Political intelligence industry

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Reform Party of California Commentary

Summary and conclusions

In April of 2012, President Obama signed the Stop Trading on Congressional Knowledge ("STOCK") Act into law (http://en.wikipedia.org/wiki/STOCK_Act). The law prohibited insider trading by members of Congress and other government employees, which had been legal since the time when inside trading on securities was even possible in the U.S. The STOCK Act exempted lobbyists and non-federal people dealing with congress from the ban on insider trading, so there some people could still trade on inside information that arose from congressional activities that could affect stock and securities prices. Some member of congress had been trying for years to pass a law to make such inside trading illegal. However, some powerful members of congress liked being able to exploit their inside information to make money on the stock market, so the reformer's efforts were simply ignored for years.[1]

On April 11, 2013 President Obama signed an new bipartisan bill into law, a rare event. The White House announced the law in an obscure 1-sentence press release. One commentator described the new law like this: "The STOCK Act passage was on the front page. When it got de-fanged, the announcement was so buried that only the most hardcore of wonks could find the news." (http://finance.yahoo.com/blogs/breakout/stock-act-gets-gutted-why-care-173159298.html)


According to the Congressional Research Service (CRS) (https://www.govtrack.us/congress/bills/113/s716), the new law eliminated the requirement for "mandatory public, on-line financial disclosure reporting by congressional staff (except Members of Congress and congressional candidates) and executive branch officers and employees (except the President, the Vice President, and officers at levels I and II of the Executive Schedule who require nomination by the President and confirmation by the Senate)." The CRS also stated that the law applies "the financial disclosure reporting requirements and restrictions of the STOCK Act only to Members of Congress, congressional candidates, the President, the Vice President, and executive branch officers at levels I and II of the Executive Schedule who require nomination by the President and confirmation by the Senate." In other words congressional and executive branch staffers, lobbyists, aides and almost anyone who works for or is close to a serving politician can trade on inside information once they become aware of it.


Because laws that congress plans to pass or not pass can profoundly affect the price of individual stocks or securities or prices of stocks in an industry or an entire market, fortunes can be made trading based on the information that only insiders have. Average Americans are simply out in the cold and kept ignorant, except maybe to occasionally trade against the elites who have the inside information. It is fair to say that it looks and smells bad, to say the least. Given the great value of some inside information, it is no surprise that enterprising entrepreneurs, all stalwart pillars of the community no doubt, have established an industry called the political intelligence industry (PII). The PII collects and sells inside information obtained from congressional activities to select, wealthy, elite clients.

According to one source, the PII collected $402 million in 2009 from clients, who in turn made unknown millions or billions by trading on the precious information (http://www.motherjones.com/politics/2013/11/political-intelligence-industry-jellyfish?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:%20TimMurphy%20%28Tim%20Murphy%29). Because clients pay millions of dollars to obtain it, there is real value in the information the PII collects for its them (http://online.wsj.com/news/articles/SB10001424127887324660404578202072713156116; https://blogs.law.harvard.edu/corpgov/2013/07/20/the-stock-act-and-the-political-intelligence-industry/). Also no surprise, clients who buy information from PII sources fight proposed rules to disclose their identities and republicans in the House protect that desire for anonymity PII clients (http://www.reuters.com/article/2013/05/08/us-usa-congress-politicalintelligence-idUSBRE94718C20130508). That has been going on since 2012 (http://online.wsj.com/news/articles/SB10001424052970204059804577225572815851652?mod=googlenews_wsj).

It is fair to characterize the situation or facts like this. Congress had no qualms about engaging in inside trading until it was embarrassed into passing the STOCK Act, in part because its public approval rating had dropped to abysmally low levels. The STOCK Act left the PII intact and it never was a blanket prohibition against insider trading based on information arising from congressional activities. A year later, congress and the President repeal some of the disclosure requirements to for some federal staffers and aides. The House continues to protect the identity of PII clients from disclosure.

