Did Congress Cash In on Insider Stock Trading?

Are members of Congress profiting from insider information on companies their legislation affects, or is something more complicated – and less nefarious – going on?

Those who watched the November 13 segment on 60 Minutes that accused members of Congress of insider trading are outraged at these public servants’ behavior. But that outrage should be aimed at 60 Minutes itself, along with Peter Schweizer, whose new book, Throw Them All Out, provided the misleading data that was the basis for the broadcast.

Schweizer’s book, which purports to document how congressmen and women benefited financially from legal but unethical insider trading, has received a lot of attention. In addition to the 60 Minutes piece, it was the focus of a Wall Street Journal opinion piece by former vice-presidential candidate and Alaska governor Sarah Palin, to whom Schweizer is an advisor.

If you read Schweizer’s book, however, I urge you, for a dose of mundane reality that is not so polemical, to read also an important paper co-authored by Yale University’s Andrew Eggers and MIT’s Jens Hainmueller. Better yet, just skip over the first seven chapters of Schweizer’s book and go directly to chapters 8 and 9. There you can read a good account of Congress’s failure to regulate itself legally and ethically, and the crony-capitalist culture that results from it. But the first seven chapters of the book are fatally flawed, for reasons I am about to explain.

Congress and the stock market

I first learned about the 60 Minutes segment in a November 14 article in The New York Times. The Times article doesn’t mention Schweizer’s book, but it does cite the same studies that Schweizer’s book relies on – two papers authored by Alan J. Ziobrowski of Georgia State University and three others, one published in 2004 and the other in 2011. The first paper says that U.S. Senators’ stock investments beat the market by about 10% a year; the second says that members of the U.S. House of Representatives beat the market by about 6% a year.

When I read the Times article, I thought, eureka! – at last an example of someone who actually can beat the market. What better way to do it than to make the market go up or down – for example by sneaking an advantage for a particular company into an earmark – and buying stock in the company at the same time before the public knows about the change. What an outrage!

Schweizer’s book states this concisely. Speaking of what he calls the “Permanent Political Class,” he says:

They obtain access to initial public offerings on the stock market that can often be lucrative. They make their investment decisions and trade stock based on what is happening behind closed doors in Washington. This might entail buying or selling stock based on what they know to be going on, or they might "prime the pump," trading stocks based on legislation they have introduced. Politicians are often extraordinarily good investors – too good to be true.

What is incredible – Schweizer explains this very well in chapters 8 and 9 – is that none of this is illegal. Virtually every other public and private citizen has a plethora of restrictions imposed on his or her legal ability to trade securities, but for Congress there is no restraint except a congressional ethics rule that members can’t use their official positions for personal gain. This restraint is too weak and vague to prevent members of Congress from cashing in on their access to the levers of power through their stock portfolios.