Insider Trading Rules That Don’t Apply To Congress

Kyle Smith
June 1 2011

We have long observed and wondered; how it is that US Senators and House Members become multi-millionaires after they are elected into office.  Here today we have found a large piece of the answer -- legal insider trading. 


This perk over time is worth tens of millions per Senator or House Member as these are the folks not only write legislation that affects manufacturing, importation, mining, fishing, farming, communications, and general commerce – (These then appear to have experts somewhere in this mix that then advise them on stock and commodity trading) so they can clean up by positioning themselves in Stocks, Bonds, and the Mercantile Exchange before anyone else knows what is contained in their thousand page legislative bills and regulatory laws.


Example: When Hillary Clinton took 10,000 and proceeded to make 100,000 dollars admittedly with no experience whatsoever in a matter of weeks.  


Example:  IPO’s we have read of Senators and House Members having first dibs on IPO offerings which in some cases were IPO’s that were not open for purchase by the general public. 


In the past economic crash that involved the housing bubble, the banking and the insurance industries one wonders how many millions were vacuumed up by Senate and House members by selling short (Shorting) their holdings of companies that they knew in advance of the public who were in deep financial trouble.   


We see here that Senator’s and House Members via the SEC and over the transom information in the form of bribes can with impunity buy and trade stocks bonds and commodities.


 We also strongly believe also that Senator’s and House Members have access to speculative land and housing deals where they can likewise enrich their investment portfolios, we are thinking in the area of royalties on land what contains oil, natural gas or minerals.  Where you buy worthless rural land and make a killing by beforehand knowing a mine, oil company or economic package is coming down the pike that will vastly drive these land holdings up.   


President Barack Obama speaks to a joint sessi...

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Laughably on the other side of Senate and House Member business we are well aware of the tomes of law and regulations that have been written concerning political donations and gifts in order to give these men and women the face of propriety and honesty to the blind general voting public. Ouch!  

You want strict ethics rules? Start at the top — with the shining example of the noble knights of the House of Representatives, which bans all gifts from lobbyists and imposes a $50 limit on gifts from anyone else. And no, you can’t give an infinite number of $49 gifts to Larry Lawmaker. Sayeth the holy rulebook.

The general provision goes on to state that a member, officer or employee may accept from any other source virtually any gift valued below $50, with a limitation of less than $100 in gifts from any single source in a calendar year.  Gifts having a value of less than $10 do not count toward the annual limit.

Okay, so maybe you can give an infinite number of $9.99 gifts, and meals are specifically designated as such. Feel free to make your case to Rep. Portentous over a daily lunch at Arby’s. But still: pretty tight rules, eh?

Except that one thing you can do as a member is study pending legislation and regulatory changes, call up your broker and instruct him to trade on that nonpublic information. Do this as often as you want; you will suffer no penalty. There is no limit to how much money you can earn on insider trading in the House or Senate. Lawmakers and their staffers are specifically exempted.

As you might expect, those who work in the hallowed halls are not shy about availing themselves of the opportunity. A Wall Street Journal analysis published more than six months ago that has thus far provoked no particular sense of shame on Capitol Hill found that at least 72 Congressional aides in both parties had recently traded shares of companies that their bosses helped regulate. In 2009, while Senate Banking Committee member Mike Crapo, a Republican from Idaho, was involved in discussing “stress tests” on banks such as Bank of America, his aide Karen Brown traded the company’s stock on several occasions in the weeks before May 7, 2009 — when BofA surged thanks to a press release on its stress-test result, assuring Ms. Brown a nifty profit.

Asked by the Wall Street Journal to explain, Sen. Crapo’s office said the trades weren’t really made by Karen Brown but by her husband, who had no knowledge of what was going on in the banking committee. Would you go to your compliance officer, much less the SEC, with that line? True, these folks do need a good laugh now and again, and the SEC has to be in a jolly mood after the jury in the Galleon case all but repeated the verdict from The Producers: “We find the defendants incredibly guilty.”

Last week a study of some 16,000 stock transactions carried out by House members was published in the journal Business and Politics. This detailed analysis showed that the investment portfolios of House members beat the market by about six points a year. (Democrats did especially well, outperforming by some nine points a year, while Republicans topped the average investor by only two percent annually.) Senators apparently do even better: “their portfolios show some of the highest excess returns ever recorded over a long period of time, significantly outperforming even hedge fund managers,” noted the journal, citing a previously published study.

In a surprising twist, the study found that there tended to be an inverse relationship between the lawmaker’s seniority and the insider-trading profits pocketed by him and his minions. The authors speculated that “Whereas Representatives with the longest seniority (in this case more than 16 years), have no trouble raising funds for campaigns, junkets and whatever other causes they may deem desirable owed to the power they wield, the financial condition of a freshman Congressman is far more precarious. His or her position is by no means secure, financially or otherwise. House Members with the least seniority may have fewer opportunities to trade on privileged information, but they may be the most highly motivated to do so when the opportunities arise.”

Doesn’t that give you a cozy feeling, knowing that nonpublic securities info is helping make your friendly local politician more secure as he daydreams new ways to prevent, limit, or appropriate for his own reelection purposes – sorry, the needs of the Republic!– your financial success?

It’s not an accident that Congressionalites are expressly exempt from insider-trading laws. The reasoning is that, were the situation otherwise, “it might tend to “insulate a legislator from the personal and economic interests that his/her constituency, or society in general, has in governmental decisions and policy,” says the House ethics manual.

This is entirely beside the point: no one would object if lawmakers placed their assets in ETFs, in which case they’d still have an interest in the overall performance of the market. Or why not be simple and allow Congressional trading on everything except nonpublic information?

In what must be treated as more of a practical joke than a serious effort at legislation, every so often a group of lawmakers typically numbering in the high single digits proposes that Congress be subjected to the same insider-trading laws as you or me. Said proposal is always swiftly ignored — it has yet to reach the House floor and hasn’t even been bandied in the Senate. Then everyone goes out to their Spartan lunches of baloney and Cheez Curls, comfortable in the knowledge that they have improved on the Golden Rule: He who makes the rules pockets the gold.