Money Stuff: Senators Picked a Good Time to Sell Stocks

The insider trading thing Here you go: Soon after he offered public assurances that the government was ready to battle the coronavirus, the powerful chairman of the Senate Intelligence Committee, Richard Burr, sold off a significant percentage of his stocks, unloading between $582,029 and $1.56 million of his holdings on Feb. 13 in 29 separate transactions. As the head of the intelligence committee, Burr, a North Carolina Republican, has access to the government's most highly classified information about threats to America's security. His committee was receiving daily coronavirus briefings around this time, according to a Reuters story. A week after Burr's sales, the stock market began a sharp decline and has lost about 30% since. … Roll Call estimated his net worth at $1.7 million in 2018, indicating that the February sales significantly shaped his financial fortunes and spared him from some of the pain that many Americans are now facing. It's good timing. The reports disclose a lot of sales and no purchases, all on the same day, including "unloading substantial shares of Wyndham Hotels and Resorts and Extended Stay America," particularly bad stocks to own during a plague. Sure, a little fishy. Also here is an amazing "rebuttal": A spokesperson for the senator quickly rebutted the notion that anything improper had happened, noting that Burr's stock sale came before the market began to show signs of strain. "Senator Burr filed a financial disclosure form for personal transactions made several weeks before the U.S. and financial markets showed signs of volatility due to the growing coronavirus outbreak," the aide said. Well, yes, right, that's when you would want to sell. "It can't be insider trading, he sold before the stocks went down!" (Burr's later, better response said "I relied solely on public news reports to guide my decision regarding the sale of stocks on February 13.") So, was it insider trading? The law—the STOCK Act of 2012—prohibits a member of Congress from trading on "material, nonpublic information derived from such person's position as a Member of Congress." Obviously I have no idea what was in Burr's mind when he sold the stocks; nor do I even know what he learned in his top secret intelligence briefings. You could have gotten nervous about the coronavirus before Feb. 13 based solely on public information, as Burr says he did. Without any classified intelligence briefings, I wrote on Feb. 10 that "the actual coronavirus is shutting down factories, disrupting trade, and generally causing large economic impacts." (I didn't sell any stock, though, sadly.) The highly classified briefings Burr got were presumably not about Wyndham Hotels and Resorts. It is not traditional inside information. I suppose if the briefings were like "we are not prepared for this and are likely to shut down the economy for months"—if they were materially worse than the public information that Burr now says he relied on—then that would have been information that was material to his stock trading and not available to everyone. If they were like "yeah this virus is bad in China" then I am not so sure. But let me say two other things. First, people email me all the time with similar stories about corporate executives. Senior executive sells stock, company announces bad thing, stock goes down, there is some basis for suspecting that the executive knew about the bad thing before it was announced. In general, with corporate executives, I am skeptical of those suspicions, because actually doing that sort of insider trading would be dumb. Like I generally assume that corporate executives are generally upstanding people trying to do right by shareholders, and that they have better longer-term ways to get rich than insider trading, but also specifically I assume that they are advised by lawyers and supervised by an effective compliance program and subject to consequences. If you are a senior executive at a public company and you trade on inside information in the most blatant obvious way—you go to a board meeting and learn about a catastrophe, you dump all your stock in your own account and file a Form 4 disclosing it, and then you announce the catastrophe—the Securities and Exchange Commission and the Justice Department will open an investigation and read all your emails and interview all your acquaintances and maybe you will go to jail.[1] They would love to come after you, and you know it. I do not make the same assumptions about members of Congress. For one thing I don't assume that they are especially upstanding or public-spirited; I also don't assume that they are particularly well-advised or heavily lawyered. (Remember Burr's defense was that he sold the stock before it went down!) Mostly though I just assume that they are not subject to an effective regime of consequences for their actions. There is less history of congressional insider trading enforcement, for one thing, though that is changing since the STOCK Act; also if you are a powerful senator you probably have, and certainly think you have, more leverage over the executive branch than the average public-company CEO. When Representative Chris Collins was arrested for insider trading, I wrote that "I suspect that, among politicians, the sense of entitlement and impunity might be a bit more robust" than it is among corporate executives, and the last few years of the Trump