Only because Matt Levine is awesome, only for that reason. (emphasis is ours, originality is his)
I was a little tickled to read this morning that Ben Bernanke had refinanced his mortgage at around the same time the Fed announced Operation Twist in September. There are a couple of ways to read this story. One is that a hard-working and heavily mortgaged civil servant, savvy about the macroeconomy and the rates markets, decided that long-term fixed rates were as low as they are likely to be for a while and so September was a good time to refinance. The other is, as Simone Foxman tongue-in-cheek puts it, “Bernanke Personally Cashed In On Operation Twist.” Conspiracy theories abound with Bernanke, and I’m sure somebody somewhere really thinks that Ben Bernanke intentionally put the U.S. on a path to the Weimar-style hyperinflation that is coming any day now just to save a hundred bucks a month on his mortgage payments, but…I’m with her that it’s an amusing coincidence.If you like a slightly different flavor of conspiracy, though, you might ask: why wasn’t Bernanke refinancing in, say, July or August? Sure, maybe he was busy with the whole stewardship of the economy and/or after-dinner Kindle reading. Or maybe he knew that the Fed was going to move to lower long-term rates and so abstained from trading based on that. Maybe he was taking advantage of his insider knowledge to make a personal profit, or at least avoid a loss.
Or not, whatever, what a stupid thing to think. But I thought of it again when I read Mr. Steven A. Cohen’s cogent argument that insider trading rules are somewhat more ambiguous than the proper form of address for him:Cohen says the rules on what constitutes inside information are “very vague” and sometimes it can depend on whether the information will move a stock, hurt another trader or can be obtained through another source.
For instance, Cohen said if he got a tip that an analyst is going to downgrade a stock and his fund opts to buy the stock that is proper “because I’m on the other side of the trade.” …“You know, I mean, I can argue that someone else could think that a – being short in front of a sell recommendation is a non-event because it’s not going to move the stock, and somebody else would think, you know, that’s trading on material nonpublic information regardless if it moves the stock or not,” said Cohen. “These are judgment calls.”Now that seems right to me. And quite alarming when you think about it, because it means that if Cohen ever gets those calls wrong – if he ever, for instance, buys a security in front of a downgrade and then it goes up on the downgrade – then a prosecutor can second-guess him, convince a jury that he was trading on inside information, and send him to the sort of place where people will be calling him “Stevie” and meaning it.
Meanwhile, as you may have heard, insider trading law for Congress is even vaguer because, in addition to all that, nobody knows if it’s actually illegal for them to insider trade at all. Law professor Jonathan Macey has an op-ed in the Journal today that, while maybe slightly off on what the proposed ban on Congressional insider trading will actually say, gets the important things right:Congress’s rules would be clear and precise. And not too broad; in fact they are too narrow. For example, the proposed rules in the Stock bill are directed only at information related to pending legislation. It would appear that inside information obtained by a congressman during a regulatory briefing, or in another context unrelated to pending legislation, would not be covered.At a Dec. 6 House hearing, SEC enforcement chief Robert Khuzami opined that any new rules for Congress should not apply to ordinary citizens. He worried that legislators might “narrow current law and thereby make it more difficult to bring future insider trading actions against individuals outside of Congress.”This don’t-rock-the-boat approach serves the interests of the SEC because it maximizes the commission’s power and discretion, but it’s not the best approach. The sensible thing to do would be to rationalize the rules by creating a clear definition of what constitutes insider trading, and then apply those rules to everyone on and outside Capitol Hill.When laid out like that it seems obviously correct, doesn’t it? (Doesn’t it? Shouldn’t it be clear to people what the laws are, so that they only go to jail if they do something they know is wrong? Why is “mak[ing] it more difficult to bring future insider trading actions” necessarily a bad thing?) But of course when laid out by Steve Cohen it sounds like – well, it sounds like a big bad hedge fund manager complaining that following the law is just too darn hard. It sounds similar when various shady-sounding things happen like some Fed guys meeting with some hedge fund managers. People tend to blow up about that kind of thing.But everyone has information, everyone has ideas, and you can make lots of things sound shady. Even having an inkling about pretty macro things that might have a pretty broad and unpredictable effect on the markets could be insider trading, if you want it to be. Bernanke’s refi couldn’t actually be insider trading – because it wasn’t a “security,” and because whatever inside information he had, under this silly theory, caused him to *avoid* action rather than taking it – but if insider trading is a thing you like to fulminate about then it’s in the same ballpark. Or it would be if I hadn’t just made it up and it wasn’t stupid.
Here’s an even better sequence from Steve Cohen:BOWE: Mr. Cohen, are you familiar with the term “edge”?
COHEN: Yes, I am.
BOWE: That’s a word that you use at S.A.C., correct?
COHEN: I hate that word.
BOWE: What’s that word mean?
COHEN: It just means that somebody believes that in a particular situation, stock, that the word suggests that somehow their expectations are different than either investors’ expectations or Wall Street’s expectations.
BOWE: They think know something everyone else doesn’t, right?
COHEN: You know, I think that’s an over — I think that’s an incorrect characterization of the word.Right. “Edge” means that you had an idea, or a viewpoint, or a model, or – yes – information, that you thought gave you a better idea what markets would do than everyone else had. Insider trading laws are meant to put a very small corner of the world off limits for providing that edge. There’s lots of reason to believe that that’s not how they work – that the SEC and prosecutors like to go after all sorts of things that might cause, oh, let’s call it “aberrational performance,” and tell the public and juries that they’re doing it to preserve a “level playing field” for everyone. But when the SEC talks about “level playing fields” and rooting out “aberrational performance” one day, then the next day some inappropriately casual lawyer is insinuating to Steve Cohen that anything that provides “edge” is almost by definition illegal insider trading. And that leaves a whole lot of more or less honest people – Cohen, sure, but Bernanke too – in uncertain territory.