I’ve always been suspicious of insider trading laws, and have thought that the time and energy spent pursuing insider trading violations likely costs more than whatever real harm is prevented. Worse, defining the boundaries of insider trading has proven difficult, if not impossible, and the “administration of justice” in this area has been highly erratic.
Thus, during orientation at the firm where I practiced—which did a lot of work for publicly traded companies—we were advised to stay a hundred miles from anything that looked like insider trading. An insider trading investigation can ruin the reputation of a law firm, and if your conduct led to one you would be shown to the door faster than if you got caught in your office doing a little hanky-panky with your secretary.
But, insider trading laws are laws, and like many laws, they do not apply to everyone equally. It should come as no surprise that conduct that would land a private party in prison is perfectly acceptable if the federal government is a partner in the transaction.
The specific example comes from Peter Schweizer’s article Warren Buffett: Baptist and Bootlegger. Before I get to the example, I want to share some of Buffett’s investment “strategies,” and perhaps you will agree that he is a top candidate for the most corrupt investor in America today. Yes, he is an advisor to Barack Obama. And yes, he was a candidate for Treasury Secretary for John McCain. The man knows how to play both parties like a fiddle.
Go back to the financial meltdown. When the initial idea of a bank started being kicked around, Buffett purchased huge holdings of firms like Goldman Sachs and Wells Fargo, negotiated with remarkably high dividends. Next, he went and lent his amicable face, reputation as one of the world’s top investors, and persuasive powers to help secure passage of TARP. Then, after plenty of closed-door meetings with Henry Paulson and Tim Geithner, the two firms received public funding through TARP, naturally with dividends much lower than what Buffett negotiated. The stocks subsequently soared, and Buffett raked in billions, while the Treasury got its money back and a little extra.
Far from finished, Buffett interjected himself into the drafting of the stimulus bill. He bought a huge share of General Electric, and. . . You guessed it, lots of stimulus money for GE that sent the stock soaring.
Later, he purchased the Burlington Northern Santa Fe railroad. Schweizer reports:
A map of BNSF lines around the country overlaps nicely with the government’s proposed high-speed rail lines, from Seattle to Florida, California to the Northeast.
Lest you think I am picking on President Obama here, I am not. Buffett would be up to the same crony capitalist tricks if John McCain were president, although the bets he would be placing might be slightly different.
Returning to insider trading, Buffett’s positions in financial firms ultimately became part of the “Public-Private Investment Program,” in which investments were 20% private and 80% public TARP funds. So, you buy a large stake in a firm, and convince the government to pitch in an even large share, and get rich. It sounds unethical, but it’s perfectly legal since the government is involved.
To prove the point, Schweizer points out another deal involving Berkshire-Hathaway that led to the resignation of Buffett’s lieutenant, David Sokol. Sokol purchased shares of a company called Lubrizol, and then encouraged Buffett to do the same. Consequently he was accused of insider trading and resigned.
But, had Sokol purchased shares of a bank—or GM or Chrysler, for that matter—and then lobbied the government to buy an even larger share, his actions would have been perfectly legal. They might have even been hailed by the statist media as a wonderful example of capitalism done right.
Schweizer concludes (and I concur):
This is why crony capitalism is so perennially attractive to financiers: It’s legal, and it’s often more remunerative than the illegal private-sector version might be. Because government officials are dealing with other people’s money, they are less likely than a private firm to drive a hard bargain.
There was a day in this country when Warren Buffett’s behavior would be a national scandal, and he would disappear from the public spotlight in disgrace. No more. Our insider trading laws have been written in a way to foster cronysim, and that’s by design. Keep in mind that I am suspect of insider trading laws in the first place. But, if we’re going to have insider trading laws, they need to be revised to prevent the kind of sweetheart deals Warren Buffett can negotiate. After all, how many of you get to bend the president’s ear any time you wish? And how many of you have your ears to the ground in Washington so you know what bet to make next?
Warren Buffet: He’s not the grandfatherly figure he’s made out to be. He’s arguably the most corrupt businessman in America today, and what he does is perfectly legal. Something is very, very, wrong with this picture.
This article is also posted at The Country Thinker.