IF YOU COME into Congress already rich, serving there will give you an opportunity to become even richer.
In early 2008, Speaker of the House Nancy Pelosi and her husband, Paul, placed a very big bet. On March 18, the Pelosis made the first of three purchases of Visa stock, totaling between $1 million and $5 million.1 But this was no ordinary stock transaction. Somehow the Pelosis managed to get their hands on shares of what would become one of the most popular and lucrative initial public offerings of stock in American history. An IPO, as the name implies, is the first stock offering made by a company prior to its going public. Visa had been privately held by a group of banks up until that year.
Mere mortals would have to wait until March 19, when the stock would be publicly traded, to get their shares. According to the Pelosis' financial disclosures, two of their purchases were made after the nineteenth, but one was made before. They listed all three purchases together on their disclosure statement, making it impossible to know how many shares they purchased in the initial offering.
In any event, getting access to this IPO was virtually impossible for the average individual investor. MarketWatch and other news organizations reported that the IPO was "oversubscribed." In the words of IPO analyst Scott Sweet, it was drawing "extreme demand." Virtually all of the Visa IPO shares were going to institutional investors, or large mutual funds or pension funds. Renaissance Capital declared the offering to be the "IPO of the year."2 Who got these coveted shares? Only "special customers," hand-picked investors, received the IPO shares at the opening price of $44. Two days later, after public trading began, the stock price jumped to $65 a share. In short, the Pelosis made a 50% profit on their investment in a matter of two days. They liked the stock so much, they made another purchase, on March 25. On June 4, 2008, they made a third purchase—and Visa stock closed at $85 a share.
What makes this all the more remarkable is that this single investment represented at least 10% of the Pelosis' stock portfolio and potentially as much as half of their equity holdings (depending on where in the range of $1 million to $5 million it actually fell). They were staking a good part of their fortune on one company. How unusual was this for the Pelosis? Although rich in real estate, according to their financial disclosure form, they had only once before committed more than $1 million of their assets to a large, publicly traded corporation: Apple Computer.
It was an enormous risk. Or was it?
The Speaker of the House and her husband just happened to get those IPO shares barely two weeks after a threatening piece of legislation for Visa was introduced in the House of Representatives. John Conyers, chairman of the House Judiciary Committee and an old liberal warhorse, was joined by conservative Republicans Chris Cannon of Utah and Steve King of Iowa, among others, in introducing the Credit Card Fair Fee Act of 2008. The bill had forty-five sponsors in all. It would effectively allow retailers to negotiate lower fees with Visa and the other credit card companies. Retailers argued that these companies—American Express, Visa, MasterCard, and Discover—often set fees together, like a cartel.
By way of background, it's important to understand that Visa does not issue credit cards or make loans; banks do. Visa makes its money by licensing the Visa name and through something called an interchange fee. Every time you use a card at a store, the merchant pays Visa an interchange fee, somewhere between 1% and 3%. Merchants argued that Visa, MasterCard, American Express, and Discover should not be able to keep their fees so high. The Credit Card Fair Fee Act would have amended antitrust laws to require the card companies to enter negotiations with merchants over their interchange fees, and if they could not agree on fees, the Justice Department and the Federal Trade Commission would be empowered to arbitrate. These fees are a huge source of revenue for Visa and the other credit card companies, and a constant thorn in the side of merchants. In 2008, the four companies took in $48 billion in revenue, or about $427 per household, from interchange fees.3
Needless to say, Visa and the others were adamantly opposed to the legislation. It was a very "bad bill," in the words of Visa's general counsel.4
One would think that this piece of legislation would appeal to Pelosi. She had been outspoken about antitrust problems posed by insurance, oil, and pharmaceutical companies. And she was vocal about the need for controlling the interest rates individual banks charged to use their credit cards. This particular bill had grown out of a House Judiciary Committee Antitrust Task Force Subcommittee study.5 Big lobbying groups like the National Retail Federation and the National Grocers Association were strongly in favor of it. Indeed, the Maplight Foundation looked at the campaign contributors pushing for this bill on both sides of the aisle and found that Pelosi received twice as many contributions from supporters than from opponents. On top of that, the bill was popular with the public, too. One survey revealed that a whopping 77% of voters were in favor of its passage.6
In fact, the bill did pass in the Judiciary Committee on a 19–16 vote, with yeas from 10 Democrats and 9 Republicans. Supporters of the bill were excited. "There is certainly time for the bill to reach a vote before the full House before the end of the year," said one. It was only mid-July.7
The National Association of Convenience Stores lobbied for a vote. "It is imperative to tell your Representative to request a vote on the House Floor from Nancy Pelosi," the association wrote to its members. Supporters of the bill waited. And waited. And waited. Speaker Pelosi made sure it never got a hearing on the House floor.
