Jan 04 2014

The political intelligence industry: A wealth-creating endeavor or just a wealth transfer gimmick?


Reform Party of California Commentary

The question this comment raises is simple: Is what the political intelligence industry (PII) does a useful, wealth-creating activity that benefits our economy and the public interest, or, does the PII simply redistribute wealth from individuals and entities who are not aware of certain inside information related to congressional activities to select individuals and entities who do possess that inside information? As discussed below, reasonable conclusions are that (i) the PII functions exclusively to redistribute wealth from uninformed sources to sources who are armed with material inside information and (ii) but for pay to play play politics, the PII would not exist at all. This is just another example of the corrosive effects of political self-interest on politics.

In April of 2012, President Obama signed the Stop Trading on Congressional Knowledge (“STOCK”) Act into law. The law prohibited insider trading by members of Congress and some other government employees, which had been legal since the time when inside trading on securities was even possible in the U.S. The STOCK Act exempted lobbyists and non-federal people dealing with congress from the ban on insider trading, so those people could still trade on inside information that arose from congressional activities that could affect stock and securities prices. Some member of congress had been trying for years to pass a law to make such inside trading illegal. However, some powerful members of congress liked being able to exploit their inside information to make money on the stock market, and the reformer’s efforts were simply ignored.[1]

Laws that congress plans to pass or not pass can significantly affect the price of individual stocks or securities or prices of stocks in an industry or an entire market. Because of that, fortunes can be made based on the information that only insiders have. Average Americans are simply out in the cold and kept ignorant, except maybe to occasionally trade against the elites who have the inside information. It is fair to say that it looks and smells bad, to say the least.

Given the great value of some inside information, it is no surprise that enterprising entrepreneurs established an industry to capitalize on that asset. The industry is called the PII. The PII collects and sells inside information obtained from congressional activities to select, wealthy, elite clients. Current law shields the identity of clients who buy information from PII sources. Clients who buy the information are usually not publicly known.

According to one source, the PII collected $402 million in 2009 from clients, who in turn presumably made unknown millions or billions by trading on the precious inside information.[2] Because clients pay hundreds of millions of dollars to obtain it, there is real commercial value in PII information. Clients who buy information from PII sources fight proposed rules to disclose their identities and republicans in the House defend that desire for anonymity. That has been going on since 2012. House republicans obviously see merit in allowing clients to hide in anonymity.

The situation

It is fair to characterize the situation or facts like this. Congress had no qualms about engaging in inside trading until it was embarrassed into passing the STOCK Act. Vulnerable incumbents in congress supported it because their opponents could use the issue against them in the next election unless they voted for the STOCK Act. Therefore, the people in congress who had blocked reform for years instantly and almost unanimously switched sides once the issue was raised as one that could hurt them in the next election.

The switch was also in part because congressional public approval ratings had dropped to abysmally low levels, not because they felt anything was inherently wrong with the practice. The STOCK Act left the PII intact and it never was a blanket prohibition against insider trading based on information arising from congressional activities. A year later, congress and the President repeal some of the disclosure requirements to for some federal staffers and aides. The House continues to protect the identity of PII clients from disclosure.


It is fair to draw the following conclusions. There is no obvious or compelling rationale for the legality of trading on inside information arising from congressional activities. Because Republicans, but not democrats, protect the identities of clients who profit from trading on PII information, it is fair to conclude that there is no compelling reason to allow client anonymity. If it were otherwise, democrats and republicans would see it the same way. Because the PII is allowed to exist at all and because the two-party political system is pay-to-play, a reasonable conclusion is that members of the PII and/or their clients have made sufficient campaign contributions to buy access, thereby allowing them to convince congress that their industry deserves to exist. Finally, it is reasonable to conclude that congress and President Obama are incapable of resisting irrational and self-serving demands political donors, with the quid pro quo for the PII being the gift of freedom to make inside trades.

The picture described above is what average Americans can easily see.

This in just one small issue in a greater scheme of things, but it exemplifies what can pass for acceptable business as usual in the two-party system. There are good reasons that millions of Americans have lost faith in the two parties and in the federal government as they now operate it. Despite continuing low public approval, congress and the President obviously believe that they can simply continue this kind of business as usual without even deigning to offer an explanation to the public. They must believe that the public does not deserve an explanation. If that is what they think, they are wrong.

Again, the question is this: Is this inside trading a transparent and worthy wealth-creating activity that benefits the U.S. economy and serves the public interest or, is it nothing more than unexplained, indefensible sleaze that appears to serve no purpose other than to repay donors for contributions, capitulate to unreasonable demands by federal employees and create distrust among average Americans who deserve better than this?


1. Apparently, what caused congress to finally pass the STOCK Act was a combination of (i) dismal new lows in congressional approval ratings in 2012 and (ii) President’s Obama’s mysterious decision to actually lead on something for a change and make this into an issue. In passing the law, congress congratulated itself on its high ethical standards and all the usual self-serving propaganda. The fact that congress was, in essence, embarrassed and scared into acting was completely ignored. The spin was just two-party politics as usual. It was just another manifestation of political self-interest trumping the public interest until a point in time where self-interest came to coincide with service to the public interest. But even then, the politicians delivered only partial service to the public interest via the STOCK Act because they maintained their self-interested urge to leave the PII intact.

2. Even with the inside information, there can still be appreciable risk in trading on it. Nonetheless, there is, on balance, less risk and the net effect is hereby predicted to be very lucrative for securities trades. If that information was of limited value, hundreds of millions would not be paid for it. Also, there could be other, important uses than just securities trading on inside information. For example, PII clients could adapt their business practices or sell or buy assets in advance of something that congress does or does not do to take advantage of changes in the value of those assets after congressional action affects the asset value for better or worse. Even if that is the dominant reason that PII clients pay for inside information, the basic question is exactly the same: Does that activity create wealth and serve the public interest or does it allow insiders to cash in on new opportunities or shift losses to people who do not possess the information. In other words, why should the person or entity without inside information lose the economic upside or suffer the economic loss simply because they did not happen to pay the PII for information? Is that a business failure or just a failure to play the game by the rules the two-party system imposes on our economy?