It is fair to draw the following conclusions from the situation. There is no compelling rationale for allowing congressional staffers, lobbyists or anyone else in possession of inside information arising from congressional activities to be allowed to make inside trades. Because is there no other obvious logic behind Republicans in the House protecting the identities of clients who profit from trading on PII information, it is fair to conclude that members of the PII industry and/or their clients maintain their privileges in return for campaign contributions. If there was another rationale, congress would have articulated it loud and clear. Finally, it is reasonable to conclude that congress and President Obama are incapable of resisting irrational and self-serving demands by federal employees and political donors.

This in just one small issue in a greater scheme of things, but it exemplifies what can pass for acceptable business as usual in the two-party system. There are good reasons that millions of Americans have lost faith in the two parties and in the federal government as they now operate it. Despite continuing low public approval, congress and the President obviously believe that they can simply continue this kind of business as usual without even deigning to offer an explanation to the public. Obviously they think the public does not deserve an explanation.

Footnotes:1. Apparently, what caused congress to finally pass the STOCK Act was a combination of (i) dismal new lows in congressional approval ratings in 2012 and (ii) President's Obama's mysterious decision to actually lead on something for a change and make this into an issue. In passing the law, congress congratulated itself on its high ethical standards and all the usual self-serving propaganda. The fact that congress was, in essence, embarrassed into acting on this was ignored. It was just two-party politics as usual.

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Pros & cons of inside trading: http://www.econlib.org/library/Enc/InsiderTrading.html
Obama guts the stock act: http://finance.yahoo.com/blogs/breakout/stock-act-gets-gutted-why-care-173159298.html
White house's 1-sentence announcement of the new law: http://www.whitehouse.gov/the-press-office/2013/04/15/statement-press-secretary-s-716
librabry of congress summary details of the new law: https://www.govtrack.us/congress/bills/113/s716

Footnotes:
1.  
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Harvard summary of the STOCK Act: https://blogs.law.harvard.edu/corpgov/2013/07/20/the-stock-act-and-the-political-intelligence-industry/
Reuters article: http://www.reuters.com/article/2013/05/08/us-usa-congress-politicalintelligence-idUSBRE94718C20130508
Mother Jones article: http://www.motherjones.com/politics/2013/11/political-intelligence-industry-jellyfish?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:%20TimMurphy%20%28Tim%20Murphy%29
WSJ research: http://online.wsj.com/news/articles/SB10001424127887324660404578202072713156116

Hot Air's conservative pol int industry viewpoint: http://hotair.com/archives/2013/01/18/wsj-the-burgeoning-political-intelligence-industry/

original post
Sometimes politics is just so much better than fiction. On Thurs., Feb. 16, 2012 (pages C1, C2; online article) the Wall Street Journal ran an article with the title "New Bill Clouds Legality of Tips." As it turns out, Congress is drafting a new law that would ban insider trading by the president, members of congress, congressional staffers and maybe some others. The article had nothing to do with tipping the waiter or bartender.

 Stardust launch 1999

The WSJ article was about information gatherers who work with people in congress and/or their staff and in the course of their work get inside information about impending laws, i.e., "tips". The WSJ noted the existence of a "political intelligence" industry dedicated to making money from this unique source of information. The people involved sell their inside information or "tips" to whoever has the cash and money to capitalize on the information. Those folks then make stock trades and money. According to an attorney familiar with this industry, the "legal risks may well outweigh the financial benefits" if the proposed bill becomes law.

This whole thing started up two or three months ago when the WSJ ran an article and 60 Minutes news show aired a piece at about the same time about people in congress, their staffers and lobbyists doing inside trades based on what congress was or was not going to do. Insider trading by congress, their staffers and lobbyists who do business with them is legal and thus a good way to make money.

People in congress and their friends have been doing inside trades for a long time. Occasional stories about this have come up over the years, but the topic apparently didn't penetrate public consciousness until (i) the two high profile WSJ and 60 Minutes stories and (ii) the public approval rating of congress dropped to below about 17% last year, an all time low until more recently when it it hit 10%. Profound public disapproval coupled with growing awareness that people in congress and their cronies were inside traders may have finally prompted a reluctant congress to fix the "problem".

