Broker, Trader, Lawyer, Spy - Eamon Javers [113]
The day traders exchanged anguished messages trying to figure out what was going on: I do not understand the volatility lately; is it the market-makers trying to get me to capitulate? wondered a trader going by the name ethylene_orion on the Yahoo! Finance message board for USG, where individual investors traded tidbits, opinions, and tips about the stock.
What ethelyne_orion and the regulars on the Yahoo! message board didn’t know was that behind the scenes, then-Senate Majority Leader Bill Frist of Tennessee (a Republican) had decided to override the qualms of the budget committee’s leaders and press ahead with a bill to create a $140 billion fund to relieve companies such as USG of their asbestos liabilities.1 It would be huge news in the small community of traders who bought and sold shares of companies affected by asbestos litigation—and almost any piece of news in that world tended to move the market. Frist wouldn’t announce his decision until November 16, but the news had gotten to key Wall Street traders a day early via a little-known pipeline: a small group of firms specializing in “political intelligence” that mine the capital for information and translate Washington wonk-speak into trading tips.
The industry started with a couple of cottage firms in the early 1970s. But now it’s been propelled to new levels of intensity as information-hungry hedge funds hire squadrons of former lobbyists and journalists to ferret out tidbits of information, such as the details of Frist’s decision. “What hedge funds do is look for inefficiencies in the market,” says one hedge fund manager who buys several firms’ reports. “And Washington is the world’s greatest creator of [market] inefficiencies.”
Unlike lobbyists, political intelligence outfits are not required to disclose their clients or annual revenues, so the size of this very quiet business is masked. One veteran estimates that there are more than half a dozen contenders collectively raking in $30 million to $40 million a year. The business stretches well beyond Capitol Hill, into every aspect of the federal government. “We analyze public policy—macroeconomics, the Fed, budget, trade, currency—that affects overall financial markets, sectors, or companies,” says Leslie Alperstein, a founder of the firm Washington Analysis. And although leaks such as Frist’s news about asbestos are welcome, Alperstein says his business is mostly about explaining trends. “If we only dealt in [hot tips], I wouldn’t be living in Potomac,” he says, referring to a pricey suburb in Maryland. “It doesn’t happen often enough.”
It happens enough, however, to trouble some legislators. A few days after the rise in USG stock, Representative Brian Baird of Washington (a Democrat) asked the House ethics committee to issue guidance for staffers sitting on some of the capital’s most valuable information. “The possibility of direct kickbacks [is] enormous,” says Baird. He worries that the trafficking comes “very close” to insider trading.
But experts in ethics say no one’s breaking the current rules. Staffers on Capitol Hill and government employees are forbidden to profit personally from confidential data and can’t share information that’s classified or deemed secret by their employers. But within those loose guidelines, political intelligence is just another legal way for investors to perform due diligence. The intelligence operatives say that Congress, where decisions are made publicly, is fair game. It’s what’s known in intelligence as an open source—where information is available to any member of the public.
In theory, ethelyne and his day-trading colleagues could have called Frist’s office and asked staffers what was going on, too—just as one of the hedge fund intelligence shops did. But of course that’s not how the world really works. An individual investor trying to get information out of the Senate Majority Leader’s office is far more likely to end up in voice mail hell than he is to get a hot tip.