The Optics of Reality
Trust is fundamental to our relationship with others – with other people, private and public institutions, and especially our elected representatives in government and those they appoint. In fact, our entire financial system and much of our economy is based on trust. So it hurts when those in power, those with special or “insider” knowledge, seem to use their position to enrich themselves. One might suggest that this is nothing new and that taking advantage of one’s position is as old as time. But perhaps what’s different now is that we learn about it faster and more thoroughly. It’s just too hard to hide these days.
Take recent findings by The Wall Street Journal and others that shine a bright light on stock and bond trades made by a host of government officials during the worst of the covid market crisis. A lot of this was news last year, but current reporting shows how widespread the issue was. As markets were only starting to rage into February 2020, officials at HHS and the NIH, for example, left their closed-door meetings about the looming pandemic and sold stocks. Going into the worst of the market lows a month later, officials at the Fed and even within Congress, bought stocks as both bodies were set to announce lowering short-term rates to zero and passing truly massive stimulus programs.
These trades could all have been honest coincidences, but how likely is that? An official might suggest that the trades were just normal rebalancing or were made by others such as spouses or the family financial advisor. They might also suggest that the closed-door meetings they were part of didn’t provide actionable investment-related information. Really? The timing of the trades by officials profiled in the articles below leaves little to the imagination.
The various federal agencies have their own ethics rules governing the trading of stocks and bonds by elected and appointed officials. I know from professional experience that these issues can get muddy pretty quick. Some officials simply own broad stock and bond market portfolios and buy, hold, and rebalance like the rest of us, pretty standard. Some officials trade stock in individual companies they regulate or have special knowledge of, which is an obvious ethical breach. But other officials timed their transactions in broad market funds based on special timely knowledge gleaned from their work. If those officials knew that government actions would very soon be shuttering the economy, or providing massive amounts of cash to stimulate it, well before the general public knew, and then bought and sold based on that information, doesn’t that seem just as wrong as someone engaging in insider trading? Maybe these officials could throw up technicalities in defense and skate past clear ethics violations, but the optics are horrible and further degrade our trust in the people who make up incredibly important institutions.
My understanding is that government ethics rules in this area are mostly based on disclosure, which happens maybe a month or two after trades take place, and sometimes annually. These disclosures are public but not always readily available. For example, the president of a regional Federal Reserve Bank posts their disclosures on the bank’s website, while the disclosures from other officials have to be sought out via submitting a government form. That’s what The Journal and other organizations dug into, and the results of their work aren’t flattering for a host of officials and the norms at many agencies.
Lots of people talk about things being rigged. Our political system is rigged. Our economy is rigged. And our markets are rigged to rake the “little guy” over the coals while “the man” fills his pockets past the point of spilling over. Personally and professionally, I think much of the rhetoric around stuff like this is overblown. By and large our systems work as intended while not being perfect; you just have to know how to navigate them. And that’s a big part of what I do within my own little corner of the world every day for clients. But unfortunately, news like this reenforces the public’s cynical views. How can it not?
My point with bringing all this up is to remind of us of the obvious: even officials in a position of power and trust can, and presumably often do, take advantage of their position for personal gain. They know they’ll probably be caught and, if so, they just apologize and move on. And their apologies in these cases have ranged from the half-sincere to, shall we say, stretching the concept of plausible deniability. I’m not naïve enough to be surprised by this behavior, but perhaps I’m still naïve enough to be saddened by it. I choose to believe in the fundamental good in us all, but there’s a little Gordon Gekko in there too and some have more than others. I hope the days of selfless acts for the betterment of society aren’t gone for good.
That said, check out these articles to learn more about this issue. Or just Google it. There’s plenty of news to go round.
The Wall Street Journal has a paywall. Let me know if you hit it and I can send the article to you from my own account.
And here’s an interesting timeline from earlier this year by Yahoo! News focusing on Fed members and their pandemic trading. In some cases the officials were forced to sell their stocks and, presumably, incur the tax burden. But what about the ill-gotten gains? I haven’t read anything about sizeable donations to charity…
https://news.yahoo.com/a-timeline-of-the-federal-reserves-trading-scandal-104415556.html
Have questions? Ask me. I can help.
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