Is Your Congressman Trading on Inside Information?

By Megan McArdle

"It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress" ~Mark Twain

CBS aired a report last night about congressional insider trading, based on a new book by Peter Schweizer of the Hoover Institution.  The allegations are pretty lurid:

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After seeing similar accusations floating around the web for years, I finally wrote a story about this phenomenon a few months ago.  While I have not yet read Schweizer's book, the academic evidence on congressional insider trading is mixed:  an older study found a huge effect (Senators outperform the market by 12%, while house members outperform by a still impressive 6%); but a newer study, as yet unpublished, showed that as a group, congressmen slightly underperform index funds.

How to reconcile this with the eye-popping trades described in the 60 Minutes piece?  Spencer Bachus betting that the economy would tank right after he was briefed on the financial crisis in 2008; John Boehner buying health insurance stocks shortly before the public option was finally killed; Nancy Pelosi getting preferential IPO shares in Visa right around the time a bill that would have hurt credit card processors was defeated.

Well, each of these trades does have an innocent explanation.  In late September 2008, it was getting fairly obvious that there was big trouble afoot in the markets.  Similarly, it was clear that the public option was dead long before its obituary ran.  And Nancy Pelosi is a very wealthy lady; those types of accounts do get preferential access to IPOs.

The problem is, they also have a non-innocent explanation.  And there's the rub: we don't know.  We ought to be able to trust our congressmen.  But when they won't take even small steps to improve their transparency--Louise Slaughter's STOCK Act has gone nowhere even though its requirements are hardly onerous--then the mistrust gets even worse.

There's not even a way to prosecute this under the law; it is at best ambiguous whether it's even a crime for our legislators to trade based on their inside information (the way it is for every single other person in the country).  And even if it were decided that it is a crime, I encountered a reluctance among government officials to even talk about the subject, which suggests that it would be difficult to get anyone to bring a case.

Schweizer and I agree on the solution: with some exemption for family-owned businesses and real estate, all the assets of congressmen ought to go into a blind trust (I would also be okay with stock and bond-market based index funds that they can only reallocate once a year).  That would eliminate both the appearance of impropriety, and the temptation that any human being must feel to lean on the scales in a way that benefits their portfolio.

But past results offer little chance that this will happen.  These studies come out a few years, some outraged journalists cover them, and then . . . nothing.  Congress has no incentive to fix the problem.  And voters don't seem to care enough to make them.

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