Is Congress Cheating The Stock Market?

A new academic study shows that Congressmen who invest in the stock market consistently outperform the market, suggesting that Congressmen are either trading on insider information or using their position to influence laws and regulations to their own personal benefit.

The researchers studied more than 16,000 stock transactions, from 1985 to 2001. What they found is that members of the House earn significantly higher returns on their portfolios, compared to the rest of us.

A portfolio that mimics the House Member stock purchases over that time beats the market by an average of 55 basis points per month — or 6% annually. That’s not just a 6% gain. That is 6% above and beyond what the market gets.

That sort of consistent results are not the product of chance or luck or even skill. It is clear that, whether they are purposefully scamming the system or accidentally gaming it, Congressmen are cheating you, me, and other investors out of money. The worst part is, since they write the laws that govern their own behaviour, they’re very likely doing it legally!

As Raj Rajaratnam awaits sentencing for insider trading, we have proof — clear proof — that Congress is using their position to gather insider knowledge and then use that to trade their own stocks. Who has more access to the secret workings of government and finance? Who has more ability to influence regulations and funnel government money to this company or that particular project.

Oh, sure, the ethics manual of the House even outright tells Congressmen that they are free to trade stocks while in office and are not required to recuse themselves from voting on legislation that could affect the value of their common stock holdings. They’re also not supposed to diddle the interns, hide bribe money in their freezer, or (allegedly) kill their mistress. That doesn’t really stop them, does it?

The outrage doesn’t just stop with the US House. Senators are even better than House members at turning their elected office into a permanent portfolio wealth generator. An earlier study on US Senators showed that Senators were the single best performing group of stock owners out there. They did even better than the giant hedge fund managers, scoring 12% above and beyond other investors.

Both studies make it clear that the advantages experienced by Congressmen and Senators is so large that it can only be explained away by the Congress having a significant information advantage over other traders.

It has always been said that a government job offered the best benefits and job security. Who could have known that it would let you get away with insider trading and gaming the regulatory system to boost your personal wealth?