Funneling Insights: Cozy Ties Between Money Managers and Your Elected Officials
The Washington Post has been running a series of articles about Wall Street access to politicians and policymakers on Capital Hill and the potential for investors to trade unfairly on the information. In my view, The Post is actually missing the most important potential improprieties. The article cites various instances where Senators or Congressmen have briefed Wall Street analysts on pending legislation, and the analysts have, in turn, issued reports to their money management clients. In my mind, this is hardly a problem. So long as the analysts disseminate the information broadly under Rule FD (“fair disclosure”) as required by the SEC, no one is harmed. It’s really no different than a reporter receiving a briefing from an elected official and then writing an article.
Actually if the analyst doesn’t publish, alarm bells should start to ring. For example, if a Wall Street analyst meets with a Senator and learns the details about a prospective bill, and then informs his firm’s trading desk about these insights, that is a problem. Or, if the analyst whispers the Senator’s gems into the ear of one of his firm’s investment banking clients, there’s a problem worth worrying about.
Suppose the analysts works directly for a money manager? The analyst meets with a Congressman, obtains non-public information about a bill or appropriation, and then gets his firm’s portfolio manager to take an investment position based on the intelligence. In my opinion, that too, is inappropriate. Policymakers, whether they reside in the legislative or executive branch, should not be feeding inside information to certain favored investors. As The Post points out, federal agencies have strict rule against these practices, while Congress does not.
The flow of campaign cash from Wall Street and money managers makes all of this even more troubling. In the 2011-12 election cycle, they invested more than any other industry in politicians: $90 million. Ironically, the casino industry was second, at $53 million. Just to give you a bit of financial flavor to this effort, Goldman Sachs spent $7.9 million on candidates and another $8 million on lobbying. Of Goldman’s 51 lobbyists, 47 were former government officials. The Blackstone Group was similarly prolific. They spent $3.6 million on candidates and another $14.9 million on lobbying. Forty-seven of their 51 lobbyists previously worked in government. These sums are trifling amounts for the donors, but hugely important to the politicians.
Politicians always say that they’re not influenced by the contributions. Does anyone really think that money managers would make contributions if they didn’t get a return on their investment? The contributions buy influence on legislative matters, such as watering down Dodd-Frank and also stifling its implementation. And, when politicians or government officials leave public service they are further rewarded with positions in money management firms, or at least a nice honorarium from a big investment conference. At the SALT conference that I wrote about yesterday, the line up included, Rep. Leon Panetta (D-CA, Sec’y of Defense), Senator Scott Brown (R-MA), Gen (ret.) Richard Cody (Joint Chiefs of Staff) General), Rep. Barney Frank (D-MA), Austin Goldsbee (Advisor to Pres. Obama), Gen (ret.) Jack Keane (US Army), Chairman Reince Priebus (RNC), and Karl Rove. There are countless opportunities like this to pay current and former politicians for showing up and mingling with investors.
Wall Street won’t stop doing this, and politicians won’t stop encouraging the behavior until the public insists on ending these practices. As of now, the public doesn’t seem overly upset that its politicians are agents for money managers and bankers.