Whether you are Republican or Democrat, an occupier or a tea partyist, the report last Sunday by CBS’ “60 Minutes” on insider trading by members of Congress should have steam whistling from your ears.
But there’s more to tell. And the news will not make you any happier.
The most egregious example cited by CBS was U.S. Rep. Spencer Bachus of Alabama, who three years ago was the ranking Republican on the House banking committee, and is now its chairman.
In September 2008, Bachus and other congressional leaders were privately briefed by Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke on the economy’s imminent meltdown.
The next day, Bachus was buying option funds that would increase in value if the economy tanked. It did. While your 401(k) and all thoughts of retirement melted into a never-ending job at Wal-Mart, the House chairman made a tidy profit on his country’s misfortunes.
And he didn’t do anything illegal.
Financial investments by House Speaker John Boehner and former speaker Nancy Pelosi also earned mentions. And yet, there is the temptation is to write such incidents off as exceptions that prove the rule of good behavior.
But in fact, the insider trading problem in Congress is systemic and longstanding. Though it received no mention, the foundation of the “60 Minutes” report was 16 years of analysis by an academic quartet led by Alan Ziobrowski, a professor of real estate finance at Georgia State University.
His wife, Augusta State University professor Brigitte Ziobrowski, James Boyd of Lindenwood University and Ping Cheng of Florida Atlantic University served as fellow researchers – as did an army of grad students.
“For years, we went through financial disclosure forms and we digitized their stock transactions. And then we ran a series of tests to see how [members of Congress] compared to the market,” Alan Ziobrowski said this week.
“The bottom line was that they considerably beat the market. In academic finance, we consider that to be prima facie evidence of insider trading,” he said. “They were even better than corporate insiders at it.” Senators were the best and even outperformed hedge fund managers.
Technically, Ziobrowski said, what members of Congress (and their staffers, one presumes) are engaged in isn’t insider trading. That’s a term reserved for executives within a particular corporation.
“What we claim they have is an informational advantage,” he said. “These guys have information that’s outside the corporation. Probably, companies would love to know what they know.”
Little things like regulations that can be added or subtracted, defense spending that might be cut or increased. That sort of thing.
The Ziobrowski crew has eschewed anything that might smack of partisanship – which explains its absence from the “60 Minutes” report.
A first study, covering investments of U.S. senators from 1993 to 1998, was published in 2004. A second, larger study took the measure of 16,000 stock transactions by U.S. House members from 1985 to 2001. It was just published this spring in an academic journal, with this priceless title: “Abnormal Returns From the Common Stock Investments of the U.S. House of Representatives.”
Partisan differences in investment returns were minimal. Senators beat the market by 12 percent per year, House members by 6 percent – a difference that could be explained by the fact that the Senate is a smaller club, where access to fruitful information is more concentrated.
In the House, younger members made greater gains in the market than senior members. Possibly because younger members are less financially secure and more likely to take financial risks.
A large part of me wants to believe that members of Congress are simply brighter than the rest of us, perhaps more aware of societal and financial trends. It is a sliver of hope that Ziobrowski politely demolishes.
“From my perspective, it’s fairly simple. If I’m sitting on a pile of $50,000 worth of stock of XYZ Company, and I find out that something’s coming down the pike that’s not going to be good for XYZ, how could you resist the temptation to unload it?” he asked.
Democrats and Republicans have introduced legislation this week to prohibit members of Congress and their staffs from using nonpublic information for investing or personal gain. Investment transactions would have to be reported within 90 days.
Ziobrowski said the legislation would be better than nothing. “The problem is the system is rigged. The whole notion that, somehow, financial disclosure solves all the ethical issues is really quite a joke. Financial disclosures are not audited. There’s nobody to check them to see if they’re accurate. Even if they are accurate, the public doesn’t see them for a year, year-and-a-half after the transactions have been made,” he said.
Corporate insiders are required to report their stock transactions immediately. Ziobrowski would like to see Congress adopt that rule. Though there’s no chance that it will.
But the House-Senate “super committee” in charge of formulating a deficit reduction deal has a deadline coming up next week. The impact on your economic fortune and mine may hang in the balance.
It sure would be nice to know if any members of Congress are saying the right things in public – and betting against us in private.
- By Jim Galloway, Political Insider