Throw Them All Out

political candidates and the more they hired lobbyists, the more they tended to invest in politically sensitive stocks that were influenced by government actions.² As the authors put it, 'Connected fund managers exhibit a bias towards politically sensitive stocks (both in terms of trading and holdings) and they outperform significantly in these political stocks.'³

It is commonsensical. The simple fact is that politically connected hedge fund managers and billionaire financiers can make a lot of money based on information gleaned from politicians and government officials. And it is not illegal for a politician to share this information. If an official gets paid directly for it, however, he risks a bribery charge. Former Congressman Brian Baird warned that the financial stakes are so high, 'the possibility of direct kickbacks [is] enormous.'⁴ So the payback must be subtle.

Elliott Portnoy, a lobbyist in Washington, says that the biggest field of growth for lobbyists is not in influencing legislation but in obtaining 'political intelligence' for hedge funds and large investors. 'There are a lot of savvy investors who have realized that there is a lot of money to be made from what Congress does,' Portnoy said.⁵ One congressional staffer was even more blunt when he told the Wall Street Journal, 'The amount of insider trading going on in these halls is incredible.'⁶

How does this process happen? Consider a 2008 farm bill analyzed by the Wall Street Journal. Money managers and hedge funds paid lobbyists big money to track the bill, because the stakes were enormous for ethanol producers, timber companies, and farm equipment manufacturers. 'I get a lot of people asking about legislation who appear to be monitoring it rather than lobbying it,' a Senate tax staffer commented to the Journal about the bill.⁷ The hedge fund investors can make money no matter how Congress votes—if they receive advance warning.

Access to government information is critical. And being on good terms with the gatekeepers of that information—elected officials, political appointees, and bureaucrats—can make all the difference between getting rich and getting hammered in the market. Consider, for example, the recent interaction between political appointees at the Pentagon and investment advisers that track defense-related stocks. As the New York Times reported in February 2011, senior Pentagon officials began meeting in secret with investment advisers in New York to give them information regarding defense-related companies. The message was direct: even with defense cutbacks on the horizon, 'the Pentagon is going to make sure the military industry remains profitable.' As those officials made clear, the Pentagon was opposed to mergers among large defense companies, but it would encourage mergers among smaller contractors.

This kind of information is critically important to investors. The Pentagon is basically the sole customer of most of these defense companies. What the military says and does will determine who thrives and who dies.

Deputy Defense Secretary William J. Lynn held a private meeting with about a dozen Wall Street analysts in October 2010 and laid out the Pentagon's cost-cutting plans 'in astonishing detail,' reported the Times. The analysts at the meeting were sworn to secrecy; nonetheless, the meeting had a noticeable effect on the market. The Big Five defense contractors—Lockheed Martin, General Dynamics, Raytheon, Northrop Grumman, and Boeing—all saw their stocks rise shortly after that October meeting.

Who was invited to the meeting? Who was excluded? We may never know.⁸

Early in 2011, a liberal organization called Citizens for Responsibility and Ethics in Washington (CREW) released some alarming material concerning the possible market manipulation of stocks involving Steven Eisman, a well-known short seller. Eisman was featured in Michael Lewis's book The Big Short for making huge profits by betting against the subprime mortgage market just before the 2008 financial meltdown.

The research by CREW caught the attention of Republican Senator Tom Coburn, who called for an investigation. According to documents unearthed by CREW, Eisman was advising the Department of Education, discussing problems associated with for-profit colleges. At a meeting with senior officials on April 26, 2010, he went so far as to compare the schools to subprime mortgage lenders. Two days later, one of the officials at the meeting, Deputy Undersecretary Robert Shireman, delivered a speech in St. Paul, Minnesota, in which he drew the same comparison. After his speech, the share prices of for-profit education companies Career Education and the Apollo Group dropped 12% and 6%, respectively. On May 26, Eisman himself delivered a speech titled 'Subprime Goes to College,' again making the comparison. After the speech the share prices of the for-profit companies ITT Education Services and Corinthian Colleges each declined 3%. In June, Eisman testified before Congress and delivered the same message.

