How Hedge Fund Vampires Use Insider Info to Extract Their Dishonest Fortunes
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While Paulson, who was the CEO of Goldman Sachs from 1999 to 2006, was telling the public and Congress one thing, he met privately with his old hedge fund cronies from Goldman to give them a different message. During that secret luncheon he disclosed that he was about to fire that bazooka – that the government would soon take over Fannie and Freddie. “Around the conference room table were a dozen or so hedge fund managers and other Wall Street executives -- at least five of them alumni of Goldman Sachs,” reported Bloomberg News.
No one knows for sure how many of those hedge funds placed their bets right after that meeting. But overall the short bets on Freddie and Fannie spiked right after that meeting. Those short betters did very well indeed when the takeover was announced and the stocks plummeted.
Did Paulson violate any laws by having this secret lunch with his cronies? No. But Paulson may have misled Congress. Couldn’t he have been indicted for perjury? Dream on. That would have “unsettled” markets. So nothing happened…nothing at all except that well connected hedge funds got access to very valuable privileged information.
Isn’t there a law against selling the government to hedge funds?
When congressional members and staff see how hedge funds make a killing based on information they provide to hedge funds, it’s only natural for our public servants to use their own information to make shrewd investments for themselves. Why let the hedge funds have all the fun? It got so bad that reports circulated on the Hill that congressional members and staff were trading hundreds and thousands of stocks per day. They were day traders while on the public payroll!
So Congress felt compelled to pass a bill that would at least help polish its public image.
Earlier this month, both the House and Senate passed versions of Stop Trading on Congressional Knowledge (STOCK) Act which:
Prohibits members and employees of Congress from buying or selling securities, swaps, security based swaps, or commodity futures based on nonpublic information they obtain because of their status;
Prohibits Executive Branch employees from buying or selling securities, swaps, security based swaps, or commodity futures based on nonpublic information they obtain because of their status;
Prohibits those outside Congress from buying or selling securities, swaps, security based swaps, or commodity futures based on nonpublic information obtained from within Congress or the Executive Branch;
Prohibits members and employees of Congress from disclosing any non-public information about any pending or prospective legislative action for investment purposes;
Requires members and employees of Congress to report the purchase, sale or exchange of any stock, bond, or commodity future transaction in excess of $1,000 within 90 days. Members and employees who choose to place their stock in holdings in blind trusts or mutual funds would be exempt from the reporting requirement; and
Requires firms that specialize in "political intelligence" and that obtain their information directly from Congress to register with the House and Senate, much like lobbying firms are now required to do.
Looks good, doesn’t it?
Well, as you might expect, there’s one important loophole designed by and for hedge funds. It centers on requiring “political intelligence” firms to register like regular lobbyists. Hedge funds don’t give a damn if congressional members and staff do a little day trading. (In fact, hedge funds that engage in high-frequency trading will fleece them anyway.) What hedge funds do care about is hiding in the shadows. They don’t want to register their “political intelligence” operatives with anyone. That would make it all too easy to trace leaks back to them, which in turn would undermine their edge. So hedge funds had to kill that last provision.