Tag Archives: cronyism

Some Cynical Investing in Washington

One of the problems that we have in the United States is policing some of the more self-interest driven actions made by our politicians. The average congressional member arrives in Washington rich, and leaves richer, and the climate in the nations capital and the laws governing politicians help that process. There are several reasons for this – money in campaign politics, lobbying, and others, but a key one is the investments that our representatives are able to make while knowing more about the workings of the world than the rest of us.

I recently read an article that analyzed a few investments of Congressional members in the context of their committee memberships, specifically around telecom. In many of today’s contemporary issues, including net neutrality, telecom mergers, and other major technology induced policy debates raging across the country, there will be clear winners and losers. Whether that is Facebook, Twitter, Google, Verizon, or Comcast, policy decisions made in Washington by Congress and the FCC will be worth big dollars to big companies. It seems incredibly corrupt for politicians to own investments in the areas that they will craft policy in such a direct manner.

In 2012, in the wake of the financial crisis (when it was possible for someone in Congress to sell Lehman Brothers before the rest of the world knew that it was imploding), Congress passed the Stop Trading on Congressional Knowledge (STOCK, how cheeky) Act in order to loudly and publically declare that Congress would no longer be able to insider trade on information that was available to them. An online database of disclosures, as the thinking went, would help citizens to monitor their representatives and prevent abuses and conflicts of interest. Of course, this only works if the information is easily accessible, which a later amendment “fixed” to make it much harder for the public to analyze the transactions of members. Call me cynical, but this is crony politics at its best, built from a bare desire to profit from their positions. Reminds me of some of the contracts-for-free-mansions deals circling around the Mexican Presidency right now…

In the private sector, there are restrictions and rules governing similar behavior. I cannot own a company’s stock, and have them as a client to which I render professional services. In accounting, consulting, and (likely?) law, there are significant barriers in place to stop financial transactions made with non-public information and importantly, effort is made to avoid conflicts of interest or even apparent conflicts of interest. It is important to have no financial asset that impairs objectivity or gives the sense that one has skin in the outcome of a project going a certain way. We have also had the scandals (e.g. Enron, Galleon) that have shown why these rules are important.

Why not the same for Congress, and members of the Executive and Judiciary that implement and adjudicate matters of law and regulation? If members of the FCC and the committees that govern it have stake in the major telecom companies, how can we have any faith that they will act in an unbiased matter for the good of all?

Our government is supposed to act in our collective interest, not for individual sectors or slices of our nation. Let us create a financial climate that incentivises the right actions. If high ranking members of our government were only allowed to own USD and Treasury bills, or some kind of pre-made basket of securities indexing the market as a whole (basically prohibiting picking individual stocks and investments), I’d bet you’d see them acting more in the public interest. Let’s bar them from holding assets with which they have incentives to support policies that enrich themselves.

What other more neutral investment options could we give Congress? Potentially a shared management endowment / money held in escrow and managed like some of our major universities? What could remove their perverse incentives most effectively? Narrowing their investment options so strongly, while probably the most enlightened option, is not likely to get into law anytime soon, so it would help to think of other similar schemes that might be used instead.