Congress Accused of Systemic Insider Trading

In most cases, insider trading, the use of confidential information to get an unfair advantage in the market, is the type of serious business that leads to criminal investigations and possible prosecution. If you’re a member of Congress, however, insider trading is perfectly legal and, in fact, can lead to a fair bit of profit for the enterprising lawmaker, according to a report from CBS’s 60 Minutes, as well as this blog a few years ago. According to the report, lawmakers routinely use significant non-public information they receive by the simple fact that they are members of Congress to inform their own investments and make a healthy profit.

For example, Rep. Spencer Bachus (R – Alabama), is said to have shorted the market during the height of the economic crisis in 2008 while, at the same time, serving as a member of the House Financial Services Committee who had been to secret briefings given by the Federal Reserve, according to the Business Insider. In response to information he got from the Federal Reserve, Bachus apparently bought contract options on shares in an index fund that gains value when the market falls. According to the 60 Minutes report, this is all legal; members of Congress are allowed to do this.

Bachus, incidentally, is now chairman of the House Financial Services Committee.

While the Bachus affair may be particularly blatant, the use of inside information to enhance stock picks could well be a systemic issue: a 2004 study conducted by Georgia State University business professor Alan Zibroski analyzed more than 6,000 stock transactions made by U.S. senators between 1993 and 1998 and found that lawmakers are consistently able to make better stock picks than even corporate traders. A portfolio mimicking the purchases of U.S. senators, in fact, beats the market by 85 basis points per month, while sales of stocks by U.S. senators lags the market by 12 basis points her month, according to the study.