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Political Insider

Congress and a 16-year study of ‘insider trading’

6:07 pm November 16, 2011, by jgalloway

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

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74 comments Add your comment

Smoke

November 17th, 2011
6:04 am

#2: Based on a report from the other day about the lack of accumulated wealth of Bishop and Lewis, now we see why Dixiecrats want their seats. Those two don’t know how to deal.

Smoke

November 17th, 2011
6:06 am

#3: We should have more respect for Nathan Deal. He kept all his crooked dealings local.

Smoke

November 17th, 2011
6:07 am

#4: Are Halliburton and Blackstone publically traded?

James

November 17th, 2011
6:39 am

This isn’t the first time congress members have used legislation to improve their stock portfolios http://tinyurl.com/85zvsv7

nelson

November 17th, 2011
6:58 am

The question is why did Jack Abramoff decline to name names of congressmen participating in insider trading? The answer is legal analysts say is Wall Street insider trading laws do not apply to Congress.
The gap between law and reality has made Capital Hill a virtual free fire zone for insider trading. The most valuable type of information for Congressional insiders to have is held by Congressional investigators who pry into corporate goings on. Advanced knowledge on “hearings” to happen with certain companies send congresmen to “shorting” the company, betting that the stock will go down.
The Judiciary should initiate proceeding against all those in Congress who are doing this.
Actually, it is laughable, the whole situation is sooooo crooked.

Smoke

November 17th, 2011
7:22 am

#5: Rick Perry called Social Security a ponzi scheme. After an IPO, the stock market is nothing more than a con game. Will one of our thesis writers briefly explain how capital gains from simply trading stocks creates jobs?

Verna Brooks

November 17th, 2011
7:49 am

#Occupy Justice and Equality for ALL!!! Martha Stewart got the penitentiary for her infraction and these guys get to laugh at us because the rules dont appliy to them! We are SNOOKERED again!

clem

November 17th, 2011
8:07 am

recent study showed that congressional stock trading beat market average of even hedge fund managers…can’t remember the time period, fairly recent, and congress trades beat hedge fund 12% vs 7-8%……this from folks who are not dedicated financial experts….

also, bachus said he lost money going loong on ge stocks , but this guy from slytherin had many other trades around the time of the financial briefings before the big collapse…..and made money…..and pelosi got preferential treatment on ipos

blind trusts please

Real Athens

November 17th, 2011
8:21 am

Unfortunately term limits only increase the power of lobbyists in Washington — alone they do very little. Pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election”.

The 26th amendment (granting the right to vote for 18 year-olds) took only 3 months & 8 days to be ratified! Why? Simple! The people demanded it. That was in 1971 – before computers, e-mail,
cell phones, etc. Of the 27 amendments to the Constitution, seven (7) took one (1) year or less to become the law of the land – all because of public pressure.
*Congressional Reform Act of 2011*_

1. No Tenure / No Pension. A Congressman/woman collects a salary while in office and receives no pay when they’re out of office.

2. Congress (past, present & future) participates in Social Security. All funds in the Congressional retirement fund move to the Social Security system immediately. All future funds flow into the Social Security system, and Congress participates with the American people. It may not be used for any other purpose.

3. Congress can purchase their own retirement plan, just as all Americans do.

4. Congress will no longer vote themselves a pay raise. Congressional pay will rise by the lower of CPI or 3%.

5. Congress loses their current health care system and participates in the same health care system as the American people.

6. Congress must equally abide by all laws they impose on the American people.

7. All contracts with past and present Congressmen/women are void effective 1/1/12. The American people did not make this contract with Congressmen/women.

Congressmen/women made all these contracts for themselves. Serving in Congress is an honor, not a career. The Founding Father envisioned citizen legislators, so ours should serve their term(s), then go home and back to work.

Imagine if we the people got past all the partisan rancor and demanded this.

MrLiberty

November 17th, 2011
8:26 am

This issue and this discussion are the very reason why so many are turning to the Libertarian Party, Ron Paul’s republican candidacy, and turning away from the corrupt democratic and republican parties as they currently exist.

Libertarians, whether the big or small “L” variety have been saying for many decades that the problem is not campaign finance dollars, or influence peddling, or whatever, but instead the problem is the power, size, and scope of government.

The founders created a government, as imperfect as it was, that was SEVERELY limited in its ability to do anything. There was no central bank that manipulated the price of everything through fiat money and inflation. There was no regulatory behemout that literally dictated the activities of every citizen from the day they are born, there was no income tax that provided trillions of dollars to hand out to friends, there was no regulatory apparatus to wield on behalf of friends’ companies and against others. There was no military industrial complex that manipulated policy to insure perpetual war for perpetual profits, etc.

The problem has ALWAYS been with the power of government and ONLY the libertarians have been clear, consistent, and correct in their call to slash at the size and power and scope of government until it is reduced to the level dictated in the constution (or even small ideally).

