Sometimes a subtitle tells you quite a lot about a book. The one for Peter Schweizer's Throw Them All Out reads: How Politicians and Their Friends Get Rich Off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison.
That's a powerful statement, and perhaps unsurprisingly, Schweizer's book has had an enormous impact on the debate over Congressional insider trading. In fact, one could argue that Schweizer's interview with CBS's 60 Minutes was one of the biggest catalysts in bringing this issue to the attention of the American public.
Our very own Chris Hill was able to sit down with Schweizer for an interview recently. An edited audio recording of the interview as well as a transcript are included below.
Chris Hill: Welcome back to Motley Fool Money. I'm Chris Hill. Insider trading is against the law, unless apparently you are a member of the United States Congress. Then it's completely legal. Peter Schweizer is a fellow at Stanford's Hoover Institution and he's the author of the new best-seller Throw Them All Out: How Politicians and Their Friends Get Rich Off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison. Peter, welcome to Motley Fool Money.
Peter Schweizer: Hey, it's great to be on with you. Thanks for having me.
Hill: There is a lot to get to here, but I want to start at the beginning of this project for you. How did you come up with the idea for this book?
Schweizer: Well, you know, somebody sent me an article that appeared in an academic journal a few years ago. It's a journal called the Journal of Quantitative Economics. If you have trouble sleeping at night, this might be a good place to go.
But this study was actually very interesting, because these scholars looked at 6,000 stock trades by U.S. senators, and what they found, shockingly, was that while the average American tends to underperform the market averages, the average corporate executive beats the market by 5% a year and the average hedge fund beats the market by 7 to 8% a year. This study found that U.S. senators beat the market by 12% a year...
Schweizer: Yeah. And so, it left me wondering, you know: "OK, gee. Either these guys are really, really smart geniuses that I don't give them enough credit for, or something else is going on." And it really only took me a split second to say, "You know, I think something else is going on."
Hill: And again, there's so much research that you and your team did for this book. How did you go about connecting the dots?
Schweizer: Well, you know, it was very difficult. What we really wanted to do was show and sort of overlay the financial transactions of members of Congress. They're required to disclose them once a year. They're required to show what their holdings are and also the dates of transactions, but they only give the amounts in ranges, so you don't know exactly how much money they're trading.
But we took that material, and then we looked at their legislative activity or things that were going on where they had access to special information. Like for example, during the 2008 financial crisis, they had a lot of closed-door meetings with the Fed chairman and Treasury secretary. And once we overlaid those, we found, astonishingly, that people who served on financial committees were aggressively trading bank stocks. Those that were involved in the health-care bill, the health-care reform debate in 2009 were aggressively buying and selling all sorts of health care-related stocks, and it was kind of stunning. So, once we had this overlay, then we started to track to see what sort of investment decisions they were making and how they did in terms of those investments.
Hill: Why are we just hearing about this now? I mean, if this has been going on for this long...
Schweizer: It's a good question. I think for a couple of reasons. No. 1, it takes a lot of work, because they don't file their financial disclosures even electronically. You'd think this is the 21st century, but they fill them out on paper, and they basically are put somewhere by the ethics committees. So you have to really go and find them and get them.
The second thing is that, frankly, I think journalists in Washington, D.C. that cover Congress are in a bit of a quandary. The example that I would give is imagine that you are the sports reporter covering the baseball team, and you write a story that says the owner is a drunk and the players are corrupt. Guess what? You're not going to get invited into the locker room anymore. And I think that a lot of reporters in Washington face that dilemma. If they start reporting these kinds of stories, they're not going to get leaks. They're not going to get exclusive interviews. So, I think the media has frankly, in Washington, been much more of a lapdog than a watchdog because they don't want to lose their access.
Hill: You're listening to Motley Fool Money. Talking with Peter Schweizer, author of the new best-seller Throw Them All Out: How Politicians and Their Friends Get Rich Off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison. There's a lot there in the subtitle. Let's start with the insider stock tips. Could you elaborate on some of the ways that politicians... let's just take John Kerry, for example. He's one of the people that you cite in the book. How is John Kerry -- who is already a wealthy guy to begin with -- how is he doing it?
Schweizer: Well, it's a great question. What's so interesting about insider trading -- whether it's in the private sector or in Congress -- is that whether you're rich or poor, people are tempted to do it. In the case of John Kerry, here's a guy that was very much involved in writing and structuring two big pieces of health-care legislation. One was the 2003 benefits for Medicare to add a prescription drug benefit, which basically was a huge boon to the pharmaceutical industry. Kerry, at the time he was helping that bill go through the Senate and craft it, the investment funds that he and his wife owned were actually aggressively buying Big Pharma stock, and they had a capital gains of about $2 million on those Big Pharma stocks.