administration have not changed my mind on that point. The second thing I want to say is: "Insider trading," I often say, "is not about fairness, it's about theft," and this situation illustrates why. What I mean is that there is a common incorrect assumption that the point of insider trading law is to prohibit people from trading when they know something that no one else does, because that is unfair. But this assumption is incorrect, and in fact the point of insider trading law is to prohibit people from trading when they have obtained nonpublic information "wrongfully," meaning basically that they got it as part of their job and then used it to make money for themselves instead. The victim of insider trading, in a technical but important sense, is not the anonymous person on the other side of the trade from the insider trader; it's the insider trader's employer, who trusted him with the information only to see him turn around and use it for his own profit. Let's assume the worst here: Assume that Burr went into a classified briefing in which the intelligence community told him "this thing is going to devastate the U.S. economy," no one else knew that, and he went out and dumped all his stocks specifically for that reason. If you think that's bad, why is it bad? One possible answer is that the people buying Wyndham Hotels and Resorts shares from him in mid-February were deceived; they had less information about Wyndham than he did, so they paid him too high a price for the stock. If he had publicly disclosed the dire information in that classified briefing, potential buyers of Wyndham shares would have known about it and would have offered him a lower price. You can extend this answer to a "market confidence" answer: People in general will want to trade stocks more, will be more confident about committing capital, if they don't have to worry about senators trading stocks based on information in classified briefings. Those answers are not crazy, they sound sort of like reasonable answers, but I do not actually think they are plausible here. The people who are mad at Burr are not mad because they recently purchased Wyndham stock. The deep perceived wrong here is not that he should have disclosed his secret knowledge to potential purchasers of Wyndham stock, so that they could appropriately value its expected cash flows. The deep perceived wrong here is that he should have disclosed his secret knowledge to the rest of us, so that we could have, I don't know, stocked up on beans or sold all our stocks or pressured our representatives to prepare more effectively for the pandemic. Or perhaps he should have kept it secret, fine (it was classified!), but he should have left that briefing determined to secure more ventilators and protective equipment for U.S. hospitals, not to call his broker and dump his hotel stocks. If you assume the worst about Burr, what you are assuming is that he got secret important information in the course of his work as a senator, information that he should have used to do that work more effectively, and instead he used it to go make money for himself. The point is not that he (maybe) cheated his counterparties, the buyers of Wyndham stock; it's that he (maybe) cheated his employer, the American people.  On the other hand Burr is not alone: The Senate's newest member sold off seven figures worth of stock holdings in the days and weeks after a private, all-senators meeting on the novel coronavirus that subsequently hammered U.S. equities. Sen. Kelly Loeffler (R-GA) reported the first sale of stock jointly owned by her and her husband on Jan. 24, the very day that her committee, the Senate Health Committee, hosted a private, all-senators briefing from administration officials, including the CDC director and Anthony Fauci, the head of the National Institutes of Health of the United States, on the coronavirus. ... That first transaction was a sale of stock in the company Resideo Technologies worth between $50,001 and $100,000. The company's stock price has fallen by more than half since then, and the Dow Jones Industrial Average overall has shed approximately 10,000 points, dropping about a third of its value. It was the first of 29 stock transactions that Loeffler and her husband made through mid-February, all but two of which were sales.  Yeah, look, the other reason I tend to give corporate executives the benefit of the doubt when they dump a bunch of stock just before announcing some corporate crisis is that often they only dump a small fraction of their shares. "CEO sold millions of dollars of stock before announcing catastrophic hack!" sounds bad, but if she sold $3 million of stock to buy a house and held on to $50 million more, it sounds less bad. Not because a little bit of insider trading is fine, but because the size of the trade is evidence that she is not insider trading. Like, what is your theory there? She knew the catastrophe was coming and decided to take some of her money off the table while leaving most of it on? Why? If you're going to insider trade in an extremely visible, definitely-alerting-the-SEC sort of way, why not at least maximize your profits? Similarly Loeffler sold as much as $3.1 million worth of stock (the reports give only broad ranges for each asset), which sounds like a lot for a senator, until you remember that "the Atlanta businesswoman, whose husband is the chairman and CEO of the New York Stock Exchange, is worth an