Capitalizing on COVID: Analysis

“Governments don't control the markets,” newly installed Chancellor of the Exchequer Jeremy Hunt said last week when discussing the current financial difficulties the UK government is grappling with. The truth, however, is more nuanced as Hunt himself knows, given that market and banks' reaction to the mini-budget put forward by his predecessor set in motion events that toppled the UK Prime Minister, with consequences for millions of people.

This is no less true in the United States, and at no time more so than when politicians, responding to COVID, were planning to enact sweeping legislation to fundamentally affect the lives of entire nations. Could there have been any doubt about the consequences for America's finances? Could politicians have been expected to take a supremely ethical stance and somehow forget their insider knowledge the minute the working day ended and their private lives began?

The answer, according to the Wall Street Journal (WSJ), is no on both counts. Moreover, the measures in place to prevent politicians from capitalizing on their insider knowledge proved woefully inadequate, failing to prevent certain named individuals (and surely many others, too) from dealing in what became the distress of all those who were soon to be hit in their finances, their social ties, and their health.

The WSJ notes, 

Senior federal officials are required to disclose their financial assets and transactions and those of their spouses and dependent children in annual reports. . . . 

Federal employees are barred from working on matters in which they have a significant financial stake, from trading on nonpublic information learned on the job and from taking any official action that creates an appearance of a conflict of interest. 

However, the unique situation that evolved during the early days of the COVID “pandemic” did not concern just a single commodity or even just a single segment of the economy. The economy as a whole was impacted by the reaction of government to what they chose to define as a national emergency, and there are apparently no rules in place that address such a unique set of circumstances.

In early January 2020 most U.S. citizens were as yet unaware that a tidal wave of legislation was about to be unleashed upon them; most, but not all. Senior government health officials were the first to be alerted regarding a “strange new” virus sickening people in China; by the end of the month, the Centers for Disease Control and Prevention (CDC) was fully in the picture, as was the National Institutes of Health (NIH) and the FDA. 

The stakes for anyone holding stock in areas of the economy likely to be affected (especially Big Pharma and biotechnology) were clearly huge. Already at that early stage vaccines were being developed, though the general public had no idea of this. The WSJ notes that around 240 officials in government health agencies and the Pentagon (which was intimately involved in the vaccine rollout) then owned somewhere between $9 and $28 million of stocks in pharma and biotech companies that ended up winning federal contracts related to the COVID response in 2020 and 2021.

At the other end of the financial spectrum, the markets were heading for a crash. This was entirely predictable for politicians who were the authors of policies that would shut down industry, lock people into their homes, and cripple the economy. During the period immediately prior to the first lockdown, officials at Health and Human Services reported sixty percent more stock and funds sales than the average over the previous year. At the NIH the story was similar. By March, things were heating up even more, with “every major [government] agency drawn into the pandemic response."

The Wall Street Journal article does not specify why it focused on certain individuals and omitted others, but it does name a few individuals discovered to have been utilizing their insider knowledge for personal advantage. One is Hugh Auchincloss, Dr. Anthony Fauci's deputy at the NIH's National Institute of Allergy and Infectious Diseases. On January 24, 2020, when the stock market was still high but Auchincloss, Fauci, and select others knew it was all about to spiral right down, Dr. Auchincloss reported selling somewhere between $15,001 and $50,000 of a stock mutual fund (regulations do not require disclosure of precise amounts, only of brackets). Several days later, he sold another few mutual funds as well as stock in Chevron Corp.

Then, at the end of January, Auchincloss attended a meeting of an NIH working group called the “International Clinical Research Subcommittee” whose top item on the agenda was “Wuhan coronavirus – plans for a response.” Later that same day, he sold another six mutual funds worth up to $315,000. Soon enough, though, their value plunged, something he surely knew was bound to happen.

Another individual named by the WSJ is Stephen Redd, described as a “veteran epidemiologist” who was then deputy director for Public Health Service and Implementation Science at the CDC. Part of his job was to collect information on the novel coronavirus and the government's response to it in order to brief politicians.

In January 2020 stock and bond sales of up to a quarter of a million dollars were reported in Dr. Redd's name, repeated the next month. Questioned by WSJ, he denied knowing of the transactions at the time and claimed that they were made by a financial adviser dealing with his wife's retirement account. 

Health and Human Services was also approached for comment by the Wall Street Journal but declined to respond. A Pentagon spokesperson said only that “most” defense personnel do not work on issues affecting the finances of private companies.

So much for federal officials in the health sector. At the Treasury Dept., officials were no more likely to respect ethical boundaries as the government plotted ways to stabilize the nation's finances. The Federal Reserve as well, set about designing a package of measures to deal with sinking stocks and Treasury securities falling to record lows. In the last week of February, “officials at the Treasury and the Fed reported more than twice as many trades as they made during the same seven days of 2019,” the Wall Street Journal notes – and then, on February 28, Fed Chairman Jerome Powell issued a written statement indicating that the central bank was prepared to cut interest rates.

Over the next few weeks, Congress took further steps to quell the market unrest and began to negotiate a package of funds for both individuals and companies. Meanwhile, the exchanges were still falling – and also meanwhile, then-Transportation Secretary Ms. Chao, who happens to be the wife of then-Senate Majority Leader Mitch McConnell, made three stock fund purchases linked to the S&P 500 and general stock market, valued at up to $1.2 million, as she disclosed.

Was Ms. Chao possibly privy to information others could only guess at? On March 19, McConnell released the first draft of his stimulus bill. On March 23 the S&P 500 hit “rock-bottom”. But by the next day the stock market had “soared on the news,” and by the end of the month, Chao's investment was up by eight percent. (It would rise by another 49 percent by the end of the year.)

A spokesman for Ms. Chao told the WSJ that Chao's investments are guided by the advice of “financial professionals” and that the funds are "held separately from her husband and managed without his consultation.”