And again in 2009, during the debate over health-care reform -- or ObamaCare, whatever you want to call it -- the same thing applied. He was dumping companies that were going to lose in that reform and he was buying companies like generic-drug manufacturers who were going to be winners.
You know, this is perfectly legal. It's deemed ethical. But were you to do this while you were working for a company, you would face either fraud charges or insider trading charges, because you're just simply not allowed to mix your investment decisions with private information or knowledge that you have of what's going to happen to your company.
Hill: Is that ultimately what this comes down to, is the unfairness of it? Because I could see someone making the argument like, "Yeah, this is going on, but this is a victimless crime. This isn't actually hurting anyone. It's advantageous to members of Congress, but it's not really hurting anyone."
Schweizer: Well, no, I would disagree with you slightly. I mean, you can argue how much the hurt really is, but every time that you are a member of Congress who is buying a stock or selling a stock, there's somebody on the other end of that transaction that is not privy to the information you have. So to pick an example, during the 2008 financial crisis, on the evening of Sept. 18, there was a closed-door briefing with the Treasury secretary and with the Fed chairman, Ben Bernanke. And as Paulson recounts in his memoirs, this was an apocalyptic briefing. They said that the market's going to go down at least 20%. We're looking at a major economic crisis.
Well, people that were in that meeting -- members of Congress -- the next day lots of them went out and dumped their shares of stock. And the Dow at that time was over 11,000, and within three weeks, it would be down to 8000. So, they were able to avoid those trades, and when you're buying and selling stock, there's somebody on the other side of that transaction. So, I don't think it's totally a victimless crime.
Hill: You're listening to Motley Fool Money. Talking with Peter Schweizer, author of the new book Throw Them All Out. One of the things that is clear from your book, Peter, is that for people who are seeking bipartisanship in Washington, D.C., they can certainly find it when it comes to insider trading because you mentioned Senator Kerry. John Boehner, the Speaker of the House -- he's in your book for buying shares of different public companies as he's essentially killing the public option on health care.
Schweizer: Yeah. I mean, this is not something that is a partisan issue. I mean, the bottom line is human nature is human nature and politicians, to varying degrees, are looking out for their own financial interests. So yes, John Boehner was doing it. Another Republican that I think was particularly egregious is Spencer Bachus, who was the ranking member of the House Financial Services Committee. He was at that apocalyptic briefing that I just mentioned, whereby they were told the market was going to go down significantly.
Literally, the next day he went out and bought something called Proshares Ultra-Short QQQ, which is a leveraged option buy -- a leverage betting that the market's going to go down -- and he literally doubled his money in a matter of a couple of days based on that information. And he wasn't done, by the way. He did 40 options trades during the financial crisis, and made tens of thousands of dollars doing so. So, yeah -- this swings to both parties, and I think it's one of those reasons that we haven't heard a lot about it, because both sides have a motive and an incentive to keep it quiet.
Hill: Well, and just to pick one other example, also in the financial space but just sort of outside the big banks on Wall Street, you had Nancy Pelosi who was the Speaker of the House. At the Motley Fool, we're constantly cautioning people to stay clear of IPOs, because you want to see how a public company performs as a public company for maybe six, twelve months. But in the case of Visa (NYSE: V ) , Nancy Pelosi got in on the IPO and it really seemed to work out well for her.
Schweizer: Yeah, I think you're right to be cautious about IPOs. But if you have particularly IPOs that are in demand like Visa, which was a very profitable company, everybody wanted its stock and they simply were not able to because there was so much demand. The Pelosis, however, while she was Speaker of the House, were given access to 5,000 IPO shares. They were able to buy it at $44 a share. The day it went public, the next day, it was up to $64 a share, and within a matter of a couple of months, it had doubled. It was trading at over $90 a share. So, they did very well. They made several hundred thousands of dollars on that transaction.
And here's the bottom line: When they took that from Visa, there were two pieces of legislation that Visa was very concerned about that had been introduced in the House that would deal with merchant fees, which is where Visa makes its money. Those bills came out of committees with bipartisan support, but as Speaker of the House, she just simply did not allow them to come to the House floor for even a vote. So Visa basically had that legislation delayed for not one year, but two years. The Pelosis did well, Visa got what it wanted, and I think it raises real concerns about conflict of interest.
Hill: You're listening to Motley Fool Money. Talking with Peter Schweizer, author of the book Throw Them All Out: How Politicians and Their Friends Get Rich Off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison. When it comes to trading stocks on privileged information -- because at the Motley Fool we're very focused on stocks -- who are the most egregious members of Congress? I know we've talked about a few. But who are the most egregious? And please tell me that, on the flip side, there are some shining lights, some members of Congress who are actually being not just above the board legally -- because as you pointed out, this is all legal -- but they've really gone beyond the call in terms of being highly ethical.
