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Congress: Trading stock on inside information? (cbsnews.com)
189 points by espeed on Nov 14, 2011 | hide | past | web | favorite | 75 comments

Another interesting point is that Congress can actually influence outcomes. For example, if you (the congressperson) have a lot of cash invested in the defense department, you'd likely push for as much defense spending as possible, even if it it's against the best interests of the nation.

I think it's time to end that. Public officials should not be able to influence their financial portfolio. At the very least, every trade, investment, position by an elected official should be made public so that we are aware of what we're voting for: Not a representative of ourselves, but of industry and their pockets.

That is f*ing remarkable. In Australia there are strict rules governing conflict of interest. If there is even a hint of someone gaining financial benefit through their position they are hounded by the press and their political opposition. Of course parliamentarians find other ways to make money such as fake tenders. But it isn't as flagrant as this.

I really feel for you guys over in the US. These are your representatives...they sound like mafioso.

One thing about corruption in some Asian countries: they give up the pretense of separating politics from business.

For example, when I visited Bangkok, I read in the local paper about the Minister of Telecom who also happened to be the owner of the largest telecom interest in Thailand.

In Western countries, we seem to cling to a standard that politics and business can be caissoned off. I do not know if this is better but more transparency never hurts.

Reminds of the zerohedge disclosure statement.


It's long, but the most important line:

The reality is, critical readers should read analytic posts and the rest of Zero Hedge with the blanket assumption that the author is totally "conflicted."

If regulated properly it isn't entirely a pretense. Regulation isn't 100% effective, but it can make a huge difference.

Bangkok probably isn't the best example of a transparent and corruption free economy.

You can make as much on a financial crisis as you can a bull market if you know in advance or can influence it -- this is a key component in the "Great American Bubble Machine" (http://www.rollingstone.com/politics/news/the-great-american...).

I think politicians should only be able to hold investments in diversified US stock index funds, like the S&P 500. This avoids conflict of interest involving individual companies (and telegraphs that they "believe in America").

If a US politician's portfolio was 100% invested in international stock funds, I would like to know!

And all their stock trades should be public, in real time!

Or better yet, make them announce all trades an hour in advance!

Here are a couple of studies from 2004 and 2011 by the same group of researchers showing congress and the house of representatives outperforming the market.



Someone should set up a hedge fund to track that.

I've become something of a political cynic at this point in my life. Stories like this usually leave me unmoved.

But this particular story has left almost shaking in anger -- this is more than graft. Our government will persecute all sorts of people for inane things. Hell, Pete Rose was investigated and prosecuted because he bet against his team. And yet we have a system where the Congressman responsible for oversight of a hydra like the financial services industry can get rich betting against America? This is disgusting.

Slightly off-topic, but an important correction: Pete Rose actually bet on his team to win, not against his team. It makes your point even stronger - he didn't have a conflict of interest.

Good catch!

It's wrong and the laws should be changed, but you cannot expect people to avoid legally pursuing their own self-interest out of their own high morals. They are politicians after all.

It's disgusting that anyone should be treated differently by the law because of their status.

Actually, lots of people and companies can legally trade on non-public information. See http://en.wikipedia.org/wiki/Insider_trading For example, it's not clear that Google can't trade stock based on what it observes its customers doing, even though that information is not public.

That said, Congress-critters are in a very different position. They're writing the rules. And, they keep claiming to be "public servants", so their use of non-public information should be at least as restricted as employees.

I'm fine with it, but only if they reveal the information to the rest of us. We should be able to trade on the same information. Very roughly based on the idea that government information is public domain. <harumph />

It's also illegal to lie to the government, but not illegal for the government to lie to us:


Ive wondered recently if one can invoke the fifth amendment to avoid all interaction with a government official because the potential to unintentionally lie to the official is always present.

My layman's understanding is that you cannot invoke the 5th amendment in many circumstances where you might want to. The Supreme Court has also ruled that an adverse inference may be taken if you assert your 5th amendment right.

The safest way to get more time to answer a question is to refer the questioner to counsel.

That's not really surprising, considering that essentially every power of government is something that would be illegal for anyone else to do. Just a few examples: withholding money from your paycheck, trapping you in a metal cage, annexing your property for a "better cause," and printing cash.

The things you have listed are all powers that can only be exercised by the government, not by individual legislators. There is a significant difference between giving power to government and giving power to the individuals that form the government. The former - though the amount of power may be debatable - gives purpose to the government. The latter, on the other hand, is probably one of the most poisonous influences on a democracy.

