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Can Rep. Bachus and His Money-Crazed Congressional Colleagues Be Stopped from Insider Trading?

A growing list of legislators use their office to play a game of "Who Wants to Be a Multi-millionaire?" But there is legislation that could potentially stop them.

Back in the Gilded Age, venality was the rule in Congress. Bribes were as common as tobacco pipes. Lawmakers fattened their bank accounts through insider deals, with the needs of ordinary people an afterthought. Nelson Aldrich, a powerful Republican who served in the Senate from 1881 to 1911, was that corrupt era’s political poster boy, serving on the Finance Committee and using his position to invest in railroads, sugar, rubber and banking deals that made him rich.

Sound familiar? It should. We’re well on our way to repeating that money-crazed chapter in American history as a growing list of legislators use their office to play the game, "Who Wants to Be a Multi-millionaire?”

Last week we learned that Rep. Spencer Bachus, R-Alabama, Chairman of the House Financial Services Committee, is under investigation by the Office of Congressional Ethics – the first such case involving a member of Congress. The probe comes at a time when America’s ethics alarm bells are ringing loudly. In the business world, trading on insider information is a crime punishable with prison time, but Congress operates in a different – and very lucrative -- universe. Recently, the House and the Senate have been debating legislation to stiffen rules on insider trading by lawmakers in the wake of a "60 Minutes" report and a book focusing on the topic, Throw Them All Out, by Peter Schweizer of the conservative Hoover Foundation. But the legislation, known as the STOCK Act, appears to be stalling.

For the public, the debate centers on several questions. Should members of Congress get to trade on and make money from inside information that can seriously sway the markets? Are elected representatives serving the interest of their constituents, or are they serving their bank accounts? And just how do we stop them from abusing their office through insider trading?

More Than Just Luck

A big sign that something is rotten in Washington is that members of Congress who play the stock market do much better on average than the individual investor.

Back in 2004, a study* considered by academics to be the baseline work in the field was published by researchers at four universities. These researchers, Alan Ziobrowski of Georgia State among them, found that during the boom years of 1993-'98, a majority of US senators were trading stocks -- and they were beating the market by 12 percentage points a year on average. Corporate insiders, on the other hand, only beat the market by 5 percent, and typical households underperformed by 1.4 percent. Interestingly, there were no differences found between Democrats and Republicans. (See Gail Chaddock's  report on the study in the  Christian Science Monitor.)

12 percent is a statistically shocking number, way beyond luck or just being smart. Nobody does that well. Not George Soros. Not Warren Buffett.

The 2004 study sent chills through Congress as members realized they were under scrutiny. And yet legislators have gone right on lining their pockets using insider information. In the executive branch, you’re expected to divest yourself of assets when you take office or put your investments into what are known as “blind trusts.” But legislators consider inside dealmaking their divine right. They typically go right on playing the stock market and often neglect to bow out when they have a financial interest in an issue they are legislating. Disclosure statements they have to release are pretty much a joke – they’re incomplete, and they are difficult and expensive for the public to obtain. A reporter requesting documents has to disclose his or her information in the request, which is then sent straight to the member, a move which can be intimidating to those asking questions.

Lawmakers Gone Wild

Remember the frightening days of 2008, the year when Wall Street was crashing and Congress was debating a rescue package? Most of us were scared stiff of losing our savings. But not lawmakers. That’s when the trading fever really caught them again. The influential Rep. Bachus was in the room back in September 2008 when the bank bailout was underway. Through briefings from Secretary of the Treasury Hank Paulson and Federal Reserve Bank Chairman Ben Bernanke, he found out ahead of the public that the markets were going to crash big-time, and he decided he would make some money in the deal, betting against the entire market in what’s called a "short option." He also sold his shares in General Electric (whose stock price subsequently collapsed), getting out at a profit.

“These meetings were so sensitive that they would actually confiscate cell phones and Blackberries,” Schweizer noted on "60 Minutes." “What we know is that those meetings were held one day and literally the next day Congressman Bachus would engage in buying stock options based on apocalyptic briefings he had the day before from the Fed chairman and treasury secretary. I mean, talk about a stock tip.”

The Alabama legislator’s funny idea of what he’s supposed to be doing in Congress scandalized the public back in 2010 just as he was named chair of the Finance Services Committee, which oversees banks, financial markets, housing and consumer credit. His succinct summary was breathtaking in its open embrace of corruption: “Washington and the regulators are there to serve the banks.” He forgot to mention that he was also there to serve his portfolio.

OCE investigators are currently examining whether Bachus violated Securities and Exchange Commission laws that prohibit individuals from trading stocks and options based on "material, non-public" inside information.

He may be the worst, but Bachus is by no means alone in his shenanigans. The activities of Sen. Dick Durbin (D-Illinois), Sen. John Kerry (D-Massachusetts), Rep. Jim Moran (D-Virginia) have been under scrutiny as examples of legislators making possible insider trades during the financial crisis. Speaker of the House John Boehner (R-Ohio), and former Speaker Nancy Pelosi (D-California) have also been cited for questionable dealings.

The STOCK (Stop Trading on Congressional Knowledge) Act 

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