American Politicians: Bad For Our Investments, Great For Their Own Investments

I was struck by a dichotomy of results from two recent investment studies. They seem to indicate that when it concerns the average American's investment portfolio, political class actions are really bad news for getting good investment returns. However, when it concerns our politicians' personal investment portfolios, political class actions are really good news for getting investment returns. How could this disconnect be possible, he asked sarcastically?

Let's start with the first investment study, one we have already referenced in a previous post. An investment fund manager by the the name of Eric Singer recently completed his analysis and developed something he called the "Congressional Effect." His overall conclusion from his analysis was as follows: "Over long periods of time the stock market performs dramatically better on days when Congress is out of session as compared to days when Congress is in session."

More specially, over the January, 1965 through December, 2010 time period:

1. The stock market returned less than 1% on an average annualized basis when Congress was in session.
2. The stock market returned 16.6% on an average annualized basis when Congress was not in session, a difference in return of almost 16% annually.
3. However, results get even more dramatic over the past ten years since the annualized rate of return when Congress was in session over the past ten years was -7.6% while it was 12.7% when it was not in session.
4. The difference was 20.3% in the past ten years vs. about 16% over the entire time frame.

Thus, it would appear that listening to politicians talk, squabble, and wander aimlessly through their Congressional sessions does not instill confidence in the market, resulting in everyone's investment portfolio getting bad returns when Congress is actively doing their job.

But this is really not a true statement, not everyone suffers as a result of the politicians being in office. Paradoxically, the very politicians that cause everyone elses' investment returns to nose dive actually do extremely well with their own investments when they are in office. A recent analytical report titled, "Abnormal Returns From the Common Stock Investments of Members of The U.S. House Of Representatives," shows that between 1985 and 2001, members of the House enjoyed a considerable advantage over members of the public on their personal investment returns. These results are totally congruent with a similar, previous report the four authors of this report did with U.S. Senators.

Specifically:

1. The study measured 16,000 of House Of Representatives' common stock transactions made by 300 House members between 1985 and 2001.
2. These stock transactions returned "significant positive abnormal results" (vs. total market returns).
3. These abnormal returns  showed that a portfolio that mimicked the common stock purchases of House members would have beaten the market, on average, by about 6.6% annually.
4. This is smaller than the advantage the Senators from the previous study incurred but still significantly ahead of total market returns.
5. A $100,000 investment getting average stock market returns of 11% over a 17 year period (such as from 1985 to 2001, the period of the House study), would have grown to $589,000.
6. That same $100,000 investment invested along the lines of the House of Representatives average return, 6.6% higher than the market, would have grown to about $1.6 million, about three times as much.
7. If the House of Representatives $1.6 million got only average returns for the next twenty years, that House member would have grown the initial $100,000 to about $13 million while the average Senator would have grown their initial $100,000 to about $18 million.

Is it any wonder why politicians do anything they can to stay in office, regardless of how their behavior and Congressional votes and behavior negatively affect the average American? Most of these people are not in it for the service they can do to their country, they are in it for the service they can do to their investment portfolio. The study concluded : "We find strong evidence that members of the House have some type of nonpublic information which they use for personal gain." Well, duh, I think so.

Just consider a few of Senator Majority Leader Harry Reid's investment strategies over the past few years. According to John Ransom, writing for Townhall.com on September 30, 2011, in 2008, one month before oil prices took a historical plunge, the good Senator sold between $15,000 and $50,000 of energy stock holdings he held in the Dow Jones Energy index. Shortly thereafter, he purchased between $15,000 and $50,000 worth of health care holdings in the Dow Jones Health Care Index at a time when he was considering rewriting the nation's health care laws.

Or consider the shenanigans of Congresswoman Ginny Brown-Waite. According to an article that was written by John Frank for the June 30, 2009 St. Petersburg Times, one day before the House of Representatives approved a massive bank bailout plan in October, 2008, the Congresswoman bought stock in Citigroup, one of the major banks that received a significant portion of the bank bailout funding. About two weeks later, on the day Treasurer Henry Paulson announced he would invest $250 billion of taxpayer money in nine major banks, the Congresswoman bought stock in Bank of America, one of those nine banks.

