Author’s note: It’s no surprise this week that the Financial Times ran an article titled “Republicans drop plan to gut ethics office after outcry“. Even Donald Trump sent a tweet rebuking them. Think our Congress doesn’t need guidance on ethics? Think again!
Protection of others or sheer hypocrisy?
If Mr. Trump was serious about cleaning up corruption in Washington DC, the first place he needs to start is with the US House of Representatives and the Senate.
In recent news, it was reported that Senators Bob Corker and Mark Warner made a bundle back in 2008. They made it off of Goldman Sachs’ subprime mortgage-based CDOs (collateralized debt obligations) called Abacus. Both Senators reported that they made millions of dollars from shorting the Abacus fund.
As is typical with the US government regulators, such as the SEC and Department of Justice, no CEO, top executives, or board members at Goldman were prosecuted for this notorious scam.
Instead, a junior executive at Goldman, named Fabrice Tourre, was scapegoated and found guilty in a civil suit.
Meanwhile CEO Lloyd Blankfein and others at Goldman who allowed Hank Paulson to choose subprime mortgages for the Abacus fund and then along with Paulson shorted that fund, went scot-free after a Congressional hearing on Abacus’ gains.
The Financial Crisis Inquiry Commission (FCIC) sent the Department of Justice a recommendation for Abacus to be prosecuted as a fraud, but Goldman only wound up paying a minimal fine.
Moreover, Goldman’s Abacus Fund was “insured” by AIG. Abacus was part of the cause for AIG’s failure at the start of the Financial Crisis in 2008. In 2009 Senator Corker complained about the taxpayer bailout of AIG, but he never offered to give back his own gains from the Abacus scam.
Senator Warner also made millions from Abacus subprime mortgage CDOs. He and Senator Corker subsequently sponsored a joint bill to reform housing finance in the US. Were these two Senators simply hypocrites?
OK, I know we’re all human. We all make mistakes. Maybe these two Senators felt shame about what they did and while not admitting anything, tried to make things a little better later on. We can and perhaps should forgive them and move on.
But what we shouldn’t forget is when something wrong is done repeatedly by the same persons or same groups of people. Then there need to be consequences.
Systemic outrage and injustice around insider trading
In 1996 Professor Henry G. Manne wrote extensively about insider trading, arguing that insider trading should be legal for everyone.
Manne noted that many US senators and representatives and their staff serve on committees where they receive confidential information about companies, industries, and investments, information which they could legally use on their own behalf.
Previously in 1982, a nominee for the Pulitzer Prize in Economics, Professor Gordon Tullock also argued against making insider trading illegal. Tullock pointed out that the ones who wanted to ban everyone else from insider trading were the professional brokers who often get inside information first.
So is it any surprise that pressure to prohibit more brokers from insider trading has increased this century?
Yet not until 2012 did members of Congress (with the exceptions of Reps. John Campbell and Rob Woodall) pass The Stop Trading on Congressional Knowledge (STOCK) Act. This bill made Congresspersons and their staffers subject to insider trading laws.
But shortly after President Obama signed that law into action, the US Congress moved by unanimous vote to modify the STOCK Act. In 2013 Congress made the law far less enforceable.
The new bill, passed unanimously by Congress and signed by President Obama, no longer requires staffers and high-ranking government employees to reveal their financial transactions to the public in electronic format, even though these government employees have access to inside information.
Doesn’t it seem obvious that staffers of members of the US Congress might be private pipelines communicating insider information to their own bosses? Not to mention outsiders?
So is it any surprise the SEC, while investigating Congressional insider trading for the first time in 2014, requested documents from a Congressional staffer named Brian Sutter? And Sutter refused?
Both Sutter and the US House of Representatives Committee on Ways and Means on which he served rejected subpoenas from the SEC. Their legal briefs cited a “Constitutional protection” against supplying the requested documents.
Their arguments were ignored. In 2015 a judge ordered both Mr. Sutter and the Committee to comply with the SEC, and the matter is now headed to court.
A noticeable consequence of Brian Sutter’s alleged leak to a lobbyist about a Medicare rate increase was a flash upsurge in the stock market that day as 200 large investors got an early report that health-insurance-company stock prices would go up. One thing seems clear now about insider trading.
In this age of high-speed trading, income inequality between the top 400 earners and the rest of Americans, along with high-speed information delivery of information to the wealthiest, doesn’t it seem likely that legalizing insider trading could wipe out many slower retail and institutional investors such as cities, states, churches and other non-profits.
Whenever financial markets turn volatile due to big bursts of insider trading, it will surely be those who have 401Ks, 403Bs, and pensions who will take the biggest hit.
Reader beware! And keep an eye on your representatives in Congress.