According to a recent study, there’s a pretty good chance that all of the stimulus money currently sloshing around may stimulate some good old-fashioned insider trading among the politically well-connected — at least that’s what the experience of the last time Washington fired its cash bazooka suggests. A Stanford article says that the study looked at trading by politically-connected insiders at TARP fund recipients during the 2008 financial crisis.
That program bailed out a lot of financial institutions, but it wasn’t a model of transparency, and key details of the program were never publicly disclosed. This excerpt from the article says that insiders used that lack of transparency to their advantage:
This gave corporate insiders advance knowledge of the likely scope of government intervention and its impact on their institution. Larcker’s study finds evidence that many seemed to trade on the basis of this private information to earn higher returns than public shareholders. Prior to massive government stimulus, political connections had far less influence on trading decisions, the study shows. But in the nine months after TARP’s inception, transactions by politically connected insiders were correctly predicting future stock performance.
Federal law requires executives to disclosure equity stakes in their own firm through regulatory filings that investors pore over for clues about potential share price swings. The researchers’ analysis shows that trades were ramped up 30 days prior to TARP announcements. During allocation of government funds, insiders made 3,058 trades averaging $105,987 and yielding $22,251 in average market-adjusted profits ($68 million overall), significantly outperforming their unconnected counterparts.
One of the authors of the study suggests that the key to preventing abuses with the current stimulus spending lies in increased transparency — which he suggests the bipartisan insider trading legislation that the House passed last year would provide — and a longer cooling off period longer between a job in government and an executive position in the private sector, and vice versa. If I were you, I wouldn’t hold my breath on either of those recommendations being adopted.
-John Jenkins, TheCorporateCounsel.net July 28, 2020
