approval for an increase in the limit, to 15%, would obviously benefit the company. As the EPA debated the idea, stock in the company jumped from about $1.50 to $2.94 a share. The EPA eventually approved the mandate.
Soros invested in Powerspan, a clean-energy technology company, in April 2009. His timing was perfect. Weeks later, on July 1, Powerspan was awarded a $100 million grant from the Department of Energy for smart-grid work.
How did these investments perform for Soros? It is very difficult to tell. He is not required to disclose the price he paid or the price at which he sold his shares. We don't know the dates of the transactions, only that they occurred during a particular three-month period. What we do know is that his investment decisions aligned remarkably closely with government grants and transfers. It would appear that one of the world's smartest investors chose a strategy based on political decisions—whether he knew about the decisions in advance or just guessed extremely well.
Soros undoubtedly viewed this the way that General Electric CEO Jeffrey Immelt did when he predicted in early 2009, 'The global economy, and capitalism, will be 'reset' in several important ways. The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner.'28
Soros recognizes and understands that good politics can lead to good profits as the government plays an increasingly central role in the economy. When he decided recently to launch a new green-tech fund, called Silver Lake Kraftwerk, to invest over $1 billion, Soros selected as its chief none other than Cathy Zoi, the former assistant secretary of energy efficiency and renewable energy. Political access has become the key to financial success.
America's financiers have learned their lesson: profits are better in Washington, among insiders, than on the open market. Far from being the purveyors of pure free market capitalism, as we imagine, they are all too often riding in the wake of government money. Wouldn't it be better if they focused exclusively on financial and business matters? Crony capitalism favors the politically active, and the manipulative. It does not favor one party over the other. It does not care about policy. It just knows how to make money off any policy—your tax dollars, leveraged to the rich.
Part Three
BREAKING THE BACK OF CRONY CAPITALISM
8. SOME ARE MORE EQUAL THAN OTHERS
If this spirit is ever corrupted to the point that it will tolerate a law which does not apply to both the legislature and the people, then the people will be prepared to tolerate anything but liberty.
NO. 57
Nearly all men can stand adversity, but if you want to test a man's character, give him power.
—ABRAHAM LINCOLN1
THERE IS SOMETHING inherently wrong with a professional athlete gambling on his own game. It's unethical because he can influence the outcome of the game and profit from his manipulation. Such gambling is banned in every major sport since it threatens the integrity of the game and runs against our sense of justice.
Very few of us are professional athletes—I have enough problems on the treadmill—but all of us are governed by laws, codes, and rules concerning conflicts of interest.
In the financial world these regulations are everywhere. If you are an investment adviser, for example, you are required to disclose not just actual conflicts of interest, but also potential conflicts of interest. It you own stock in a company and you recommend that stock to others, you had better tell them that you stand to gain if they take your advice. Failure to do so can land you in a lot of legal trouble. If you are a bank regulator, you are not allowed to conduct so much as a simple bank examination if you happen to own any stock in that particular bank.
If you are a federal judge, the law requires that you recuse yourself from cases involving any company in which you own more than $30 worth of stock. If you don't, it's a felony.
On the U.S. Supreme Court, justices recuse themselves all the time for this very reason. Sometimes there is no direct conflict, yet propriety causes members of the court to be extra-careful. In May 2008, for example, four justices recused themselves from considering a case that involved compensation on behalf of citizens of South Africa from more than fifty American companies that were doing business in the country. Apparently the justices believed even the appearance of a remote link with any of the companies might raise concerns. When a case involving Disney World was brought for review before the Supreme Court in March 2008, Justice Samuel Alito recused himself because he owned Disney stock.2
The ancient Roman symbol of justice, the goddess Justitia, was often portrayed carrying scales and a sword and wearing a blindfold. These objects are meant to symbolize fairness, justice, and impartiality.
The executive branch of the federal government follows similar ethics rules and laws. If you work for a government agency like the Federal Communications Commission 'you may not have a financial interest in any company engaged in the business of radio or wire communication.'3
Don't even consider actively trading stocks based on executive-branch knowledge. The Securities and Exchange Commission recently launched investigations into two of its own employees who may have traded stock based on inside information. One of the employees, an SEC attorney, sold all of her shares in a large health care company two months before an investigation of that firm was opened. She also sold all her shares in an oil company two days before a colleague began an inquiry into that firm. Another attorney allegedly 'traded in the stock of a large financial services company' while the SEC had an ongoing investigation into the firm.4
Conflict-of-interest laws are not limited to the federal government. School superintendents across the country are expected to make financial decisions that are to the benefit of their districts—not themselves. If they fail to do so, they can be charged with violating state laws. This applies even if they receive only an indirect financial benefit from their actions. Award a school contract to a relative's company and you will get in trouble.5
Even nonprofit organizations are required by the IRS to comply with conflict-of-interest laws. Failure to do so is a punishable offense. And certainly in the private, for-profit sector every large corporation has rules on conflicts of interest. If you use corporate resources for your personal benefit it is generally considered fraud, and you may find yourself in legal trouble. If you don't believe me, just ask former Tyco CEO Dennis Kozlowski. He was convicted in 2005 of accepting millions of dollars in unauthorized bonuses, among other improprieties, and he is serving a jail sentence as a result.
If you work for a major accounting firm, you are asked not to own stock in the companies you are auditing. An accountant must swear a professional oath to 'hold himself or herself free from any influence, interest, or relationship in respect to his or her client's affairs, which impairs his or her professional judgment or objectivity.'6
Corporate executives and officers are expected to reveal conflicts of interest and recuse themselves from decisionmaking that might personally benefit them. They are required by law to report to the SEC any transactions involving corporate stock within forty-eight hours of the transaction.
Many companies have codes of conduct for all employees that prohibit owning shares in a competing firm or supplier, or working for a competing firm or supplier. The conflict of interest is obvious.
If you work for a reputable news organization, chances are that conflict-of-interest rules quite clearly guide your portfolio. The
These kinds of corporate policies are developed to comply with federal and state laws. The Securities and Exchange Commission has actually gone after reporters who trade on their knowledge for personal gain. In the
