Peter Schweizer - Throw Them All Out

A study in the Journal of Financial and Quantitative Analysis found that U.S. senators may have missed their calling: they should all be running hedge funds. How else to explain these results, based on 4,000 stock trades by senators:

The average American investor underperforms the market.

The average corporate insider, trading his own company's stock, beats the market by 7% a year.

The average hedge fund beats the market by between 7% and 8% a year.

The average senator beats the market by 12% a year. 11

When the same team looked at 16,000 trades by members of the House of Representatives, they found similar if less spectacular results. House members beat the market by 6% a year, almost as much as what corporate insiders achieve when trading their own stock. 12(It is unclear why senators are better investors than are representatives. Perhaps it is because they have relatively more power and therefore greater access to market-moving information.)

Another study, by scholars at MIT and Yale, looked at a shorter period of time, from 2004 to 2008, and found that while many individual legislators do not beat the market, they do extremely well with stock in companies with which they are "politically connected." They beat the market by almost 5% a year. As the researchers put it, "Members of Congress seem to benefit as investors from knowledge of companies to which they are politically connected (and particularly those headquartered in their districts), and they appear to take advantage of this knowledge by investing disproportionately in those companies." 13

"They seem to know something that other people don't know," said Jens Hainmueller, coauthor of the study and an assistant professor of political science at the Massachusetts Institute of Technology. 14

The winners are the politicians who possess insider knowledge, or who are most likely to receive favors from wealthy supplicants.

That's one side of the crony-capitalist spider web. On the other side are the political entrepreneurs and private investors. There is disturbing evidence that politically connected hedge funds perform dramatically better than those without Washington contacts. One study found that politically connected hedge funds beat their equivalent nonpolitical counterparts by about 2% per month. 15

In short, the Permanent Political Class has clearly figured out how to extract wealth from the rest of us based solely on their position and proximity to power. If you have a seat at the table, you are in for a feast. If you don't have a seat at the table, you are probably on the menu. Exactly how crony capitalists are consuming public wealth and fattening themselves is the subject of this book.

Ideology and political philosophy matter in Washington, but often less than you might think. Honest graft is generally bipartisan. Complex bills that are hundreds or even thousands of pages long can contain a single sentence or word that translates into money and that can influence how a politician votes. One study by scholars at the University of Pennsylvania's Wharton School of Business and the University of Chicago found that during the critical votes on the subprime-mortgage bailout and subsequent matters related to the financial crisis of 2008, a key factor in how members of Congress voted was whether they held stock in banks and in the financial sector. Personal equity ownership also influenced congressional committee decisions on the amount of bailout money particular financial institutions received and how quickly they got it. Apparently the vote had less to do with your politics and more to do with your pocketbook. 16

Is it any surprise that Washington lawmakers are staying in office longer than they did before, and that in recent years we've had the oldest Congress ever? 17Long gone are the days when Thomas Jefferson could write, as he did in 1807 to Count Jules Diodati, "I have the consolation of having added nothing to my private fortune during my public service, and of retiring with hands as clean as they are empty." 18Now, politicians' fortunes are rising, and they are clinging to their jobs for all they're worth.

But hasn't it always been this way? Graft has a long and sordid history in America. In 1789, Alexander Hamilton, the first U.S. secretary of the Treasury, announced plans to pay off both the federal Revolutionary War debt and the debt obligations of the individual states, all at 100%. The deal was preceded by massive insider trading in federal and state government bonds. Members of Congress were among the speculators who traded these bonds, based on advance knowledge of the Treasury's intent. According to Senator William Maclay, Democrat of Pennsylvania, speculators sent people in stagecoaches all over the country to buy up federal and state notes at a fraction of their face value. 19

Crony capitalism is not new, but it has become a dominant force in Washington. The amount of money to be made is much larger. And the opportunities have become more frequent. In fact, it is now threatening the health and integrity of our entire economic system. "Crony capitalism" is a term that used to be applied almost exclusively to developing countries that were rife with corruption. Now the label can be applied to many sectors of our economy. It is an important part of the reason we face the economic crisis that we do.

One of the best-known chroniclers of crony capitalism in the nineteenth century was one of its participants. George Washington Plunkitt was a party boss of the infamous Tammany Hall, the corrupt political machine that ruled New York City for decades. Plunkitt was born in poverty, in a squatter's hut in what is now Central Park. He left school at the age of eleven and became a multimillionaire through elective office. He explained quite candidly in a series of newspaper interviews in the 1870s how he did it.

Plunkitt's philosophy was that politics is a business. How did he begin his career? "Did I get a book on municipal government ... ? I wasn't such a fool. What I did was get some marketable goods. What do I mean by marketable goods? Let me tell you: I had a cousin. I went to him and said, 'Tommy, I'm goin' to be a politician, and I want a followin', can I count on you?' He said, 'Sure, George.' That's how I started in business. I got a marketable commodity—one vote." 20

Plunkitt continued with the classic description that has kept his name alive long after his death:

"There is a distinction between honest graft and dishonest graft. I've made a big fortune out of the game, and I'm getting richer every day, but I've not gone in for dishonest graft—blackmailing gamblers, saloonkeepers, disorderly people, etc.—and neither has any of the men who have made big fortunes in politics. There's an honest graft, and I'm an example of how it works. I might sum up the whole thing by saying: 'I seen opportunities and I took 'em.'"

He goes on: "Just let me explain by examples. My party's in power in the city, and it's going to undertake a lot of public improvements. Well, I'm tipped off, say, that I go to that place and I buy up all the land I can in the neighborhood. Then the board of this or that makes its plan public, and there is a rush to get my land, which nobody cared particular for before. Ain't it perfectly honest to charge a good price and make a profit on my investment and foresight? Of course, it is. Well, that's honest graft." 21

More recently, Lyndon Johnson, while he served in the House and the Senate, told people to purchase advertising on his Austin radio station, KBTC, in order to get his attention. 22LBJ also frequently used his power at the Federal Communication Commission to obtain licenses for his radio and television stations and to block competitors from invading his markets in Texas. His company, needless to say, prospered. An initial investment of $17,500 grew into a media empire worth millions. 23