We are in the late innings of a Congressional push to enact financial reform, based on the notion that the game has been rigged and that we need to change the rules. That’s no doubt true, but I wonder about the process. Reform is needed, but who’s watching the reformers?
Let me explain. The courts are clogged these days with insider-trading cases, the assumption being that those who buy or sell stock with the advantage of material information about the company are illegally profiting by these actions. The alleged profiteers are usually securities analysts, hedge-fund managers, or others working for financial institutions or publicly owned companies.
The cases are rarely open and shut. On Wall Street, rumors are thick as flies at a garbage dump. Harry passes a story along to Joe, who passes it along to Steve, who buys 10,000 shares and scores a direct hit. Or maybe not; the story may be spurious, so he loses his shirt. Of course, if the story comes from the company’s chief financial officer, that’s another kettle of fish, but that’s very, very rare; most CFOs are too smart to act so foolishly.
Inside information flows through subterranean channels. The financial press is one such channel. Reporters have access to many insiders at trade shows, press conferences, etc. A fragment here, a fragment there, and the cat’s out of the bag.
But the biggest conduit for inside information may not be the financial world or the press, but the thousands of bureaucrats who regularly have knowledge of information that’s worth millions to any stock trader. The stories with the biggest impact on stock prices often originate at some government agency. Think of the opportunities. You work at the Food and Drug Administration, and you know that in a day or two the FDA will report that a new drug, potentially a blockbuster, has failed a phase 3 test. Or you work at the Justice Department or the Federal Trade Commission, and you know that the Government will file suit against such and such a company for illegal trade practices. Or you work at the FCC, and you know that a pending sale of TV stations will or will not be approved.
For that matter, members of Congressional committees regularly sound off on CNBC and have a built-in opportunity to attack a company in the course of a televised hearing. Most of what they say is just political grandstanding, but they have the power to move the market, and only they and their aides know in advance what they will say.
I don’t know of any such malfeasance, but that’s the point. Is it possible, in this era of rampant corruption by elected officials, that the entire federal regulatory apparatus and our Congressional watchdogs are squeaky clean? Or is it possible that a torrent of inside information flows from the corridors of federal power to trading accounts in the names of girlfriends, brothers-in law, friends of friends, and others outside the monitoring zone?
If there had been one or two front-page stories about such leakage, I would not be so suspicious. But if there have been such stories, I missed them. And so we are left with the politically correct conclusion: Wall Street is filled with crooks, and the Government is filled with honest people who work hard to protect us from the crooks.
Maybe.
