Insider Trading, Washington DC style

• Posted by Jeff Carter
• on May 5th, 2010

Today in the Wall Street Journal, they had an article about insider trading and Congress.  Apparently, Congress wants to go after all insider trading, but not their own.  This doesn’t surprise me, since the Dodd bill does nothing about Fannie and Freddie, or any other government excesses that contributed greatly to the market melt down.

There have been a few studies over the years that have confirmed that a Congressional seat is an excellent place to build wealth, despite the poor government pay.  It’s not specific to one party.  All parties have people that have benefitted greatly from serving terms in public office. In Illinois, we even see it at the state and muni level.

Here is a true story, and one that is edited so you don’t get bored reading it.

Years ago, I wound up in a back room with an overserved Alphonse D’Amato.  He was a Senator from New York.  (We bought him a bottle of Chateau Montelena, Napa Valley) At the time, he was head of the Senate Banking Committee.  It was your typical smoke filled room, filled with guys swapping funny stories.  D’Amato was the center of attention.  When he found out that myself and my two friends were from the Merc, he immediately asked us how Hillary Clinton had made $100,000 in cattle trading.

“Heh, heh, she was just that good.”, we said.  We knew that it was purely dumb luck or the fix was in.  We all assumed the fix was in.

“C’mon”, he prodded.

We explained how we thought it went down, none of us knowing anything concrete.  It also is very tough to know how she did it without seeing trading registers, time stamps, and actual orders.   At the time she made the trades, the regulatory requirements were not the same as today.  There was no real audit trail.  To tell you the truth, I don’t think Hillary was the only one that got away with it in those days.

An aside-today it would be tough to execute an insider trade in the futures market. The audit trail is too transparent. In stocks though, it’s easy. Lots of dark pools to park stuff in.

Here is my assumption as to how she made money.  One way was to enter a cattle spread.  As the market moved up or down, one side of the spread would make money, the other would lose.  She found a patsy, presumably Tyson, to take the losing side-while she took the winner.  The other way is trickier.  Since there was no time stamp on orders, customers never knew where they were filled sometimes until the end of the day.  They just put winners into her account-made sure she bought low and sold high.

Of course, nothing could be proven.  You just have to hand it to anyone that can make a quick 100K trading. There is a small probability that she might have just gotten lucky.  It’s a tough business.

This brings me back to the good Senator.  In the backroom, after we explained away the First Lady’s cattle trades, he grumbled about the Clinton’s.  Then he said, “She’s testifying before my committee, and I am going to crucify her.”  Huzzahs around the room.

Then Mr. D’Amato said this.  ”Who was our guy at the NASDAQ?”.

Someone muttered under their breath, “Ziffy”.

“Yeah, Ziffy.”, the Senator said.   “Ziffy used to send us money.”

I asked, “How’d he do that?”

“We were trading.”, said the Senator.

“Trading?”, I asked.

“Yeah, Ziffy used to trade for us at the NASDAQ.”, he said.

“Surely, you made the trading decisions, and Ziffy executed them right?”, I asked.

“Fuck that, I just used to get a check.”, said the Senator.

That’s when we graciously said we had to go. Yuck. It turns out that he may have been unethical, but nothing was illegal. They ought to make that kind of thing illegal. Kind of hard for those guys to go after Goldman-unless Goldman was eating into their profits.

UPDATE
Here is a link to another study. It is from 2006.  It shows a strong correlation between Congressional activity and stock market returns.  Stock volatility is lower when Congress is not in session! Here is a graph of how well our elected representatives trade.  Washington loves to rage against traders, but a fair amount of “speculation” is taking place in DC.  Senators outperform the broader market by 100 basis points per month!  I doubt seriously that a lot of risk is being taken though…..Become a trader, run for Congress.  I’d love to see some studies on how their spouses or significant others did.  We know that many spouses sop up lots of cash via working for lobbying firms.  How much do they make “playing the market”?

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