License to Profit: Legalized Corruption in the US Congress

Are members of Congress corrupt? Perhaps we should define the term. There is the terrible, “legal” corruption of pay-for-play campaign contributions, with wealthy donors and big corporations paying to get tax cuts, subsidies, special laws and “access.” This is part of why our government is responsive to the agenda of the 1 percent and their corporations only.

Even worse, there is the new “Citizens United” form of corruption, enabled by conservatives on the Supreme Court who ruled that corporate money is “speech.” Now, corporations can threaten elected officials: If they don't get what the corporations want, they can put up so much money to oppose – which in today's campaigns mean smear – that official in the next election; so that the person won't be able to be elected to any office again.

But the blatant, in-front-of-our-faces “legal” corruption of the current campaign finance system is about raising and spending millions of dollars to get a job that pays relatively little, not personal profit. It has the appearance of bribery, with corporate interests pouring huge amounts of money into the process. Of course, corporations don't do this for the good of the country; they do it out of profit interest. Why else would a corporation do it? By definition, offering something of value to a government official with the intent to influence what that official does is bribery, but in this case it is legal, because what's offered is considered “speech.”

So, what about old-fashioned cash-in-the-pocket personal enrichment? Are our members of Congress corrupt, using their position to directly enrich themselves, not just the 1 percent? This question is once again in the air, and Americans want and need to know the answer.

On November 13, CBS's “60 Minutes” aired a segment that made allegations of (legal!) trading based on inside knowledge and other “soft corruption” by members of Congress. This is the segment:

The “60 Minutes” segment was based on work done for a book by Peter Schweizer of the far-right Hoover Institution. According to Politico, “Schweizer was a speechwriting consultant for former President George W. Bush and helped write a book with conservative commentator Glenn Beck. He is also listed as the editor of website run by conservative journalist Andrew Breitbart.” These credentials are major, major red flags on a person's credibility. Even so, the “60 Minutes” segment is not partisan, going hard after Republican, as well as Democratic, members of Congress. And the partisanship of the investigator does not change the facts of an accusation, if they are true. The accusations from the CBS report include:

• Representative Spencer Bachus (R-AL) trading in funds that would make money if the economy tanked after receiving secret briefings warning of the pending collapse of the financial sector;
  
• Members of Congress trading health care stocks during the health care reform debate;
  
• Speaker John Boehner (R-OH) “just days before the [public option] provision was publicly killed off, Boehner bought health care stocks, all of which went up.” (Boehner says he does not make day-to-day decisions on buying stocks.)
  
• Former Speaker Nancy Pelosi (D-CA) was also implicated.

In The Huffington Post piece titled, “'60 Minutes' Hit On Boehner, Pelosi Falls Short,” Ryan Grimm, writes that both Boehner and Pelosi were treated unfairly in the “60 Minutes” piece. On Speaker Boehner, Grimm writes:

The public option wasn't killed by Boehner, who had no real power in the previous Congress; it was done in by Blue Dog Democrats and a White House that didn't push for it. The public option returned from the dead repeatedly before finally being laid to rest – and there's no reason to think that Boehner had any better insight into what was happening within the House Democratic caucus than anybody else reading news reports at the time.

And as Boehner says in the “60 Minutes” segment, the trade was decided upon and carried out by Boehner's longtime broker without any input from him. In context, it seems even less suspicious: Around the same time, Boehner broker purchased a range of other blue chip stocks, not just health care companies, a defense that a Boehner spokesman reiterated to the Huffington Post.

Whatever the outcome of any investigation into the allegations in the “60 Minutes” piece – there will be an investigation of these charges, right? This is the shocking truth: elected officials, their staff, and other government employees with access to information and the ability to influence legislation and regulation are allowed to own and trade in stocks. The fact that members of Congress and their staff – and any government employee, for that matter – are allowed to own and/or trade in stocks at all leaves wide open the perception if not the actual fact that they can use information that is not available to others for personal enrichment.

IPOs

A little-understood potential channel for personal enrichment, in or out of government, is access to stock that is sold in an “initial public offering” (IPO). An IPO occurs when a company “goes public,” selling its stock publicly for the first time. Usually when a company goes public, it hires an investment bank to underwrite and facilitate the process. The investment bank is supposed to sell the stock for the maximum possible price, so the company raises as much capital as the market thinks the stock is worth. The opportunity for corruption in an IPO occurs if the stock price is manipulated to initially sell for a price that is lower than the market demand, guaranteeing instant profits to purchasers of stock at the opening price. This manipulation cheats the company, as the difference between the initial price and the demand-based price is channeled elsewhere. Since this form of price manipulation is under the control of the investment bank that is managing the IPO (with a wink and a nod from executives of the company that is offering the stock), the opportunity for access to the guaranteed quick profit offered by a manipulated IPO can be traded for favors. And, as we know, Congress has, over the years, granted lots of favors to Wall Street.