Schweizer: No, I think that's a great point. I'll mention one liberal Democrat and one conservative Republican that if you look at their financial investments, you look at what they do, are very clean on this out of principle. The liberal Democrat I would mention would be Barney Frank, who is the once-chairman of the House Financial Services Committee. He's from Massachusetts. He's retiring. He does not invest in stocks as a matter of principle. He puts all of his money into municipal bonds.
On the Republican side, you could take a conservative like Michele Bachmann who basically does the same thing. She's from Minnesota. Had an ill-fated presidential run here. She's the political opposite of Barney Frank, but she does the same thing. And there are others, and I think we need to applaud them.
I would look at the stock traders and say that John Kerry and his wife have a lot of assets. They do a lot of stock transactions that seem to be patterned on legislative activity, so he would be somebody I would pick on the Democratic side. Spencer Bachus, who I've mentioned, I would pick on the Republican side. He is an aggressive trader in options.
I'm sure you've talked at the Motley Fool about how that is a very high-risk investment strategy. Most people don't make money. They lose money doing that. But Bachus has done this for years, and he does it in trading stock options in companies like United Airlines, for example, or Sony Corporation (NYSE: SNE ) or General Electric (NYSE: GE ) . And he does this when he's privy to all sorts of information. And although most options traders lose money, he consistently makes a lot of money. In fact, I think it was in 2007, he made $160,000 which was the equivalent of his Congressional salary.
Hill: Maybe these guys should open up a side business where they can basically be brokers...
Hill: You know, if someone's got that kind of track record, if they're getting those kind of returns, I would think seriously about investing my money with them.
Schweizer: Well, what I would do is I think Motley Fool needs to set up a Congressional Index Fund. If we could get these guys to do instant disclosure of their financial transactions, and Motley Fool were to just track their investment choices, we would all be beating the market by 12% a year. So I think maybe that's the future direction we need to go.
Hill: We've talked a lot about the problems as you've laid them out in your book. Let's think in terms of solutions. There is a bill before Congress right now -- the STOCK Act. It does have wide bipartisan support in the House. I think it has over 240 co-sponsors. This would effectively kill the type of insider trading that we're talking about. I'm curious. What do you think about that legislation and the chances that it has in the new year to pass?
Schweizer: I think the STOCK Act has a pretty good chance of passing and I think it's a good step forward, but I don't think it goes far enough, simply because what the law does is it makes congressional insider trading illegal. The question is enforcement. Is the Securities and Exchange Commission really going to go after, say, a powerful congressman on this issue? And past experience is not good. I mean, when the FBI was investigating William Jefferson, the congressman who famously had the money in his freezer...
Hill: In his freezer, yeah...
Schweizer: Yeah, when they got a search warrant to search his congressional office, both political parties said that this was a breach of congressional privilege, and they threatened to cut the FBI budget. So I don't think the SEC is going to enforce it. I think that we should pass the bill out of principle. I think we should also pass something that's been introduced called the RESTRICT Act. It's been introduced by Congressman Duffy and has co-sponsors from both political parties.
Duffy's, I think, is very good in that he would basically give members of Congress an option. No. 1, you need to put your assets in a blind trust and one that's certified and recognized as a blind trust. Or, if you don't want to do that, you have to disclose all of your transactions within three business days. So, in other words, if there's a health-care bill on Capitol Hill, we could see on a website that this congressman was buying or selling Big Pharma stock. And I think transparency would be a huge step forward. So, I think we need both of these bills to be passed.
Hill: You're listening to Motley Fool Money. Talking with Peter Schweizer. His new book is Throw Them All Out. What surprised you the most when you were working on this book?
Schweizer: What surprised me the most is that wealthy members of Congress did this -- this just wasn't the guy who was kind of scraping by and trying to make money -- and how large some of the amounts were. During the health-care debate, for example, you had a congressman from Colorado, Jared Polis, who's very wealthy, making multimillion-dollar bets on health company businesses that were going to benefit from health-care reform which he was supporting. So, the sheer amounts, in some cases, and the frequency of these transactions by members of Congress really stunned me.
Hill: What has the response on Capitol Hill been to your book?
Schweizer: Oh, you know, it's been mixed. What I found is that in Washington, D.C., the response has been to sort of attack me or to say it's not that big an issue. The response around the country has been the opposite. It's been on the best-seller list, now, for six weeks. People are very angry and frustrated about it. The media interest has been keen. And people from both political parties have really adopted the mantra that I've said, which is even if it's your guy that's doing this, we have to have a zero-tolerance policy.
For example, I'm a conservative Republican. If a conservative Republican is doing this, I need to vote against him and help throw him out of office, because they use the fact that they're with us on the issues to justify themselves staying in power and enriching themselves. And I think we need to stop, or otherwise this problem is just going to get worse and continue.
Hill: The book is Throw Them All Out: How Politicians and Their Friends Get Rich Off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison. Very thought-provoking stuff. A lot of great ideas. Peter, thanks so much for being here.
Schweizer: Hey, thanks for having me.