Shine a Light on Congressional Stock Traders

by Tom Taulli | November 15, 2011 12:27 pm

According to a recent Gallup poll, Americans’ approval rating for Congress is at a mere 13%. It’s the lowest ever (George Washington must be rolling in his grave).

Then again, citizens have plenty to be mad about. And now we have some more red meat: A recent episode of 60 Minutes makes Congress look like a shifty hedge fund, with its members trafficking in insider information. Needless to say, it has ignited a firestorm.

For example, in September 2008, then-Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke gave a horrific presentation to a variety of members of Congress. What happened next? They started to dump their investments.

One such example is detailed in a new book that hit the stores today: Throw Them All Out by Peter Schweizer, a fellow at the conservative Hoover Institution. Schweizer says Representative Spencer Bachus (R-Ala.) purchased options on the ProShares UltraShort S&P500 (NYSE:SDS[1]), in which he quickly doubled his money. He then went on to short General Electric (NYSE:GE[2]). How about that for his faith and patriotism for America?

In light of these revelations, it should be no surprise that the reflex reaction many are calling for is to completely ban trading among members of Congress. Why give them any temptation? Don’t they make enough money already?

Well, trading by elected officials can certainly be problematic in many cases. But this doesn’t necessarily mean all of their trading should be banned. After all, the federal securities laws allow CEOs to trade in their own stocks — as long as they disclose it. So why not apply the same rule to Congress?

After all, much of Congress’ business is already public. In fact, watching CSPAN and keeping track of legislation is something many hedge fund managers do. It can be a rich source of information to trade on.

Yet when it comes to reforms of Congress, it seems unlikely that anything will happen. Does Congress really have the incentive to regulate itself?

Besides, even if there was a new disclosure regime, it would probably be tough to prosecute. After all, the Securities & Exchange Commission and the Justice Department get their funding from Congress.

Tom Taulli runs the InvestorPlace blog “IPOPlaybook[3],” a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling”[4] and “All About Commodities.”[5] Follow him on Twitter at @ttaulli[6]. As of this writing, he did not own a position in any of the aforementioned stocks.

Endnotes:
  1. SDS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SDS
  2. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  3. IPOPlaybook: http://investorplace.com/ipo-playbook/
  4. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  5. “All About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  6. @ttaulli: http://twitter.com/#%21/ttaulli

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