Congress's Phony Insider-Trading Reform

Wall Street Journal ^ | December 12, 2011 | Jonathan Macey

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Members of Congress already get better health insurance and retirement benefits than other Americans. They are about to get better insider trading laws as well.

Several academic studies show that the investment portfolios of congressmen and senators consistently outperform stock indices like the Dow and the S&P 500, as well as the portfolios of virtually all professional investors. Congressmen do better to an extent that is statistically significant, according to studies including a 2004 article about "abnormal" Senate returns by Alan J. Ziobrowski, Ping Cheng, James W. Boyd and Brigitte J. Ziobrowski in the Journal of Financial and Qualitative Analysis. The authors published a similar study of the House this year.

Democrats' portfolios outperform the market by a whopping 9%. Republicans do well, though not quite as well. And the trading is widespread, although a higher percentage of senators than representatives trade—which is not surprising because senators outperform the market by an astonishing 12% on an annual basis.

These results are not due to luck or the financial acumen of elected officials. They can be explained only by insider trading based on the nonpublic information that politicians obtain in the course of their official duties.

Strangely, while insider trading by corporate insiders has long been the white collar crime equivalent of a major felony, the Securities and Exchange Commission has determined that insider trading laws do not apply to members of Congress or their staff. That is because, according to the SEC at least, these public officials do not owe the same legal duty of confidentiality that makes insider trading illegal by nonpoliticians.

The embarrassing inconsistency was ignored for years. All of this changed on Nov. 13, 2011, after insider trading on Capitol Hill was the focus of CBS's "60 Minutes."

[khnyny]

"The denizens of Capitol Hill are remarkable investors. A new law meant to curb abuses would only make their shenanigans easier."

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“This is a terrible story. And the story that I read said that Nancy Pelosi did exactly that as speaker of the House. … That is sick. Politicians shouldn’t be able to do that, to benefit themselves, and the American people or somebody else would go to jail. … These politicians should go to jail for doing something like that. They’re no better than anyone else. I think it’s wrong. And I would back legislation to make that illegal and a criminal offense.”

SETTING: The meeting room of a Pizza Ranch restaurant in Charles City, Iowa.desmoinesregister 2012 Iowa Caucuses