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Reflections on Paul Ryan's Transactions in Individual Bank Stocks in 2008

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January:
  • Sold his Wells Fargo position (1K-15K) on January 14, 2008
  • Sold part of his Wachovia position (1K-15K) on January 22, 2008
  • Sold part of his JPMorganChase position (1K-15K) on January 22, 2008
  • Sold part of his Citigroup position (1K-15K) on January 22, 2008
  • Bought Goldman Sachs (1K-15K) on January 22, 2008
February:
  • Sold part of his Goldman Sachs position (1K-15K) on February 22, 2008
  • Bought Citigroup (1K-15K) on February 22, 2008
March:
  • Sold part of his Citigroup position (1K-15K) on March 24, 2008
April:
  • Bought Citigroup (1K-15K) on April 24, 2008
June:
  • Sold part of his Wachovia position (1K-15K) on June 16, 2008
  • Sold part of his Citigroup position (1K-15K) on June 16, 2008
  • Bought Goldman Sachs (1K-15K) on June 16, 2008
July:
  • Sold part of his JPMorganChase position (1K-15K) on July 17, 2008
  • Bought Citigroup (1K-15K) on July 17, 2008
August:
  • Sold part of his Goldman Sachs position (1K-15K) on August 18, 2008
  • Sold part of his Wachovia position (1K-15K) on August 18, 2008
  • Sold part of his Citigroup position (1K-15K) on August 18, 2008
September:
  • Sold part of his Wachovia position (1K-15K) on September 18, 2008
  • Sold part of his JPMorganChase position (1K-15K) on September 18, 2008
  • Sold part of his Citigroup position (1K-15K) on September 18, 2008
  • Bought Goldman Sachs (1K-15K) on September 18, 2008
  • Sold his State Street position (1K-15K) on September 30, 2008
October:
  • Sold part of his Goldman Sachs position (1K-15K) on October 20, 2008
  • Bought Citigroup (1K-15K) on October 20, 2008
November:
  • Sold part of his Goldman Sachs position (1K-15K) on November 5, 2008
December:
  • Sold part of his Citigroup position (1K-15K) on December 8, 2008
  • Sold part of his Goldman Sachs position (1K-15K) on December 8, 2008

The Richmonder's "Paul Ryan traded on insider information to avoid 2008 crash" says:

Ryan attended a closed meeting with congressional leaders, Bush's Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke on September 18, 2008 [...] to beg Congress to pass legislation to help collapsing banks [...] Ryan left the meeting and [...] sold shares of stock he owned in several troubled banks and reinvested the proceeds in Goldman Sachs, a bank that the meeting had disclosed was not in trouble...

On seven dates in 2008, Paul Ryan sold bank stocks -- either because he needed the cash, or because he thought he knew better than Ms Market that bank stocks were overvalued (1/14, 3/24, 8/18, 9/30, 11/5, 12/8) or undervalued (4/24).

On six dates in 2008 Paul Ryan switched his portfolio from one bank to another -- because he thought he knew better than Ms Market that Goldman Sachs in particular was a buy (1/22, 6/16, 9/18) or that Citigroup was a buy relative to Goldman Sachs (2/22, 10/20) or that Citigroup was a buy relative to JPMorganChase (7/17).

Did Paul Ryan run from his Paulson-Bernanke briefing to his phone to call his broker and trade on inside information? I doubt it. It is certainly not a potential conflict of interest or the appearance of a conflict of interest but rather an actual conflict of interest for a Congressman receiving Fed and Treasury information on the health of banks to be buying and selling individual bank stocks. But late-mid-month -- the 16, 17, 18, 20 -- is a "normal" time for Ryan to be trading (38 percent of trading days are in that 17 percent of the month) and for Ryan to switch out of some banks into another (usually Goldman Sachs) was a common thing for him to do: once every two months.

The impression I get from these 27 transactions in individual bank stocks in 12 months, 17 of which involve not net injections or withdrawals but rather switches between banks, is of a guy who simply does not know what he is doing.

There are three sound reasons to trade:

  • rebalancing: you find that you are bearing too much of some idiosyncratic or systematic risk factors, and want to shed that risk on to the market -- but that doesn't motivate switching out of some banks into others.
  • liquidity: you need to either put money into or pull it out of the market -- but that doesn't motivate switching out of some banks into others.
  • information: you know something, either because of better analysis of public information or because of inside information, that Ms Market does not -- in this case, that Ms Market has gotten her assessment of the relative strength of different money-center banks wrong, and is too bearish on either Goldman Sachs (1/22, 6/16, 9/18) or Citigroup (2/22, 7/17, 10/20).

Whenever you neither rebalance your portfolio nor move money into or out of the market but instead switch out of stock X and into stock Y, you are able to do so only because somebody else -- or somebody else's -- thinks that it is a good idea to switch out of stock Y and into stock X. And if it is a good idea for them to switch out of stock Y and into stock X, it cannot be a good idea for you to switch out of stock X and into stock Y. Such trades are a bet that your counterparty is a fool -- and since your counterparty in all likelihood is sitting at the corner of 57 and Park or on Canary Wharf with a staff of five, each of whom has much better quantitative analytical skills than Paul Ryan or his broker, watching and analyzing the relative valuations of bank stocks full time, odds are that you are the fool.

Historically, people who invest in indexed mutual funds like the Vanguard S&P make 5.5 percent/year above inflation (but, alas! only 1 percent/year since January 1, 2000); people who invest in actively-managed mutual funds like those run by Fidelity make 4.5 percent/year above inflation (but, alas! only 0 percent/year since January 1, 2000); people who actively trade individual stocks turning over their portfolio once year or so as it appears Paul Ryan does make 3.5 percent/year above inflation (but, alas! only -1 percent/year since January 1, 2000); and day-traders who trade every day lose 5 percent/year (and, alas! have lost 10 percent/year since January 1, 2000).

Now stocks as a whole have historically earned 6 percent/year above inflation (but, alas! only 1.5 percent/year since January 1, 2000). The gap between the return to stocks as a whole and the return to individual investors -- which, in the case of Paul Ryan, is considerable: unless he is actually trading on his inside Congressional information his portfolio strategy underperforms the market by 2.5 percent/year -- accrues to the princes and professionals of Wall Street: Ryan and his ilk are the meat on which they feed.

At the level at which part-timer Paul Ryan plays this game -- Oh! Goldman is undervalued relative to Citigroup on January 22! Oh! Citigroup is undervalued relative to Goldman on February 22! Oh! Goldman is undervalued relative to Citigroup on June 16! Oh! Goldman is undervalued relative to Citigroup on September 18! Oh! Goldman is overvalued relative to Citigroup on October 20! -- he can no more win than Reagan-era ex-Secretary William Bennett could win as he dropped $7 million over the years in Las Vegas. An intelligent man takes the advice of the computer in the movie Wargames: "A very interesting game. The only way to win is not to play."

I don't want to hire as my vice president and federal budget czar somebody who uses Congressional inside information to profit by switching his portfolio back and forth between Citigroup and Goldman five times a year: I want somebody with better ethics.

I don't want to hire as my vice president and federal budget czar somebody who investing very part-time with no analytical support and without inside information switches his portfolio back and forth between Citigroup and Goldman five times a year: I want somebody with a better brain.

Stats courtesy of OpenSecrets.org.

Originally posted on "Grasping Reality with Both Invisible Hands: Fair, Balanced, and Reality-Based: A Semi-Daily Journal."