The Wall Street Journal has a totally maddening article today about insider trading by hedge funds who pay expert-network consultants to give them inside information about congressional deliberations. Which you’d think would have prosecutors demanding that they get 20 years in jail without any concern for their delicate constitutions, except no:
Securities laws don’t, however, bar most political insiders from sharing nonpublic information about government affairs. On the contrary, part of the job of lawmakers, staffers and lobbyists is to discuss policy options and pending legislation with anyone who might be considered an interested party. “A legislator normally talks to a lobbyist without any expectation that the information will be kept confidential,” says Karl Groskaufmanis, a lawyer at Fried, Frank, Harris, Shriver & Jacobson LLP in Washington who focuses on securities regulations.
“The ultimate [investing edge] is insider information, so you want to get as close to the line as possible without crossing the line,” says Sanford Bragg, chief executive officer of Integrity Research Associates LLC, which evaluates investment-research firms. “That’s why Washington is so interesting—because there is no line.”
Though this is not exactly a surprise to anyone interested in insider trading and the workings of government, that particular sequence of paragraphs filled me with an unfamiliar urge to put on a Guy Fawkes mask, Occupy Wall Street, protest the money-politics nexus and throw all the banksters in jail.
But then, like, breathe. Insider trading, which tends to be a victimless crime that helps markets obtain efficient prices, is not the worst thing in the world. The argument for criminalizing it is typically “insider trading undermines ordinary investors’ confidence in the capital markets,” which, THIS. The Journal’s report, and the totally blasé “there is no line,” manages to undermine confidence in the markets, in government, in everything. WE ARE THE 99%.
Still. Breathe. You could make the case that trading on this sort of information about pending legislation improves price discovery and allows information to be transmitted efficiently between politicians and markets. That’s a good thing both for the markets – which can anticipate information about who is going to be screwed by the next bad idea / blessed with below-market loans – and for the legislative process. It can serve as a sort of natural experiment: Legislator tells Lobbyist “we are definitely not increasing the debt ceiling, we’ll just default, we think it’ll be awesome,” Lobbyist tells Hedge Fund, Hedge Fund shorts everything in sight, markets tank, and Lobbyist goes back to Legislator and says “so, are you satisfied that this is going to destroy the world yet?” And then maybe Legislator is willing to increase the debt ceiling.
But it’s pretty annoying. Whatever value is being created here is being siphoned off by middlemen who talk to legislators and can sell that access to the highest bidder for private gain. The legislator isn’t paid, at least not directly, which means that he’s probably getting compensated in some creepy non-transparent way, like the lobbyist is taking him on lavish vacations or finding him pages with loose morals and a thing for grandfatherly types. The government – whose information it is, I guess, if it’s anyone’s – gets nothing.
Now that’s true of regular old insider trading too – insiders siphon off corporate information for private gain. But for companies, allowing insider trading can be a sensible compensation mechanism. For legislators that is not at all true – the best profit-maximizing opportunity for a legislator might be to get short the US economy and then do his worst to screw up the country.
So what should be done about congress insider trading? Prohibiting congressmen from discussing their deliberations with outsiders seems like a step in the wrong direction. Banning trading based on those conversations is pretty appealing, but it’s another expansion of federal criminal law with dubious underpinnings.
Maybe the simple answer is transparency. Let congressmen sell access directly just like expert networks do – publish an hourly rate and let anyone who wants pay them to ask questions about pending legislation, committee processes, whatever. Make it a first-come first-served signup, or an auction, whatever. Limit the hours they can spend on this – so they can occasionally do their day job – and make them turn over, say, 50% of pretax earnings to the Treasury.
The advantage is that you have much more transparency, more information probably gets out more efficiently, and there’s no favoritism – just market mechanisms. Oh and the government actually gets paid for this information.
The main disadvantage would seem to be that open selling of access would undermine confidence in markets, democracy, take your pick. It’s just hard to see how it could do more so than articles like this.
Hedge Funds Pay Top Dollar for Washington Intelligence [WSJ]
Trading based on information… Not a bad idea.
Day Jobs = Campaigning.
Matty McMatty: You certainly do defend insider trading a bunch – i.e "victimless crime" – do you have a guilty conscience?
I've seen Matt workin the street.
What are you impwying, Wevine?
Matt,
Your article is retarded. Watch cspan. Now you have information too! Or text your boys at government sachs, whatever is easier.
-guy who was really annoyed by matts unfunny use of the word 'breathe'
-
Take a breather
Why so many paragraphs Matt? Why?
This article is so gay. And I like it!
This is old news.
http://online.wsj.com/article/SB10001424052748703...
are you "modestly" proposing we eat barney?
Transparency is my simple answer as well.
-Lisa Falcone
Anyone who argues that "insider trading…tends to be a victimless crime…" has obviously never been a two-sided market maker.
Matt I am so tired I can't even get past the first two paragraphs of this article.
What kind of buddy are we talking about here? A close buddy? A butt buddy?
Want to know something else? Members of Congress and their staff are not subject to insider trading laws and they have, in fact, been trading ahead of major political decisions. However, they still managed to underperform the market. There was a WSJ article on this a few months ago; you may want to look it up.
Hedge funds already pay lobbyists to get this information. Hedge funds can pay lobbyists because they have a lot of money, and stand to make a lot of money from this information. In your solution, Matt, this information will still go to the highest bidder, the wealthiest and most powerful people, so how is it any different? The information gap between the wealthiest hedge fund managers and the common investor is still there. The only benefit is that government gets a cut from it. I don't see how that solves the underlying issue.
– Guy who will pre-empt the replies and say it for you: "this must be your first time here yadda yadda"
TAVDNR
(Too awkwardly verbose did not read)
TMLzzzzzzzzzzzzzzzzzzzzzDR.
This fine man needs to focus.
The only benefit is that government gets a cut from it. Winners. Its pretty darn close to being insider information or maybe just high quality consulting lol.
Which shows the amount of idiocy that is running this country.
matt:
Since you state it as a fact, would you please provide some references (BUT NO CHARTS PLEASE) that explain why insider trading is a victimless crime? No, GS training manuals don't count.
Otherwise, would you please stop callously espousing a position that gives validity to the conclusion that Wall Street really is inherently corrupt?
If you work in political DC, all major political decisions tend to be public. Everyone knows what's happening beforehand and it's completely predictable. Capital markets don't understand how to read political signaling (and vice versa).
Barney looks like he was on the recieving end of a Louisville Slugger at last nights insider trading party
Last time I saw a mouth like that, it had a hook in it!
-R. Dangerfield
Can't we just get back to cheap laughs at the expense of appalling people?
I think we can do our own sophomoric musings about weighty topics, thanks.
Literal cocksucker and Wollensky