When you hear about the price of a stock increasing right after the company goes public, this is a sign that the pricing may have been manipulated, bringing with it the opportunity for corruption through the offering of access to purchasing at the opening price. For example, if a company goes public for $20 a share, and the price rises to $25 right after the opening, anyone who was able to purchase at the opening price of $20 makes a quick 25 percent profit, while the company raised 25 percent less capital than it could have. Access to stock as it is initially sold in an IPO, therefore, can be a huge opportunity for guaranteed profit, like being offered a deal along the lines of, “If you buy this house today for $100,000, tomorrow I will buy back it from you for $150,000.”

According to the “60 Minutes” segment, former Speaker Pelosi was able to participate in IPOs, including the 2008 VISA IPO. From the transcript:

“… former House Speaker Nancy Pelosi and her husband have participated in at least eight IPOs. One of those came in 2008, from Visa, just as a troublesome piece of legislation that would have hurt credit card companies, began making its way through the House. Undisturbed by a potential conflict of interest, the Pelosis purchased 5,000 shares of Visa at the initial price of $44 dollars. Two days later it was trading at $64.”

In Pelosi's defense, along with the previously mentioned defense of Speaker Boehner, Huffington Post's Grimm writes in, “'60 Minutes' Hit On Boehner, Pelosi Falls Short“:

… CBS leaves out the fact that the bill passed out of committee at the very end of the legislative session, as Congress was dealing with the Wall Street implosion and bailout, and that the chamber then adjourned until the election. More importantly, Democrats didn't have the votes for it in the Senate and the notion that President Bush would have signed it if they did is far-fetched.

… Pelosi's office also noted that there was no preferential treatment. Her husband purchased the shares, participating in the largest IPO in history, which raised $17.9 billion. He continued to buy shares on the open market as the price continued to rise.

In the '90s former House Speaker Tom Foley (D-Washington) participated in 42 of these special-access IPOs.

Rep. and then Sen. Robert Torricelli (D-New Jersey) was involved in such offerings – in one case a $5,000 investment became $225,000.

Former New York Sen. Alfonse D'Amato (R-New York) was also granted access to IPOs:

According to his new financial filing, the New York Republican tripled an $18,000 investment overnight when a friendly broker provided him first chance at a new stock offering – known as an initial public offering, or I.P.O. – unavailable to ordinary investors.

D'Amato received this special stock from a firm that was under investigation by a Senate committee on which D'Amato was the chairman at the time.

Beyond Stocks – Other Opportunities

There are lots of ways to enrich public officials. In the 1960s, there were rumors that Howard Hughes would use land parcels to make payoffs. Public officials were advised to purchase certain land parcels. Soon after the purchase, it was “discovered” that the parcels had oil under them, and a company would buy them for a huge markup. The public officials were generously rewarded. Word is that there are worthless parcels all over the southwest that are supposed to have oil under them, but really do not.

The “60 Minutes” segment alleges that former Speaker Dennis Hastert (R-Illinois) used his office (legally) for personal enrichment. From the transcript:

Congressmen and senators also seem to have a special knack for land and real estate deals. When Illinois Congressman Dennis Hastert became speaker of the House in 1999, he was worth a few hundred thousand dollars. He left the job eight years later a multi-millionaire.

Jan Strasma: The road that Hastert wants to build will go through these farm fields right here.

In 2005, Speaker Hastert got a $207 million federal earmark to build the Prairie Parkway through these cornfields near his home. What Jan Strasma and his neighbors didn't know was that Hastert had also bought some land adjacent to where the highway is supposed to go.

Strasma: And five months after this earmark went through he sold that land and made a bundle of money.

Kroft: How much?

Strasma: Two million dollars.

… We stopped by the former speaker's farm, to ask him about the land deal, but he was off in Washington where he now works as a lobbyist. His office told us that property values in the area began to appreciate even before the earmark and that the Hastert land was several miles from the nearest exit.

The “60 Minutes” segment also alleges that former Sen. Judd Gregg (R-New Hampshire) (legally) used his office for personal enrichment:

But the same good fortune befell former New Hampshire Senator Judd Gregg, who helped steer nearly $70 million dollars in government funds towards redeveloping this defunct Air Force base, which he and his brother both had a commercial interest in. Gregg has said that he violated no congressional rules.

The Revolving Door

Another commonly used opportunity for personal enrichment occurs when elected officials, their staff, and other government employees are susceptible to trading favors for lucrative future jobs. The practice of going from a government job to a job in an industry they regulated is called the “revolving door.” Watch this November 6 “60 Minutes” segment in which convicted Congress-briber Jack Abramoff explains how it is done:

From the transcript, Jack Abramoff: The lobbyist's playbook:

But the “best way” to get a congressional office to do his bidding – he says – was to offer a staffer a job that could triple his salary.

Abramoff: When we would become friendly with an office and they were important to us, and the chief of staff was a competent person, I would say or my staff would say to him or her at some point, “You know, when you're done working on the Hill, we'd very much like you to consider coming to work for us.” Now the moment I said that to them or any of our staff said that to 'em, that was it. We owned them. And what does that mean? Every request from our office, every request of our clients, everything that we want, they're gonna do. And not only that, they're gonna think of things we can't think of to do.

