Something like eleven percent of the population still has a favorable view of Congress. An appreciable percentage of those are probably Native Americans gloating as they contemplate the miserable mess the palefaces are making of their affairs, but except for hardcore America haters who like to watch the Congressional wrecking machine, the few people left who approve of Congress are likely to change their mind as word of the latest scandal spreads across the heartland.
After all, the only group of people more unpopular than Congress are the hedge fund managers and Wall Street bankers.
And it turns out that many of the most famous names in Congress have for years been exploiting loopholes that allow them to help friendly hedge funds make millions from information the poor, gullible, stock-buying public knows nothing about.
Events like a decision on government-funded health insurance, for instance, or the likelihood that political deadlock on budget issues would lead to a US default, are very important to investors — they could mean big profits or losses, depending on the bet. And knowing ahead of time could mean all the difference.
Enter JNK Securities, led by its president William Williams. Mr. Williams has pioneered a very profitable strategy of cooperation between Wall Street and Washington, a strategy that is perfectly legal and nets huge profits for the quickest and richest of Wall Street investors.
JNK sets up meetings between lawmakers and investors. At the end of 2009, when lawmakers neared a decision on a government-funded healthcare plan, hedge fund executives were let in on the deal, ahead of the official announcement. What they did with their early-bird information the hedgies won’t say, but shares of healthcare companies like Aetna and Cigna were buoyed by the news that the government would not be offering a competing insurance plan. In particular, shares of Cigna rose 6 percent within days of the announcement.
Here’s more to the story from a recent investigation by the WSJ:
When investors, for example, wanted to know how Congress would weigh in on the proposed merger between Express Scripts Inc. and Medco Health Solutions Inc., Mr. Williams set up a face-to-face session Dec. 1 with a top aide to Sen. Herb Kohl, the Wisconsin Democrat who chairs the Senate’s antitrust subcommittee…Last month, JNK Securities brought a group to Capitol Hill to meet with top House telecommunications aides to discuss whether the government would grant a license to LightSquared Inc., a start-up funded largely by hedge fund Harbinger Capital Partners that wants to provide national broadband wireless service…Earlier this fall, Rep. Adrian Smith (R., Neb.) was peppered with questions from hedge funds about whether the congressional supercommittee would raise taxes on companies incorporated as master limited partnerships during a Sept. 26 lunch hosted by JNK Securities in New York. Such a tax increase would hit shares of master limited partnerships that are publicly traded.Mr. Smith, a member of the Ways and Means Committee, told the group such tax changes should come through a separate tax-reform bill, which made the prospects seem unlikely. That was a valuable insight for investors involved with publicly traded investment funds.
Lawmakers defend this practice: “Republicans say they seek the views of hedge fund managers to help shape laws that spur investment. Democrats say the conversations lead to better public policy because investors tell them about loopholes, inefficiencies or unseen consequences of existing laws.”
Both of these arguments have merit: investment firms are an important driver in our economy and hedge fund executives got to where they are today because they are intelligent analysts of financial trends and events. Their input is valuable for policy-makers. And in any case, it is constitutionally impossible as well as undesirable to prevent groups of citizens from discussing public policy with elected officials.
Yet this cozy relationship between Wall Street and Washington smells funny — as if there was a dead rat behind a wall somewhere in the house. Fabulous profits are there to be made, perfectly legally; legislators do Wall Street a favor by giving the hedgies an early head’s up, the hedgies reciprocate by making large campaign contributions. Everybody wins except for the pathetic losers not part of the magic inner ring, and nobody breaks any laws. Here’s another example:
At the time [January, 2010], investors assumed Mr. [Christopher] Dodd [the former chairman of the Senate’s Banking Committee] would support legislation from Sen. Richard Durbin (D., Ill.) to cap fees that Visa Inc. and MasterCard Inc. collect on debit-card purchases. The possible fee cap weighed on the share price of the two credit card giants because it would shrink revenues.Mr. Dodd signaled to the hedge funds that he wouldn’t include Mr. Durbin’s provision in his bill, a position favorable to Visa and MasterCard that didn’t surface for weeks, according to people at the meeting.
The symbiotic relationship between Wall Street and Washington does not end with investors’ big bets on inside policy information. As a recent article (paywall alert) in the National Review makes clear, the relationship often goes the other way too: politicians, privy to early or inside knowledge from Wall Street not available to the wider public, make handsome profits on their investments.
Nancy Pelosi and her husband were parties to a dozen or so IPOs, many of which were effectively off limits to all but the biggest institutional investors and their favored clients. One of those was a 2008 investment of between $1 million and $5 million in Visa, an opportunity the average investor could not have bought, begged, or borrowed his way into — one that made the Pelosis a 50 percent profit in two days. Visa, of course, had business before Speaker Pelosi, who was helping to shape credit-card-reform legislation at the time. Visa got what it wanted. The Pelosis have also made some very fortunate investments in gas and energy firms that have benefited from Representative Pelosi’s legislative actions.
Symbiotic, according to the dictionary on this computer, is defined as a relationship between organisms “typically to the advantage of both”. Washington and Wall Street have just such a cozy arrangement. Information passes from hand to hand, out of reach of the unsuspecting public, that — if used correctly — can help procure great heaps of money. Some of the money, of course, is reinvested in the perpetuation of the relationship: the cycle runs merrily on as the republic withers on the vine.
Naturally all of this is perfectly legal: corrupt congressmen make sure it stays that way. The foxes have written the chicken house rules.
Ultimately no laws can protect a republic when the people have lost their virtue. If we can’t throw out these bums and find some better people to replace them, American democracy will slowly turn into something very unattractive. Fortunately, almost everyone hates Congress these days; the loathing and contempt we have for the status quo may yet inspire a genuine and effective movement of reform.
The pathetic “Occupy Wall Street” protests seem to have collapsed; even the liberal media are edging away from the increasingly forlorn spectacle. But the problem never was just Wall Street: it is the nexus of Wall Street and government that we should worry about and, frankly, the Tea Party’s grasp of these connections and the danger they pose was and is smarter and more focused than the OWS version.
The paternalistic and benevolent government envisioned by the architects of the blue social model has morphed into a corrupt insider state that can no longer regulate or protect. The answer can’t be to give more power to people like Chris Dodd; that is what the Tea Party understands and the OWS folks too often miss. Power corrupts; building a government strong enough to do what it must without giving up our essential liberties has been the core issue of American politics from the days of the Continental Congress. The problem is more urgent than ever, and if the recent GOP primaries have shown pretty clearly that the Tea Party insurgency and the politicians hoping to lead it don’t have convincing answers, there is plenty of evidence that the movement is posing necessary questions.