Lawmakers’ success on Wall Street raises eyebrows

WASHINGTON — The investment portfolios belonging to members of Congress perform conspicuously better than those of the general public, according to a new study that suggested lawmakers may be able to circumvent lax ethics rules and use inside information when trading securities.

Currently, U.S. House members are barred from using their positions for personal gain, but beyond that, there are no limits to investing. A bill sponsored by Minnesota Democrat Tim Walz would change that, but it hasn’t been touched since it was introduced more than two months ago.

And an ethical watchdog group said it’s not sure this recent study will be enough to shame Congress into acting.

The study, published in the current issue of the Business and Politics journal, tracked the stocks owned by House members between 1985 and 2001, using public Financial Disclosure Reports to determine the portfolios held by each member and the member’s families. The researchers found many members trade stocks (16 percent of the House and 27 percent of the Senate), but not very often (an average of 20 purchases and 17 sales each year in the House, though that number increased over the years). But House members who do play the market perform well, beating the market by about 6 percent annually. Previous research showed that Senators do even better, beating the market by 10 percent annually.

The report, from a group of four university professors, doesn’t explicitly say members of Congress engage in activities like insider trading, but it insinuates that it’s possible. “We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain,” the study concludes.

House rules allow for stock trading
Standing House rules are casual when it comes to member’s investing practices. While there is a broad guidance against using a position in Congress for one’s personal gains, members are not required to give up their stocks while serving in Congress, nor are they directed to recuse themselves when debating or voting on matters that might affect their portfolios. They are, however, required to fill out annual financial disclosure reports.

Rep. Tim Walz
MinnPost/Corey Anderson
Rep. Tim Walz

Walz doesn’t think that’s enough. The rules don’t stop members from using information they receive in their official capacity for investing purposes, leaving an opening for members to unfairly play the market, he said.

For example, Walz said Congressional insiders could easily have counted supporters and known well before the first vote on the auto bailout bill in 2008 that it was going to fail, causing stocks to fall. They could have dumped their relevant stocks before they voted and while prices were still high, earning a pay day few outsiders were able to do.

“It obviously violates the spirit of the law, but you can do most of this legally right now,” he said.

The Walz bill would forbid members of Congress and the executive branch from buying or selling stock based on nonpublic information they received during the course of their duties. It would bar them from discussing nonpublic information for the sake of investing purposes and require members report any stock-based transaction that exceeded $1,000 in cost. It’s called, “The Stop Trading on Congressional Knowledge (STOCK) Act.”

And on Thursday, Minnesota Democrat Betty McCollum announced a similar proposal, a resolution that would bar any House member from buying or selling stocks, commodities or precious metals within three days of next week’s scheduled vote to raise the debt ceiling. That vote, whether it passes or fails, will likely affect stock prices.

“When members of Congress have the power to vote on major economic issues that have direct impact on global markets, resulting in potentially trillions of dollars of profits and losses, there should be no question of a Members motives or a staff member’s use of inside information,” McCollum said in a letter to colleagues. “The integrity of our actions must be above reproach.”

Important after financial crisis
Walz’s bill has been introduced in past Congresses, but he said it really became important after the financial crisis in 2008. Lawmakers took part in discussions that revealed critical, nonpublic information about publically traded companies that could be used to gain a leg up on the stock market. While Walz said he doesn’t know of anyone who used that information in their personal investments, the fact that they theoretically could was itself a problem.

Walz said he will push for a hearing on the bill later this session, likely after budget negotiations have cooled down. Since a budget deal between House Republicans and Democrats in Congress and the White House seems far off, the bill could remain stalled for months.

Even then, changing the House’s official code of conduct, as part of this bill does, generally involves leadership support, said Rep. John Kline, a Minnesota Republican who served on the Standards of Official Conduct Committee in 2008, the last time the House’s ethics manual was rewritten. Walz’s bill has only three co-sponsors, and none of them are Republicans.

Poorly written ethics guidelines sometimes have unintended consequences, Kline also warned. In 2008, a House rule barred representatives from flying their own private airplanes. After months on the books, the House needed to amend the guidelines again to delete that provision.

“When you put these things together, if you do it in haste, and particularly if you’re trying to make a political point, you can end up with some pretty poorly written rules that we then have to live by, then we have to go back and change that,” Kline said, speaking generally since he said he doesn’t know the specifics of Walz’s bill.

Even some in the ethics community are not optimistic about the bill’s prospects. While her organization supports the STOCK Act, Melanie Sloan, the executive director of Citizens for Responsibility and Ethics in Washington, said it’s unlikely anything less than a scandal will force lawmakers to act on the issue.

