We have been given information lately by the media that insider trading and crony capitalism are among the influences corrupting our political process and the governing of our nation. Recent reports on 60 Minutes (CBS) and MSNBC make it quite clear that members of Congress are “on the take”, so to speak, but seem to be getting away with it, perhaps because Congress itself determines what is legal and what may be termed illegal.
Recently, I finished reading a book that tackles this topic. Peter Schweizer in Throw Them All Out makes it plain that, from President to Congress to the Judiciary, all are guilty of playing fast and loose with the ethics of the situation, let alone with laws that may inform the issue, however slightly. My purpose this week is to impart some of the main points of the book, by way of encouraging you to read it and to consider again, as we enter the New Year of 2012, that reform is imperative in our times.
It is instructive to look at the sub-title of the book: “How Politicians and Their Friends Get Rich Off Insider Stock Tips, Land Deals and Cronyism that would send the rest of us to Prison.” Schweizer presents us with the legal restrictions imposed upon most sectors of our capitalistic system for dealing with these particular actions:
1) Insider trading laws are on the books. If a board member or employee within a large corporation dumped all his shares right before an announcement of bad news and a plunge in the company’s stock price, it would at least warrant a look by the SEC. (Remember the prison term served by Martha Stewart for insider trading?). But when a Congressman does the same thing, he or she gets a free pass.
2) Conflict-of-interest statutes exist. Often legislators receive big financial favors from specific companies, and then through legislation they sponsor or push, they work to help those firms instead of recusing themselves from the legislative process. No problem, because conflict-of-interest statutes don’t apply to them. An executive persuading a large corporation to spend money on an initiative that he would personally profit from, would raise substantial legal questions.
3) Enriching oneself by mixing real estate investments with taxpayer money would certainly be actionable at the municipal level. Congressional “ethics” committees have deemed it “ethical” for Congress persons to do so. A favorite trick in Congress is to earmark a mass transit project that is in close proximity to their (or their family’s or friends‘) real estate holdings to increase the value of those properties.
4) If a government grant somehow is designated as “serving the public interest”, it can become part of a larger project and escape scrutiny. The game of funneling taxpayer money to friends or favored 3rd parties, has exploded to astonishing levels in recent years. Try that in the private sector with corporate money and you could wind up facing criminal charges for misuse of corporate assets. Interesting then that it becomes legal and even acceptable if it’s taxpayer money.
It doesn’t take long to realize that the Congress, which makes the laws for everyone else’s business transactions, exempts itself from those laws, or refuses to apply common practices, such as recusal, to themselves.
So, let’s take a brief look now at some rather glaring examples of questionable practices by our politicians.
When six senators on July 27, 2009, announced that they were going to eliminate the “public option” from their version of the health care reform bill, the share prices of three major insurance companies surged by between 8% and 10% the next day. If one knew ahead of time that this event was happening, that piece of information could turn out to be highly profitable in stock trading. A former Democratic nominee for President happened to be part of that group, and was serving as a member of the Health Subcommittee of the powerful Senate Finance Committee. His buying and selling of health care stocks during the health care debate is very interesting. When the legislation was working its way through the House and Senate, the Kerry's began buying stock in Teva Pharmaceuticals. In 2010, after the passage of the bill, the Kerry's sold some of their shares in Teva and reaped tens of thousands in capital gains (all reported on his disclosure forms). He wasn’t the only congressional trader in pharmaceuticals, nor was this the only time that some congressmen and senators had gotten richer by using inside information regarding health care.
Congressman John Tanner of Tennessee, Senator Jim Webb of Virginia, Senator Tom Carper of Delaware, Congresswoman Melissa Bean of Illinois, Congressman Vern Buchanan of Florida, and even John Boehner of Ohio bought shares in Teva or numerous other pharmaceutical or health insurance companies, and some invested in real estate groups specializing in health-related properties, all while health care legislation was being considered. Elected in 2009, an already rich freshman Congressman, Jared Polis of Colorado, gained seats on two powerful committees that were central to the crafting and passage of the health care bill. While he was praising the benefits of health care overhaul, he was buying up millions of dollars worth of a private company called BridgeHealth International which offers medical tourism: providing less expensive medical procedures in other countries. Guess what? Polis bet right -- medical tourism expanded rapidly as many Americans reacted negatively to the new law and sought alternatives in other countries.
Timing is everything, and some made money by knowing when to dump shares in certain companies while buying others. It happened in 2003 when a new entitlement for Medicare Prescription Drugs was created and debated. Read the book for more details. Let’s take an example of dumping shares when inside information indicates that something drastic is about to happen. On September 16, 2008, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke met with congressional leaders who had been led to think that the financial crisis was just a disruption with limited effect upon the economy. What they were told at this September 16th meeting made it plain that the general perception was wrong. Paulson also told lawmakers in this meeting that the federal government was going to bail out the insurance giant AIG and that the markets were in deep trouble. The very next day, Congressman Jim Moran of Virginia dumped his shares in ninety different companies. It was his most active trading day of the year. While Moran did not profit much from these trades, he avoided large losses that the general public would face within a week. And, Moran was just one of at least ten Senators who traded stocks or mutual funds that very day related to the financial industry. A month later, the stock market had dropped over 22%. Preventing a catastrophic loss can be just as important as making a big gain, and having inside information in your possession, like those who attended that closed-door meeting had, puts you in a position to act that is denied to all those who weren’t privileged to be there.
Schweizer makes an important point for all to consider at this point: “Members of the Congress are privy to all sorts of inside information about pending government actions. Some of it comes from their actual actions -- that is, passing legislation. Some of it comes as a result of their position of power. Legislators are told things by regulators or bureaucrats in private because they ask about them. (In addition) very frank and detailed conversations often take place behind closed doors. The most valuable information is revealed in private meetings, phone calls, and correspondence. If members of Congress buy and trade stock based on that information, or if they pass that information along to a campaign contributor or their own financial advisers, they are not considered to be guilty of any wrongdoing…(because) they write their own rules.”
However, using inside information for trading in stocks is not the only dirty little secret being kept by members of the Congress. This Permanent Political Class, as Schweizer terms them, has become quite sophisticated in enriching themselves by mixing real estate investments with taxpayer money, and these are easier to camouflage than are stock transactions. He tells the story of how a former Speaker of the House, Dennis Hastert, was able to increase the value of his land in a rural area to his own enrichment (which we do not have time to re-tell). Suffice to say that members of Congress have used legislative earmarks to enhance the value of their own real estate holdings in several ways: by extending a light rail mass transit line to near their property, by expanding an airport, or by cleaning up a nearby shoreline. Federal funds have been used to build roads, beautify land, and upgrade neighborhoods near commercial and residential real estate owned by legislators, substantially increasing property values and the net worth of these elected officials.
There is just too much of importance in Schweizer’s book to bring to you in one Blog. I recommend the book to your perusal, as it will clearly open your eyes to the bamboozling of the public in which all too many members of the Congress are actively involved. May you have a healthy and prosperous New Year. Many members of Congress expect to use their political position, and insider information, to make sure that their New Year is very prosperous -- for them!! Remember, reform is imperative for our times. Resolve to VOTE ONLY for REFORMERS!