Around the same time, Congressman Peter Welch of Vermont introduced a second bill on interchange fees. Called the Credit Card Interchange Fee Act of 2008, it did not go as far as the Credit Card Fair Fee Act. Welch's bill was merely a call for transparency: it would require the credit card firms to let consumers know how much they were paying in interchange fees. Again, Visa was adamantly opposed. This second bill suffered the same fate as the first, never making it to the House floor.
The following year, both bills were reintroduced. Conyers's bill, now called the Credit Card Fair Fee Act of 2009, had even more support this time, including among conservative Republicans like Joe Barton of Texas and liberals like Zoe Lofgren of California. Welch reintroduced his bill as well. Yet again, neither made it to the House floor.
To be sure, Speaker Pelosi did champion a credit card reform bill, one that did become law, but it focused on interest rates charged by the banks. The Credit Card Reform Act provided consumers more information about credit card fees and prevented the issuers of credit cards from jacking up rates. Pelosi declared, on November 4, 2009, that the Credit Card Reform Act was a great victory. "Today, the House voted overwhelmingly to send a strong and clear message to credit card companies; we will hold you accountable for your anti-consumer practices," she said.8 None of this affected Visa, however, only its client banks. Interchange fees were not touched, though the bill contained a vague clause stating that the issue should be "studied." Little surprise, then, that Visa stock went up when the bill passed. Having squelched legislative action on interchange fees for more than two years, Speaker Pelosi and her husband saw their Visa stock climb in value. The IPO shares they had purchased soared by 203% from where they began, while the stock market as a whole was down 15% during the same period. Isn't crony capitalism beautiful?
Congress did eventually act to deal with credit card swipe fees. But Speaker of the House Pelosi had little to do with it. The Frank-Dodd Wall Street Reform and Consumer Protection Act included a clause that required the Federal Reserve Bank to study and take action on the matter. Pelosi was pushed by her colleagues to support these efforts, but remained outside the fray.9
All too often we think of corporate interests in terms of campaign contributions or lobbyists. There is a more direct path for corporations and executives to advance their interests: help politicians get rich.
Companies recognize the importance of having friends in powerful places, and granting them access to an IPO is one way to reward them. Members of Congress often participate in IPOs that are difficult, if not close to impossible, for ordinary Americans to join. Pelosi and her husband have been involved in no less than ten lucrative IPOs during her congressional career. Not all IPOs, of course, are beyond the public's reach. And some are available by auction, theoretically making them accessible to everyone (assuming your broker is handling the auction). Still, the Pelosis' track record for IPO participation is impressive. These transactions have played a role in making the Pelosis wealthy.
PROTECTING OUR INVESTMENT
Often the Pelosis received stock in an IPO and then sold it days later for a huge profit. In 1993, they bought IPO shares in Gupta, a high-tech company. After the price soared 88%, they sold it the next day. They did the same when they participated in IPOs involving Netscape and UUNet, both of which doubled in value the same day. They also gained access to other oversubscribed IPOs, including those of Remedy Corporate, Opal, Legato Systems, and Act Networks. They sold all of them within a month or two for hefty profits.
The Pelosis may well have participated in even more IPOs, but Nancy Pelosi's financial disclosure forms often obscure dates on which they bought stocks. In December 1999, for example, they bought between $250,000 and $500,000 worth of stock in a high-tech company called OnDisplay. The Pelosis don't tell you exactly when they got the shares; they simply list "2X various dates" for the transactions on the congresswoman's disclosure form. OnDisplay went public in mid-December of that year, so the purchases must have happened in that month. And the investment worked out very well. Months later, OnDisplay was bought out by Vignette, and the Pelosis made up to $1 million in capital gains. Interestingly, Vignette's IPO was underwritten by William Hambrecht, an investment banker, a longtime friend of Nancy Pelosi's, and a major campaign contributor.
A few years later, the same Bill Hambrecht went before the House Finance Committee, chaired by Barney Frank, a Pelosi ally, to push for a change in the registration process for stock IPOs, an exemption called Regulation A. Under current law, a company that plans an IPO of less than $5 million in stock gets an exemption from detailed reporting. Hambrecht wanted the exemption raised to $30 million, which would greatly benefit his business, making IPOs easier, quicker, and far less expensive. As the hearings began, Congressman Frank said, "I should note also that it was Speaker Pelosi who first called this to our attention earlier in the year. It is something that the speaker has taken a great interest in because of her interest in job creation, so we have had to find a way to have this hearing."10 Indeed!
