Congress Adds Depth to Insider Trading
For all you "caring” individuals on the left, what would you have done in similar circumstances? What would you have done if told that a certain investment you held would be worthless in a matter of days or weeks? I cannot blame Martha Stewart for acting on information that she was given without asking. She was not the "insider” but an "outsider” with ears and the same sense of self-preservation that governs most of us.
Envy has its unintended consequences. The "change zombies” cheered on the likes of Barney Frank, Chris Dodd and Barack Obama to "make them pay their fair share” and what we got may be the biggest insider trading scandal in history. But first, a basic lesson on the stock market that even a "change zombie” can understand. If you are not a change zombie, please bear with me.
Most people have the perception that you make money on Wall Street buying stock that appreciates in value, and certainly you can. Wall Street investors react to information about a company’s dividends, capital planning, acquisitions and divestitures. Most small investors are merely along for the ride, not setting the market trend but either benefiting or suffering from its direction. The "dark side” of the force says you can make money when stocks go down in value. It’s called a short sale or shorting in the Wall Street vernacular. If you already know what a short sale is, please forgive my digression while I explain it to those who may not know.
Let’s suppose you borrow a dozen oranges with a promise to the lender you will return a dozen oranges by a certain date with a "rental fee” of $1. The day you borrow those oranges you sell them for a dollar a piece making $12. A few days later the price of oranges drops to 50 cents each. You buy a dozen for $6 and return them to the lender and pay the $1 rental fee. You just made $5 with no investment on your part. You can lose however if the price of oranges goes up, because you are still obligated to return the dozen oranges to the lender. This is the essence of a short sale.
What has this got to do with Washington politicians? Insider trading has always been understood to mean information from within the company that will favorably or adversely affect the value of its stock. If you have that information in advance of it being released to the public, you can act on it to make money based on a reasonable guess as to whether that information will raise or lower the price of the stock. With the regulatory climate in Washington, a politician’s mouth can and has sent stocks up or down.
Imagine your favorite politician announcing that congress will no longer support the development of ethanol fuels and remove any requirements for its inclusion in motor fuel formulations. What do you think will happen to the stocks of companies that produce ethanol as a fuel additive? What about all that corn that will not be required for ethanol production when mandates for ethanol are dropped? What do you think George Soros would do if he were privy to this information and knew in advance that any day some congressional loud mouth would make such an announcement?
If you are on the left and have concluded this is a good reason to promote ethanol, you need to remove your head from the orifice centered on your gluteus maximus to understand that isn’t the point. Demanding more government intervention in business gives politicians the power to manipulate the markets and pick the winners of their choosing by just saying the right words at the right time to drive the market up or down. Their beneficiaries will happily reward that "heads up” with a campaign donation or house in the country or both.
I’m going to have a bi-partisan moment, so be forewarned. No politician, Democrat or Republican, is immune from this temptation. It’s better they not have this power and by strict interpretation of the Constitution, they don’t. Unfortunately, the "living constitution” gives them this and many other powers. Some of the rich are getting richer thanks to their Democrat and Republican pawns. That is why I will choose a conservative with good character and high ideals over a party loyalist. Too bad there are so few. |
