The same economists who discovered what looks like evidence of insider trading by members of the Senate in the 1990s have repeated their study for members of the House of Representatives. Dan Froomkin reports:
Four university researchers examined 16,000 common stock transactions made by approximately 300 House representatives from 1985 to 2001, and found what they call "significant positive abnormal returns," with portfolios based on congressional trades beating the market by about 6 percent annually.
What's their secret? The report speculates, but does not conclude, it could have something to do with the ability members of Congress have to trade on non-public information or to vote their own pocketbooks -- or both.
I've written about the legal aspects of Congressional insider trading, most recently and most comprehensively in Insider Trading Inside the Beltway, whose abstract follows:
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.
Under current law, it is unlikely that Members of Congress can be held liable for insider trading. The proposed Stop Trading on Congressional Knowledge Act addresses that problem by instructing the Securities and Exchange Commission to adopt rules intended to prohibit such trading.
This article analyzes present law to determine whether Members of Congress, Congressional employees, and other federal government employees can be held liable for trading on the basis of material nonpublic information. It argues that there is no public policy rationale for permitting such trading and that doing so creates perverse legislative incentives and opens the door to corruption. The article explains that the Speech or Debate Clause of the U.S. Constitution is no barrier to legislative and regulatory restrictions on Congressional insider trading. Finally, the article critiques the current version of the STOCK Act, proposing several improvements.
BTW, as a self-identified Republican (albeit of what some folks call the RINO variety), it would ill behoove me to comment on this aspect of the findings:
The study found some significant difference based on party membership and seniority, with the Democratic sample beating the market by nearly 9% annually, versus only about 2% annually for the Republican sample.
Instead, I'll just let it speak for itself.
I should note that there is at least one study finding that the Congressional trading advantage disappeared post-2004. But even so, there remains no justification for the loophole that allows Congressmen to inside trade with impunity.
