The Insider Versus The Average Joe

Something weird happened in the markets earlier this week. About 60 seconds before the November Consumer Price Index data was released, there was a sudden surge in trading of stock futures and Treasury futures–both of which inevitably would be affected by the report that the CPI for November was a bit lower than what economists had forecast. You can see the spike in trading in the chart above, published by Bloomberg in its story about the trading that occurred only moments before the release of the report.

It’s good news, of course, that the November CPI report indicates that inflation appears to be cooling, and we should all hope that trend continues. But the jump in trading activity in the minute before the CPI report was released is obviously suspicious, and suggests that someone who received the report prior to the release tried to profit from the good news. (In fact, the activity sounds vaguely like the plot of the movie Trading Places, where the Duke brothers tried to make a killing from getting an early copy of a government report, only to be foiled by the Dan Ackroyd and Eddie Murphy characters. In this case, however, Dan and Eddie weren’t around, and neither was the guy in the gorilla suit.)

The Biden Administration denied that the White House leaked the report, and downplayed the trading data as “minor market movements”–when, as the Bloomberg article linked above points out, it clearly was nothing of the sort. The Bloomberg article notes: “over a 60-second span before the data went out, over 13,000 March 10-year futures traded hands (during a period when activity is usually nonexistent) as the contract was bid up.” And even if we accept that the White House didn’t leak the report, it’s obvious that something happened that requires an investigation, to see who was making those trades, and why.

Under these circumstances, in fact, I would argue that an investigation is mandatory. Trust in the markets is a delicate thing, and an insider trading scandal coming on top of the stories about the inner workings of now-collapsed FTX doesn’t exactly instill confidence in the integrity of the markets. If there is no investigation or prosecution, it will go down as just another example of the fundamental difference between insiders who get to profit from a sure thing and the average Joes who must accept the ups and downs in the accounts that hold their hard-earned retirement savings.

Regulatory Insiders

The Wall Street Journal published an exhaustive piece of investigatory journalism this week about stock trading by senior officials and employees of federal regulatory agencies, You can see the full WSJ article here, and a summary of six “takeaways” from the reporting here. It’s a classic example of old-fashioned shoe leather reporting, but on a big scale. One of the six takeaways describes what the Journal team did:

“The Journal obtained and analyzed more than 31,000 financial-disclosure forms for about 12,000 senior career employees, political staff and presidential appointees. The review spans 2016 through 2021 and includes data on about 850,000 financial assets and more than 315,000 trades reported in stocks, bonds and funds by the officials, their spouses or dependent children.”

The fruits of the investigation justify this enormous amount of work by the reporting team, because the analysis found that thousands of federal administrative officials trade stocks in companies their agencies are actively regulating. The full article is worth reading, but let’s focus today on five of the takeaways.

First, more than 2,600 federal agency officials owned millions of dollars in stocks in companies that were lobbying their agencies. Second, officials directly owned stocks in companies whose businesses obviously would be affected by decisions made by their regulatory agencies, including Defense Department officials owning stocks in aerospace and defense companies, an EPA official owning stock in an oil and gas company, and an FDA official investing in food and drug company stocks that were supposed to be off limits. Even more amazing, some Defense Department officials owned stocks in Chinese companies that the U.S. was considering for blacklisting.

Third, The Journal investigation found dozens of examples of officials trading in stocks of companies shortly before their agencies announced enforcement actions against those companies. Fourth, 1,800 officials owned stock in Facebook, Amazon, Apple, or Google. And fifth, about 70 officials engaged in trading that most normal investors don’t even consider, like options trading or short selling, including some individual trades of between $5 million and $25 million.

The ability of regulatory officials to buy or sell stocks in companies that are under the oversight of their agencies is obviously a gaping hole in federal law. Administrative officials are supposed to be objective and dispassionate in their decisionmaking. When such officials are directly investing in companies they are regulating, often under circumstances–like trades made shortly before regulatory actions are to be announced–such conduct gives rise to reasonable suspicions that insider information might have influenced the buy or sell decision. The potential conflicts of interest are even greater when regulatory officials engage in especially risky trading tactics, such as short selling, or large-money trades. And, perhaps most concerning, the agencies in question apparently had rules prohibiting much of this conduct, but waived the rules so the trades could be made.

It’s time for members of Congress to get off their duffs, stop the constant fundraising, skip another appearance on CNN, MSNBC, or Fox News, and take a good look at the conflict of interest and stock trading rules applicable to the administrative state. A statute that requires officials to avoid any direct ownership of stocks during their service in regulatory agencies–and instead participate solely in mutual funds managed by others–seems like a good start. Given the increasing role of federal agencies in making decisions that affect our lives in countless ways, we’re entitled to some meaningful assurance that those decisions aren’t influenced by the regulators’ personal financial interests.

Calling With A Final Update On That GM Investment

Mr. Webner, long time, no talk! It’s the federal government calling to update you on your GM investment.

For the love of God! Leave me alone! We got rid of our land line so you wouldn’t bother us any more. How did you get this number?

Don’t be naive, Mr. Webner. We’re the federal government. Now let’s talk about that GM investment. We liquidated the last of our GM investment in December, and incurred only a $10 billion loss on our $49.5 billion investment!. Isn’t that wonderful?

Wait a second . . . did you say a $10 billion loss? You’re happy that the government lost more than 20 percent of our investment in GM?

That’s right. GM stock has gone in the dumper over the last few months. By wisely selling when we did, we’ve managed to keep our losses to only $10 billion. If we’d held on and tried to sell now, we’d have a much bigger loss!

Isn’t the drop in GM’s stock due to some extent to its problems with faulty vehicles due to a faulty ignition switch? Were you guys aware of that problem when you decided to invest our money in GM stock and then to sell it when you did?

(Silence.)

You know, there was a Senate hearing today on that issue. More than 2.5 million GM cars worldwide have been recalled, and Senators suggested that GM’s failure to act more promptly raised issues of criminality. Say, do you think you guys might be in trouble because you were aware of that whole issue?

(Heavy breathing.)

You know, the whole recall situation makes your decision to sell GM stock seem really convenient. As long as we’re on the phone, maybe you can answer this question — what did the government know, and when did it know it? Was there some insider trading here? Maybe you should get a lawyer.

(Click.)

Calling To Report On That GM Investment

Calling To Update The Report On That GM Investment

Calling With Another Update On That GM Investment