Wednesday, November 16, 2011

Insider Trading, Congress Style



On CNBC this morning Author Peter Schweizer discussed his forthcoming book “Throw Them All Out: How Politicians and Their Friends Get Rich off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison."

22 Comments:

At 11/16/2011 12:05 PM, Blogger Benjamin said...

I hope somebody double-checks this guy's stats. In my experience, almost nobody beats the market. EMT and all that.

If the stats bear out, then require Congresspeople to post their stock purchases 24 hrs in advance. The market will create mimic funds, and the problem is solved.

 
At 11/16/2011 12:17 PM, Blogger arbitrage789 said...

Let me play devil's advocate here.

The more money that Congress people can make off of insider trading, the less that they have to rely on bribes to fund their campaigns.

 
At 11/16/2011 12:51 PM, Blogger Bill said...

Discussion of last Sunday's "60 Minutes" segment on this issue was noticeably absent in the MSM this week.

 
At 11/16/2011 1:30 PM, Blogger AIG said...

"If the stats bear out, then require Congresspeople to post their stock purchases 24 hrs in advance. "

Agreed. You're not going to be able to "ban" insider trading. But at least you can make it more useful to the rest of us. (although, no doubt, there will be many ways of getting around reporting this info)

 
At 11/16/2011 2:52 PM, Blogger Methinks said...

I love the part where he says congresscritters believe it's not hurting anyone.

So, let me get this straight: They believe it's not hurting anyone, yet they criminalized it.

I actually think it not only doesn't hurt anyone but it makes the market far more informationally efficient.

Decriminalize it for all. But, if they aren't willing to decriminalizing beneficial things, then at least they should maintain rule of law - a concept that is becoming increasingly foreign to our political overlords.

 
At 11/16/2011 2:53 PM, Blogger Methinks said...

The more money that Congress people can make off of insider trading, the less that they have to rely on bribes to fund their campaigns

Their greed is not boundless? Interesting concept. I don't think you believe this.

 
At 11/16/2011 2:56 PM, Blogger Methinks said...

AIG,

Broker dealers require their employees submit a form requesting permission to trade a security before executing a trade. Every trade must be pre-approved. If the trade is deemed a conflict of interest, then permission to trade is denied.

There's no reason something like this can't be effected for congress.

 
At 11/16/2011 3:21 PM, Blogger morganovich said...

"In my experience, almost nobody beats the market."

that's because you don't know any smart investors.

beating the market is easy so long as you are running under a couple hundred million dollars. i know tons of people (myself included) who find it very easy.

and your mimic fund idea is ludicrous. seems like a really stupid solution to the problem.

the easy solution is to normalize insider trading laws and either make it illegal for congress or legal for the rest of us.

 
At 11/16/2011 3:23 PM, Blogger morganovich said...

"The more money that Congress people can make off of insider trading, the less that they have to rely on bribes to fund their campaigns"

that's absurd.

in very few cases to congressmen spend their own money.

you think they would take cash out of their own pocket if they could get it from someone else?

perhaps the senator for fantasy land might, but i doubt many of our rogues gallery would do so.

 
At 11/16/2011 3:41 PM, Blogger morganovich said...

"There's no reason something like this can't be effected for congress."

i think there likely is.

it's much less clear what the effects of congress are (than say a secondary offering or analyst coverage).

further, there is nothing like a chinese wall. congresspeople and their aids cross-pollinate on numerous, unrelated issues. just because a bill is in committee does not mean your staffer has not talked to a committee staffer and knows where the wind is blowing etc.

monitoring congress would be much, much more complex.

 
At 11/16/2011 3:44 PM, Blogger AIG said...

"AIG,

Broker dealers require their employees submit a form requesting permission to trade a security before executing a trade. Every trade must be pre-approved. If the trade is deemed a conflict of interest, then permission to trade is denied.

There's no reason something like this can't be effected for congress."

Oh yeah. You can. But there's always ways around.

 
At 11/16/2011 7:07 PM, Blogger Benjamin said...

Morgan-

Let's seem some audited figures. And I mean audits of all accounts under management, not just those that are left after five years.

Hedge funds took it in the shorts last year.

I suspect you are bogus.

 
At 11/17/2011 9:56 AM, Blogger morganovich said...

bunny-

my numbers are on hedgefund.net. you already know that. you are just grandstanding and acting like a fool.

go look for yourself.

we creamed the market in 2008, 9, and 10.

since 2003 we have beaten the S+P by an average of 15 percentage points a year even after our 20% fee, which mean we beat it by 18 percentage points on a gross basis.

you are speaking from pure ignorance.

 
At 11/17/2011 11:43 AM, Blogger Methinks said...

Morganovich,

It's not that hard to implement. The policy of broker dealers is if the BD is actively engaged with the company in question in any way, Chinese wall or not, nobody is allowed to trade the stock. It's a little more nuanced, but not much.

They can always go the hamfisted route congress routinely imposes on industry - they could simply ban trading by any staffer or elected official and force everyone into a blind trust.

It's easy enough to police who is trading. All brokers now require you to disclose if you're an employee of a BD. If you are, your trading blotter is automatically sent to your employer.

