Congress’s Trades Fail Sniff Test, Deserve Ban: View

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(Corrects spelling of Spencer Bachus’s name in ninth paragraph and Robert Khuzami’s title in the 13th paragraph of story published Dec. 2.)

Congress’s public-approval ratings have been in the dumps for months -- and that was before the supercommittee’s failure last month to find a deficit-reduction compromise.

Here is one way Congress might put a little shine on its sullied image: a self-imposed bar on what some have called insider trading that would go beyond restrictions contained in pending legislation.

Members of Congress almost by definition can influence or gain knowledge of legislation that can benefit or hurt a company. And they can get this information before much of the investing public. Last month a book, “Throw Them All Out,” by conservative scholar Peter Schweizer of the Hoover Institution, which served as the basis for a “60 Minutes” report, described how congressional leaders, including John Boehner, Nancy Pelosi and Spencer Bachus, seemed to profit from insight gleaned from their work on Capitol Hill.

According to Schweizer’s research, Boehner, House minority leader in 2009, invested in health-insurance stocks before the so-called public option in President Barack Obama’s health-care overhaul bill was killed. Shares in those companies eventually soared.

Pelosi and her husband, Paul, with a net worth estimated at $40 million, bought shares in the initial public offering of credit-card company Visa Inc. in 2008, when Pelosi was speaker of the House. As in many IPOs, the price they received was available mainly to company insiders and select investors. They bought the shares just before legislation died that would have limited the fees credit-card issuers could charge retailers. The shares more than doubled in the next two months.

Options Bet

Bachus, who was the ranking member of the House Financial Services Committee on Sept. 19, 2008, used options to place a bet that the stock market would fall after a private meeting on the state of the financial industry with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke. He closed out the position four days later, almost doubling his money.

There is no evidence that these episodes bear any resemblance to true insider trading. In Boehner’s case, the public option, which would have created a government entity to compete with private insurers and drive down their profits, was a long shot. This could be readily discerned from reading daily news reports at the time.

The same is true for the bill that would have hurt credit- card issuers; similar bills that followed also died before last year’s passage of the Dodd-Frank Act, which regulates credit-and debit-card fees. That the Pelosis, based on their wealth, might be seen by their broker as preferred clients worthy of getting in on an attractive deal is hardly shocking.

As for Bachus betting that financial markets would fall? Let’s see: Lehman Brothers Holdings Inc. collapsed four days before Bachus made his wager. American International Group Inc. was bailed out by the federal government three days before. Someone would have to be sublimely oblivious not to know that the financial system was on the brink of a cataclysm. Lots of people without Bachus’s pipeline to Paulson and Bernanke made money with similar investment strategies.

As for Congress getting information first, there is an entire industry devoted to scraping insight, data and news from the bowels of the government to use in any number of ways -- including investing. No one would call that insider trading.

The truth is, the laws governing insider trading were never designed to police the financial decisions of Boehner, Pelosi, Bachus and other members of Congress. Although what constitutes improper use of private information to trade is murky, it usually comes down to fiduciary duty. Corporate executives, privy to secret information, have an obligation to place the interests of shareholders ahead of their desire to use that knowledge to trade. It’s hard to see how this duty figures in the investments made by members of Congress.

Congress’s Duties

Congress does have other duties, though -- to the American people. One step would be to pass a law barring members of Congress, as well as their legislative staffs, from trading on nonpublic information. The House of Representatives has had such an opportunity for half a dozen years in the Stop Trading on Congressional Knowledge Act. The bill hasn’t been able to garner enough sponsors to go anywhere.

Perhaps for good reason. The version introduced in the House in March might not ban the kind of trading Boehner, Pelosi and Bachus engaged in. And in a hearing yesterday on a similar bill introduced last month in the Senate, Robert Khuzami, director of enforcement at the Securities and Exchange Commission, said he believed members of Congress might be subject to existing insider trading laws and could be prosecuted.

A better alternative would be to require members to put their stock holdings in blind trusts in much the same way as the president and some other executive branch employees. A blind trust would hold the assets and be managed by a trustee who neither consults with its owner nor reveals investment decisions during the owner’s time in office.

Much of Congress’s trading may be legal, but it fails the sniff test. Asking members to forgo investment opportunities while serving the public is a modest sacrifice to make in the name of boosting Congress’s credibility.

To contact the Bloomberg View editorial board: view@bloomberg.net.

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