insider trading congress

Divesting the Trump commercial holdings how about Congressional insider trading?

Yes, I absolutely favor enforcing clear commercial conflict of interest regulations on any president, if only for reasons of perception and legitimacy.  But may I quote Alex T. from way back when (2010, the rest of the passage is him note I am not double indenting)?

Bloomberg: Your senator learns that a much- maligned weapons system now has enough votes for funding. Before the news gets to a reporter, he buys shares in the arms manufacturer for a quick, handsome profit.

What’s wrong with this picture? Nothing, according to the law…

U.S. senators, representatives and congressional staffers routinely attend high level, closed briefings or engage in conversations where secrets are disclosed that might send shares climbing or slumping if widely known.

That access lets them buy low and sell high based on material, non-public information, and they can do it without concern that their remarkable prescience will alert federal investigators of possible wrong doing.

Insider trading in Congress is not new.  In 2004, I wrote about a study showing that the portfolios of US Senators “outperformed the market by an average of 12 per cent a year in the five years to 1998.” [TC: this result of superior returns doesn’t seem to have held up.]

Hat tip: The Browser.

TC again: From me, here is a 2013 update:

The Senate has severely scaled back the Stock Act, the law to stop members of Congress and their staff from trading on insider information, in an under-the-radar vote that has been sharply criticised by advocates of political transparency.

The changes, if they become law, will exclude Congressional and White House staff members from having to post details of their shareholdings online. They will also make online filing optional for the president, vice-president, members of Congress and congressional candidates.

The House was expected to pass a similar bill on Friday.

Here is the FT article, here are other sources.  Some officials suggested that transparency “could threaten national security,” more detail on that here.  Here are some further interesting details.

Current TC again: And here is Alex’s update from 2011.  And here is a 2015 update: “Congress tells court that Congress can’t be investigated for insider trading.”  I am not sure where such cases stand as of December 2016, please tell us if you know.

On this whole matter, please don’t accuse me of asserting “false equivalence,” (one of the weakest charges you hear in current debates and usually a sign of sloppy thinking), I am not saying all these practices are equivalent.  But neither a comparison nor an analogy requires equivalence.  I find it striking how many people are discussing this issue, and treating the administration-to-come as the end of democracy and the onset of rampant corruption, without noticing…etc.

File under: Conflicts of interest for me, but not for thee…

Insider Trading is Legal for Congressional Insiders

Bloomberg: Your senator learns that a much- maligned weapons system now has enough votes for funding. Before the news gets to a reporter, he buys shares in the arms manufacturer for a quick, handsome profit.

What’s wrong with this picture? Nothing, according to the law…

U.S. senators, representatives and congressional staffers routinely attend high level, closed briefings or engage in conversations where secrets are disclosed that might send shares climbing or slumping if widely known.

That access lets them buy low and sell high based on material, non-public information, and they can do it without concern that their remarkable prescience will alert federal investigators of possible wrong doing.

Insider trading in Congress is not new.  In 2004, I wrote about a study showing that the portfolios of US Senators "outperformed the market by an average of 12 per cent a year in the five years to 1998."

Hat tip: The Browser.

Should we legalize insider trading?

Henry Manne says yes:

The implications of what we already know of this “wisdom of crowds”
approach to price formation, as against the traditional marginal
pricing/arbitrage approach, are apt to be startling. We should rethink
any current policies based on a view of pricing in which we exclude the
best-informed traders and discard the wisdom of the many. For instance,
we now have a new and more powerful argument than we had in the past
for legalizing most insider or informed trading.

Since such trading clearly makes the market process work more
efficiently, it aids capital allocation decisions and informs business
executives through market-price feedback of the best predictions about
the value of new plans. Furthermore, the Supreme Court’s “fraud on the
market” theory of civil liability under the federal securities laws and
Congress’s ideas of correct civil damage claims for insider trading no
longer have any intellectual merit. The same is true of any other part
of our securities laws implicitly based on the notion of the marginal
trader as a rational arbitrageur of price.

The new approach would suggest that it is undesirable to have laws
discouraging stock trading by anyone who has any knowledge relevant to
the valuation of a security.

