In February, congressional star Alexandria Ocasio-Cortez, D-NY, broke viral political video records with her clever exposure of political corruption, drawing tens of millions of viewers as she laid out how easy it is for “bad guys” to cruise into Congress on corporate cash. Then, once there, they craft laws for big donors and back legislation to boost their stock portfolio. All without breaking the law.
But the reality is even worse than what Ocasio-Cortez had time to cover in her five-minute spot. Consider this: What kind of system would allow members of Congress to beat not only average Americans on the stock market, but even legendary investors like Warren Buffett?
Georgia State University professor Alan Ziobrowski led one of the first systematic studies of how politicians perform as stock market investors back in 2004. Poring over thousands of transactions during the boom years 1993 to 1998, his team found something shocking: Over and over, U.S. senators demonstrated uncanny timing on when to buy and sell their stocks. In fact, they regularly beat the market by breathtaking margins — that is to say, enjoyed returns exceeding the performance of the Standard & Poor's 500 index.
During the period reviewed, high-flying Wall Street financiers only beat the market by five percentage points. By some miracle, however, Ziobrowski found that senators managed to outperform it by a whopping 12 percentage points annually. Not even Warren Buffett pulls that off. Ordinary folks had quite a different outcome over those same years: They underperformed the market by 1.4 percentage points.
To beat the market, you can be very lucky or work very hard at studying certain industries — an exceedingly rare accomplishment. Or you can use insider information.
To beat the market, you can be very lucky or work very hard at studying certain industries — an exceedingly rare accomplishment. Or you can use insider information. Trading on stuff the public doesn’t know about in the business world can earn you a trip to prison. But amazingly, until recently members of Congress were not barred from the practice. (Members of the executive branch were held to higher standards on this one).
The Ziobrowski study alerted Congress that researchers were starting to pay attention to this noxious state of affairs. Any resulting check on greed may have slowed, but certainly did not halt, the stock activity of elected officials: Ziobrowski’s team went on to examine how House members did from 1985 to 2001, publishing their findings in 2011. All told, representatives beat the market on average by six percentage points annually.
Some more recent studies have suggested that Ziobrowski’s results might not hold for later periods — perhaps because of heightened scrutiny that followed their research, including a 2011 “60 Minutes” segment featuring investigative journalist Peter Schweizer. But if you study what went down in 2008 when the country was hit by financial disaster, greed still too often trumps the public interest.
In autumn of 2008, then-Rep. Paul Ryan, R-Wis., sold stock in U.S. banks in patterns unusual for him on the very day he found out that the financial sector was about to tank — and before the public knew. Rep. Spencer Bachus, R-Ala., made bets the next day that financial stocks would fall in the form of “short” options. Bachus was investigated for insider trading but cleared by his congressional peers. Ryan denied any wrongdoing and ran for vice president, later becoming speaker of the House.
Time and time again, studies show that what politicians do in a crisis has a funny way of lining up with what fattens their wallets.
Consider, members of Congress tended to vote in favor of the 2008 bank bailout if it benefitted their holdings in things like financial sector stocks, according to research conducted by London Business School professor Ahmed Tahoun and Laurence van Lent of the Tilburg School of Economics and Management for the Institute for New Economic Thinking. The researchers found that representatives were “60 percent more likely to vote in favor of government intervention when the financial crisis affected their personal wealth.”
Banks in which senior members of finance-related congressional oversight committees held stock got their bailout funds faster, for longer periods and cheaper than other banks.
The study also showed that banks in which senior members of finance-related congressional oversight committees held stock got their bailout funds faster, for longer periods and cheaper than other banks. What a coincidence!
By 2012, outrage reached a point that President Barack Obama signed the Stop Trading on Congressional Knowledge (STOCK) Act to great fanfare. It was touted as an end to insider trading by members of Congress, the executive branch and their staffs. In reality, it was a weak law with all kinds of loopholes — and in 2013, Obama signed a bill that gutted it even further.
So, the insider trading game continued.
A 2017 Politico story testified to the enduring popularity of the phenomenon, highlighting a small group of especially wealthy lawmakers — some of whom own big stakes in private companies impacted by their legislative work — who were making thousands of stock trades a year. The piece alleged disturbing conflicts of interest swirling around politicians like Rep. Kurt Schrader, D-Ore., who sits on the House Energy and Commerce Committee and apparently likes to trade in companies like Exxon Mobil and ConocoPhilips. Or Rep. Hal Rogers, R-Ky., who maintained partial ownership of a bank and frequently traded stocks while chairing the House Appropriations Committee that oversees bank regulation.
The current congressional rules are so lax that you can actually own companies and sit on corporate boards as long as you don’t draw a salary. And why would you need a salary when the stock returns are so good?
Most recently, Rep. Chris Collins, R-N.Y., showed such alacrity for the insider game that he was overheard boasting in an elevator, "Do you know how many millionaires I've made in Buffalo the past few months?"
Collins, one of President Donald Trump’s early congressional supporters, was not only a shareholder of an Australian drug maker, but a member of its board. His shenanigans to avoid losses when one of its drugs failed a trial included calling his son to warn him to dump stocks in a hurry. Video showed him making the call while at a White House picnic. In August, he was indicted on insider trading and lying to federal agents. Collins, who won re-election in November, is slated return to court in September. (He denies the allegations.)
Today, Washington remains mired in the money swamp. When it comes to members of Congress enriching themselves at public expense, the enforcement of ethics rules seems haphazard at best. Disclosure statements are incomplete and hard for the public to find. Determining what happens on the golf course or what gets passed among family members and staffers can be near-impossible. The gray area is huge and wrongdoing is notoriously difficult to prove.
None of this comes as a surprise to political scientist Thomas Ferguson, whose research with Paul Jorgensen and Jie Chen has shown in stark terms how money affects congressional elections. A recent summary of their findings displays a striking straight-line relationship between money spent and votes obtained by major party congressional candidates in every election since 1980.
“This looks almost like a law of nature,” Ferguson noted, “except, of course, it isn’t. It’s the result of our how our institutions work.”