What Nancy Pelosi is doing should still be illegal

By:
on Jul 21, 2022
Updated: Aug 2, 2022
  • Nancy Pelosi traded $12.75 million of call options in 2021
  • Her portfolio grew by an estimated $26 million in 2020, as the COVID pandemic struck
  • She has defended her trading, saying the US is a "free market economy" and that should extend to lawmakers

Let me just kick this piece off by saying I don’t care about left vs right, blue vs red, Democrat vs Republican. I’m a numbers nerd that grew up in Europe, and the numbers are what I focused on here.

They call her the Queen of Stonks.

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Jaime Rogozinski, who founded the infamous Reddit forum WallStreetBets that took on the Goliaths of Wall Street hedge funds over the GameStop saga last year, refers to her as “the best meme stock trader in the world”.

Indeed, that same Reddit forum even launched an ETF to track her performance, such was her perceived dominance of the markets historically.

She is, of course, Nancy Pelosi, the US House Speaker whose returns in the stock market have astonished many.

Insider trading

Nancy Pelosi claims it is her 81-year-old husband Paul Pelosi that transacts in the market, but this has not put rest to the suspicions that the pair’s returns are too good to be true. Either way, US legislation means anyone can now view the Pelosis’ trades. So I did exactly that.  

First, let’s look at her portfolio during the decade 2010 – 2020, which was estimated by Sludge using the mean of the minimum and maximum asset values reported by Nancy and Paul Pelosi in annual House disclosures.

Looks good. Taking the above asset values and translating them to annual returns, we see the below distribution. Over the entire decade, the Pelosis grew the portfolio by 54%.

A 54% growth rate constitutes a 4.4% annualised return, which in the context of today’s bear market, seems like a far-fetched dream. But this was a decade when the stock market steamrolled all before it. In fact, layering the S&P 500 over the Pelosis’ returns in the below graph shows they underperformed the market over the full-time period.

However, this is misleading as it is judged solely on asset size. Sell orders, as well as capital inflows, interfere with this meaning a simple percentage comparison is spurious. Unfortunately, the data isn’t exhaustive enough to do a full analysis – it would be nice to be able to complete a hypothesis test, say, assessing whether there is statistically significant evidence at a reasonable confidence interval that the Pelosis have acted on inside information (assuming the stock market follows a random walk, of course, which is a matter for another day).

Isolated Trades

But we will need to be content with isolated trades, meaning it’s admittedly less scientific. However, some cases seem dubious at best.

On May 21st 2021, for example, Pelosi purchased up to $1 million worth of call options in Amazon, along with up to $250,000 in call options on Apple. Reading the disclosure form, Pelosi purchased 20 Amazon call options with a strike price of $3,000 and an expiration date of June 17, 2022, while there were also 50 Apple call options with a strike price of $100 expiring on June 17, 2022.

For anyone unaware of how options work, they are highly leveraged bets which have enormous upside if the share price can move above the “strike” price before the expiry date. In the above case, Pelosi was betting that the Apple share price would rise above $100 before June 17th 2022, and Amazon would rise above $3,000 by the same date.

If these scenarios happen, Pelosi would net a potentially huge windfall, depending on how far the shares rose.

The big problem here, however, is that these stock purchases come as Pelosi and the House of Representatives were working on anti-trust legislation to rein in the power of the big tech companies such as Apple. Apple CEO Tim Cook even called Pelosi to voice his opposition to the legislation, around the same time period she bought the Apple share options.

Indeed, in 2021 Pelosi traded $12.75 million worth of call options (assuming maximum disclosures). This is frankly hard to believe, given she holds a position where she could not only easily have inside information on a variety of factors, but also actively influence them.

It also goes beyond legislation against certain companies – it’s not beyond the realm of belief to suspect she may have an inside track on all sorts of discussions surrounding the monetary environment or other economic developments before the public does.

Pelosi softens on legality

Pelosi has in the past defended her actions (or, her husband’s, I should clarify), contesting that the US is a “free market economy” and that she sees no reason that lawmakers should not “be able to participate in that”. Hmm. I’ve got a few reasons, Nancy.

However, with growing scrutiny on her transactions and antics, it seems Pelosi has softened. Earlier this year, she supposedly u-turned to greenlight a bill that would ban members of Congress from trading stocks.

Montana senator Steve Daines summed it up well when he protested “when you’re elected, you’re here to serve the people, not the elite, and [a stock trading ban] I think is a step forward, an important step forward, to restore the faith and trust of the American people in this institution”.

Conclusion

This should not really be an issue. Pelosi goes to work every day, having been voted in by the American people, and deals with matters of legislation which can be of highly influential economic and societal importance. Her day should not end with her coming home to her husband telling her that he has been whacking BUY on a whole load of high-upside call options on the very same companies that her decisions will affect.

In closing, let’s get back briefly to the ETF mentioned at the top of the article. With Pelosi required to publicly disclose trades within 45 days of transacting, the ETF can’t follow her performance exactly, but can sometimes ride the coattails.

As for the name of the ETF? It’s the Insider Portfolio ETF, with the ticker symbol INSDR. I like that.

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