According to a 2005 Public Citizen study, “Congressional Revolving Doors: The Journey from Congress to K Street,” that looked at the Congressional revolving door, as of 2005:

Forty-three percent of the 198 members who have left Congress since 1998 and were eligible to lobby have become registered lobbyists.

Almost 52 percent of the Republican members of Congress who left Capitol Hill since 1998 registered to lobby (58 of 112). Thirty-three percent of the departing Democrats chose the same career path (28 of 86).

The Public Citizen study offered an example:

Former Speaker of the House Bob Livingston [(R-Louisiana)] left Congress in 1999 amid allegations of extramarital affairs. Within a week of his departure, the former chairman of the House Appropriations Committee formed a lobbying shop named the Livingston Group. The scandal that forced him from Congress did not appear to hurt his earning potential as a lobbyist.

In its first year of business, the Livingston Group pulled in $1.1 million, even though that was during Livingston's cooling-off period in which he was prohibited from directly lobbying his former colleagues. The cooling-off period, however, does not restrict a former member from supervising or managing lobbyists, and Livingston took full advantage of that liberty.

Six years later, the Livingston Group is ranked as the 12th largest non-law lobbying firm in Washington and had taken in almost $40 million from 1999 through the end of 2004.

Here are some other notable examples of the “revolving door”:

Rep. Billy Tauzin (R-Louisiana) was chairman of the committee in the House that regulates the pharmaceutical industry. He ushered through the Medicare prescription drug program that was so beneficial to the pharmaceutical industry. He retired very soon after it passed to take a job as head of the pharmaceutical lobbying group, the Pharmaceutical Research and Manufacturers of America. Just HOW much money does he now make? From Bloomberg News:

Billy Tauzin, the former congressman turned pharmaceutical industry lobbyist, was paid $11.6 million in 2010, the year he brokered a deal with President Barack Obama that helped pass the health-care overhaul.

The lucrative “lobbying” door revolves not just for members of Congress. Meredith Attwell Baker (R) was a member of the Federal Communications Commission where she voted to allow the hotly contested Comcast/NBC merger. Four months later, she left to take a job … as “senior vice president of governmental affairs” – lobbyist – for the newly combined company.

Solutions

These practices are apparently legal. This must change. But, of course, Congress makes the laws, which means they decide what is legal and what is not. Should they decide to do something about these problems, here are some suggestions.

Don't let them take higher pay when they leave government. Members of Congress, their staff, and other government officials must be prohibited from going to work for companies they regulate or that otherwise can benefit, if those jobs pay a significantly higher salary or provide other compensation. It is the promise of future compensation that provides the incentive to do favors for interests while in government office. Their expertise should be allowed to move between government and industry – and removing the possibility of compensation for favors removes the appearance of and possibility of corruption.

Because members of Congress, their staff, and people in the agencies of government are in a position to provide favors of all kinds to companies and individuals, they should not be trading in stock at all, and especially not allowed access to IPOs. Special access to IPOs creates the appearance if not the fact of the offer of financial gain in exchange for misusing their position.

To address the stock-trading problem, Luigi Zingales, professor of entrepreneurship and finance at the University of Chicago Booth School of Business, offers reforms in his op-ed piece, “Elected Dirty Dealers“:

Rather than just extending insider-trading law to the US Congress (or to other legislatures), citizens should demand that all restrictions and reporting requirements imposed on the private sector apply automatically to elected representatives as well. This would make these legislatures more credible, and their laws more just.

Lisa Gilbert of Congress Watch, a division of Public Citizen, writes in “Isn't That Already Illegal? Congressional Insider Trading,” at The Huffington Post, that the “60 Minutes” segment,

“… seems to be providing the necessary energy to finally spur action on the STOCK Act, introduced in the House of Representatives by Reps. Louise Slaughter (D-N.Y.) and Tim Walz (D-Minn.). This legislation would increase disclosure and highlight conflicts of interests for lawmakers and ensure that they do not benefit from their insider knowledge…. and both Sens. Scott Brown (R-Mass.) and Kristen Gillabrand (D-N.Y.) have introduced companion legislation in the Senate that would change Senate rules to ban insider trading.”

Others suggest banning all ownership and trading of stocks by members of Congress and others in government with access to information that might provide and insider advantage.

However, these are really patchwork solutions, not changes to the system that has proven to be so corrupting of our public officials. The real problem is the use of corporate money to influence politicians, government officials and the public. We urgently need laws prohibiting the use of corporate funds to influence public attitudes, politicians or our political and social environment in any way.

Not Everyone

It has to be pointed out that not all or even most members of Congress and other government officials engage in these practices. But these practices cost everyone because of the resulting loss of confidence in government. The fact that Congress does not stop these practices shows us that, for whatever reason, enough members want them to continue more than they want the public to believe they have been stopped.