If those things are not the reason for congress' attention to this topic, then who knows what is. Regardless, there is a reason. Congress partly feeds its massive ego on being above the law. They won't mess with that exhaulted status unless something very serious forces a change.

The congressional effort to deal with this public relations issue may cause the political intelligence industry massive potential collateral damage (or maybe not, if Republicans get their way). That was the focus of the WSJ article. The trouble with the pending legislation is that it may require people who gather tradable information to file disclosure reports. The horror of that is that the firms who work in this industry and the people who buy that inside information would likely lose their anonymity and the fees paid for such information might be made public. That awful scenario would ruin the whole political intelligence industry and cause massive job losses among the very wealthy and well-connected. Economic chaos would ensue. Or would it?

A plethora of questions from the bemused/irate

taxpayer outside the beltway

Why would the political intelligence industry be damaged at all if they had to disclose the people, fees and profits involved? After all, what they do is perfectly legal. Perfectly legal. What's wrong with making money? What's wrong with screwing the party (admittedly, usually anonymous) without inside information on the opposite side of an insider's trade? Its legal in this context. This is just a matter of winners and losers in a deadly serious capitalist game of making money. Some economists defend insider trading and some Republicans (Eric Cantor) are trying to defend the fine, job-creating, mom & apple pie, all-American political intelligence industry, so there must be merit to it, right?

Or, is it just that the people involved in this profitable industry don't want the rest of us idiots to know just how much money they make and how they make it, i.e., by cheating? But why? Are they embarrassed? Come to think if it, just what do inside trades do for the U.S. economy as a whole? It punishes fools without inside information and dumb enough to think they trade in a clean and fair marketplace. So, is inside trading good for the economy in some other way? Does it create confidence in our economy among those with inside access, wealth and power and that more than trumps any downside among the idiot masses or in the overall economy?

Allowing legal inside trading arguably undermines public trust in the federal government and financial markets by showing the reality of just how corrupt our government and "respectable" business people can be. It undermines public trust in congress. It is hypocritical, e.g., a few in congress complain about people in congress doing it but say nothing about people outside congress. If its bad for people in congress to do insider trades why isn't bad for those on the outside? Does the inside trade industry create jobs in the wider economy? If so, how many jobs and what are they - a few butlers and yacht and private jet salesmen?

The WSJ article quoted a political intelligence industry insider who said the new law will mean that some information providers "will simply quit doing it as the compliance creates burdens and costs." Huh? They will quit because they don't want to be outed and their information will likely become worthless or people will risk Martha Stewart's mildly adverse fate. That's probably not that big a risk, given the SEC's usual inability to police the markets, hedge funds and Bernie Madoff, but that's a different topic. Nonetheless getting caught by the SEC is a probably enough of a deterrent to cause the inside information to lose significant value to political intelligence operatives and their stalwart customers.

Fair and balanced

All that one can reasonably and fairly say about the people in congress, their staff and the fine "entrepreneurs" involved in the political intelligence industry is that they are sleazy cheats. Like Honey Badger, they just don't care. They are not criminals because what they do is legal. What Martha Stewart did and went to jail for, they do with impunity. This sleaze or variations of it has been going on in federal, state and local governments for decades, if not centuries.

Even Newt's failed fantasy called the 1994 Contract With America had a provision that laws applicable to us would also apply to people in congress. We all know how far that got. If insider trading like this was even marginally good for the country, then why doesn't congress just tell the public that and do nothing? On the other hand, if it was bad all along, then why didn't congress fix this in 1994 or decades or centuries ago? Either way, congress is far beyond being just ethically challenged. The institution is inherently corrupt. The people outside government who make money from this cheating scheme could not care less about the sleaze or the people they rip off so long as they (i) remain anonymous (look good via plausible deniability), (ii) make money and (iii) pay taxes, if any, at the 15% capital gains rate. Is that a sweet deal or what?

Now, how can a political story get any better than that? It is easy to see why congress' approval rating is 10%. They earned it.