Congress' insider trading

The WSJ's Peter Lattman discusses Congress's moves to regulate its own insider trading based on Congressional information. He quotes The New Yorker's James Surowiecki from last October (discussing Frist's trading) suggesting that people shouldn't "get rewarded for who they know or for what they're lucky enough to stumble into."

Hopefully we'll keep some perspective here. Congress's insider trading is bad because it gives our lawmakers the wrong incentives. Do we really want to give Congress more reasons to hurt and help particular firms?

In fact, Congress's trading is worse than trading by corporate insiders, which at least might be rationalized as a way to let employees cash in on their productive efforts. It's far worse than the usual trading on non-public information by outsiders without any breach of duty, which may encourage socially productive investigation and monitoring, as Bruce Kobayashi and I have argued.

And if we started regulating outsider trading, where would we stop? Efficient market theory tells us there's no good reason for trading individual stocks unless you have nonpublic information. Should we allow trading only when it's irrational?

So we should stick with the Supreme Court's approach (most recently in O'Hagan) that unequal access is not enough to trigger insider trading liability.

Moreover, let's not go too far even in regulating Congress's trading, as long as they're not cashing in on Congressional secrets. In fact, it might even be a good idea to require them to own stocks (say, index funds) to encourage them to think like shareholders rather than politicians.

Comments

[Robert Schwartz]

Am I missing something? Has there been a case of trading by congress creatures? Or is this just more posturing?

[Larry E. Ribstein]

There have been reports of significant abnormal returns by congress creatures based on their annual disclosures. Where there's smoke. . .

[andy]

Here's something I haven't heard brought up.
If I, as a congressman, KNOW that, say, Erbitux isn't going to go through the FDA, I can confidently bet the farm on a short and make enough to support a significant lifestyle change, OR I can throw the money into my campaign fund.

And this begs the question, if a CEO of a major corporation wanted to influence a congressman's future vote, instead of handing out a hefty campaign contribution, I can just let him know some important upcoming announcement, and let him take a long position, which is better than a campaign contribution, because it's not really something anyone would follow, or criticize.

What also gets me is congress voting themselves a pay raise every year.

With the stock tips I would get, I'd be willing to work as a congressman for free!