Knowledge is power. But insider knowledge is more lucrative than power, because it offers the surest path to vast riches. If you know something that will move markets before everyone else does, you will profit mightily.
Normally, we think of insider trading as a Wall Street crime of illegally obtaining corporate information before the rest of the investing public. But the same game can be played with governmental information concerning changes in health care rules or military programs. If you know in advance that an important change is about to take place in a Medicare rule, for example, you can win enormous returns on your investments in key health care corporations.
So a new game is afoot as Wall Street hedge funds, acting through "political intelligence" consulting firms, are on a crusade to gain information from congressional staff and even key White House officials.Is the White House open for Hedge Fund Business? The latest outrage concerns a series of private meetings between White House health care officials and hedge funds that are betting on the health care industry. As the Washington Post reports:
"Wall Street investors hungry for advance information on upcoming federal health- care decisions repeatedly held private discussions with Obama administration officials, including a top White House adviser helping to implement the Affordable Care Act."
This comes on the heals of similar meetings between congressional staff and hedge funds via political intelligence firms that led to enormous jumps in stock activity. The Securities and Exchange Commission issued subpoenas in early May to look into an incident that emerged on April 1st, "when Height Securities, a Washington-based stock brokerage firm, alerted its clients that the government would soon make a decision favoring private health insurers who participate in a Medicare program. The alert went out 18 minutes before the end of the trading day, sparking a surge in trading in the shares of several major health-care firms, including Humana and Aetna. The official government announcement was made after trading closed for the day."
Hedge funds and their never ending lust for lucre are the driving force behind this gold rush for insider governmental information. And you can understand why: The secret to making a million dollars an hour is coming up with sure bets. Insider trading leads to the surest of sure bets.
There ought to be a law.
There already is.
In 2012, President Obama signed a bill that disallowed government insider trading of all kinds. You see, academic studies figured out that on average congressmen miraculously earned returns that were 6 percent higher than the average market returns. And senators did even better by scoring 10 percent higher returns. Either these elected officials are really, really smart investors (of course, doing all their prodigious stock research on their own time), or they are trading on insider knowledge. Then again, also might profit handsomely by pushing legislation to feather their own investment portfolios. Either way, it's good work, if you can get it.
Knowing how difficult it would be to police thousands of government officials, the new law relied on sunshine: All federal elected officials and key staff would have to put the investment portfolios online so that we could see the results of their prescient investment decisions.
Well a funny thing happened as the law was about to be implemented -- the sunshine provision was dropped for all staff. (It's still there for elected officials.) That means thousands of government officials might be further tempted to feather their own nests through sharing insider knowledge with predatory investors.
Trading on their own accounts is risky since it leaves behind an electronic record, and beside, these staffers aren't rich enough to place the kind of bets needed to cash in big-time. But giving a tip or two to a hedge fund via a political intelligence firm might, on day, land you a fat job on Wall Street. Meanwhile, the spigot is open, meaning that hedge funds will make more money on one illicit trade than all the staffers combined can make in a lifetime of investing.
Will the fox be guarding the hen house?
We learned earlier this month that President Obama will nominate James B. Comey, a former hedge fund attorney, to lead the FBI. Will Comey be vigilant in pursuit of hedge fund crimes? Will he provide full FBI support for Preet Bharara, the U.S Attorney for the Southern District of New York who has secured insider trading convictions or guilty pleas from over seventy hedge fund honchos?
The jury is out.
But we have some clues. It turns out that from January 2002 to December 2003, Comey had Preet Bharara's job in New York. During his time a the top Wall Street cop, he is best known for convicting Martha Stewart for trading on insider information. However, a cursory review of his prosecutorial record shows that he did not go after hedge funds, even though they were cheating their way to billions of dollars in illegal profits through insider trading and other scams.
The Wall Street-Washington Infection
Let's take a cold hard look at what we've become. As a result of a generation of deregulation, Wall Street barons earn as much in one hour as the average government official earns in 20 years. Just think for a moment the amount of contempt that super-rich hedge fund moguls must have for these lowly public servants. And think for a moment about how many of these public servants might like to cash in on Wall Street's riches. After all, they see the revolving door spinning away as elected officials and government operatives move effortlessly from high finance to government and back again -- Robert Rubin, Larry Summers, Hank Paulson, Peter Ortzag, Tim Geithner... and on and on they go.
Of course, none of them would ever condone insider trading of any kind. But it's doubtful they would lose much sleep over it, or demand intense prosecution of financial crimes. After all, the group-think is powerfully clear: What's good for Wall Street is good for America... and visa versa. The idea of breaking up too-big-to-fail banks, or challenging them with a public state banks, or capping Wall Street incomes at reasonable levels, or instituting a financial transaction tax on Wall Street's casinos, or closing the special tax loopholes used by billionaire hedge fund managers -- all of it is anathema to their hermetically sealed world view.
As a result, they are (mis)leading us into a downward spiral of trust and cheating as public support for government erodes. The more that insider government trading and job swapping spreads, the more the public will detest the ties between Wall Street and Washington. As the trust in government declines, public employee morale and self-respect will plummet, increasing the temptation to spill the beans to hedge funds. The net winners, of course, will be the rapacious hedge funds. The net losers are? All the rest of us.
Where's Washington's Preet Bharara?
What we need right now is a Washington version of the NY federal attorney Preet Bharara who is rounding up the hedge fund cheaters by the dozen. We need a Justice Department/FBI task force to put a stop to hedge fund manipulation of government sources, and we need to insist that those government sources to do the people's business, instead of their own.
Memo to President Obama: Please think again about the signal you send by appointing a former hedge fund lawyer to run the FBI
This article originally appeared on Alternet.org
Les Leopold is the director of the Labor Institute in New York. His most recent book is How to Make a Million Dollars and Hour: How Hedge Funds get away with siphoning off America's Wealth (Wiley, 2013)