Today’s Ethics Quiz: How Do You React To Congressional Insider Trading?


Gekko for Congress. He has what It takes...Insider trading experience!

An  study in the journal Business and Politics last week reported that the investments of members of the House of Representatives outperformed those of the average investor by 55 basis points per month, or 6 percent annually. It concluded that lawmakers are taking advantage of inside information to make significant profits, engaging in conduct that would send a Gordon Gekko or Martha Stewart to jail.

“We find strong evidence that members of the House have some type of non-public information which they use for personal gain,” the four researchers who authored  “Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives” wrote.

Lawmakers and their staffs  have immunity from laws barring trading on insider knowledge. A similar 2004 study found that U.S. senators do even better than Congress when it comes to picking stocks, outperforming  House members with their insider knowledge  by an average of 30 points per month. They also make more money at it, because they have more money to invest—you know, from all their years in the House of Representatives before graduating to the Senate.

Under current laws,  Senators and Representatives can trade shares on the market while voting on legislation that affects their own portfolios. How can this be? The House ethics manual explains that  requiring lawmakers to divest their holdings would “insulate a legislator from the personal and economic interests that his/her constituency, or society in general, has in governmental decisions and policy.”

Today’s Ethics Quiz: Which of the following statements reflects your reaction to this information?

1. “I’m not surprised.”

2. “So THAT’s why all these people are rich!”

3. “That quote from the ethics manual is the most pathetic rationalization I’ve ever heard in my life.”

4. “This is both unconscionable and easy to fix, and voters need to make Congress fix it.”

The right answer is 4., but 3. is correct as well.

Reps. Louise McIntosh Slaughter (D-NY) and Timothy J. Walz (D-MN) re-introduced the Stop Trading on Congressional Knowledge (“STOCK”—cute!) Act in March, a bill which would limit the ability of lawmakers to buy and sell stock shares.

It’s been around since 2006, but for some strange reason, it has not received widespread support.

It is despicable that both houses of Congress expect the public to tolerate a an obvious conflict of interest that allows members to vote for what benefits their portfolios rather than what is in the best interests of their constituents and  nation, all while cynically attacking the ethics of Wall Street.

If we allow this to continue, we deserve the consequences.

13 thoughts on “Today’s Ethics Quiz: How Do You React To Congressional Insider Trading?

  1. I picked (1), along with (3) and (4), but I remember the machinations around Kerry’s stock when he was running for president. His blind trusts weren’t exactly blind.

  2. I thought the answer was all of the above. Why don’t they make them do what others have to do in similar jobs? Like the blind trusts, etc? I can’t remeber all the machinations, but I recall it was a real humdinger for Cheney to divest/make it all go blind…

  3. Let’s see:
    1. They exempt themselves from insider trading issues.
    2. They leave congress to immediately take lucrative lobbying jobs.
    3. They increase their pay every year (getting the message though, as they didn’t take cost of living increases in 2010 or 2011, however it’s still automatic if they don’t vote it down).
    4. They have better retirement systems than almost any private individual or sector.
    5. They continue to ignore mounting support for term limits (according to Cato handbook for congress).
    Sorry, I don’t have time to go on, as I have to work for a living.

  4. I know how to fix this:
    (1) Stop bring the congress and senate to washington dc. let them stay in the home districts and states and comunicate electronically. This eliminates the need for more money to pay for two homes.
    (2) Make them pass a lwat stating that all rules that they pass apply to them also. Did you know that the ADA doesnt apply to the Capitol building or any of its associated office buildings?
    (3) Every election on a random lottery pick a memeber of congress or the senate and stone them to death to keep the others in line.

  5. I’m not so taken with the report as you. All their transactions are subject to annual reporting, so if there’s inside-info trading, where is the evidence? I don’t think the inference is evidence, i.e., because they did well they must have cheated.

    If members of Congress do 5-6% better than the average investor, maybe they’re 5-6% smarter investors than the average. This hypothesis is supported by the fact that Republican members did worse than Dems.

    • The Republican didn’t cheat like the Democrats.

      Actually, the intellectual level of Congress is so abysmal that party variations have to be negligible. Is a grasshopper smarter than a jellyfish? I wouldn’t want either on my Trivial Pursuit team.

      I’ve been following these studies for a long time…there are a lot of them, and they always show the same thing. Investing is essentially gambling; if the same group does well without exception, decade after decade, they are cheating. If the members can make trades, naturally they are using inside info—it would hard to avoid it.

    • I’m not sure they’re smarter, but I’d like to see them compared against the average return on investment for people of commensurate income before jumping to conclusions. I think it’s reasonable that a group of people who usually have high incomes have better financial resources, advisors and instincts than a person of average income.

  6. “The House ethics manual explains that requiring lawmakers to divest their holdings would ‘insulate a legislator from the personal and economic interests that his/her constituency, or society in general, has in governmental decisions and policy.'”

    I’m not sure what this means. Selling their stocks etc. means you don’t understand your district’s economic needs? That’s not even a rationalization. It’s just nonsense.

    • So I suppose once I decrypted all the ten-dollar words, I pick (3).

      My English teacher warned me against purple prose, maybe she needs to go to Washington.


    How dare they use inside information to feather their own nests, when it is a Federal offense for the “average citizen’ to do the same? This is insider trading, no doubt about it. And so whom do we trust?

    Aside from this, whom do we trust on national security issues? If Senators and Congressmen(women) are willing to use inside information to make money, why then should we trust them to make an about-face when it comes to national security? Just asking the question…

    I just read that Obama administration has TRIPLED the number of Cadillac limousines paid for by the government since the Bush Administration . By all means, let’s believe him when he talks about cutting back on key programs to balance the budget… As long as he has his perqs, then I guess all is well.

    We need to get back to the “citizen representative,” in much the way Tom Brokaw talks about the “citizen soldier” in WWII. These were NOT lifetime military folk: only those that did their duty when called upon. (My father in law was one).

    Lifetime politicians become inherently evil and corrupt. Like a plethora of institutions, the FACT of their representation becomes more important than the PURPOSE of their representation. And all the perqs and accolades enable rationalizations that make my head spin.

    Why, as a resident of the City of Alexandria, VA, do I have to see the crook and liar Jim Moran be re-elected over and over again? Because we all want what we can get, and because we’re all lazy. Under Moran’s leadership, we find TC Williams High School (the only one in the City) have a multi-million dollar facility, and a ranking as the bottom number 5 of all Virginia high schools. Any wonder why 40% of all City students attending private school or are home schooled?

    Good leadership, Jim.. How lucky for you that your got an unsecured $500,000 loan from Bank of America when you needed it.


  8. I have long thought that legislators should consider putting as much of their investments as feasible in index funds (i.e. they shouldn’t sell their house in their district, but they should not keep individual stocks, bonds, etc.). Index funds will track the market, which should approximately follow the prosperity of the country. Since legislators should want to increase prosperity anyway, there should not be the same level of conflicts of interest.

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