With Eric Cantor’s electoral defeat, the “political intelligence” industry loses its best friend on Capitol Hill at the moment it needs one most. Hallelujah.
Political intelligence is the acquisition of market-moving government information not yet known to the general public that a hedge fund or mutual fund can profit from.
When such inside information is obtained about publicly-traded companies, we call that “insider trading,” which is a crime. But when the information is obtained about the government, things get a bit more complicated, even when an identical opportunity exists to gain financial advantage. It’s more complicated because the law, quite properly, deems government secrets less worthy of legal protection than corporate secrets. A citizen’s right to know what his government plans to do exceeds his right to know what Advanced Micro Devices Inc. plans to do. For members of Congress, additional protection is provided by the Constitution’s “speech or debate” clause.
This legal bias in favor of letting government information flow freely has allowed a small but lucrative financial sector to flourish in Washington. A 2011 story in the Wall Street Journal, which has written extensively about the industry, reported that it generated annual revenue of about $100 million.
Insider traders rip off ordinary investors by profiting from information that those ordinary investors don’t have access to. The result undermines faith in the market. Political intelligence gumshoes compound this loss of faith by also persuading ordinary citizens that the government is a rigged game. Among other problems, the marketing of political intelligence creates dangerously tempting kickback opportunities for whichever government official supplies the non-public information.
(The shock troops of the political intelligence business are also an irritant to journalists because they perform essentially the same tasks yet can easily earn in one month more than most reporters can expect to make in a year. The main difference is that instead of publishing or broadcasting his scoops, the collector of political intelligence sells them to a few tight-lipped investors.)
Political intelligence got a mild comeuppance with the 2012 passage of the Stop Trading on Congressional Knowledge (STOCK) Act. The bill’s main purpose was to punish members of Congress and their staffs who trade stocks based on undisclosed government information. But it also required that the Government Accounting Office produce a 2013 report on “the role of political intelligence in financial markets.” This report turned out to be weak tea compared to reporting that had already appeared in the Journal and other news outlets. But it helped publicize one troubling incident from 2005 concerning asbestos litigation.
On Nov. 16 of that year, then-Senate Majority Leader Bill Frist announced a forthcoming vote to bail out certain companies that were on the hook for asbestos liabilities. This was a bit of a surprise because the Budget Committee didn’t want to move the bill. Ordinarily, one would expect such an announcement to increase trading volume for those companies. But in fact, trading volume had already risen in the days before Frist’s announcement– almost certainly because somebody on Capitol Hill had blabbed about it to a political intelligence flatfoot. The Securities and Exchange Commission looked into the incident but took no enforcement action. (In the end, the liability-relief bill didn’t pass.)
Why wasn’t the 2012 law harder on political intelligence? Because Eric Cantor didn’t want it to be. At Cantor’s direction, a Senate provision requiring political intelligence firms to disclose their activities (just as lobbyists do) was dropped from the House version. It never made it into the final bill. Sen. Chuck Grassley, R.-Iowa, who’d sponsored the disclosure requirement, was apoplectic. “It’s astonishing and extremely disappointing,” Grassley told The New York Times, “that the House would fulfill Wall Street’s wishes by killing this provision.” Dave Brat, unsurprisingly, used the issue against Cantor in his successful campaign to unseat him.
Congress may have whiffed on political intelligence, but years of bad publicity are having a cumulative effect. On June 19, the Wall Street Journal reported that lobbyists are getting out of the political intelligence business and hedge funds are scaling back their political intelligence activities or abandoning them altogether. Firms are tightening up internal controls on political intelligence, in many instances replacing it with more sophisticated mining of the mountains of data the government has already made public.
The Securities and Exchange Commission and the Justice department have sent subpoenas to the House Ways and Means committee, where they suspect a staff aide may have shared information about an impending Medicare policy change that raised stock prices for affected companies before the change was announced. A political intelligence firm “predicted” the change in an email to clients shortly before it happened. Even though the STOCK Act imposed no restrictions on political intelligence firms, the law’s new restrictions on members of Congress and their staffs may make it easier to prosecute such offenses. “The SEC is trying to make a test case, and you don’t want to be it,” an attorney who specializes in ethics told the Journal.
In short, this is a moment when the political intelligence business could use all the help it can get from Cantor. This time, though, it’s doubtful they’ll get it.