banksters.  The “public memory” may be short but – fortunately – the term of office for a Congressman is equally brief.


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