[Marketplace]Insider Trading? Not if you are in Congress!

This is a transcript of a story that aired on "Marketplace", which locally is aired right after "All Things Considered" from NPR. You can listen to the original audio here.

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Lawmakers' inside advantage to trading

Company executives are forbidden from trading stocks using insider knowledge, but no such law exists to prevent members of Congress from doing so. Steve Henn reports.

Kai Ryssdal: Insider trading is among the biggest of big-time no-no's. If you know something not everybody else does, you just aren't allowed to act on it. Corporate executives know there are laws against it. But there's nothing that says that lawmakers can't act on inside information they get just by doing their jobs. Marketplace's Steve Henn reports from Washington.

STEVE HENN: A year ago this week Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke dashed to Capitol Hill. They hastily met with a small group of congressional leaders to tell them that the country was teetering on the edge of financial catastrophe.

Paulson and Bernanke asked Congress to spend hundreds of billions to save the banks.

<blockquote>John Boehner: We clearly have an unprecedented crisis in our financial system.</blockquote>

GOP House Minority Leader John Boehner...

<blockquote>Boehner: On behalf of the American people our job is to put our partisan differences aside and to work together to help solve this crisis.</blockquote>

The next day, according to personal financial disclosures, Boehner cashed out of a fund designed to profit from inflation. Since he sold, it's lost more than half its value.

Sen. Dick Durbin, an Illinois Democrat, who was also at that meeting sold more than $40,000 in mutual funds and reinvested it all with Warren Buffett.

Durbin said like millions of others he was worried about his retirement. Boehner says his stock broker acted alone without even talking to him. Both lawmakers say they didn't benefit from any special tips.

But over time members of Congress do much better than the rest of us when playing the stock market.

<blockquote>ALAN Ziobrowski: Senators make significant abnormal returns, some place around 1 percent above the market, 12 percent a year.</blockquote>

Alan Ziobrowski is a business professor at Georgia State University. Using hundreds of personal financial disclosures from the 1990s, Ziobrowski analyzed more than 6000 stock transactions by members of Congress going back up to 15 years.

<blockquote>Ziobrowski: I mean they do better down market, up market. They just outperform the average.</blockquote>

Most lawmakers are not active traders. But Ziobrowski found that politicians who do play the market fare even better than corporate insiders when it comes to picking stocks.

<blockquote>Ziobrowski: We have every reason to believe they are trading on information that the rest of us don't have.</blockquote>

The value of information that flows from the inner workings of Washington isn't lost on Wall Street professionals.

Michael Bagley is a former congressional staffer who now runs the OSINT Group. Bagley sells access and research. His clients are hedge funds, and he makes it his business to mine Congress and the rest of Washington for tips.

<blockquote>MICHAEL Bagley: The power center of finance has moved from Wall Street to Washington.</blockquote>

His firm is just one recent entry into Washington's newest growth industry.

<blockquote>CRAIG HOLMAN: It's called political intelligence.</blockquote>

Craig Holman is at Public Citizen, a consumer watchdog. Holman believes lobbyists shouldn't be allowed to sell tips to hedge funds and members of Congress shouldn't trade on non-public information. But right now it's legal.

<blockquote>HOLMAN: It's absolutely incredible, but the Securities and Exchange Act does not apply to members of Congress, congressional staff or even lobbyists.</blockquote>

That law bans corporate insiders, from executives to their bankers and lawyers, from trading on inside information. But it doesn't apply to political intelligence. That makes this business lucrative. Bagley says firms can charge hedge funds $25,000 a month just to follow a hot issue.

<blockquote>BAGLEY: So information is a commodity in Washington.</blockquote>

Inside information on dozens of issues, from bank capitol requirements to new student loan rules, can move markets. Consumer advocate Craig Holman is backing a bill called the STOCK Act. Introduced in the House, it would force political-intelligence firms to disclose their clients and it would ban lawmakers, staffers, and lobbyists from profiting on non-public knowledge.

<blockquote>ZIOBROWSKI: What it would do is first of all and most importantly actually make it illegal.</blockquote>

Professor Alan Ziobrowski says it's not just the marketplace that suffers.

<blockquote>ZIOBROWSKI: The real danger here, of course, is that you are going to have in some cases congressman that will literally vote or act against the interests of their constituents in favor of their portfolio. And right now there is virtually nothing that would stop them from doing that.</blockquote>

The STOCK Act would but none of the lobbyists, hedge fund executives, or congressional staffers I spoke with for this story thought that bill has a prayer of passing.

In Washington, I'm Steve Henn for Marketplace.

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