All of you are arguing over whether its the democrats fault or the republicans while you all probably agree with 90% of the power and control the government wields.

When a single unconstitutional bill can destroy an industry (healthcare), or a single unconstitutional action by the president (GM ownership while shafting the bondholders) can ruin an entire group of investors in favor of another, there can never be freedom, equity, or justice in america.

Stop whining about this kind of corruption and do something about it. Support candidates like Ron Paul who are demanding a fundamental change to government. Only when government (and the federal reserve) no longer have the power to boost or destroy the economy at will can we ever stop this kind of congressional abuse (or abuse by the power elites in general).

Cynical Reader

November 17th, 2011
8:54 am

Instead of whining, sniveling and wringing our collective hands, the issue becomes what are any of us doing to change this?

cartoon

November 17th, 2011
8:55 am

I have exposed td in the past for being a troll who posts to himself from his grandmother’s basement like a total wankwad. What’s frightening is that he thinks he’s fooling anyone. He’s not, but yet he’s allowed to stink up this blog. Galloway: Please ban this menace.

Begging here.

td

November 17th, 2011
9:05 am

Jim,

Can you please post on this board and tell these fools that my IP address is not used by multiple screen names.

UGA 1999

November 17th, 2011
9:18 am

State carry gun bill has PASSED great job house.

Your morning jolt: Bomb could be planted 'very easily' at Hartsfield-Jackson, says Paul Broun | Political Insider

November 17th, 2011
9:51 am

[...] we posted the background of that CBS report on “insider trading” by members of Congress. A team of four academics led by Georgia state prof Alan Ziobrowski worked 16 years analyzing thousands upon thousands of financial disclosure documents submitted by [...]

mum

November 17th, 2011
11:10 am

There is a bill to curb this but they can’t get any co-sponsors. I guess that given the 2010 mid-terms, folks need to make their money in 2 years for fear they might get primaried. Oops, my bad, if you don’t do anything to help your constituents, you can stay around for years because nobody is paying attention unless you say or do something stupid.

Your morning jolt: Terrorist bomb could be planted ‘very easily’ at Hartsfield-Jackson, says Paul Broun

November 17th, 2011
11:53 am

[...] we posted the background of that CBS report on “insider trading” by members of Congress. A team of four academics led by Georgia state prof Alan Ziobrowski worked 16 years analyzing thousands upon thousands of financial disclosure documents submitted by [...]

SlipKnot

November 17th, 2011
1:27 pm

Recall the brinksmanship earlier this year about the debt ceiling. The market response was totally predictable and those who knew the outcome first made lots of money.
Still mad at the Occupy folks?

George

November 17th, 2011
3:07 pm

isn’t that what Martha Stewart went to jail for ? Put em all in jail where they belong!!

Mark

November 17th, 2011
10:03 pm

You fix this problem by taking the capitalism out of the government just like the church and state. You don’t let the capitalist companies run the government. You make them play by the same rules as you or I. There is no reason a person can’t make a billion dollars they should just have to pay the equal amount of taxes with no tax breaks for where they build their enterprises. There is no way the founding fathers who wtote the constitution could have ever have dreamed that we would put a man on the moon let alone have the people and corporations run the government. Get rid of lobbiests(?) and let the government do what is right for the people. Technology exists that every person could vote electronically on every bill ever dreamed of!

Penny Lane

November 18th, 2011
10:36 am

I have always been against term limits, because it is such a blunt tool and gets rid of dedicated public servants as well as useless, corrupt politicians.

However now that that politicians are all that we have left in Washington, I have decided to support term limits wholeheartedly. Throw them all out!

Does anyone know where I can donate to help acheive this?

indie-voice.com

November 18th, 2011
8:03 pm

My newest podcast focuses on congressional insider trading, and I give 8 ways to start (tip of the iceberg) cleaning up Washington. I list them below. I’d love other suggestions. We need to mobilize this now more than ever. Until we clean up the corruption, we’ll never fix anything else.

We need to create an independent 3rd party to write regulations the people can vote on that should include:

- No more PACs
- 100% public donations
- Only individuals can donate to a candidate (no more corporate donations)
- $5000 total cap on individual donors
- Laws that disbar and ban you from public office if you are caught taking lobby money
- No campaigning until 4 weeks before they cast the first vote
- All 50 Primary votes are done during the same week
- 1 TERM LIMIT ON ALL OFFICES

Congress and a 16-Jahr-Studie „insider trade “- the Atlanta journal constitution (blog) | Investment Articles

November 19th, 2011
10:59 am

[...] the rest here:  Congress and a 16-Jahr-Studie „insider trade “- the Atlanta journal constitution (blog) Investments, [...]

James

November 22nd, 2011
5:07 am

Pelosi is spending our tax dollars to protect her own investments http://tinyurl.com/7d2aj2b

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