Exactly. It's the biggest and most successful ruse ever employed: creating an exception for yourself on what should otherwise be universally accepted moral rules.

Peter Schweizer's (http://www.hoover.org/fellows/9706) research at the Stanford Hoover Institution was the catalyst for this report.

He's also the author of a book with the subtitle: "Why conservatives work harder, feel happier, have closer families, take fewer drugs, give more generously, value honesty more, are less materialistic and envious, whine less … and even hug their children more than liberals." (http://en.wikipedia.org/wiki/Makers_and_Takers).

I sometimes wonder how much of the contemporary non-fiction publishing industry is based on 1980s/90s trolling. Is adequacy.org used as a case-study? They've even perfected the art of the paired troll, where you publish two un-nuanced books taking opposite inflammatory positions, which feed on each other, driving sales of both.

Ok, that's an even longer, harder and more arrogant-er subtitle than Kanye West's upcoming autobiography.

You know how people get really outraged -- not just morally, but legally! -- about things that might maybe possibly be discrimination?

I wish they felt the same way about corruption.

I wonder if someone could write a meme for that.

We had a government of laws, not of men. Now we have a government of men and honest graft.

I don't really understand why insider trading is illegal in the first place (it makes the market more efficient, and no one is defrauded) but it does seem weird to make it legal only for a certain class of favored people. The right answer, though, is to just legalize it.

Its only illegal for people that don't know how to wink.

It's insider trading because the information that motivates it isn't public. It's like selling someone a work animal that you (but not they) know has a fatal disease. It's not literally fraud, but it smells the same.

I think of the market as a medium for transmitting and storing information about how much people value things. It has incredible bandwidth and storage capacity, but its latency is not always the best. Anyone proposing a replacement for a market (in anything!) needs to have respect for the incredible volume of information they're seeking to replace, but the market is not the best tool for everything.

I think this is one of those degenerate cases where the latency kills you. Specifically, the time it takes to go from "some people know this company is in trouble" to "everyone knows it" is way too long when the market is the medium of transmission. Lots of people can be ruined in the mean time.

The person on the other side of the trade is defrauded.

I'm sure all publicly listed companies will be thrilled to see material secret information central to their business openly traded to highest bidder under your scenario. Who wouldn't want to know exactly how many CPUs Intel sold yesterday and intends to sell tomorrow?

edit 1 hr later: Now, a dilemma: do I blame the Apple fanboys or the Android fanboys for these downvotes? HN hive mind, please advise.

True. And their stock trading performance bears this out. Very sickening.


"The buying and selling of stock by corporate insiders who have access to non-public information that could affect the stock price can be a criminal offense, just ask hedge fund manager Raj Rajaratnam who recently got 11 years in prison for doing it. But, congressional lawmakers have no corporate responsibilities and have long been considered exempt from insider trading laws, even though they have daily access to non-public information and plenty of opportunities to trade on it."

The big economic information advantage of being in congress is not so much wrt trading stocks in public companies, but in private investments.

Wouldn't this information eventually be diluted into the market if ETFs are created to effectively track congressmen's picks?

When is CBS going to fix their broken web technology so that I can read their site on the iPhone?

Article 1 of the US Constitution:

"[Senators and Representatives] shall in all Cases, except Treason, Felony and Breach of the Peace, be privileged from Arrest during their Attendance at the Session of their respective Houses, and in going to and returning from the same; and for any Speech or Debate in either House, they shall not be questioned in any other Place."

This passage has an incredibly long and complex history behind it and implicates ancient rights and privileges beyond its literal text dating back to the earliest days of Parliament that are too complex to describe in detail here, but people need to realize that it does exist, it exists for a reason, and it has implications for attempts to restrict "insider trading" by members of Congress.

Even bribery statutes can come into conflict with the Congressional privilege, and some prosecutions that probably should be brought never will be because it becomes such a close call in court.

This particular problem can and should be fixed, probably by requiring a blind trust, but people need to realize that such legislation is getting into an area that's much more complex than simply "they shouldn't personally profit from their privileged position" -- few would argue with the principle, but all should be cautious that we don't end up with laws that risk partisan prosecutions for legitimate political activity.

This is a very important rule that facilitates the separation of the three powers: executive, legislature, and judiciary.

The idea is that if one institution or person has any two of these power it can "take over the country".

Executive and judiciary: Enforce your own court orders. Executive and legislature: Enforce your own laws. Legislature and judiciary: Enforce your own laws (through the courts this time).

That is why members of congress cannot be arrested. That is actually the same in most democracies.

