Wednesday, January 11, 2012

Congress Cheats With Insider Trading

Finally, an issue both Republicans and Democrats can agree upon, halting the practice of exempting Congress from ethical laws that apply to the rest of us. But instead, our elected members of Congress are ignoring their partisan differences and uniting together against the wishes of constituents of both parties. Why don’t insider trading laws apply to members of Congress? How can members of Congress vote objectively on issues affecting companies they are heavily invested in? A new Rasmussen poll found that 48% of Americans believe most members of Congress are corrupt. Congress's approval rating has slipped to a shocking new low of just 5%.
The third most popular stock owned by members of Congress is bank stock – which no doubt influenced the financial bailouts. 57 members have stock in Bank of America. Senator Dianne Feinstein (D-CA) owns between half a million and one million dollars in Bank of America stock. The eighth most popular stock owned by Congress is Wells Fargo, another recipient of government bailouts. John Kerry (D-MA) owns the most stock in Wells Fargo, somewhere between $350,000 and $765,000 in shares.
Corporate insiders are banned from insider trading because it gives them an advantage everyone else does not have. Congressional investors have a better trading record than average investors, so how are they any different? Members of Congress and their staff outperform other investors by 6% to 25%. Democrats’ stock portfolios do the best, outperforming the market by 9%. Senators outperform the market by 12%. They know in advance through nonpublic information what kinds of regulations are going to affect various industries, so they know when to buy and sell stock accordingly.
60 Minutes aired an expose on congressional insider trading in November. The show divulged that several members of Congress bought stock in companies during debates on legislation that would likely affect those businesses. One of the worst offenders was former House Speaker Nancy Pelosi (D-CA), who bought 5,000 shares of VISA stock in 2008 at $44 per share while legislation that would hurt credit card companies was making its way through Congress. Two days later, the stock was trading at $64 and the legislation coincidentally failed to make it to the floor of the House. Nancy Pelosi’s office dismissed the report as a “right-wing smear.” Considering CBS’s 60 Minutes is no bastion of conservatism, and the report went after many high-profile Republican Congressmen as well, Pelosi’s response indicated she had no defense.
The broadcast was based on a book that Peter Schweizer, a fellow at the Hoover Institution, published last year exposing some of the most flagrant congressional inside traders, including John Kerry (D-MA). Kerry, his wife and their companies made heavy investments in healthcare stocks. One week before Congress announced it would limit Medicare reimbursements, Kerry’s wife conveniently ditched her shares in Amgen. After the legislation went public, it caused a 15% drop in Amgen's value.
Former lobbyist Jack Abramoff, who served time in prison for trading gifts in exchange for political favors, released a tell-all book last fall naming members of Congress who could be bought by showering them with gifts. Senator Harry Reid (D-NV) was one, who was “very much a secret weapon in our lobbying efforts” after Abramoff’s “clients showered Reid and his staff with contributions, tickets to events, and every other gratuity imaginable.”
Shortly after Obama was elected to office as a U.S. Senator, he invested $5000 in the speculative company AVI Biopharma. At the time, AVI Biopharma was developing a drug to treat avian bird flu. Two weeks after Obama bought the stock, when bird flu was spreading in Asia, Obama pushed for more federal funding to fight bird flu.
In December, due to pressure caused by the 60 Minutes broadcast, Democrats and Republicans on the House Financial Services Committee proposed restrictions on insider trading. The "Stop Trading on Congressional Knowledge Act" (H.R. 1148), or “STOCK Act,” was revived. But instead of adopting the same restrictions that apply to the public, the STOCK Act gives Congress special treatment. The proposed regulations are so narrow and specifically written that Congress will be able to find wiggle-room around them, unlike the broad restrictions that apply to the public. An article in The Washington Times declared, “The proposed STOCK Act has enough loopholes to drive a truck through.
The bill has gained 220 bipartisan cosponsors in the House, more than the 218 required for a majority, but it may not get through the Senate. The vast majority of its cosponsors are Democrats, perhaps reflective of their higher culpability as beneficiaries from insider trading interested in protecting the status quo. The bill will be brought up for a vote in the House this year, and a version of it has been approved by the Senate Committee on Homeland Security and Governmental Affairs.
