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Last night's 60 Minutes segment suggesting people run for Congress to profit from insider trading was pretty puffy in a number of ways. It seems, for example, pretty stupid to suggest Nancy Pelosi benefited from an IPO investment in Visa in 2005 when she was instrumental in pushing through credit card industry regulation in 2009 as Speaker of the House. Likewise, John Boehner most certainly reaped more benefit from passing out checks from tobacco industry lobbyists on the House floor than he did with any insider trading on stock deals to defeat the public option.
But there is definitely one Congressman who has profited much from inside deals: Rep. Spencer Bachus (R-AL), current Chairman of the House Financial Services committee. Bachus has been unrelenting on his opposition to any derivatives regulation and why not?
Pat Garafalo at ThinkProgress reports that Bachus was hedging on the failure of the economy in 2008 while receiving confidential briefings about it.
Bachus, who was the ranking member of the Financial Services committee at the time (since the Democrats held the house) made about 200 trades as the financial crisis peaked, netting about $28,000. “What we know is that those meetings were held one day and literally the next day Congressman Bachus would engage in buying stock options based on apocalyptic briefings he had the day before from the Fed chairman and Treasury Secretary,” said Peter Schweitzer, a fellow at the conservative Hoover Institution, whose work was the basis for CBS’ report. “I mean, talk about a stock tip.”
Last week, Jefferson County, AL declared bankruptcy after officials were unable to work out a refinancing deal for sewer bonds with creditors. Jefferson County is in Bachus' district, as is Birmingham, Alabama's largest city.
Jefferson County was a victim of the credit crisis in 2008. The sewer system’s floating-rate securities were coupled with interest-rate swaps, in which two parties make periodic payments based on an underlying measure of borrowing costs.
The contracts, arranged by New York-based JPMorgan, were supposed to save money by offsetting the floating rates the county paid and giving it a fixed rate that was lower than on traditional bonds. The strategy backfired in early 2008 as the subprime-mortgage market meltdown sent ripples through Wall Street, undermining the credit ratings of companies that insured Jefferson County’s bonds.
Investors dumped the bonds and the county’s interest costs soared. When banks demanded early payoffs of the bonds, the county defaulted. The swaps exposed the county to hundreds of millions of dollars in fees to refinance.
Former Commissioner Larry Langford was convicted of accepting bribes in connection with the sewer financing, and two associates pleaded guilty in the scheme.
Two former bankers at JPMorgan are fighting a U.S. Securities and Exchange Commission lawsuit alleging that they made $8 million in undisclosed payments to friends of commissioners to secure a role in the deals. JPMorgan separately agreed to a $722 million settlement with the SEC.
Matt Taibbi has more on the whole sordid mess. This was only one example of thousands, maybe millions, where Wall Street played with house money to profit at the expense of ordinary people. It wasn't only municipalities, as we all know. Everything was up for grabs.
Bachus Profits Much
Wall Street Journal, on Bachus' stock trades:
During 2008, almost all of Rep. Bachus's trades were in options: bets that a stock would rise above or fall below a particular price by a given date. Between January and September 2008, he executed roughly four dozen trades in stock and options on ProShares UltraShort QQQ, a "leveraged" exchange-traded fund that is designed to go up by twice as much as the Nasdaq 100 index goes down.
Had you invested in the Nasdaq index, you would have lost 23% in the first nine months of 2008. Rep. Bachus, on the other hand, made money from that decline—effectively betting against a market his committee helps oversee. His account statement indicates that trades in the ultrashort fund and its options earned Rep. Bachus roughly $28,000 in gains, a figure he doesn't dispute.
Not all of Rep. Bachus's trades were as profitable. His 2008 financial disclosure shows that he earned a total of $30,473.85 in short-term gains across his entire trading account. Given the high trading volume, that isn't much, says Gary L. Gastineau, author of "The Options Manual," who analyzed the activity for the Journal without knowing who the accountholder was.
"This person traded more [options] contracts in a single year than I've traded for my own account in my entire lifetime," says Mr. Gastineau, who spent 20 years as a Wall Street options strategist.
We don't know whether any of those options were interest rate swaps, but it's reasonable to think they might be. Whether or not they were, it's clear that Bachus had information about the economy that he used to make a tidy little profit on his personal investments while his own district became a victim of the scams that he was using to make money. Oh, and by the way, he does his own trading:
"It is prudent to protect your investments," Rep. Bachus said. "My No. 1 goal [in trading] is to profit from my investments, and a secondary goal is an enjoyment of investing and to better understand the markets. More members [of Congress] ought to be invested in the markets." Rep. Bachus said he normally enters his trades on nights or weekends.
Why It Matters
It matters from a simple ethical standpoint, of course. Insider trading is illegal for private citizens and should be just as illegal for elected officials. Can you imagine the outcry if it were discovered that SEC regulators were trading in options and swaps in 2008 while Wall Street fell apart? But beyond that, it matters because Spencer Bachus holds a powerful committee chairmanship and has sworn to weaken and repeal the reforms which would shine light on exactly how he made his profits in 2008. As the Congressman who said his role is to "serve the banks", he would also appear to be using that vow to serve himself.
One of his vows is to repeal derivatives reform and certain trades by federally insured banks.
One of the banks Bachus is protecting? JP Morgan, the bank that drove his own district into bankruptcy. Garafalo writes:
The swap deal that sunk Jefferson County was crafted by the mega-bank JP Morgan Chase (in concert with other banks, including Goldman Sachs). As Rolling Stone’s Matt Taibbi put it when describing JP Morgan’s actions in Jefferson County, “here you can see a trail that leads directly from a billion-dollar predatory swap deal cooked up at the highest levels of America’s biggest banks, across a vast fruited plain of bribes and felonies — ‘the price of doing business,’ as one JP Morgan banker says on tape.” And while Jefferson County was pushed over the cliff, JP Morgan has bounced back to record profits, and its municipal business has continued “unscathed.”