Peter Schweizer - Throw Them All Out

On October 14, the federal government tapped into the $700 billion provided by the Emergency Economic Stabilization Act. The government took equity positions in banks that chose to participate. The next day, Bachus bought more SPDR option contracts and netted a quick $3,400. On October 21, the Federal Reserve announced it would spend $540 billion to purchase short-term debt from money market mutual funds. The next day, Bachus bought more than $5,000 worth of options in Market Vectors TRN. Thanks to his purchase of this call, he more than doubled his money.

Bachus was not just buying options on broad market funds or a sector of the economy. He also bought options on specific companies. On September 8, Hank Paulson received a disturbing private phone call from General Electric CEO Jeffrey Immelt. GE was having trouble selling its bonds, Immelt quietly told him. 12Just two days later, Bachus shorted General Electric options. He did so four times in a single day, according to his financial statement from Fidelity, and more than doubled his money. 13Indeed, between September 10 and 15, Bachus shorted GE a total of twelve times. Nine of those trades were profitable—a high batting average for such a risky game. Is there absolute proof that Paulson told Bachus about Immelt's phone call? No. Are Bachus's trades suspicious? You bet. Why, of all companies, did he choose to short GE at this time?

This was not the only instance when Bachus took leveraged stock options that were intertwined with his government work. Back in 1997, he aggressively purchased eleven put options on United Airlines, betting on the stock to fall. At the time, Bachus was on the House Transportation and Infrastructure Committee, which set policy toward the airlines. That same year, Bachus also took short positions in Microsoft. The Department of Justice was in the midst of its antitrust case against the company. Bachus purchased two puts just days before the Justice Department filed a complaint demanding a $1-million-per-day fine against Microsoft for its violation of a consent decree. Is there proof that he knew about the complaint? No. But the larger pattern is suspicious. In the middle of the antitrust hearings he placed more bets that Microsoft stock would fall. On the Microsoft transactions he netted up to $20,000 in capital gains, according to his financial disclosure form.

Bachus has been able to use his above-average success with option trades to yield a nice supplemental income. In 2007, the congressman undertook several dozen risky short-term put and call options on a variety of companies. He was betting that he would know whether a company's price would go up or down. These included companies like Apple as well as obscure Chinese Internet advertising companies like Focus Media. Bachus had impeccable timing. In over two dozen cases, representing more than two-thirds of all the trades he made, he guessed correctly.

In the case of Focus Media, for example, he held the investment for only two weeks, and sold it on the same day that the company's stock price surged following its announcement that it would acquire a competitor. Again, there is no proof that he knew of the acquisition in advance. But it is highly unlikely that his two-thirds success rate in those 2007 trades could have been based on public information alone. If so, he should have quit Congress and become a professional investor. All told, in 2007 Bachus was able to supplement his $165,200 congressional salary with $160,000 in profits from aggressive put and call options on a variety of stocks. 14

A spokesman for Bachus, Jeff Emerson, claims that this presented no difficulty. "There is no conflict of interest," he says. "He asked the Ethics Committee if he could do this, and they said there's no problem." As a matter of law, that answer is accurate and complete. Only Congress's own Ethics Committee can decide whether to condone this kind of stock trading.

Here's the heart of the scandal—the fact that the Ethics Committee deems this acceptable. Welcome to the outrageous arrogance of crony capitalism in Washington. Not only are members of Congress able to act on information that is not available to the rest of us, but they are able to put their own fortunes at risk when they ought to be concerned only with the public interest. If you bet on a particular sector of the economy to fall over the course of a few days or weeks, how can you be sure that your subsequent decisions are not influenced by that bet?

Congressman Bachus was not the only one actively trading stocks while setting policy during the financial crisis. But he was particularly aggressive with options; others merely cashed out of positions that were just about to worsen. Sometimes knowing inside information can mean protecting your assets while the rest of America goes over a financial cliff.

On Tuesday, September 16, 2008, when Henry Paulson and Fed Chairman Ben Bernanke held another of their terrifying closed-door meetings with congressional leaders (two days before the "ashen-faced" meeting), the stock market had dipped only a few percentage points, and most people assumed that the financial crisis was a disruption that would have just a limited effect on the broader economy. But what Paulson and Bernanke told lawmakers on September 16 made it clear that the public's perception was wrong. Paulson, in his memoir, explains that during the meeting he outlined that the federal government was going to bail out the insurance giant AIG and that the markets were in deep trouble. "There was an almost surreal quality to the meeting," he recounts. "The stunned lawmakers looked at us as if not quite believing what they were hearing." 15

The next day, Congressman Jim Moran, Democrat of Virginia, a member of the Appropriations Committee, dumped his shares in ninety different companies. 16Moran is a former mayor and city councilman of Alexandria, Virginia. Earlier in his political career he had faced legal charges for casting a vote on the Alexandria City Council that helped a developer friend win a bid for a lucrative plot of land. Moran pleaded no contest to a misdemeanor charge and resigned. It did not stop his career. He was elected mayor in 1985, and to Congress shortly after. (It's interesting to note that legal standards in Virginia are apparently higher than those of the U.S. Congress. Had Moran cast that same vote in Congress, there would be no cause for any charges!)

September 17, 2008, was by far Moran's most active trading day of the year. He dumped shares in Goldman Sachs, General Dynamics, Franklin Resources, Flowserve Corporation, Ecolabs, Edison International, Electronic Arts, DirecTV, Conoco, Procter & Gamble, AT&T, Apple, CVS, Cisco, Chubb, and a dozen more companies. Moran's timing was impeccable. He didn't profit very much from these trades, but he avoided the larger losses that the general public would face in a matter of weeks. Moran and his wife actually eked out a net capital gain on these trades.

Moran was just one of many. At least ten U.S. senators, including John Kerry, Sheldon Whitehouse, and Dick Durbin, traded stock or mutual funds related to the financial industry the following day. Representative Shelley Capito is a Republican from West Virginia who sits with Congressman Bachus on the House Financial Services Committee. She and her husband dumped between $100,000 and $250,000 in Citigroup stock the day after the briefing. According to her financial disclosures, she and her husband somehow managed to accrue capital gains from Citigroup stock transactions made throughout the crisis, as much as $50,000 worth. 17

Senator Dick Durbin, the Democratic whip and chairman of the Subcommittee on Financial Services and General Government of the Senate Appropriations Committee, attended that September 16 briefing with Paulson and Bernanke. He sold off $73,715 in stock funds the next day. Following the next terrifying closed-door briefing, on September 18, he dumped another $42,000 in stock. 18By doing so, Durbin joined some colleagues in saving themselves from the sizable losses that less connected investors would experience. The stock market collapsed shortly after these congressional trades. By October 3, just seventeen days after the September 18 meeting, the market had dropped more than 9%. A month later, it had plummeted over 22%. Preventing a catastrophic loss can be just as important as making a big gain.