Absolute Power Corrupts Absolutely?

Washington, D.C. is a town that runs on inside information - but should our elected officials be able to use that information to pad their own pockets? As Steve Kroft reports, members of Congress and their aides have regular access to powerful political intelligence, and many have made well-timed stock market trades in the very industries they regulate. For now, the practice is perfectly legal, but some say it's time for the law to change.

The following is a script of "Insiders" which aired on Nov. 13, 2011. Steve Kroft is correspondent, Ira Rosen and Gabrielle Schonder, producers.

The next national election is now less than a year away and congressmen and senators are expending much of their time and their energy raising the millions of dollars in campaign funds they'll need just to hold onto a job that pays $174,000 a year.

Few of them are doing it for the salary and all of them will say they are doing it to serve the public. But there are other benefits: Power, prestige, and the opportunity to become a Washington insider with access to information and connections that no one else has, in an environment of privilege where rules that govern the rest of the country, don't always apply to them.

When Nancy Pelosi, John Boehner, and other lawmakers wouldn't answer Steve Kroft's questions, he headed to Washington to get some answers about their stock trades.

Most former congressmen and senators manage to leave Washington - if they ever leave Washington - with more money in their pockets than they had when they arrived, and as you are about to see, the biggest challenge is often avoiding temptation.

Peter Schweizer: This is a venture opportunity. This is an opportunity to leverage your position in public service and use that position to enrich yourself, your friends, and your family.

Peter Schweizer is a fellow at the Hoover Institution, a conservative think tank at Stanford University. A year ago he began working on a book about soft corruption in Washington with a team of eight student researchers, who reviewed financial disclosure records. It became a jumping off point for our own story, and we have independently verified the material we've used.

Schweizer says he wanted to know why some congressmen and senators managed to accumulate significant wealth beyond their salaries, and proved particularly adept at buying and selling stocks.

Schweizer: There are all sorts of forms of honest grafts that congressmen engage in that allow them to become very, very wealthy. So it's not illegal, but I think it's highly unethical, I think it's highly offensive, and wrong.

Steve Kroft: What do you mean honest graft?

Schweizer: For example insider trading on the stock market. If you are a member of Congress, those laws are deemed not to apply.

Kroft: So congressman get a pass on insider trading?

Schweizer: They do. The fact is, if you sit on a healthcare committee and you know that Medicare, for example, is-- is considering not reimbursing for a certain drug that's market moving information. And if you can trade stock on-- off of that information and do so legally, that's a great profit making opportunity. And that sort of behavior goes on.

Kroft: Why does Congress get a pass on this?

Schweizer: It's really the way the rules have been defined. And the people who make the rules are the political class in Washington. And they've conveniently written them in such a way that they don't apply to themselves.

The buying and selling of stock by corporate insiders who have access to non-public information that could affect the stock price can be a criminal offense, just ask hedge fund manager Raj Rajaratnam who recently got 11 years in prison for doing it. But, congressional lawmakers have no corporate responsibilities and have long been considered exempt from insider trading laws, even though they have daily access to non-public information and plenty of opportunities to trade on it.

Schweizer: We know that during the healthcare debate people were trading healthcare stocks. We know that during the financial crisis of 2008 they were getting out of the market before the rest of America really knew what was going on.

In mid September 2008 with the Dow Jones Industrial average still above ten thousand, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were holding closed door briefings with congressional leaders, and privately warning them that a global financial meltdown could occur within a few days. One of those attending was Alabama Representative Spencer Bachus, then the ranking Republican member on the House Financial Services Committee and now its chairman.

Schweizer: These meetings were so sensitive-- that they would actually confiscate cell phones and Blackberries going into those meetings. What we know is that those meetings were held one day and literally the next day Congressman Bachus would engage in buying stock options based on apocalyptic briefings he had the day before from the Fed chairman and treasury secretary. I mean, talk about a stock tip.

While Congressman Bachus was publicly trying to keep the economy from cratering, he was privately betting that it would, buying option funds that would go up in value if the market went down. He would make a variety of trades and profited at a time when most Americans were losing their shirts.

Congressman Bachus declined to talk to us, so we went to his office and ran into his Press Secretary Tim Johnson.

You can read the entire transcript here and I embedded the clip below. Of course, this hardly surprised me. As I wrote in my last comment, Homo Honimi Lupus, wolves and weasels abound in Washington, on Wall Street and at public pension funds.

I can write books on conflicts of interest at large public pension funds where I've seen it all. I have already discussed the Mother of all stealth scams and how to prevent fraud at public pension funds, but let me go over some key points below for auditors, board members and supervisors:

• Always assume someone somewhere is up to no good. It could be a pension fund manager on the take, accepting bribes from a hedge fund manager, private equity manager, splitting commissions with a broker he or she regularly trades with, pocketing money from a service provider who has been awarded a lucrative contract or whatever. When there is big money involved, people find ways to scheme. Seen it all at every level. And just because someone has a CFA or a fancy title, doesn't mean squat. In fact, some of the biggest weasels are those in positions of power. I trust nobody and if I was on a board, I'd hire only independent certified fraud examiners (CFEs not CAs) with experience to audit all activities and come up with comprehensive fraud.
• Protect whistleblowers. I can't stress enough the importance of protecting whistleblowers. I'm not talking about some bogus rule like "go see the CEO if you see something wrong." Nobody is going to risk their career if that's the case. Whistleblowers need anonymity and there have to be clear external channels to report fraud of even gross mismanagement. This way if someone gets fired after exposing wrongdoings, they have recourse.
• Term limits and common sense policies. If, for example, your head of real estate is giving billions to an external private equity fund, then he shouldn't be allowed to work for this fund for a minimum of 3 years (I think it should be 5 years). The same goes for hedge funds and other activities related to external funds. This is common sense but you'd be shocked to discover that few public pension funds enforce these rules. It's a scandal and sham government auditor reports do not cover operational risks and performance audits to make sure pension fund managers are truly doing their job in the best interests of their stakeholders. I would even go as far as imposing term limits on anyone who deals with external funds. When someone gets "too big, too powerful", they usually become too arrogant and become organizational liabilities.
• RFPs are useless. Why? Because the decision is usually taken a priori as to which fund or service provider will receive the money and the request for proposal is only there to weed out other potential candidates to make sure the firm of choice is selected. This goes mostly in US pension funds where they actually have RFPs posted online. In Canada, they do not even bother posting RFPs. Apparently we are too good for that.
• Wining, dining, and outlandish gifts. Most pension funds have rules but very few actually enforce them and track who is receiving gifts like tickets to sporting or entertainment events and being wined & dined at fancy restaurants by brokers, external fund managers, consultants or service providers.
  

The point is don't trust anyone, especially those that make the big money decisions as to which fund is receiving money. I guarantee you if certified fraud examiners went through their activities, past and present, most pension funds would not pass a comprehensive fraud audit.

Lord Acton once remarked: "Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad man." Nothing can be truer in government and in the private sector. And the same goes for public pension funds.

Took great pleasure watching Republicans and Democrats squirm as Steve Kroft asked them some tough questions. Nancy Pelosi had this contemptible disgusting air as she answered some straightforward questions. She was probably thinking "how dare you imply I did anything wrong?" Know of a few former and current pension fund managers who would react the same way.