Here is one summary; here is the (gated) WSJ piece.  I find it hard to believe that legalized insider trading would boost the level of equity prices in the United States; I would be willing to bet against that view.  Some new developments would be reflected in stock prices more quickly but, given that most marginal investment decisions are financed by a) retained earnings, and b) debt, I doubt if this would improve resource allocation very much.  Also keep in mind that another function of equity markets is to share risk and help people save for their retirement.  Even if it is only an issue of perception, legalized insider trading won’t serve either of those ends.

For the pointer, I am grateful to Chris F. Masse.

The culture that is Washington

The Senate has severely scaled back the Stock Act, the law to stop members of Congress and their staff from trading on insider information, in an under-the-radar vote that has been sharply criticised by advocates of political transparency.

The changes, if they become law, will exclude Congressional and White House staff members from having to post details of their shareholdings online. They will also make online filing optional for the president, vice-president, members of Congress and congressional candidates.

The House was expected to pass a similar bill on Friday.

Here is the FT article, here are other sources.  Some officials suggested that transparency “could threaten national security,” more detail on that here.  Here are some further interesting details.

Capitol Gains

I have written several times before (e.g. here and here) about how Washington insiders, politicians and staff, use their knowledge of behind the scene deals to profit in the stock market (see also Megan McArdle’s recent piece from which I stole the headline). Last night 60 Minutes reported on the story based on new research in Throw Them All Out a forthcoming book by Peter Schweizer.

Here is one bit from the transcript:

In mid September 2008 with the Dow Jones Industrial average still above ten thousand, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were holding closed door briefings with congressional leaders, and privately warning them that a global financial meltdown could occur within a few days. One of those attending was Alabama Representative Spencer Bachus, then the ranking Republican member on the House Financial Services Committee and now its chairman.

Schweizer: These meetings were so sensitive– that they would actually confiscate cell phones and Blackberries going into those meetings. What we know is that those meetings were held one day and literally the next day Congressman Bachus would engage in buying stock options based on apocalyptic briefings he had the day before from the Fed chairman and treasury secretary. I mean, talk about a stock tip.

While Congressman Bachus was publicly trying to keep the economy from cratering, he was privately betting that it would, buying option funds that would go up in value if the market went down. He would make a variety of trades and profited at a time when most Americans were losing their shirts.

Even though the Congress is exempt from insider trading law, many of 60 Minutes’s findings are hugely damning, which you can tell just by looking at the stunned faces of John Boehner and Nancy Pelosi when Steve Kroft questions them about their special dealings. The video is here.

On a Fast Track to Nowhere?

Periodically when the FDA is criticized for slowing the approval of new drugs they announce a new policy like Fast Track.  I’m skeptical of these announcements since they are inconsistent with the FDA’s incentives.  A recent investigative report in the Cleveland Plain Dealer seems to suggest that I am right to be skeptical but in the end makes me wonder whether Fast Track may be useful after all.  Here’s the part that supports my skepticism.

A decade ago, the Food and Drug Administration introduced a Fast
Track designation for drugs in development that was intended to speed
the availability of medical treatments for serious diseases.

However, a seven-month investigation by The Plain Dealer shows that
this government blessing has not increased the number of drugs approved
or moved them to market faster.

…Dr. John Jenkins, director of the FDA’s Office of New Drugs,
acknowledged that the Fast Track designation only gives companies the
same access to FDA programs that was already in place when they lobbied
Congress for the provision in 1997.

       "There’s really not much other, if any, benefit for Fast Track," he said.

The report, however, makes a big deal of the fact that stock prices do respond positively to Fast Track designation.  The report spins this as pump and dump with the FDA in effect doing the pumping and insiders and hedge funds doing the dumping. 

…frenzied trading occurs regularly when companies announce Fast Track
status. The number of shares bought and sold more than doubled on 49
percent of days that companies announced Fast Track designations.
Trading was 10 times higher than the day before in 22 percent of
instances….hedge funds and others who [short the stock] bet that the price of a
stock will fall – and it often does after the initial jump a company
receives from Fast Track designation.

But I’m also skeptical of stories that suggest markets are systematically fooled by non-events and the numbers presented do not seem wildly inconsistent with a modest but real positive signal from being listed as Fast Track.

Stock prices of companies that trade on the New York Stock Exchange
rose just 1 percent after Fast Track announcements… Excluding these companies, most of which are major
pharmaceutical firms, Fast Track announcements boosted stock prices
11.5 percent.

I’ll call this one a draw until further information arrives.  What wisdom does the crowd offer?

Hat tip to Mike Giberson at Knowledge Problem.