Ultimately this does not apply here, though, as (1) congress can remove other member from congress and (2) prosecution and arrest can start as soon as the person is no longer member of congress.

Edit: Spelling

The issue here isn't this particular problem. The insider trading problem is just a particularly egregious example of how modern American government holds many of the fundamental founding principles of the nation in contempt.

I respect the need for our representatives to be able to speak their mind and vote their conscience without fear of intimidation by some tyrant in the executive or judiciary. But according to the byzantine code of law enacted by Congress and based on statements made in the 60 Minutes report, every member of congress mentioned in this article likely committed one or more felonious acts.

Who watches the watchers? The rules of the House of Representatives and Senate need to address issues such as this. Widespread corruption of this nature, extending into the leadership of the Congress brings the integrity of the United States government into question.

_You_ watch the watchers. The best reason for a simpler, smaller government is the ability to see what it's doing, and for whom.

That doesn't mean they can't be arrested and charged with crimes they commit while in office, as long as the arrest and trial occurs after they leave, does it? Indeed they could even be charged in between sessions, couldn't they?

The point isn't the "arrest" part (which doesn't mean what you think, actually -- they can, in fact, be arrested and charged for serious crimes while serving, and have been), it's the totality of the clause and its history, which acts to protect and caution against the criminalization or suppression of political activity.

It's not a straightjacket, but more a statement of principle and warning shot.

Edit: By the way, see http://en.wikipedia.org/wiki/Parliamentary_privilege

What should happen at the very least is they should be required to disclose publicly exactly what investments they have made.

Also, while they may be immune from prosecution, it should be considered an ethical violation to fail to disclose if you have a financial interest in pending legislation, and/or to be profiting in a way that would be considered illegal in another context.

Really? They get the awesome health care, they can't be charged with insider trading... since when did our elected officials rise above the law? These people are supposed to represent me yet they're far removed from mine, yours, and most everyone else's reality.

My mother works as a sales assistant to a well known broker at Morgan Stanley and she isn't allowed to trade for her own account or even have an account there yet these public officials who are known to hob-knob with people who are in the know get to trade as they please using any information they stumble across?

Come on now. There should be one set of rules here but I see two: one set for me and another set for those who are supposed to represent me. Disgusting.

Perhaps part of the problem is that you cannot select who represents you.

You can pick your lawyer and he has to do what you say. Same with your plumber.

But you have only two choices for your representative, selected by others and both will ignore you and their promises once they get in. There's something very wrong with that.

Of course, the real problem is the break down of the federal arrangement. Power is way more concentrated than the founders intended.

> Power is way more concentrated than the founders intended.

I'm not sure this is anything more than technically true.

It's easy to forget that the Constitution actually created a very powerful central government for its day. The Federalists, at least, envisioned the Constitution as giving Congress sweeping powers over inter-state economic activity, foreign relations, etc.

The difference between then and now is that most human activity at the time of the writing of the Constitution was strictly local. You grew your own food, died where you were born, etc.

What has happened today is not so much Congress extending its power closer to our day to day activities, but our day to day activities coming closer to the reach of Congress. Nearly every thing today involves a market transaction, often an inter-state one. If you asked one of the founders whether a purchase of a product produced with components from multiple states, in a transaction involving multiple multi-national corporations at the point of sale, was within the scope of Congressional power over commerce, the answer would likely be "well if such activity isn't within its scope, what is?" Yet that is precisely the transaction that would occur if I were to go downstairs and buy a Snickers bar from the VISA-enabled vending machine.

If you lived today on a farm, self-sufficient, perhaps trading with other self-sufficient people, like it was 1789, I don't think you'd notice much difference in Congress's power over you. You'd have to file a yearly tax return, but the Tax Code doesn't tax self-created value so you wouldn't pay much if anything in taxes. You wouldn't be paying into social security, etc. You wouldn't be using health care services, so that would all be inapplicable. The biggest burden on you would be the collection of state property taxes, just the same as it would've been in 1789.

No, its true.

The Constitution originally let the states directly appoint senators. That gave state governments more power than they have now.

The Constitution also originally prohibited any taxes that were not proportional, making direct taxation of citizens very difficult. But when that was thrown out, the federal government was free to grab a huge percentage of your income.

Money is power. Now the states have to kiss up to the federal government to get money.

One also has to remember that the direct election of senators happened because virtually every state was selling Senate seat, ala Blagojevich style.

16th amendment passed because people wanted Congress to tax rent, interest and property income the same way as their work wages were taxed.