House Financial Services Committee Chairman Spencer Bachus (R-AL) has proposed competing legislation that may have more teeth. H.R. 3549 would require members of Congress to place all their stocks, bonds and other securities into a blind trust to be managed without their consent as long as they are in Congress. Bachus is under some of the heaviest scrutiny for insider trading. The 60 Minutes expose speculated that he engaged in insider trading involving GE, and Schweizer’s book reported that Bachus bought options in an index fund betting that the market would fail while the TARP negotiations were occurring.
A related problem that may be even tougher to fix is the influence of special interest money funneled into candidates' campaigns. When Bank of America is bankrolling a Congressman's reelection campaign every cycle, is that Congressman likely to vote against a bailout of the financial industry? Even Rep. Ron Paul (R-TX), one of the most outspoken critics of special interest influence, accepts large amounts of campaign contributions from financial institutions. Campaign finance reform is not the answer, it has been a dismal failure. Not only does it arguably infringe upon free speech, but members of Congress simply find ways around it.
Another troubling situation has been identified by Harvard professor Lawrence Lessig. He explains why Congress keeps passing temporary tax revisions and extensions. They serve as repeat opportunities to please various special interests which then contribute more money to congressional coffers.
If anything, Congress should be held to higher standards than the rest of us, not lower standards. Members of Congress already enjoy tremendous benefits, such as fame, power, media opportunities, incredible networking, and a generous salary and pension. Why they should also receive insider trading benefits is mind boggling. It is actually worse than regular corporate insider trading, because it influences their decisions on important legislation and coerces them to pass bad legislation like TARP and the financial bailouts.
According to the Center for Responsive Politics, 250 of the 535 members of Congress are millionaires, or 47%. While the middle class is struggling and disappearing, it is appalling that those purporting to represent them are becoming millionaires through special advantages that others have gone to prison for. Why did Jack Abramoff serve time in prison but Harry Reid did not? Even celebrity Martha Stewart did not get off the hook for insider trading, but underwent a long, humiliating jury trial which resulted in five months serving time.
Congress passes the laws – which ironically includes passing laws exempting themselves from laws the rest of us must follow. The opportunity for abuse is staggering. To fix this problem, objective analysts outside of Congress should be involved with any solution. Having guilty members of Congress who got caught propose a way to fix this is like the fox guarding the hen-house. An independent committee should be set up outside of Congress to fully vet any proposed solution.
The SEC asserts that congressional insider trading is already banned, since SEC insider trading laws apply to Congress. However, no member of Congress has ever been prosecuted by the SEC for it. Congress controls the SEC's budget. The U.S. House of Representatives' Ethics Manual states that a member should "never use any information coming to him confidentially in the performance of governmental duties as a means for making private profit." If insider trading is already prohibited but ignored, this shows how bad the problem has become. Since members of Congress from both parties benefit from it, reform means overcoming opposition from both parties.
One can only hope an additional ban is not also ignored. 76% of voters want to throw out existing members of Congress. If Congress does not stop cheating, time for the outsiders to vote at the ballot box and throw the insiders out.

Read the rest of my article at Townhall

1 comment:

Owls said...

About one hour and eight minutes into the Senate hearing on insider trading Robert Walker told congress why blind trusts are not a workable solution to insider trading. These kinds of trusts cost a lot of money. “They are only blind is so far as .. they are not blind what you put into them initially, they are only blind if you put in cash, or after a period of time the assets are sold down to a particular level, then you are notified that you do not have those any more.”

The first blind trust used in modern times was that of President Lyndon B. Johnson. He knew what was in the trust and it was managed as he wanted. It would have been public information had the assets been sold. Anyone with half a brain can get around a blind trust. The way to catch these people is to have real time disclosures. Their constituents can send them back, or throw them out. If they fail prompt disclosure, put them in jail, just like corporate insiders. They can inside trade as much as their voters allow, the enforcement that will work is failing to disclose.

The SEC, which conducts most insider-trading investigations, urged faster disclosure of stock trades by members of Congress on electronic, searchable forms. This is why no Congress people were investigated under the current laws. Trades need to be disclosed in "real time or near real time," so that the memories of potential witnesses are fresh and suspects do not have time to cover up their actions. Blind trusts are not blind, only the people who think they are.

See: The problem with blind trusts.