Trading Inside Congress

In a year full of financial scandals and regulatory debate it’s worth noting that one group of investors remains free to trade on insider information as much as they’d like: congress members.

It is perfectly legal for members of congress to trade on nonpublic information they learn on the job. At several points in time, legislation has been introduced that would outlaw congressional insider trading (most recently the Stop Trading on Congressional Knowledge, or STOCK Act) but, well… it never passes Congress.

Incidentally, members of Congress were worth a collective $2 billion in 2010, and that was nearly 25% more than 2008.  Is the fox guarding the hen house?

60 minutes this week highlighted the conflict of interest by questioning the ethics of such events as Nancy Pelosi’s participation in Visa’s 2008 IPO.  Since Pelosi is among the legislators tasked with creating and enforcing laws that directly affect the financial services industry, such an investment is a little disconcerting.

Ms. Pelosi’s nemesis is no better. After meeting with Paulson and Bernanke in September, 2008, and hearing that the country was headed toward almost certain catastrophe, John Boehner barely paused to lament the crisis on his way to withdraw his cash from a fund designed to profit from inflation.

Congress members, of course, claim that they don’t profit from their inside knowledge. But research by GSU business professor Alan Ziobrowski shows that house members’ portfolios beat the market by an average of 6% annually, and senators came away with a 12% edge.

Just today, likely as a reaction to the 60 minutes attention, Senator Scott Brown (R) from Massachusetts introduced a new version of the STOCK Act.

Perhaps if Congress makes move to promote its own financial responsibilities, bankers may begin to take its laws a bit more seriously.


About Eliza Ronalds-Hannon