While I was employed by a Wall Street firm, my husband bought a few closed end funds in his account. He mistakenly thought he didn't need to get approval from my company because they're not individual company stocks. My firm's compliance received the report, didn't have a matching approval notice and I was very nearly fired.

Like I said, I prefer the market were made more information efficient by decriminalizing insider trading (which would also increase competition among insiders and decrease the price of that information). However, if we are not going to decriminalize it, then we must at least equality under the law.

Of course, Peter Schweizer brings up a good point - will the SEC ever do anything about it? In theory, they have the power now. But, will the SEC bite the hand that feeds it? FINRA bites its member firms all the time, but it can always go to congress to beg for an expansion of its powers to shake down other parts of the industry. Financial planners (or is it advisers) are its newest target.

 
At 11/17/2011 11:55 AM, Blogger Methinks said...

Morganovich,

What's the name of your hedge fund? I'm assuming since you're directing Bunny to hedgefund.net you've already revealed that information.

Also, congrats on the returns.

 
At 11/17/2011 12:02 PM, Blogger SumFlow said...

Excellent work. Should lead toward instant disclosure.

 
At 11/17/2011 12:13 PM, Blogger morganovich said...

methinks-

manchester explorer since 3/2004.

there was a predecessor entity in the prior 15 months called JEB partners but the track record there is tricky as it was originally run by my current partner and only by the 2 of us from jan 2003 onward.

note that the returns on HF.net are all net of fees.

 
At 11/17/2011 12:21 PM, Blogger morganovich said...

"It's not that hard to implement. The policy of broker dealers is if the BD is actively engaged with the company in question in any way, Chinese wall or not, nobody is allowed to trade the stock. It's a little more nuanced, but not much."

methinks-

i know. my point is that "involved with" is much less easy to determine in congress than in a bank.

a prospective change in FICA, for example, sets up a wonderful arb. if fica is being cut, you go long companies with huge payrolls and short those without them.

so are all companies off limits when taxes are on the table?

environmental laws effect huge numbers of companies.

if there is a law around co2, do you ban all the power producers, oil companies, automakers, lawn mower producers etc?

i think that coming up with a workable definition of "involved" may be much more difficult than you suspect.

banning staffers from trading is also unlikely to really stem the information flow.

they tell their golfing buddies, college roomates, or whatever, and off they go.

it's not even clear that such behavior meets the definition of insider trading. if the cfo tells me they will miss the q and i tell you and you trade, that's not nesc insider trading as you never heard it from an insider.

congress would work the same way.

senator porkbarrel tells his staff, who tells the staff of another congressman, who tells me, and bingo. i then tell you, and now you are clearly outside the insider cone.

i'm not really sure there is any way to effectively regulate it.

you can stop congress from trading, but not the flow of info.

 
At 11/17/2011 12:44 PM, Blogger morganovich said...

oh, and bunny, as i doubt you have a hedgefund.net subscription, here are the numbers (net of a 20% fee)

2003: 66.6% JEB
2004: 67.36% (includes first 2 months of JEB, then explorer once open. the rest are explorer)
2005: 5.41%
2006: -3.38% (underperformed the market)
2007: 8.06%
2008: -0.57%
2009: 52.94% (note, this is the year you claim we went short at dow 7000)
2010: 29.25%

every number is audited.

this compounds to +504.08% vs 44.5% for the S+P, 11 times the performance if you are an investor.

if you look at our own accounts, the numbers are much better as we do not pay ourselves a 20% fee.

that makes the compounded return 756%, or roughly 17 times the return of the S+P over an 8 year period, all audited by walsh, jastrem, and brown or deloitte and validated by a prime broker (B of A and later BNP).

i can't give you an audited 2011 number because i won't have it until late in q1.

so much for your "nobody beats the market" argument. lots of people do it. i know dozens and dozens. if you don't know any, it's because you know poor investors, not because beating the market is difficult.

so, nice try, but another unfounded bunny fable bites the dust.

 
At 11/17/2011 12:59 PM, Blogger morganovich said...

once thing worth considering though:

congressmen outperforming the market is not proof if insider trading.

congressman compared to the general public are probably better educated and better connected.

it would be interesting to see their returns compared to something that looks more like a peer group.

normalize for age, education, and size/quality of personal network and i will bet that a lot of this variance goes away.

anyone with a college education and a significant network of business leaders is likely to do better than average.

 
At 11/17/2011 9:47 PM, Blogger Methinks said...

Morganovich,

Do you realize that you just made a pretty good case for doing away with the expensive and clearly useless insider trading rule? :)

 
At 11/18/2011 11:32 AM, Blogger morganovich said...

methinks-

yes.

it's an idiot rule that is so poorly constructed and defined as to be damn near arbitrary.

i can see the benefits of certain restrictions to insider trading, such as shorting your own company or officers trading on the pre issue press releases, but other than that, managing it just gets too difficult.

there is really no good way to define or police most insider trading, and idiot rules like red FD have done more to reduce market transparency than perhaps any other legislation ever.

 

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