Capitol Gains

October 27, 2011

While insider trading has been legally targeted for 80 years in the United States, it is still not understood to the degree that it should be.  The vagueness of its conditions and the difficulty in identifying its harm cause the action to be difficult to pin down and identify.  This is particularly true for members of Congress: though they do not fit the typical insider trading image of a corporate executive that takes advantage of secret information to make a quick sell, their opportunity is just as large (if not greater) and motivation quite the same, says Megan McArdle, a senior editor for The Atlantic.

A study published in 2004 provided analysis of financial transactions of U.S. senators during the 1990s and brought to light the prevalence of the practice.

  • Between 1993 and 1998, Senate portfolios outperformed the market by approximately 12 percent a year, while House members averaged a still-impressive 6 percent over the market.
  • This evidence is demonstrated in numerous examples: Sen. Lloyd Bentsen (D-Texas) sold stock in dairy processors just days before the Justice Department began investigating the company; Rep. Newt Gingrich (R-Ga.) bought Boeing stock just before he helped kill amendments that helped Boeing secure space-related contracts.
  • The researchers conducting the study suggested that the results might have proven even more significant if they had had access to better-organized financial records.

But a follow up study conducted by a different team treated the same question for the time period of 2004 to 2008, and found the opposite result: portfolios of congressmen were outperformed by the market during that period.  The reversal has been attributed to several possible causes.

  • Some suggest that the two studies were inconsistent in their research methodologies -- a claim that is difficult to confirm or deny given that neither data set has been publicly released.
  • Others charge that insider trading on the whole became more difficult in the time period between the two studies.
  • Still a final group suggests that congressional insider trading stopped because the public finally started paying attention.

Regardless, the possibility that congressmen were using public decisions for private gain compels the need for greater clarification in insider trading jurisprudence.  If the accusation were true, would it have been illegal?  Such questions linger because of the lack of a reliable metric, but need to be answered before government decisions become corrupted, says McArdle.

Source: Megan McArdle, "Capitol Gains," The Atlantic, November 2011.

For text:

http://www.theatlantic.com/magazine/archive/2011/11/capitol-gains/8692/

 

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