Pelosi is not alone in benefiting from IPOs. Other lawmakers have profited from public offerings issued by companies and entities interested in currying favor in Washington. Senator Robert Torricelli, for example, made $70,000 in one day, courtesy of a New Jersey bank's IPO. In 1997 alone, Torricelli was involved in no fewer than nine stock IPOs. Senator Jeff Bingaman enjoyed a 378% return on his investment in Avanex after just one day of trading. Senator Barbara Boxer reaped rich returns after she was given the chance to participate in IPOs involving Avenue A (up 200% the first day) and Interwave Communications (up 184%).11 There are no doubt many other lawmakers who have participated in IPOs, but they are not required to designate their stock transactions as such. And it is extremely difficult to track IPO transactions given to politicians.
Congressman Gary Ackerman was given access to stock in a private company—and he didn't even need to use his own money to make a large profit. Ackerman, who sits on the Financial Services Committee, had the opportunity in 2002 to buy private shares in a company called Xenonics, which makes military-related technologies. The investment didn't cost Ackerman one cent. The firm's biggest shareholder, Selig Zises, loaned the congressman $14,000 to buy the stock. "Gary is one of my closest friends," explained Mr. Zises. "I was only happy for Gary to make some money. If the thing succeeded, he paid me back."12
Ackerman used his position as a congressman, and as a fervent supporter of Israel, to arrange a meeting between Xenonics executives and Israeli officials to discuss a deal involving the company's night-vision systems. After the company went public in 2005, Ackerman was able to sell his shares for more than $100,000.13
Did Ackerman do anything wrong? Most of us would say yes! But experts say that based on current rules, the only thing he did wrong was not have a written agreement covering the loan. Otherwise, it was all aboveboard—at least according to House ethics rules. Think of it: you can get IPO shares in a company, buy them with money from a friend, make lots of money, and your only mistake is not writing the loan down on paper.14
Other members of Congress could be singled out too. But Nancy Pelosi stands out for two reasons: not only is she enormously wealthy, and thus (like John Kerry) able to invest in large amounts, she is also one of the highest-ranking members of the House. There are many companies that want to curry favor with the Speaker or majority leader of the House of Representatives.
One of the IPOs that the Pelosis participated in was Clean Energy Fuels, in which they landed up to $100,000 of stock. The company was founded by Texas billionaire T. Boone Pickens, who wanted to promote the use of liquid natural gas as a solution to America's dependence on foreign energy. In other words, the company was hoping to exploit America's vast natural gas reserves while reducing our dependence on petroleum. Arguably, that's a fine goal. As the Wall Street Journal noted at the time, expanding natural gas was a key plank of the Democratic Party's energy platform.15 What isn't so fine is that the Pelosis now had a financial stake in the issue. As Speaker, Nancy Pelosi pushed a series of bills that would benefit Clean Energy Fuels. The stock did well. The Pelosis got it at around $12 a share. By April 2010, it was trading at more than $20 a share.
The Pelosis' investment in natural gas did not end there. In November 2007, they participated in yet another IPO, this one involving Quest Energy Partners. They bought up to $500,000 in what was described by investment advisers as "a company that exploits and develops natural gas properties." (This IPO was handled by Wachovia Securities.)16
Pelosi became a champion of natural gas, pushing for tax benefits as well as aggressively backing global warming legislation that would tax carbon emissions. Natural gas would benefit enormously if any of these bills became law. Pelosi went so far as to state on Meet the Press, "I believe in natural gas as a clean, cheap alternative to fossil fuels." (Of course, natural gas is a fossil fuel.) There is nothing wrong with a policy decision to reduce our dependence on foreign oil. But there is something wrong when the policymaker has a financial stake in the game.
In 2008, Clean Energy Fuels also backed California Proposition 10, a ballot initiative that would require the state to float a $5 billion bond offering to subsidize the purchase of "alternative fuel" vehicles. Clean Energy Fuels donated at least $3.2 million to the ballot campaign. Nancy Pelosi endorsed the initiative.
In corporate America this would be a clear conflict of interest. Persuading a corporation to spend money on an initiative that you as an executive would personally profit from would raise huge questions. And if you were a middle-level employee in the executive branch of government, such a conflict of interest would trigger an investigation. Trying to help companies in which you have a large financial stake become more profitable through congressional legislation is the very definition of conflict of interest. But Pelosi tried to turn what was a vice for most everyone else into a virtue. "I'm investing in something I believe in," she told Meet the Press host Tom Brokaw. "I believe in natural gas as a clean, cheap alternative to fossil fuel." But, of course, she was also investing in something she could make more profitable by changing government policy. When Brokaw asked her that very question, she responded, "That's the marketplace."17
But it's a marketplace where politicians get to set the terms and the rules and influence the outcome. Accumulating wealth or growing the wealth you already have is much easier when you have a piece of the action.