Courtesy of various loopholes, members of both the House and Senate have long been allowed to trade on inside information, something that grabbed the media's attention when back in November 2005 someone, somewhere sent the stock of USG Corp., W.R. Grace & Co., and Crown Holdings higher even though there was no public information. Only later would it become known that then-Senate Majority Leader Bill Frist would deliver a speech announcing new legislation to relieve companies of asbestos litigation. Subsequent studies (such as Ziobrowski et al's 2004 paper “Abnormal Returns from the Common Stock Investments of the United States Senate.”) confirmed substantial market outperformance by members of Senate. A few days ago, Ziobrowski et al, have released a follow up study "Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives" which confirms that not only do congressional critters consistently outperform the market, but does a granular analysis of just who it is in congress that should consider leaving the public arena, and raising capital to start their own hedge fund: simply said, junior, democratic congressmen beat the market by roughly the same amount, with the same consistency (and probably with the same Sharpe ratio) that allows SAC to charge 3% and 35%.
In a nutshell, the latest stereotype is that if one is a junior democrat in Congress, and one trades for their own discretionary account, one most likely is doing so using insider information.
The conclusion.
In sum, the findings from this study of the U.S. House of Representatives’ common stock transactions are generally supportive of the previous study of the U.S. Senate. We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain. That having been said, abnormal returns earned by Members of the House are substantially smaller than those earned by Senators during approximately the same time period. These smaller returns are due presumably to less influence and power held by the individual Members. The nature and source or sources of information is unknown, but clearly further research is warranted. We recommend that congressional committees should be studied for abnormal returns and indications that members of those committees may favor stocks in industries their committees oversee. Abnormal returns associated with the common stocks of specific industries or companies should be investigated for patterns of potential misconduct. We suggest the examination of the relationships between campaign contributions, common stock acquisitions, and abnormal returns.
http://www.zerohedge.com/article/why-hedge-fund-comprised-junior-congressional-democrats-should-outperform-market-9
Stuart P. Green, JD, Professor of Law and Justice Nathan L. Jacobs Scholar at Rutgers School of Law, wrote in his May 13, 2008 email to ProCon.org:
"People in many fields of endeavor are privy to valuable confidential information before it is made public: For example, business executives, investment bankers, and lawyers have access to information about impending corporate mergers and acquisitions; Judges, juries, and court personnel have access to information about the probable outcome of court decisions; and officials at the FDA [Food and Drug Administration], EPA [Environmental Protection Agency], and other administrative agencies have access to information about the likely outcome of regulatory proceedings. All of these individuals are prohibited by law from using such confidential information in the purchase and sale of publicly traded stocks. Likewise, members of Congress and their staffs are also privy to valuable confidential information not yet made public. They have information about the likely outcome of various votes, committee proceedings, and investigations. Such information can be extremely valuable to investors. Those who buy and sell stock on the basis of such non-public information will have an obvious advantage over those who lack such information. This is not the sort of information that even the most savvy and sophisticated investor would be able to obtain legally. From a moral perspective, such informational advantages are indistinguishable from those enjoyed in more familiar forms of insider trading."
"'Senators' stocks beat the market by 12%' blared a headline in the Financial Times. So what? Isn't beating the market what everyone tries to do?... Like corporate executives, senators also have access to valuable inside information. They are aware of likely changes in the tax laws, government contracts, research funding, trade negotiations, etc. Any of these may have profound ramifications for the various companies or industries involved. In addition, those in Congress have the power to help or hurt individual companies and industries by changing the laws. This also can impact share price.
Unlike corporate executives, congressmen can trade common stocks without restriction, buying and selling as much as they want whenever they want. They may vote on issues in which they have a personal financial interest. Furthermore, Senate members are not required to report their transactions to the Securities and Exchange Commission like corporate insiders...
In fairness, just because they have the power to earn 'unfair' profits in the stock market does not necessarily mean they use it. Two-thirds of senators do not trade stocks at all and, so far, not a single member has admitted trading stocks based on confidential information he or she obtained on the job. The evidence, however, is rather compelling. In beating the market by 12% per year, the chance that they merely are lucky is very small."
May 2005 - Alan J. Ziobrowski, PhD
Sheila Kaplan, MA, Lecturer in the Political Reporting Program at the University of California at Berkeley Graduate School of Journalism, wrote in the article "Trust Busters" published in the Sep./Oct. 2005 issue of Mother Jones:
"Federal agency officials are generally prohibited from buying and selling stock in the companies they oversee. But Congress long ago exempted itself from ethics rules regarding investments. At one time this exemption made sense: Farmers wanted to be able to serve on the Agriculture Committee without selling their farms, for example. But many lawmakers now interpret this exception as carte blanche to invest after taking office.
...Some members, seeking to avoid the appearance of conflicts of interest, avoid buying stock or stow their assets in blind trusts. Others invest only in index funds or in diversified mutual funds. But a substantial share of House members and senators trade enthusiastically -- or, like Biggert [US Representative Judy Biggert (R-Ill)], permit their spouses and children to do so. An examination of the latest batch of financial disclosure reports, filed this summer for calendar year 2004, shows that dozens of lawmakers routinely buy and sell stock in industries they oversee, raising questions about whether they have an unfair advantage over the average investor."