State governments would never need money and interference from Federal Government if they were to build there own highway, maintain their own airwaves, launched their own Moon mission, agree not to prosecute minorities, have their governor not stands in way of kids attending schools, etc etc. Over period of 200 years, both technology and working of States has led to more power getting concentrated in hand of Federal government, because people wished so.

Perhaps the framers thought states would act more sensibly, but that is not what seems to have happened. This also leads to side effects like Federal government regulating what crops I can grow in my home, even if I have no intend of participating in any commerce at all.

In practice, the direct appointment of Senators gave local political machinery complete and utter control.

The result was an institution in the Senate the was regressive by nearly any measure by the 1890's and 1900's.

Yes, you've got it. Local control.

Much better than lobbyist control.

Ha! I take it you don't follow state politics much.

State Legislatures make the Congress look like the Mormon Tabernacle Choir.

That doesn't mean they all are or that somehow they were worse before the breakdown of federalism.

But, yes, they are bad. Which is why cities and counties should be free to leave for a different state or start their own.

That's actually how it works in Switzerland with their cantons.

Choice is what we need. Monopolies where the customers can't leave are very unresponsive. Government doesn't need to be as bad as it is.

Fair point about states appointing Senators.

The taxation bit isn't on point at all. The Constitution gave Congress broad taxing authority: "That the authority conferred upon Congress by § 8 of Article I 'to lay and collect taxes, duties, imposts and excises' is exhaustive and embraces every conceivable power of taxation has never been questioned" Bruschaber v. Union Pacific, 240 U.S. 1, 12 (1916).

The limits the Constitution imposed were in "the requirements of Art. I, § 8, cl. 1, that 'all duties, imposts and excises shall be uniform throughout the United States,' and... the limitations of Art. I, § 2, cl. 3, that 'direct taxes shall be apportioned among the several States' and of Art. I, § 9, cl. 4, that 'no capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken.'"

I.e. direct taxes must be apportioned, while excise (indirect) taxes must be uniform throughout the states.

Now, "direct" is a term of art. It does not mean that Congress can't directly tax individuals. The Framers intended for "direct taxes" to be a narrowly-defined category.

"What are direct taxes within the meaning of the Constitution? The Constitution declares that a capitation tax is a direct tax, and both in theory and practice a tax on land is deemed to be a direct tax." Hylton v. U.S., 3 US 171, 176 (1796).

"I never entertained a doubt that the principal, I will not say, the only, objects that the framers of the Constitution contemplated as falling within the rule of apportionment were a capitation tax and a tax on land." Id. at 177.

Now an 1895 case called Pollock v. Farmers' Loan & Trust Co. ruled that a tax on income from property was effectively a direct tax. It noted that a tax on the gross value of land was one of the two taxes considered direct by the Framers (the other being a capitation--head tax), and determined that a tax on income from land was basically the same thing.

What the 16th amendment did, then, was not grant Congress a broad new taxing authority had did not previously have, but nor even resolve the question of whether an income tax was a direct tax or an indirect tax, but simply removed the constraint of apportionment from the income tax, whether or not it was a direct tax.

Many people think Pollock was wrongly decided, for the simple reason that the income tax is much more like an excise tax than a property tax. The distinction between the two, as the Framers understood it was that a direct tax could not be shifted to another person, but had to be paid by the person it was legally allocated to. A head tax is the ultimate direct tax: you have to pay it, regardless of anything else.

The prototypical indirect tax is something like a sales (excise) tax, where the cost of the tax can be passed along to the buyer. The income tax is much more like an excise tax than a direct tax. It only taxes the proceeds from market transactions involving goods and labor. Income taxes are readily shifted to someone besides who it is legally incident to. Payroll taxes, for example, are apportioned by the market among employer and employee irrespective of how they are apportioned legally. Essentially, the income tax for most people functions like an excise tax on labor.

What changed between 1789 and today was not really that the 16th Amendment gave Congress carte blanche to tax the heck out of people, but rather that nearly all of the country's activity became subject to market transactions that brought it within Congress's taxing power. If you lived on a farm like in 1789, being nearly self-sufficient, like most of America at the time, the IRS could collect very little from you even today. It can't tax the value resulting from growing your own food or making your own clothes. It's only because you participate in market transactions for every little thing, from selling your labor on the open market to buying your bread on the open market, that brings so much activity within Congress's taxing power.

Article 1 Section 2 states:

Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons.

Article 1 Section 9 states:

No capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.

"The difference between then and now is that most human activity at the time of the writing of the Constitution was strictly local. You grew your own food, died where you were born, etc."