All of this coincided with government action that called for tough new regulations of for-profit colleges. Of course, there is nothing wrong with officials at the Department of Education getting briefings and making speeches. But why would the department listen to a short-selling investor who is no expert on education? Eisman has refused requests to reveal whether he was shorting for-profit college stocks during this period, but given that that is his day job, members of Congress on both sides of the aisle have called for an investigation.⁹

Or consider the suspicious trading activity around the Obama administration's decision to tap the Strategic Petroleum Reserve (SPR) during the summer of 2011. CNBC looked at trades made shortly before the release of some of the nation's stockpiled oil and discovered that there was a curious spike in trading. Dennis Gartman, a hedge fund manager who also publishes the Gartman Letter, constructed a timeline of the trade activity and concluded: 'When presented this information in this simple but elegant format, how can we not believe that someone in a position of some authority did indeed know what was in the works regarding the SPR?' His comments were echoed by Ross Clark, an investment adviser at CIBC Wood Gundy: 'Call me a cynic, but there appears to have definitely been money made on inside information. As a rule of thumb, some of the best opportunities occur by trading opposite the headline news once prices stabilize.'¹⁰

Human nature being human nature, such actions are not unique to the Obama administration. Traders, speculators, and investors seek out friends in both political parties. And politicians, political appointees, and bureaucrats see the value in helping out wealthy friends and contributors in the hope that the favor will be returned when they need it. But what has changed in recent years is the amount of money involved, and the power of the federal government to move markets and make people very rich.

The economic stimulus bill passed in 2009 provided a much greater opportunity to make money. The amount of federal expenditures on the table, and the small details embedded in the bill, promised to have an enormous influence on the profitability of hundreds of companies. If you could predict which ones would land large stimulus contracts or which ones would benefit from an arcane sentence in the bill, you would reap impressive investment returns. The legislative and executive actions set off a feeding frenzy among investors with political connections.

One investor who worked hard to profit from the stimulus is the legendary George Soros. Whether he is a Baptist or a bootlegger in this story is hard to say. In a way, it is possible that he is both: a true believer and a profiteer from government policies he has championed. Again, there is nothing illegal about taking on both roles. But as a review of the many ways in which he made smart stimulus bets reveals, the lesson is clear: if you are a big investor, you are a sucker if you don't play the Washington game. The symbiosis of politics and markets has become so blatant, the two realms have become so intertwined, that Washington is essentially putting its thumb on the scale of a massive portion of the American economy—and elite insiders are the ones who benefit most.

George Soros is perhaps the most visible investor in the world after Warren Buffet. He is as famous for his currency trades as for his outspoken political views. And in a world where government actions and policies have such a huge effect on the world of finance, the two spheres are not so separate as one might think.

Soros's spokesman Michael Vachon told a New Yorker reporter that 'none of his contributions are in the service of his own economic interests.'¹¹ Others, such as former New York Times columnist Frank Rich, who shares some of Soros's political views, assert that Soros gives 'selflessly' to causes.¹² Surely his charitable donations are motivated by his ideals. He is a significant philanthropic investor in science and education projects around the world, among other worthy causes. But Soros also makes huge investments whose fate is tied to his political activism.

Soros made his money early on in currency speculation, which often amounts to a financial bet either for or against a government policy. For example, in 1992 Soros bet (correctly) against the British pound and famously made $1 billion in a single day. Former U.S. Chamber of Commerce chief economist Richard Rahn believes that Soros had hints that his bet would succeed. According to Rahn, he was told by a member of Parliament who was a close adviser of the chancellor of the exchequer at the time that Soros was acting on insider information obtained from the French central bank and the German Bundesbank.¹³ These banks had previously agreed to