At Bloomberg, Joshua Green reports on a Hill aide who gave a lobbyist a tip that Medicare was about to raise some reimbursement rates. The lobbyist told an investment analyst, who told clients, many of whom profited.
This episode is a prime example of the shadowy Washington business of “political intelligence”—gathering inside information on executive, legislative, and regulatory developments and selling it to Wall Street investors, who pay large sums to keep abreast of what’s going on behind the headlines and trade on it before anyone else. It’s clear such information is valuable. An August 2014 paper by two finance professors at the University of Illinois at Urbana-Champaign found that hedge funds which hired Washington lobbyists “gained an informational advantage in trading politically sensitive stocks” and outperformed funds that didn’t by 63 to 87 basis points per month. (A basis point is one one-hundredth of a percent.)
Initially the banking and financial-services industries weren’t a big focus, because they weren’t often the subject of major legislation. That changed when the financial crisis hit in 2008. The massive government intervention in the economy and the blizzard of new programs aimed at propping up banks and homeowners put a premium on insider knowledge. The intelligence industry mushroomed. By 2009 it was a $400 million business, according to Integrity Research Associates, which tracks the sector, although nobody knows the industry’s size for sure. Unlike lobbyists, political intelligence shops aren’t required to disclose their clients or revenue. Most operate in the shadows.
As demand grew, the field became more competitive and the tradecraft evolved. In Washington, it’s an industry hiding in plain sight. Its members swarm Capitol Hill receptions and think tank panels and even try to infiltrate background briefings for reporters—anything to suss out useful information. “You can recognize the political intelligence people by their designer eyeglass frames,” says Alec Phillips, an economist at Goldman Sachs in Washington. A former Senate Banking Committee aide says hedge fund managers often use their standing as big campaign donors to arrange private briefings with lawmakers; some also give money to think tanks to have access to well-connected specialists.