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Is Congress picking stocks with insider information?

“It’s not illegal, but I think it’s highly unethical, I think it’s highly offensive and wrong.”
That’s Peter Schweizer, a researcher at the conservative Hoover Institution at Stanford University, talking about the ability of members of Congress to make trades in the stock market based on inside information they’ve gleaned from their positions on Capitol Hill.

Does that sound unbelievable?

Check out this clip of Schweizer from the “60 Minutes” interview.

The show hits a wide swath of lawmakers, from House Speaker John Boehner (R-Ohio) to House Minority Leader Nancy Pelosi (D-Calif.). Perhaps the most egregious example: Rep. Spencer Bauchus (R-Ala.). Bauchus, who now chairs the House Financial Services Committee, was sitting in meetings with Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson during the early stirrings of the financial crisis and then making big bets that the stock market would tank.

Isn’t this already illegal? Amazingly, no, say sponsors of the STOCK Act, a bill that would make it illegal for members of Congress to trade on such information. Here’s what a 2006 fact sheet from one of the bill’s sponsors, Rep. Louise Slaughter (D-N.Y.) says:

MYTH:  Even if congressional insider trading is not covered by current insider trading laws, congressional insider trading is illegal under other laws.

FACT:  In 1958, the House of Representatives adopted the Code of Ethics for Government Service into its Ethics Rules.  Clause 8 of the Code of Ethics states that “Any person in Government service should…[n]ever use any information coming to him confidentially in the performance of governmental duties as a means for making a private profit.”  However, this is a House Rule, enforceable only by the House Ethics Committee on an internal basis, and not a law under which a Member or staffer can be prosecuted.  Recent years have proven that House Ethics Rules are rarely, if ever enforced.  In those cases where they are enforced, Members receive little more than a slap on the wrist.  In addition, there is currently no mechanism in place within the House to track and monitor this.  If we want to put an end to this practice, we must develop a new law that can and will be enforced.

In addition, the Code of Ethics for Government Service has not been adopted by the Senate and therefore does not apply to Senators or Senate staffers.

Finally, House Rules do not have any effect on those outside of the House. The Code of Ethics for Government Service has no impact on “political intelligence” firms who gather information from Members of Congress or their staffers and share that information with outside investors.  In addition to shutting down congressional insider trading by Members and staffers, the legislation will prohibit trading based on information gathered and sold by “political intelligence” firms.

This is not to say that all or even most members of Congress are running around making huge profits off of insider information, as Schweizer – whose book on the subject is being released tomorrow – acknowledges. But the point is, they could be and it wouldn’t be against the law. “It’s not that I think John Kerry is calling up his broker, on health care, and saying, ‘Buy this company, sell that company,’” Schweizer says in a Daily Beast piece.

“The issue is one of a double standard…. The only group in America that we exempt [from insider trading strictures is] politicians, who are probably the last people about whom we should be saying, ‘Oh, we’ll take their word for it.’ That’s what’s so amazing to me.”

Dig Deeper:
Talk back to Decoder: We want to know what you think about the 60 Minutes piece. Shoot us a line here
Read this piece from the Atlanta-Journal Constitution that asks some questions about 60 Minutes’ reporting and conclusions.
Check out Peter Schweizer’s book “Throw Them All Out” which details his study further.
Read this DailyBeast piece that gets into Schweizer’s claims in more detail.

Comments (2)

  1. Submitted by James Hamilton on 11/15/2011 - 09:33 am.

    I’d very much like to read the pieces I’m directed to by this article, but the links are missing.

  2. Submitted by Jordan Hansen on 11/15/2011 - 10:11 am.

    We have added the links, James. Thanks for reading.

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