Jan 06 2014

Reality warp: The power of self-interest and self-image


Reform Party of California Commentary

The Reform Party of California (RPCA) recently raised the issue of whether the political intelligence industry (PII), an obscure but lucrative creature that congress created and protects, was a worthy wealth-creating endeavor or just a means by which individuals or entities with material inside information could transfer wealth from themselves to individuals or entities who do not possess the inside information. Inside information the PII obtains arises from normal congressional activities such as plans to pass laws that could affect the value of securities or other assets in the private sector. Based on the information readily available to the public, the most reasonable conclusion is that the PII exists exclusively to redistribute wealth from insiders in possession of material information to outsiders who, when they conduct commerce with the insiders, are at an economic disadvantage.

Since other Americans cannot legally trade securities based on material inside information, the fact that the PII even exists raised the question of why it exists. A reasonable conclusion that average citizens could easily come to is that congress created and protects the PII and its clients primarily or exclusively as a reliable source of campaign contributions.

Ideology talks, reality walks

This comment focuses on how one U.S. Senator, Tom Coburn (R-OK), who supports the PII and opposed the STOCK Act rationalizes the situation. Despite a highly ethical self-image, the RPCA sees Senator Coburn as blind to the fact that he was in a real conflict of interest situation and completely self-deluded about it. This is yet another example of how normal human traits, self-interest and self-image in this case can profoundly distort reality. Self-interest and self-image are forms of ideology. Ideology underpins beliefs and if reality has to be distorted to reconcile disconnects between the two, reality typically gets distorted to some extent or another. Those human traits can easily blind believers into perceiving a reality that is much more fantasy than true unspun reality. That is a point the RPCA has argued many times. The situation exemplified here is not extraordinary or unusual.

On December 27, 2013, the Wall Street Journal (WSJ) published (page A1, A10, online here) an article entitled “Lines blur when lobbyists invest in the industries they represent”. The gist of the article was that Americans and investigators cannot easily tell when lobbyists who possess inside information trade securities would, but for the STOCK Act law that allows inside trades by private sector people in possession inside information, constitute illegal inside trading. Maybe the trades are all innocent. Maybe many of the trades are not. The situation is, as usual, opaque and complicated. All of that raises reasonable suspicion that things are not nearly as innocent and clean as literally every single person and entity involved will have regulators and the public believe. Despite hot, righteous indignation from everyone involved that anyone would even dare to suggest otherwise, the appearance, if not the actuality, of conflicts of interest  are obvious.

Senator Coburn’s fantasy

According to the WSJ article (this information about Sen. Coburn and conflicts in law and rukes is not in the WSJ’s online story – it apparently is only in the hardcopy article at page A10), there is a disconnect between the 2012 STOCK Act and congressional rules that govern ethics and stockholding. The STOCK Act was supposed to make it illegal for members of congress and congressional employees to trade on inside information that they become aware of in the course of their work. By contrast, congressional ethics rules allows people in congress to trade and invest in companies they investigate and/or regulate. Executive branch rules impose a simple flat prohibition against investing in companies that agencies oversee. There is no ambiguity there. This alone constitutes at least the appearance of a conflict of interest for members of congress, who never really supported the Stock Act until they were forced by political self-interest to pass that law. Sen. Coburn was one of the few senators to oppose the STOCK Act. His spokesman characterized it like this: the “law has created enormous and unnecessary paperwork burdens”.[1] Apparently Sen. Coburn had no objection to trading on inside information. Congressional disdain for the STOCK Act is clearly reflected in its “ethics” rules that allow the kind of trading that executive branch rules proscribe.

The way congressional ethics rules handle conflicts by members of congress is to require disclosure of their securities trades. One can ask how disclosure of inside trades can possibly make any conflict go away, but  in the collective wisdom of congress, disclosure launders the trades and makes them acceptable. Its sort of like confessing sins and having them absolved.