estimated $500 million." So she learned devastating news about a global pandemic and rushed out to sell … stock worth 0.6% of her net worth? Really? At that level of wealth that's just a minor portfolio tweak; if she was going to insider trade, surely she'd have gone bigger. Also frankly at that level of wealth—and having a stock exchange CEO in the family—it seems unlikely she's making such tiny trading decisions at all. As, in fact, she said: Loeffler responded on Twitter by calling criticism of her stock sales "a ridiculous and baseless attack." The tweet said "I do not make investment decisions for my portfolio. Investment decisions are made by multiple third-party advisors without my or my husband's knowledge or involvement." That is a much better response than "no I sold before the stocks went down"! Similarly: One of Loeffler's two purchases was stock worth between $100,000 and $250,000 in Citrix, a technology company that offers teleworking software and which has seen a small bump in its stock price since Loeffler bought in as a result of coronavirus-induced market turmoil. Look, first, Citrix Systems Inc. is a decent way to bet on everyone working from home for months, though it is not necessarily the most obvious way; it's up about 2.7% since Loeffler bought it, while Zoom Video Communications Inc. is up about 36% in that period.[2] But, second, she put less than 0.05% of her wealth behind that bet! Why bother? What can Loeffler buy with the $6,700 she has made on her Citrix trade[3] that she couldn't have bought with the $500 million she had already? Like I said, I am happy to assume that senators insider trade more brazenly than everyone else, but if you're going to assume that you need to restrict it to cases when they seem to have insider traded brazenly. This is clearly not that. Money market funds In the 2008 financial crisis, money market funds—the very safe boring mutual funds that invest in short-term debt of governments, banks and corporations—became terrifying. One famous old fund "broke the buck," failing to return 100% of its investors' money, a real no-no in that business. (It returned 99.1% of their money.) A run on money market funds—in which investors all demand their money back at once, forcing funds to liquidate and further drive down the prices of their holdings—could be devastating, analogous to a bank run. The Federal Reserve and the Treasury stepped in to effectively guarantee money-market funds and avert a run. This was viewed as a striking and troubling extension of typical banking concepts—deposit insurance, the lender of last resort—to "shadow banking" entities like money market funds. In the aftermath of the crisis, there was much discussion of the problems with this. There was a widespread view that money market funds should not be guaranteed by the government, and that they should be subject to stricter bank-like regulation, including increased prudential requirements and also perhaps capital buffers, to prevent this from ever happening again. These ideas got a lot of attention for a while, and some were implemented, and I am sure that I wrote about them, and now I regret it, because it was all a waste of time. Money market funds are scary again now—because everything is scary now—and so the Fed and Treasury are stepping in to guarantee them again. Here's the Fed's announcement of its Money Market Mutual Fund Liquidity Facility, in which "the Federal Reserve Bank of Boston will make loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds." And the Wall Street Journal reports that "the Trump administration is asking Congress for authority to develop guarantee programs for the $4 trillion money-market mutual-fund industry, as part of its broader effort to calm turmoil sparked by the novel coronavirus epidemic." People are mad: Aaron Klein, a former Obama administration Treasury official, said there was widespread agreement following the financial crisis that money-market funds would bear losses in the future, and postcrisis regulatory changes were meant to impress upon investors the risks they were taking. "This sends a signal that investors in money-market mutual funds are going to get bailed out—again," he said. I can't say I have a huge problem with this. I am generally in favor of a robust lender-of-last-resort response to financial crises, and this generally seems like a good use of that power: Money market funds are a place where a government guarantor can do a lot to avert financial panic while taking relatively little credit risk. Still I do retroactively regret all the hours that I and others spent thinking about money market reform over the past decade or so. I feel like there is a sort of template of financial regulation and crisis response here; the template is something like: In a crisis, do everything you can to address the immediate issues, without worrying too much about moral hazard. After the crisis, solemnly declare that you will never do that again, and announce lots of regulatory measures to address the problem of moral hazard and prevent all future bailouts. In the next crisis, go to step 1. Honestly that is probably even a good template? It sounds bad. It has flaws. You can see why people would be annoyed. But the basic way to prevent moral hazard is to very seriously tell everyone that you won't rescue them, and the basic way to prevent a financial meltdown is to rescue them anyway, and if you go long enough