Limits Of, And On, Political Intelligence

I am not a Washington insider, but in the course of a long career I have come to know a few people who work on Capitol Hill. I happened to talk to one of them in the closing weeks of 2009, just before the federal estate tax was scheduled to take a one-year hiatus.

It would never happen, my contact assured me. Democrats controlled the Senate, the House of Representatives and the White House, and they were going to ensure that the tax would continue as it existed in 2009: at a rate of 45 percent on estates greater than $3.5 million.

Things did not work out that way. The estate tax actually took its one-year break. When it returned at the end of 2010 – after Republicans had scored solid election gains, but before they took control of the House – it was at today’s top rate of 35 percent, and it applied only to estates greater than $5 million.

Political intelligence from Washington ought to carry a label warning that it is inherently unreliable. There are 535 legislators, who all seem to believe that they single-handedly control the fate of the Republic, while at the other end of Pennsylvania Avenue sits the occupant of the Oval Office, who is convinced of the same thing. And they’re all wrong.

I do not mean to suggest that information about what is happening in Washington is valueless; far from it. An army of well-paid lobbyists proves the opposite every day. Traditionally, lobbying is considered to be the art of influencing legislation and government policy, but that is only part of the job. Any good lobbyist would tell you that a big part of the work is just keeping track of what is happening inside the government before it emerges into public view.

This is where the line between lobbying and the more recently defined field of “political intelligence” gets blurry. Lobbyists are required to register and disclose their identities; so far, intelligence-gatherers are under no such obligation.

On the surface, it seems fair to impose this same requirement on the political intelligence industry. The Senate thought it was a good idea when passing the latest effort to legislate government ethics earlier this month. The Senate version of the Stop Trading on Congressional Knowledge, or STOCK, Act, passed with near-unanimous bipartisan support, but the House struck the political intelligence requirements when it passed its own version of the bill, ordering further study of the question instead. The bill cannot go to President Obama, who has said he supports it, until the two chambers reconcile their differences.

While requiring Washington intelligence-gatherers to identify themselves has a lot of surface appeal, I see some practical problems. Would I have needed to register if, for example, I told one of my estate planning clients that he need not keep his terminally ill and very wealthy father on life support until the clock struck midnight on New Year’s Eve in order to avoid millions of dollars in estate tax? What if I had charged my client for this advice? (Fortunately, both the client and the advice are hypothetical, since taking such advice would have been very costly to this nonexistent client. I probably would not have given such advice anyway, since I doubted my source’s conclusion that an estate tax extension was a done deal.) Should everybody who asks his or her representative about the status of some piece of legislation, or who uses the representative’s answer for some financial or commercial purpose, need to register?

Most of the STOCK Act is, or at least ought to be, uncontroversial. It explicitly states, for the first time, that members of Congress are not exempt from the insider trading laws that apply to every other American. Currently, according to Sen. Susan Collins of Maine, one of the bill’s sponsors, “there is a dispute among experts” about whether existing laws cover lawmakers who trade on their knowledge of government affairs..

Less disputed is the fact that some members of Congress seem to be unusually successful in their stock picks. A “60 Minutes” report that aired last November titled “Insiders” – which many have credited with spurring legislators to action on the issue – highlighted extremely profitable trades made by House Financial Services Committee Chairman Spencer Bachus, former Speaker Nancy Pelosi and current Speaker John Boehner, among others.

The House Ethics Committee is reportedly investigating Bachus, an Alabama Republican, regarding possible insider trading involving options trades in his personal account. Pelosi was criticized for buying stock in Visa’s initial public offering, which was available only to certain favored institutional and individual clients, while she was House speaker in 2008. Boehner’s profit came from several health insurance stocks he bought while he led the opposition to the so-called public option for health insurance. When the public option was rejected, just days after Boehner’s trades were made, the stocks of the health insurance companies rose. All three lawmakers have denied any improper conduct.

When a version of the STOCK Act was first introduced in the House in 2006, it attracted only 15 sponsors. The “60 Minutes” report revealed that, as of November, many lawmakers had no knowledge of the bill.

But this is a rare case in which election-year politics has actually done something useful. With Congress’ public approval rate at a dismal 15 percent, incumbents are desperate to shore up their reputations.

I have waited quite awhile for Congress to restrict lawmakers’ trading activities. It is simply not fair for government insiders to buy or sell stock with advance knowledge of significant official action, when the party on the other side of the trade lacks access to the same information. We have extensive rules and procedures here at Palisades Hudson to ensure that nobody on our staff misuses nonpublic information, either for personal benefit or for client accounts. Every publicly traded company takes similar precautions. There is no reason for legislators to behave differently.

But the House probably got it right when it stripped the political intelligence provisions from the STOCK Act. The Senate’s attempt to crack down on the industry was drafted hastily and clumsily. There are better approaches to the issue, such as regulating the time and the manner in which government employees disclose information, rather regulating than the people who pay attention to such disclosures. Congress should revisit this issue another day and, in the meantime, pass the STOCK Act to clean up its own investment practices.

About Larry M. Elkin 562 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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1 Comment on Limits Of, And On, Political Intelligence

  1. If they would disclose there trades in real-time the voters could decide for themselves if what they did was improper. Disclosing after, just gives them time to cover it up.

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