As you know, Congress oversees the bureaucracy. It’s agencies, the unelected bureaucrats that make a lot of the regulations that affect our lives. Colloquially, you might know this as a part of The Deep State. The Senate Banking Committee and the House Financial Services Committee oversee the Securities and Exchange Commission (SEC).
The GameStop saga has laid a lot of things bare. But one thing that needs pointing out is that most of the people on those committees have no clue how the entire financial system as it pertains to exchanges and markets works. I am not impugning the personal characters of the Senators and House members on the committees. In 99.9% of the cases they are decent and intelligent people. What I am saying is most of them have no clue when it comes to understanding the industry they are charged with overseeing. It is rare when you find an elected official that really and truly understands. Not rare like a four leaf clover rare. Rare like seeing a tiger in the wild rare.
I am not talking about trading markets either as plenty of elected congresspeople seem to know how a brokerage account works. I am talking about understanding the mechanics and plumbing, and truly understanding.
A lot of them have sterling credentials. Many graduated from Ivy League schools, and almost all of them graduated from a top law school. Most are career pols or served as prosecutors or something similar prior to their Senate term.
Financial services companies spend a lot of time and money trying to educate them. It’s a full-time gig. The Chairpeople and CEOs of banks, insurance companies, and exchanges spend almost as much time in Washington as they do in their home office. Lobbyists are hired and know chapter and verse about bills and pending issues. Of course, that’s where knives are sharpened. Maybe a particular segment of an industry that can afford to hire the lobbyists don’t want a particular thing happening. They will advocate like heck for it even if the new policy is “good for the industry”. Sometimes they swing the knives at each other as I blogged about with Single Stock Futures.
Appointments to committees are all about politics. For example, if you are from Illinois, New York, or Georgia you have a better shot at getting on the Banking or Financial Services Committee because you have markets in your backyard. As former Senator Carol Mosely Braun once opined to Senator Tom Daschle when she was fighting for committee assignments, “the exchanges are to Illinois as oil is to Texas or milk is to Wisconsin”. Carol didn’t have market experience but she got on the Banking Committee.
This came up in a Clubhouse discussion I was a part of hosted by Benzinga Founder Jason Raznick.
This is why we often have a bad reactionary policy to shocks in financial markets. Dodd-Frank is just one singular example. The prior answers to crisis in 2007 and 2008 of TALF, and TARP were terrible too.
Senator Warren came out last week and said stocks ought to trade on fundamentals. I don’t think she understands that stocks trade on fundamentals and things other than fundamentals, like speculation. Sometimes stocks just where they trade because of market dynamics. If she thinks Tesla ($TSLA) is trading on fundamentals, can she please tell me what fundamentals point to a price-earnings ratio of 1267? A competitor, Fiskers, isn’t close to the same valuation. What if Chewy founder Ryan Cohen, who has purchased a lot of GameStop stock, takes control of GameStop and turns it into a scalable internet company like Netflix ($NFLX 87 P/E ratio)? Except, unlike Netflix, the company would have an established brick and mortar base that has positive cash flow? Where should it trade then? On the current accounting fundamentals? Or on the expectation that a guy who did it before can do it again?
Of course, central planning advocates like Senator Warren aren’t aficionados of the capitalistic free-market system. The Senator sits on the Senate Banking Committee. She helps oversee the SEC that oversees the market. She also comes up with a lot of statements around banking, insurance, trading, clearing, finance, taxes, and wealth that seem logical, but are really based on the logic of thin air. Vapid ramblings and thoughts you might say. Maybe she read some smoke signals somewhere.
The dual chairmen of the very powerful Senate Banking Committee, Senator Crapo and Senator Brown have exactly zero experience in the market. They are both career politicians and lawyers. Senator Toomey’s bio says he worked in the financial services industry but doesn’t specify what or where. He’s retiring after this term. Senator Rounds had an insurance business. Senator Kennedy was a state treasurer. Senator Warner was the CEO of a large telecom. Senator Reed was an attorney specializing in banking and securities law. (I used to know Jack and he did know his stuff).
The rest of the Senators are career politicians. They didn’t have business experience before being elected. They were state legislators or some other political stepping stone to their current position. No one ran a bank, clearinghouse or exchange. Senator Kelly Loeffler, who was appointed to her position and then lost her subsequent Senate race, was the only one that had that sort of experience. She was CEO of Bakkt, and was a part of the ICE management team prior to that.
In the House, it is no better. Representative Maxine Waters is the Chairperson. No banking experience. No market experience. Career politician. There are several more members and I only looked at the ones from Illinois, NY, and Georgia where the largest financial marketplaces reside. None of the Representatives from those states have any true banking or market experience. The ones I saw also weren’t exactly what you would call “free market advocates”. Illinois’ Chuy Garcia is a socialist/communist.
As we wade through very complex concepts like cryptocurrency, Congress doesn’t have a hope of understanding the real issues at the core of why or why not. This phenomenon isn’t isolated to financial services. It’s in a lot of industries where regulators set the pace, and legislators oversee them. I think the issues in finance are significantly harder to grasp than other industries, but that might be my personal bias showing and because I have had a lot of experience with financial illiteracy in the US. There is a lot of it to go around on Capitol Hill.
If you wonder why hearings become hyper-political and devolve into soundbite attacks, the above is why. There isn’t a lot of real world experience in the halls of Congress.
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