between crises and sound serious enough in the interim maybe it will all work out. "Dining bonds" If a restaurant sells gift certificates, is that a securities offering? No, absolutely not, not at all; a gift certificate is a gift certificate, not a security. There has been some confusion on this point due to the crypto boom: Lots of cryptocurrency startups did initial coin offerings of tokens that they argued were akin to gift certificates (you could use them to buy stuff in the startup's blockchain ecosystem), but that the SEC argued were akin to investments (the blockchain ecosystem rarely existed, and you were clearly buying the tokens for a speculative profit). The SEC usually has the better of these arguments, but you might worry that it got a bit carried away sometimes. SEC Commissioner Hester Peirce complained last year that if some ICO tokens "were securities, it would be hard to distinguish them from any medium of stored value. Is a Starbucks card a security?" Anyway: As concern among New York City restaurants grows about the financial toll the novel coronavirus is taking, some are trying to offset their losses with a new initiative: selling "dining bonds." The program, created by local hospitality publicists and consultants Steven Hall and Helen Patrikis, is designed so that restaurants can offer gift certificates—"bonds"—at a reduced price for redemption at full value on a later date. I am all for buying gift certificates from restaurants to get them through the coronavirus crisis, but as someone who writes about ICOs a lot, my not-at-all-legal-advice view is, maybe don't call them "bonds." Pandemic banking "Frequently Asked Questions" is a term of art; it describes a certain form, a way of organizing information into a list of questions and answers. There is no real expectation that anyone has ever asked any of the questions, never mind frequently. Still. Here is a "Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019" from the Federal Deposit Insurance Corp. Question 1 is about letting "borrowers affected by COVID-19" skip some loan payments, a question that one imagines a lot of banks might be asking these days. Here is Question 9: How should a bank handle customers wearing masks coming into a branch? It may be difficult to distinguish between a customer and a bank robber. The answer is surprisingly vague. I wonder if a lot of banks were asking this question? It certainly had never occurred to me, but … now … it … has? I am not myself much inclined to rob banks, and I doubt most of my (or the FDIC's) readers are, but in a certain light this does read like Helpful Tips From the FDIC About When to Rob Banks. Things happen The Five Days When World Economy's Guardians Fought Virus and Market Turmoil. People are worried about bond market liquidity. Quadruple witching, but from home. Before Fed Acted, Leverage Burned Hedge Funds in Treasury Market. The Next Coronavirus Financial Crisis: Record Piles of Risky Corporate Debt. Virus Revives Beaten-Down CFD Firms as Britons Bet on Markets. Analysts point finger at 'risk parity' strategy in market rout. Companies Are Suspending Dividends Because of the Coronavirus. Steve Cohen's Point72 Quant Unit Falls 22% in March. The Idea of Negative Oil Prices Is More Realistic Than You Think. U.S. Considers Intervention in Saudi-Russia Oil Standoff. US drugmaker doubled price on potential coronavirus treatment. Former Google Engineer Charged With Trade-Secret Theft Reaches Deal With U.S. Disneyland closure ends man's 2,995-day streak of visits. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] I like the story of the Equifax Inc. hack. Equifax got hacked, and when it announced the hack its stock went down. Between the time that some people at Equifax learned of the hack and the time it was announced, some Equifax executives sold stock. Had *they* learned of the hack already? Were they insider trading? No, come on, I said, and no charges were ever brought against them, presumably because the SEC agreed. But *another* Equifax employee—a "senior executive," but not one senior enough to have to file a Form 4, *not* someone who got any press scrutiny in the early reports, and actually not someone who was told directly about the hack—was charged with insider trading for dumping his stock based on his suspicions that something had gone wrong. The point here is that those executives who sold some stock and filed Form 4s *triggered an investigation* that unearthed subtler insider trading. The SEC was not just going to ignore those Form 4s! [2] Also have you seen the price of like VIX call options? If you were making an all-in bet on societal collapse due to coronavirus, Citrix would not be the vehicle for it. [3] That's a made-up number. Loeffler bought between $100,000 and $250,00 of Citrix stock on Feb. 14, 2020, according to her financial disclosures. Citrix closed that day at $122.03; it closed yesterday at $125.31, up about 2.7%. If she bought $250,000 at the Feb. 14 close, she'd be up $6,719.66 as of yesterday's close, but that's pretty much the maximum.   Before it's here, it's on the Bloomberg Terminal. Find out more about how the Terminal delivers information and analysis that financial professionals can't find anywhere else. Learn more.   You received this message because you are subscribed to Bloomberg's Money Stuff newsletter. Unsubscribe | Bloomberg.com | Contact Us Bloomberg L.P. 731 Lexington, New York, NY, 10022