Congressional Day Traders: Laws for Thee, But Not For Me

Categories: Standards, Ethics & Regulations (SER)
John Rogers, CFA

Monday marked the release of Peter Schweizer’s new book, Throw Them All Out, a non-fiction tale about the skullduggery of a group of well-connected insiders who used their positions and clout to obtain non-public information about imminent market moves. But this is not another story about Bernie Madoff or Raj Rajaratnam taking advantage of their clients. No, Schweizer’s book is about the consummate insiders — members of the U.S. Congress, the .0001% — using privileged access to critical information (material non-public information in many cases) on government actions or regulatory reform legislation to line their own pockets.

Schweizer is the William J. Casey Research Fellow at the Hoover Institution and the author of several books, including a book on the financial crisis, “Architects of Ruin: How Big Government Liberals Wrecked the Global Economy—and How They Will Do It Again If No One Stops Them.” While having definite political leanings to the right, Schweizer finds plenty of disgust for both sides of the political divide.  

What makes the activities that Schweizer showcases in his latest book so troubling is that, in each case, policy makers gave themselves a pass. The same kinds of activities that would get you or me sent to federal prison for use of insider information are perfectly legal in the alternative universe of the D.C. Beltway. 

There was nothing illegal, then, about what former Speaker of the House Nancy Pelosi (D-CA) or current House Financial Services Committee Chairman Spencer Bachus (R-AL) did. Ms. Pelosi is said to have profited handsomely from privileged access to the Visa initial public offering while legislation that might have hurt the credit card issuer sat on her desk. Mr. Bachus reportedly gained from short positions taken against the market within hours of listening to a late 2008 briefing from then-Treasury Secretary Henry Paulson. None of this was against the law.

Incredibly, a recent Wall Street Journal piece by Holman Jenkins even suggests that trading based on an advance look at information congressional leaders are typically privy to is no big deal. Information such as the extensive array of government-calculated economic indicators, planned regulator actions, and other inside tidbits that these legislators may pick up are likely “already in the market,” claims the article.

Doing what is legal is not necessarily the equivalent of doing what is right, ethical, or moral. The CFA Institute Code of Ethics makes it clear to CFA Institute members that meeting the letter of the law in many cases may not be enough to fulfill the duties owed to our clients. Specifically, using material, non-public information to game markets and gain investment advantage is simply prohibited under any circumstance.

In many ways, Americans have become desensitized to this kind of “official” graft. As Schweizer points out, Congressional insiders are able to enhance their re-election chances by routinely slipping earmarks for pet projects into Congressional bills at the last moment, with the notorious “Bridge to Nowhere” being one example.

None of this should surprise anyone, of course. What is often considered wrong in the private sphere is accepted practice in the world of government. Off-balance-sheet accounting, for example, got its start with Social Security in the 1930s, and received an official imprimatur in the financial sector when Fannie Mae and Freddie Mac were moved off the books of the federal government in the 1960s.

It is time Congress and other public officials in Washington, D.C., end this system where the politically connected live by a different set of rules from everyone else, and subject themselves to living under the same laws that they expect the rest of us to honor. A first step would be a prompt re-examination of Congressional ethics rules to prohibit this nonsense and to realign with the interests of the public. Leaving it to Congress may not be an option, however. As of Thursday afternoon, the reintroduction of the so-called STOCK Act — Stop Trading on Congressional Knowledge, which has been around for about a decade — has met with the resounding support of just five senators.

It has long been said that the ethical tone is set at the top. Whether we are talking about government or our own financial services industry, the ethical challenges we face have never been more serious or in more urgent need of attention.

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