May 17, 2022


Skillful Business Crafters

Financial self-dealing is rotting our government

If an unrelenting pandemic, legislative gridlock, a looming election in Virginia and a supply chain crisis weren’t causing enough national anxiety, Washington has something else in store: a legitimacy crisis at the Federal Reserve.

On Monday the Federal Reserve banned its officials from trading individual stocks after a growing scandal over personal stock trading during the pandemic by top federal reserve officials implicated Fed Chair Jerome Powell. Powell’s trades likely weren’t made with any insider knowledge, but the visual of America’s economic stewards playing in their personal portfolios as the stock market burned is an unsavory one. 

Powell’s trades may be clean, but that certainly isn’t the case for all involved. Regional Federal Reserve Presidents Robert Kaplan and Eric Rosengren both announced hasty retirement plans after media investigations into their trades revealed conduct that veers dangerously close to outright criminality.

Public trust in government sits near historic lows. If our nation wants to avoid a serious legitimacy crisis in the near future, Congress must act to shore up ethics at the highest levels. They can start by passing bold legislation to shore up ethics laws where necessary, and craft new laws where our recent experiences have revealed dangerous gaps. 

Earlier this month, Sen. Elizabeth WarrenElizabeth WarrenMichelle Wu elected as Boston’s first female mayor Ocasio-Cortez defends climate provisions in spending bill: ‘I have to live in this future’ Financial self-dealing is rotting our government MORE (D-Mass.) called on the Securities and Exchange Commission (SEC) to investigate potential instances of insider trading at the Federal Reserve. That’s a good start, but start picking at Washington’s insider trading epidemic and you’ll find a city awash in market-moving confidential information and a political elite trading on secrets with impunity. 

On Oct. 21, Business Insider published a list of 43 lawmakers flagrantly violating the STOCK Act, a 2012 law designed to curb insider trading in Congress. That’s because in most cases, the penalties for violating the STOCK Act are nonexistent. “While lawmakers who violate the STOCK Act face a fine, the penalty is usually small — $200 is the standard amount — or waived by House or Senate ethics officials,” Insider’s Dave Levinthal writes. And while watchdog groups have periodically pushed for tougher conflict-of-interest laws to rein in the worst excesses, it’s been nearly a decade since any serious insider trading legislation made it to the president’s desk.

Official self-dealing has become such an expected part of American public life that TikTokers have taken to monitoring lawmakers’ stock trades, offering both critiques of their investment strategies and pointed criticism of elected officials mingling their access to private market information with their suspiciously-timed and surprisingly lucrative personal stock plays. The TikTok kids may be all right, but they shouldn’t be responsible for policing the ethics of our lawmakers. 

At the same time the Federal Reserve was putting in place basic safeguards to make corruption a little bit harder, the Office of Congressional Ethics was addressing Rep. Mike KellyGeorge (Mike) Joseph KellyThe Hill’s Morning Report – Presented by ExxonMobil – Political earthquake rocks Virginia; New Jersey too close to call The Hill’s Morning Report – Presented by ExxonMobil – Manchin drama intensifies; all eyes on Virginia Financial self-dealing is rotting our government MORE’s (R-Pa.) shady financial dealings. With the help of his wife, Kelly earned a tidy profit during the Trump administration by trading in the stock of a local steelmaker based on privileged information Kelly picked up during the course of his legislative work.

“The ethics report details an aggressive push by Kelly, who worked closely with the company while pressing administration officials, including Mark MeadowsMark MeadowsTrump, Jan. 6 panel lawyers head to court in executive privilege fight Georgia secretary of state: Trump ‘had no idea how elections work’ Trump looks to block 770 pages of records from Jan. 6 panel: court records MORE, who was Trump’s chief of staff at the time,” the Associated Press reported. After Kelly’s lobbying resulted in Trump administration action to protect domestic steel, “Word of the development spread quickly through Kelly’s office, and the following day — several days before the announcement was made public — Victoria Kelly purchased between $15,001 and $50,000 worth of stock in the company.” 

But despite Kelly offering a flagrant example of government corruption, it’s unlikely he’ll face serious consequences due to a congressional accountability structure shot through with holes. Fortunately, Congress can address these gaps by passing legislation requiring the House Ethics Committee to follow through on referrals for subpoenas or further investigation made by the Office of Congressional Ethics. 

Laws will help control the rising tide of insider trading among our leaders. But we must also ask why so many lawmakers and officials from both parties feel no shame engaging in transparently crooked financial schemes. Replacing norms with laws makes enforcement more reliable. Replacing the outcome-based morality that is currently eating away at Washington will prove harder.

Of course, we could also address the problem directly by banning lawmakers from buying and selling individual stocks while they serve the national interest. That’s an idea supported by 67 percent of Americans — and an easy political winner for Democrats and Republicans.

After years of barely-veiled corruption by those elected to serve us, only a complete firewall between personal financial profit and public service can restore public trust in our institutions. 

Max Burns is a Democratic strategist and founder of Third Degree Strategies, a progressive communications firm. Follow him on Twitter @themaxburns.