Thursday, January 19, 2006
by josh orton
Thu Jan 19, 2006 at 03:04:45 PM PDT
In an exclusive last night on Air America Radio's The Majority Report, Rep. Louise Slaughter alleged that day-traders had been operating inside the offices of Senator Frist and Congressman Delay. Telling us that her source was "as good as gold," Rep. Slaughter promised to investigate further and get back to us. Audio available via AMERICAblog here.
"I'm going to track this down, I know it's true," Slaughter told us,"that Frist, DeLay and probably others had some day traders working out of their offices." Those working out of the Congressional offices "would find out there's a bill being written by lobbyists, that there would be no asbestos bill ... and when the market opened the next day, the cost of asbestos stock had doubled."The context of this story, and the practice of spreading insider "political intelligence" is starting to unfold...
The backstory of this involves what's called "political intelligence." The Hill did a story nearly a year ago on firms that harvest insider political info and feed it to Wall Street to get ahead of the news cycle; obviously much of what happens in DC affects the market.
The Hill piece is here.
"We provide customized political intelligence and deliver the information ahead of the news cycle," Portnoy said.
In a business that is in large measure a gamble, information that helps a trader pick one side or the other is critical.
"It's all about comparative advantage and market efficiency. ... There are lots of things that happen in Washington that affect the market," said Tim VandenBerg, a senior policy analyst at Washington Analysis, a D.C.-based group that advises Wall Street on Congress. "If you are reading about it in The Wall Street Journal, you are reading about what has happened, not will happen."
For its information, the financial sector can turn to firms such as VandenBerg's, which does not lobby. Another example is Charles Schwab's Washington Research Group, which keeps clients abreast of legislative and regulatory moves.
Many larger players, including some major hedge funds, have set up their own offices in town. Others hire such firms as Sonnenschein that specialize in lobbying to mine their Hill contacts for another purpose.
Because they aren't, in fact, lobbying for these clients, firms don't have to register with the Senate or the House. Most firms don't identify their clients or disclose the revenues from the work.
Then, this past December, Business Week reported on the phenomenon:
Washington Whispers To Wall Street
Low-profile firms enjoy a lucrative business selling "political intelligence"
Day traders were confused. On Tuesday, Nov. 15, they couldn't figure out why there was so much action in USG Corp. (), a Chicago building-materials company whose subsidiary is mired in asbestos lawsuits. The stock was trading at double the normal daily volume and would gain $2.12 to close at $61.55. But there wasn't any major news to power the run-up.
Public news, that is. Behind the scenes, Senate Majority Leader Bill Frist (R-Tenn.) had decided to override the qualms of Budget Committee leaders and press ahead with a bill to create a $140 billion fund to relieve companies such as USG of their asbestos liabilities. Frist wouldn't announce his move until Nov. 16. But the news got to key Wall Street players a day early via a little-known pipeline: a small group of firms specializing in "political intelligence" that mine the capital for information and translate Washington wonkspeak into trading tips.
The business started with a couple of cottage firms in the early 1970s. But now it's taking off. Industry insiders say the explosion of hedge funds has driven new clients and bigger dollars to Washington-watchers. "What hedge funds do is look for inefficiencies in the market," says one hedge fund manager who buys several firms' reports. "And Washington is the world's greatest creator of [market] inefficiencies."
Unlike lobbyists, political intelligence outfits are not required to disclose their clients or annual revenues, masking the size of this very quiet business. One veteran estimates there are more than a half-dozen contenders collectively raking in $30 million to $40 million a year. Prominent players include the Washington research shops of Prudential (), Lehman Brothers (), and Stanford Washington Research Group, owned by Stanford Financial Group of Houston.
The business stretches beyond Capitol Hill. "We analyze public policy -- macroeconomics, the Fed, budget, trade, currency -- that affects overall financial markets, sectors, or companies," says Leslie Alperstein, a founder of the firm Washington Analysis. And while leaks such as Frist's asbestos news are welcome, Alperstein says his business is mostly about explaining trends. "If we only dealt in [hot tips], I wouldn't be living in Potomac," he says, referring to a pricey Maryland suburb. "It doesn't happen often enough."
It happens enough, however, to trouble some lawmakers. On Nov. 23, Representative Brian Baird (D-Wash.) asked the House Committee on Standards of Official Conduct to issue guidance for staffers sitting on some of the capital's most valuable information. "The possibility of direct kickbacks [is] enormous," says Baird, who read about the political intelligence business in The Hill, a newspaper covering Congress. He worries that the trafficking comes "very close" to insider trading.
But ethics experts say no one's breaking the rules. Hill staffers and government employees are forbidden from personally profiting from confidential data and can't share information that's classified or deemed secret by their employers. But within those loose standards, political intelligence is just another legal way for investors to perform due diligence. The intelligence operatives say that Congress, where decisions are made publicly, is fair game.
So already there is a hugely lucrative practice of trading insider political info...something that needs to be shut-down as is.
But now, it seems as though the traders may have actually been operating from INSIDE the offices of Republicans. So even if mining "political intelligence" is still technically legal, this development seems like unambiguous insider trading if true: Republican lawmakers gave market info exclusively to these firms, info that was not yet available to the general public.
Representative Brian Baird (D-Wash.), quoted in the Business Week story and the Congressional point man on the potential scandal, will be on The Majority Report tonight at approx. 7:51 Eastern tonight to talk to Sam Seder. The audio stream and a list of affiliates can be found here.
The next step is tying the employees of these intelligence firms to both the Repoublican party in general, and Delay, Frist, and their staffers specifically. Rep. Baird has already written to the House Ethics Committee to investigate (we'll hold our breath on that) and is proposing legislation to end this corruption. We've also heard that outside law-enforcement agencies may soon become involved.