Both cases just smell to high heaven. If ordinary Americans behaved like this, we would be going to jail for insider trading. When members of the political class do this type of thing, nothing happens except that they continue to enrich themselves rather than focusing on fixing the issues facing America today.

The appearance of conflict of interest is just as loathsome as actual conflicts of interest and these two examples are definitively in loathsome neighborhood. Maybe if they had been more focused on fixing our energy problems, our health care problems, or our dysfunctional banking system problems than trying to maximize their portfolios returns, the country would be in much better shape.

Two steps are urgently needed here. First, any Federally elected official needs to put all of their investments in a blind trust for as long as they are in office, a trust that they have no control over, both the investments within that trust and the timing of trades within that trust. There needs to be a wall of silence built between the politician and the entity managing their trust, absolutely no communication at all.

The second step is Step 39 from "Love My Country, Loathe My Government." This step would impose term limits on all Federal politicians so that they do not get into office to enrich themselves, they get into office to fix the problems of the country. By limiting their long term potential, via term limits, to use their elected position to enrich themselves and forbidding them any control over their investment portfolios while in office, we should attain two positive results. First, these people might actually do what is right for the country vs. what is right for their personal wealth. And second, by eliminating the temptation to dabble in the stock market via blind trusts, they may actually spend more time working on problem resolutions vs. working on personal enrichment.

In the face tens of millions of Americans that are unemployed, underemployed, or having given up looking for work, this type of behavior is despicable and should be criminal. It is no wonder that  members of Congress, as a whole, receive single digit approval ratings. The least they can do is not be in session since according to Mr. Singer that would at least give us a fighting chance to catch up to their out sized investment gains.

But what does that say about our politicians' abilities: we would rather have them do nothing than do what they usually do. Very scary, very scary indeed.



Our book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available, at http://www.loathemygovernment.com/. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.


Please visit the following sites for freedom:


http://www.loathemygovernment.com/
http://www.cato.org/
http://www.robertringer.com/
http://realpolichick.blogspot.com/
http://www.flipcongress2010.com/
http://www.reason.com/
http://www.repealamendment.com/

The Conflicts Of Interest and The Lies That Are Our Political Class When It Comes To Banks

Consider the sleazy, conflict of interest behavior of our political class that has occurred over the past year or so:


- In the middle of the TARP bank bailout discussion and debate, the Associated Press reported that Congresswoman Ginny Waite Brown from Florida was actively trading stocks of the very banks she was helping determine if and how much taxpayer bailout money those very banks would be receiving. She obviously had insider information since she knew what banks would be getting a government bailout boost and which ones would not. In real life this is called insider trading and is generally a felony. In the political class reality, this is business as usual. When called out on this obviously conflict of interest, her staff tried to justify these actions by revealing that she had actually lost money on these trades. How ridiculous is this justification? It was alright to participate in insider trading and have a gross conflict of interest since she was an incompetent stock trader? Don't think that argument would hold up in court. Conflict of interest, insider trading style.

- A Bloomberg.com report, that was reprinted recently in an October issue of The Week magazine, reported that six dozen Congressional staffers had traded in stocks of companies that their political bosses were actively involved in. One staffer heavily traded in Bank Of American stock when he found out early, before the rest of the world, that Bank of America had successfully passed its so-called "stress test," i.e. it was deemed a healthy company. Conflict of interest, being a parasite off of a politician style.


- Congresswoman Maxine Walters is likely to go on trial before the House Of Representatives after the midterm elections, accused of allegedly using her influence in Congress to get the Treasury Department to change their minds on a specific bank and to allow it to get bailout funds. Apparently, according to the investigators. Ms. Walters' husband stood to lose a substantial investment he had made in the failing bank unless it was bailed out with taxpayer money. Conflict of interest, family style.


- It is interesting that Ms Walters will be facing charges while Senator Daniel Inouye of Hawaii will not. The Associated Press reported some time ago that Mr Inouye's staff had encouraged those in charge of bailouts to funnel some taxpayer bailout money to a local Hawaiian that was initially not going to receive any government funds. The reason his staff was allegedly involved: the Senator had invested a substantial amount of his personal funds in the bank, which would be lost if the bank was not bailed out by the Treasury Department. Conflict of interest, personal wealth style.


