"It profits me but little that a vigilant authority always protects the tranquillity of my pleasures and constantly averts all dangers from my path, without my care or concern, if this same authority is the absolute master of my liberty and my life."

--Alexis de Tocqueville, Democracy in America

Wednesday, September 28, 2011

And Why Exactly Isn't This a Major Scandal?

Ace of Spades is highlighting the fact, unknown to most, that the laws against securities fraud, and specifically the laws against insider trading do not apply to Congress.    With predictable results, I might add:

A pair of recent academic studies found that House members beat the market in their personal stock trading by about 6 percent, and Senators beat the market by about 10 percent.

In the 2011 study “Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives,” four university professors found that a portfolio that mimics the purchases of House Members beats the market by 55 basis points per month, or approximately 6 percent annually. That study looked at 16,000 common stock transactions made by approximately 300 House delegates from 1985 to 2001.

“Overall we find that the common stocks purchased by Members of the U.S. House of Representatives earn statistically significant positive abnormal returns. Our results indicate that Representatives, like Senators, also trade with a substantial information advantage,” wrote the study’s authors, Alan J. Ziobrowski of Georgia State University, James W. Boyd, of Lindenwood University, Ping Cheng of Florida Atlantic University and Brigitte J. Ziobrowski of Augusta State University.

The group also noted that stocks purchased by Democrats outperform stocks purchased by Republicans.

This ought to be a major, major scandal, if the media were doing it's job.   And, from a legal perspective, while this may not be securities fraud, I have a hard time believing that trading on insider information you obtain as a Congressman isn't a crime.   Information is valuable, and obtaining something of value in relation to issues you vote on is corruption by definition.  

Moreover, trading on such information (and doing better than the general public) is akin to a trustee self-dealing in matters affecting a trust.   It's a breach of fiduciary duty.   After all, consider that every time a Congressman buys a stock, someone else sells it; every time a Congressman sells, someone else buys.   If Congressman are doing better than the norm on their trades, that means that the people they are trading with (let's call them "citizens") are doing worse.  

In short, the Congressman who trades on insider information is willfully screwing the public he has sworn an oath to serve.   

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