Congress “could be embarrassed into passing” an ethics law like the STOCK Act, she said, but, “I don’t think this is an area that will see any reform.…A study won’t do it.”

Walz was more diplomatic in his assessment of potential opposition to a bill, saying some members could view the bill as giving the public a bad perception of lawmakers’ ethical standards.

“You plant the seed in the mind of the public that we need to have all these rules because these people are running rampant,” he said. “Some have accused us that this is a solution looking for a problem. Maybe. But maybe it’s just a safeguard there just to be sure.”

Devin Henry is an intern in MinnPost’s Washington Bureau. He can be reached at dhenry@minnpost.com

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Comments (5)

  1. Submitted by Al Shrepton on 05/27/2011 - 12:02 pm.

    This certainly seems like an issue where an outside opinion on ethics should be presented. So, which ethics expert from outside government does Devin Henry choose to quote?

    Remarkably, the outside expert Henry quotes is a longtime Democratic Party operative currently serving as director of a blatantly anti-conservative group. Henry and his liberal reporter ilk can quote whoever they want, but they should at least pretend to be unbiased, and pretend so by not providing an appearance of neutrality where it isn’t warranted, and by including ideologically-diverse quote sources.

    Perhaps Devin Henry and MinnPost question the evidence regarding CREW and Melanie Sloan… Serious news organizations such as Congressional Quarterly and Roll Call have reported on CREW’s overwhelmingly lopsided vendetta against conservatives. CREW has been explicitly called “Democratic-leaning” by McClatchy News Service and The Daily Caller, been called “left-leaning” by the Chicago Tribune and Lexington Herald-Leader, and been called “liberal” by Time magazine, Roll Call, the Washington Post, and USA Today. So again, why does this article imply CREW is neutral?

    Frankly, there is reason to doubt CREW’s own ethics. In March 2011, other of CREW’s anti-conservative accusations were called ‘hypocritical’ by The Weekly Standard, and The New Republic even published an article titled: “Why Do Ethics Stories Still Quote CREW’s Melanie Sloan?”.

    Devin Henry and the rest of the media do their readers a disservice when they hide CREW’s leftwing political underpinnings and imagine them as the only quotable standard on ethics.

  2. Submitted by Neal Rovick on 05/27/2011 - 01:53 pm.

    So Al (#1), are you saying that there is no trading on insider information going on in Congress, or is your beef with specifically with CREW?

    There is a surprising number of politicians on both sides of the aisle who go to Washington and serve almost their entire career “in the public interest” and wind up much wealthier at the end of their career.

    I know nothing of particulars but there is a recently retired Minnesota representative that was born in humble beginnings, served his entire working life in government, and ends up with a net worth estimated at $6.5 million. Luck or not, that’s certainly unusual performance.

    It’s certainly due for investigation, regardless of your affiliation.

  3. Submitted by Rich Crose on 05/27/2011 - 02:04 pm.

    If a CEO buys or sells a stock where they have an interest, they have to disclose it to the SEC. Make the Senators and Representatives do the same.

    Don’t bar them from doing it, just make sure everyone knows what they are doing. If a Senator buys a stock then votes for a bill supporting that company, that’s insider trading and that should be illegal.

  4. Submitted by Patrick Wells on 05/27/2011 - 09:20 pm.

    Many insiders strongly feel that insider trading is the way the real world works … also, they believe that politicans will always be corrupt.

    As a preverse lesson in insider trading, Martha Stewart was sent to prison for taking the advice of her broker, who had insider knowledge. Martha was not much of an insider. Martha’s imprisionment illustrates the perversity of our enforcemnet mechanisms when it comes to Wall Street matters.

    I am a conservative. I am not an insider. I strongly object to being cheated by insiders. I support financial disclosure, including complete and detailed financial disclosure by our elected officials, our public servants.

    Some will complain that complete disclosure will limit the pool of candidates who seek office. I hope that it does.

  5. Submitted by Bernice Vetsch on 05/29/2011 - 11:13 am.

    In addition to Mr. Crose’s recommendation (#3), I’d like to see:

    –Term limits.
    –Public financing of all federal-level campaigns.
    –An unbreakable ban on post-Congressional employment with any company that may have benefited from legislation sponsored by or voted for by a member.
    –An unbreakable ban on serving as a lobbyist for any industry or group that may have benefited from legislation sponsored by or voted for by a member.
    –An unbreakable ban on allowing industry lobbyists to “help” write legislation.

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