- A December, 2008 Associated Press article reported that earlier in the year many of the big banks and financial institutions that received taxpayer bailout money were also heavy contributors to the implementation of both the Democratic and Republican national conventions. AIG, Goldman Sachs, Citibank, and Freddie Mac (a government entity!) had themselves contributed $3.1 million to the parties and celebrations that are also known as political conventions (other banks had also contributed more). Several months after the conventions, these same companies received tens of billions of dollars in unwarranted taxpayer funds. Not a bad deal, give the political class millions, have the political class give them back billions in taxpayer dollars. Conflict of interest, corporate welfare style.


- And now the latest in sleazy political class behavior. According to an October 22, 2010 article in the Boston Herald by Dave Wedge, Massachusetts Congressman, Barney Frank, has accepted $40,000 from financial institutions that received bailout/TARP from the government. Two things make this action so despicable. First, Congressman Frank was at the center of the whole taxpayer bank bailout activity since he was chairman of the lead House of Representatives committee that was determining which institutions got how much taxpayer money, if any. Second, in 2009, Mr. Frank told the Washington publication, Roll Call, that he "won't take any PAC money from banks that took TARP funds, nor would I take it from the top executive." However, according to Mr. Wedge's research and article:

• According to Mr Frank's own campaign disclosure reports, he accepted a campaign donation of $7,000 from top executives from Bank Of America. Bank of America received  $45 billion in taxpayer bailout funds.
• He received $5,000 for Bank Of America's Federal PAC fund.
• He received $10,000 form the Bank Of New York Mellon Corporation which received $3 billion from the bailout fund.
• He received $2,000 from the Financial Services Roundtable PAC that includes representatives from TARP recipients Bank of America, JP Morgan, Chase, and Wells Fargo.
• He received $1,000 from U.S. Bancorp's PAC which received $6 billion in bailout funds.

I guess the pledge had a time limit or expiration date. It was good for as long as Mr. Frank did not need the money. Makes you wonder why we ever believe what the politicians tell us. They never seem to really mean it and have no problem justifying their behavior in their own minds, hypocrisy and conflict of interest be damned.

These are just a few examples of how the political class is so much more concerned about their own wealth, their own welfare, and their own future and not the wealth, welfare, and future of ordinary Americans and the country as a whole. That is why systematic changes are needed to structurally change how politicians behave, they have proven time and again that when left to their own devices and integrity, they cannot do the right and ethical thing. Several steps from "Love My Country, Loathe My Government" would be a good start to this structural change:

• Step 39 - implement term limits so that re-election campaigns and their financing become a thing of the past since re-elections would no longer exist.
• Step 40 - prohibit any politicians to go to work for a company or lobbying firm or other entity that the politicians had responsibility for during their tenure in office for at least ten years after they leave office.
• Step 7 - implement election financing rules and laws that allow only individual citizens to contribute to election campaigns. The Bill of Rights guarantees freedom of speech for individual Americans, not freedom of speech for corporations, unions, PACs, etc., they should not be protected by this individual freedom and should not be allowe to flood the election process with funding. Only individual American should be allowed to contribute to election campaigns.
• Step 38 - require all politicians to sign off on an annual shared values commitment pledge which includes enhanced anti-conflict of interest rules that result in stronger penalties for personal wealth, family welfare, insider information, insider trading, and other conflict of interest situations which could result in stiffer penalties including dismissal from office and criminal prosecution.

Our politicians have proven that they cannot prevent the conflict of interest sleaze that follows them around. We will have to do it for them with the above steps and an ever vigilant watch that requires us to identify subtlee and overt conflicts of interest and demand that they be eliminated. It is time for America and its citizens to retake the central focus of the government, not the individual welfare of the political class.


Our new book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at www.loathemygovernment.com. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.


Please visit the folloiwng sites for freedom:



http://www.cato.org/

http://www.robertringer.com/

http://www.realpolichick.blogspot.com/

http://www.flipcongress2010.com/

http://www.reason.com/