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Is the White House Open for Hedge Fund Business?

How the insider trading game is played in government...and at the White House.

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Knowledge is power. But insider knowledge is more lucrative than power, because it offers the surest path to vast riches. If you know something that will move markets before everyone else does, you will profit mightily.

Normally, we think of insider trading as a Wall Street crime of illegally obtaining corporate information before the rest of the investing public. But the same game can be played with governmental information concerning changes in health care rules or military programs. If you know in advance that an important change is about to take place in a Medicare rule, for example, you can win enormous returns on your investments in key healthcare corporations.

So a new game is afoot as Wall Street hedge funds, acting through "political intelligence" consulting firms, are on a crusade to gain information from congressional staff and even key White House officials.

Is the White House Open for Hedge Fund Business?

The latest outrage concerns a series of private meetings between White House healthcare officials and hedge funds that are betting on the healthcare industry. As the Washington Post reports:

"Wall Street investors hungry for advance information on upcoming federal healthcare decisions repeatedly held private discussions with Obama administration officials, including a top White House adviser helping to implement the Affordable Care Act."

This comes on the heals of similar meetings between congressional staff and hedge funds via political intelligence firms that led to enormous jumps in stock activity. The Securities and Exchange Commission issued subpoenas in early May to look into an incident that emerged on April 1, "when Height Securities, a Washington-based stock brokerage firm, alerted its clients that the government would soon make a decision favoring private health insurers who participate in a Medicare program. The alert went out 18 minutes before the end of the trading day, sparking a surge in trading in the shares of several major healthcare firms, including Humana and Aetna. The official government announcement was made after trading closed for the day."

Hedge funds and their never-ending lust for lucre are the driving force behind this gold rush for insider governmental information. And you can understand why: The secret to making a million dollars an hour is coming up with sure bets. Insider trading leads to the surest of sure bets.

There Ought To Be a Law

There already is.

In 2012, President Obama signed a bill disallowing government insider trading of all kinds. You see, academic studies figured out that on average congressmen miraculously earned returns that were 6 percent higher than the average market returns. And senators did even better by scoring 10 percent higher returns. Either these elected officials are really, really smart investors (of course, doing all their prodigious stock research on their own time), or they are trading on insider knowledge. Then again, they also might profit handsomely by pushing legislation to feather their own investment portfolios. Either way, it's good work, if you can get it.   

Knowing how difficult it would be to police thousands of government officials, the new law relied on sunshine: All federal elected officials and key staff would have to put the investment portfolios online so that we could see the results of their prescient investment decisions.

Well, a funny thing happened as the law was about to be implemented—the sunshine provision was dropped for all staff. (It's still there for elected officials.) That means thousands of government officials might be further tempted to feather their own nests through sharing insider knowledge with predatory investors.

Trading on their own accounts is risky since it leaves behind an electronic record, and beside, these staffers aren't rich enough to place the kind of bets needed to cash in big-time. But giving a tip or two to a hedge fund via a political intelligence firm might, one day, land you a fat job on Wall Street. Meanwhile, the spigot is open, meaning that hedge funds will make more money on one illicit trade than all the staffers combined can make in a lifetime of investing.