Sen. Coburn’s situation exemplifies the absurdity of it all. According to the WSJ, when in April of 2012 Sen. Coburn found out that Apple Inc. was not paying any tax on billions in offshore revenues he had this to say: “I’m livid. . . . we have to look at this.” Sen. Coburn was the ranking member of the Senate subcommittee in charge of investigating these matters. At the same time, Sen. Coburn was making 20 trades in Apple stock while the investigation was in its early stages. The disclosure data shows that Sen. Coburn made between $15,001 to $50,000 on his Apple trades in July and early August of 2012. After that, Sen. Coburn apparently had a flicker of recognition that this just might, maybe, possibly look like a conflict of interest. On Aug. 6, 2012, after making his gains, Sen Coburn emailed his stock broker with these instructions: “trading of options and shares of Apple should be closed out in an orderly fashion”[2] to avoid “the slight possibility of the appearance of a conflict of interest with my Senate responsibilities.” Slight possibility of the appearance of a conflict of interest??? What about the actuality of a real conflict of interest?

According to the WSJ, Sen. Coburn’s conflicts concern arose when the subcommittee’s “investigation shifted from a focus on several companies to primarily Apple”. How that makes any difference is simply beyond the RPCA’s comprehension. How does inside trading during an investigation of several companies, let’s say three companies for the sake of argument, differ from inside trading once the investigation that focuses on one company?[3] The simple answer is that there is no difference at all. However, the point is this: This is the kind of bizarre, twisted thinking you get when reality clashes with self-image and political self-interest. Sen. Coburn’s spun reality is distorted into something that does not even closely resemble the unspun version. In the RPCA’s version of reality, he was in a conflict of interest situation, but in his view he was not. The contrast here is as about as clear as it can ever get.

To be fair, the WSJ did not report any evidence that Sen. Coburn had engaged in insider trading in any Apple securities. Of course, that is no surprise. There is only so much a newspaper can do. Newspapers do not have power to subpoena, wiretap or compel witness testimony. People in congress conduct their business behind closed doors. Clients who engage in PII business all want anonymity for good reasons, i.e., they do not want to the public to know who they are because the whole thing looks and smells so bad. People in congress are no different.

The questions are obvious and simple: Why put the public in a position of having to trust that everything is clean and innocent? If everything were so innocent, then why doesn’t congress simply adopt the same unambiguous rules that the executive branch has? Why did it take public embarrassment and imminent threats to political self-interest to get congress to pass the STOCK Act after years of resistance? Why is there even a potential disconnect between the STOCK Act and congressional “ethics” rules or a clear disconnect between executive and legislative branch rules?

Who you gonna trust, or more to the point, how do you see reality?

How one sees reality here may, for the most part, depend on (i) how much trust one has in our political institutions and (ii) one’s perception of what rules or tactics the private sector is willing to employ while doing business in pursuit of profit. Thinking that conflicts can just go away by simple disclosure of otherwise illegal stock trades is a self-deluded fantasy at best. There are good reasons for widespread public disapproval of congress and both political parties.

Under the circumstances, it is reasonable and defensible to simply believe that things in congress are not all innocent and pristine when it comes to insider trading by members of congress. The fact that congress resisted until forced to change supports that belief.


1. It is odd that a U.S. powerful senator complains about “enormous and unnecessary paperwork burdens” as if he has nothing to do with it. If the STOCK Act-imposed paperwork burden is too big and unnecessary, it is his job to fix it so that compliance with the law is a minimal burden. The same concern applies to literally thousands of laws in the U.S. Code (a topic for a later commentary), but fixing flawed legislation does require careful thought and work. Given the profound congressional rancor, mundane but important things like fixing fixable laws is not high on its list of priorities. Even the House’s pointless votes to attack Obamacare about 40 times is a higher priority.  If you accept Sen. Coburn’s rationale that the STOCK Act is a fatally flawed due to paperwork, then the advantages of allowing members of congress to trade on inside information must therefore outweigh the disadvantages. How persuasive is that?

2. Even after recognizing that a conflict of interest was possible and that recognition inspired Sen. Coburn’s instructions to wind down suspect stock trades, Coburn’s instructions still allowed more trades in Apple’s stock as part of the process of closing out Coburn’s trading of options and shares “in an orderly fashion”.

3. Would it make any difference if the subcommittee was focused on 10 companies or 50 companies? If so, how? Insider trading is insider trading.