Wall Street’s Killer Day on Capitol Hill

Wall Street’s Killer Day on Capitol Hill

Wall Street’s Killer Day on Capitol Hill

Congress passed two major bills yesterday—and they have a disturbing common denominator.


The US Senate burst forth from lethargy on Thursday, passing not one but two major bills with overwhelming bipartisan support. The STOCK Act, which prohibits insider trading by members of Congress and their staffs, passed 96-3, and the JOBS Act, which is supposed to make it easier to for small business to access investment cash, passed 73-26.

This might normally be a cause for celebration. But the details of each bill are a painful reminder of who is really in charge in Washington. While there are some important features to the STOCK Act, it purposefully leaves out any penalty for hedge funds or other Wall Street entities that trade in insider Congressional information. And the JOBS Act is simply a naked attempt to deregulate Wall Street even further.

The STOCK Act’s path to becoming a law is the stuff of high school civics textbooks. 60 Minutes did a report in November detailing how some members of Congress appeared to be trading stocks based what they—and only they—knew about pending legislation affecting particular industries. Politicians reacted to the ensuing public outrage; President Obama asked for legislation to combat it during his State of the Union speech in January, and both chambers of Congress quickly obliged.

The bill, which Obama is now expected to sign within days, bars members of Congress, their family, their staff  and some federal employees from profiting from non-public information they learn while working for the government. (Take one example of this slimy practice: in 2008, Representative Spencer Bachus, a powerful member of the House Financial Services committee, sat in on a private meeting with Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke. He was warned the financial system was teetering on the brink of collapse, and then promptly bought option funds that would increase in value if the stock market went down. The Office of Congressional Ethics has found probable cause of insider trading.)

So the STOCK Act is a laudable change. But when it comes to insider knowledge from the halls of Congress, members dumping off a handful of stocks isn’t where the real money is being made. There’s a multimillion-dollar “political intelligence” industry operating in Washington, which seeks to gain knowledge of things only members of Congress and their staffs would know—and it sells that information to massive Wall Street hedge funds, which then makes bets on a far larger scale than any individual member of Congress.

Consider for example JNK Securities, a Wall Street brokerage firm that operates one of the “most aggressive” political intelligence outfits in Washington, in the words of the Wall Street Journal. As healthcare reform was being debated in December 2009, JNK Securities arranged meetings between some hedge fund managers and key members of Congress involved in the legislation. In these meetings, the hedge funds managers learned before anyone else that the government-run public option would not be included in the final bill.

News about the demise of the public option was a huge boon to health insurance industry stocks; Aetna shares rose 6 percent within days of that announcement. Viking Global, one hedge fund present at the meeting, bought 6 million shares of Aetna in the fourth quarter of 2009, according to regulatory filings examined by the WSJ. Karsch Capital, also present at the meetings, bought a half-million Aetna shares.

Ultimately the Aetna stock rose 14 percent in that quarter—and those two hedge funds presumably got in at the ground floor, getting a bottom-dollar price on the stocks before anyone else knew the public option was dead and before the price went up. (The firms won’t disclose exactly how or when they used the information gained through these Capitol Hill meetings, but it was information worth millions, and it’s extremely hard to imagine they didn’t use it.)

That’s just one example of hundreds and perhaps thousands—there are meetings set up by political intelligence firms virtually every day on Capitol Hill, as Wall Street is eager to get advance knowledge of the wide array of regulation and legislation that’s been under consideration in recent years.

The original version of the STOCK Act passed by the Senate in January included tough provisions on political intelligence outfits, forcing them to disclose virtually every meeting they had, with whom, and when. The bill seemed to be barreling towards passage in the House, much to the delight of good-government groups.

But when it reached the lower chamber, House Majority Leader Eric Cantor gutted any reference to political intelligence operations. “Think of the wording ‘political intelligence,’ ” Cantor told reporters when trying to explain why he removed those provisions. “I mean, there’s so much question about what that even means.” (We’ll leave that unintentionally self-incriminating quote alone for now).

The House passed the weakened version 417-2, and it headed back to the Senate because it had been altered. Even some Republicans there blasted Cantor. “It’s astonishing and extremely disappointing that the House would fulfill Wall Street’s wishes by killing this provision,” said Senator Chuck Grassley, an Iowa Republican.

Grassley has been fighting to get the political intelligence provision back into the final Senate version in recent weeks—but Majority Leader Harry Reid decided this week to move the House version of STOCK Act. That’s what passed Thursday, sans any check on political intelligence outfits.

While the STOCK Act ultimately avoided harming Wall Street, the JOBS Act is explicitly designed to help it, under the guise of job creation.

Cantor is once again a key player—he’s the original author of the JOBS Act, though it also enjoys broad bipartisan support in the House and Senate, particularly from New York Senator Chuck Schumer. The bill removes a wide array of SEC regulations on startup companies, with the ostensible purpose of making it easier for them to raise cash and thus create jobs. (The full name of the bill is the Jumpstarting Our Business Startups Act.)

But there’s little evidence these regulations are hampering job growth—and since they are mainly investor protection measures, the regulations are in place to stop massive, Enron-style fraud. Mary Schapiro, the SEC chairwoman, has openly criticized the JOBS Act and said it could be actually counterproductive to job growth. “Too often, investors are the target of fraudulent schemes disguised as investment opportunities,” Schapiro wrote to the Senate this week. “As you know, if the balance is tipped to the point where investors are not confident that there are appropriate protections, investors will lose confidence in our markets, and capital formation will ultimately be made more difficult and expensive.”

But nevertheless, the Senate passed the bill today, and it was lauded by politicians on both sides, and the White House this afternoon. Vermont Senator Bernie Sanders was not as pleased:

At best, this bill could make it easier for con artists to defraud seniors out of their entire life savings by convincing them to invest in worthless companies. At worst, this bill has the potential to create the next Enron or Arthur Andersen scandal or an even worse financial crisis.

Have we learned nothing? Deregulating Wall Street led to the worst financial crisis since the 1930s. Now the same people who caused this horrible recession are telling us that more Wall Street deregulation will create jobs. Give me a break. I strongly support providing small businesses with the tools they need to create jobs. Sadly, that’s not at all what this bill will do.

Only in Washington could Wall Street deregulation be sold as job creation. And on the very same day, a bill to stop malevolent use of confidential Congressional information failed to include Wall Street—the biggest offender—in the prohibition. It’s their world, and we’re just living in it.  

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