In my paper, The Stop Trading on Congressional Knowledge Act, I explained that a 2004 study of the results of stock trading by United States Senators during the 1990s found that that senators on average beat the market by 12% a year. In sharp contrast, U.S. households on average underperformed the market by 1.4% a year and even corporate insiders on average beat the market by only about 6% a year during that period. A reasonable inference is that some Senators had access to - and were using - material nonpublic information about the companies in whose stock they trade.
In that paper, I assumed that members of Congress frequently come into possession of material nonpublic information via their Committee assignments. My supposition is confirmed by a recent Washington Post story, which reports that:
In both houses of Congress, a host of other committee chairmen and ranking members have reported that they have millions invested in business sectors that their panels oversee, according to a Post analysis of financial disclosure records through 2008, committee assignments and lawmaker investments by industry. ...
The patterns are important because committee chairmen and ranking members have more power than their colleagues to raise questions, hold hearings and push through targeted legislation that in some cases governs the industries in which they have investments.
In other words, they have better access to nonpublic information. In addition, they have the power to control the timing of legislative events so as to maximize their trading profits (e.g., delay a bill until they buy more stock).
The fact that many members of Congress are routinely investing disproportionately in industries over which their committees have jurisdiction at the very least raises serious questions of propriety.
Steve Ellis, vice president of the nonpartisan Taxpayers for Common Sense, said there has been a long-standing suspicion, difficult to verify, about committee assignments: that lawmakers tend seek out certain committees to suit their own interests.If members of Congress had any sense of propriety, the STOCK Act would have passed years ago. But since I'm finishing up an expanded article on the Act, I guess I'm glad they're a bunch of tools.
"It is part of the problem with the committee system. People try to get on the committees in which they have a vested interest," said Ellis, whose group closely tracks congressional activity. "Committees can have a huge impact on the sectors of the economy under their jurisdiction, and they're going to know more about what's going on in those sectors than the average lawmaker."
"By being on a committee with a particular jurisdiction, they're in a better position of influencing the performance of their investments," he said, "or at least appearing to have that ability.