Do you think Wickard v. Filburn allows Congress to regulate whether you grow food for yourself?

Wickard v. Filburn is at the very edge of Commerce Clause jurisprudence, and is probably a high watermark. There was a lot of scaling back of the doctrine under the Rehnquist and Roberts courts.

The issue really became one of scaling democracy. 200 years ago our congress was much closer to the citizens because there were so few citizens per elected official. An increasing population could not easily be represented by an increasing number of delegates, so each one had to represent more people. Representing the desires of a few thousand people is fairly simple, and there is less voter 'inertia' to carry delegates if they fail to adequately represent the people.

Let's just say for the sake of argument that a typical congressman can fairly represent 20,000 people. This gives them the ability to hear the issues of those people, and a group that size can pick a representative who is close to those issues. Given congresses current size the limit of effective government is about 10,000,000 people (or perhaps just voters). To represent the United States, congress would need to have 15,000 members. As it currently stands, each member of congress represents on average 560,000 people. I'm not proposing any solutions here. I just want to illustrate what I believe to be a key issue with our democratic republic.

> The issue really became one of scaling democracy

Scaling democracy is absolutely the issue.

It's pretty much a fundamental fact of systems that organizational overhead grows super-linearly. Why are Windows, OS X, and Linux so big? Why do Microsoft and IBM and even Google have so much bureaucracy? The US population in 1790 was 3.9 million. Today it's over 300 million. Of course government is going to be much larger than it was then!

But the US federal government now has a centralized single point of failure. The US has chosen the Oracle/Solaris route for scaling. :)

Let's say for the sake of argument that a typical congressman CANNOT represent 20,000 people.

What number would you say is feasible, or are you fundamentally against a democratic republic system of government, and if so, why?

Those aren't the only choices.

We have representative republic, not a democracy.

I would prefer no coercion at all. Let people join a political entity if they wish and let them leave if they don't like how its going.

And these political entities can cooperate amongst themselves. Or not.

For example, the nations of Europe might choose to cooperate on border control. Some might share have a common currency. They don't have to be forced.

The merits of an initiative are enough to entice them to participate. And if a particular thing fails, they should be able to walk away from it.

Obviously, there's no guarantee government won't still screw up. But at least you're not trapped.

> I would prefer no coercion at all. Let people join a political entity if they wish and let them leave if they don't like how its going.

I can already do that.

> And these political entities can cooperate amongst themselves. Or not.

They can already do that.

I don't understand how the current system inherently prevents any of what you're suggesting. What you are describing is a problem with the people, not the system. What sort of system would account for problems with the people?

The Old Icelandic system was interesting. Those who were lawmakers and representatives were fixed , and they could buy/sell their positions. However, you could choose who your lawmaker/representative was from any that were there.

> since when did our elected officials rise above the law?

Since the first article of the United States Constitution, Section 6 Clause 1?

> [The Senators and Representatives] shall in all Cases, except Treason, Felony and Breach of the Peace, be privileged from Arrest during their Attendance at the Session of their respective Houses, and in going to and returning from the same; and for any Speech or Debate in either House, they shall not be questioned in any other Place.

This makes it very tricky to try house members for any reason at all. As a result, few try as it's so hard to handle in court.

As an outsider to US politics I hear nothing but absurdities from what is supposed to be the shining example what a true democratic society is supposed to be. Instead what we see is a deep rooted system of hypocracy and corruption that trancends the only two political parties capable of being elected and a support system fueled by a propaganda machine that would make Hitler spit up his milk.

Democracy is messy, and everyone has dirty laundry.

"some say it's time for the law to change".

lol, "some say", just "some", really?

Anyone know how to get at whatever this is supposed to be from an iPad? The site is putting up one of those "download our useless app" pages, and doesn't have any apparent way to get past that.

Of course, if you watch their trades, the information becomes public, and you can get in too.

The problem is, according to 60 minutes, government officials only have to disclose their trades once/year. A couple in congress have tried to change the law to quarterly but of course that goes nowhere.

Even if we change disclosure laws to zero day (haha, good chance) it still doesn't fix the obvious bribing with IPOs. The fact that it isn't legally a bribe is laughable.

I doubt it. The example of getting preferential access to stock market IPOs wouldn't be able to be acted upon by the general public. Also several of the examples cite timing between a trade and the price moving event as a few days. Usually financial discloser reports are only made on a yearly basis and if you go to the congressional website http://clerk.house.gov/public_disc/financial-search.aspx there is a disclaimer saying that the use of the information for commercial purposes is illegal.

Are their trades available to watch in realtime?

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