San Antonio Express-News (Sunday)
Congressional corruption in plain sight
Many questions in finance and politics are murky. We the people disagree because issues are multifaceted and complex. In a democracy, we get to duke it out to determine which of the many sides gains enough allies to win the day.
Undisclosed stock trading by members of Congress is not one of these clouded issues. It is what in my household we call a PMC — a “position of moral clarity.” There is no plausible reason for members of Congress — or their relatives or their staffers — to get to trade on nonpublic information without consequences.
Members of every other profession — think professors, lawyers, bankers, journalists — have strict disclosure rules, ethical restrictions and legal limitations on the trading of nonpublic information, for themselves and family members. The fact that Congress does not has been a scandal in plain sight for a long time.
A Federal Reserve vice chair resigned in mid-January because of previously undisclosed stock trading (good!). But violations by U.S. senators and representative continue to go unpunished (bad!).
Think about members of a congressional health care committee trading pharmaceutical stocks. Or members of the armed services committee trading defense-industry stocks. Or members of an environmental oversight committee trading energy stocks.
The opportunity for corruption is obvious. And yet, as recent reports from Business Insider have shown, corruption is precisely what’s been happening. Even if any individual trade is “innocent,” the whole enterprise stinks and undermines faith in both fair politics and fair markets.
Stock trading by members of Congress is one of those unique situations in which insiders ultimately make the rules for themselves — but they shouldn’t because of the obvious conflicts of interest.
Congressional pay raises fit this category, in a minor way. Gerrymandering voting districts fits this category in a major way. Undisclosed stock trading on nonpublic information falls in between. But it’s still very bad.
To be clear, ethically speaking, it isn’t entirely the Wild West when it comes to stock trades. A 2012 rule known as the STOCK
Act requires disclosure of stock trades by members of Congress within a 30- to 45-day window. The disclosure was meant to deter unethical behavior by exposing the timing of trades.
One problem, however, is that the practice of disclosure has been — as Hamlet would say — “more honored in the breach than the observance.” Violations abound.
The second problem has been the lack of consequences for breaking the STOCK Act. Violations have either been ignored or punished with fines in the hundreds of dollars.
An online report released this month by a trading platform called Unusual Whales has a stunning compilation of congressional stock trading since 2020, complete with data visualizations, the most active trading members of Congress, average holding periods, rates of return and clear conflicts of interest. This is amazing citizen journalism and deserves our attention. Rest assured the bad practices and sketchy trades are bipartisan.
If you go to the report (and you should really go to the report!) search for “unusual trades” and enjoy the “things that make you go hmmmmm.”
In June 2020, U.S. Reps. Abigail Spanberger, D-Va., and San Antonio’s Chip Roy, R-Texas, introduced bipartisan legislation requiring blind trusts for members holding stocks. There was a lot going on at the time (COVID and Black Lives Matter protests), and the effort did not get far.
House Speaker Nancy Pelosi, D-Calif., is believed to be an opponent of further restrictions on trading by representatives and their families. On stock trading by members of Congress, she said in December, “We are a free market economy. They should be able to participate in that.” Pelosi’s husband has a large, actively traded portfolio, and critics rightfully point out her conflict of interest.
Yet despite the depressing status quo, something has possibly shifted recently.
Last week, Sens. Jon Osoff, D-Ga., and Mark Kelly, D-Ariz., introduced the Ban Congressional Stock Trading Act, which would require members of Congress and their families to place stock investments in a blind trust.
Not to be outdone by Democrats, Sen. Josh Hawley, R-Mo., announced that he plans to introduce a competing bill to ban congressional stock trading.
Meanwhile, House Minority Leader Kevin McCarthy, R-Calif., who has been catastrophically wrong on basic democracy issues such as the Jan. 6 commission and voting rights, is correct on this issue. He already had voluntarily eschewed owning individual stocks for himself. He also said he would seek a ban on congressional stock trading when (or if ) he becomes House speaker following the November elections.
This past week, Pelosi shifted her stance a bit, calling for an investigation into violations of the 2012 STOCK Act and increasing penalties for violations, and saying she was open to a considering a ban if it had the support of her fellow Democrats. It’s not enough, but it is something.
Better, clearer solutions exist. One clearly would be for wealthier members of Congress who have individual stock portfolios to put them into a blind trust, in which decisions to buy or sell are removed from the representative’s or senator’s hands. A simple, multisector equity index fund also would serve the purpose. (Careful readers of this column will notice diversified, low-cost equity index funds continue to be the answer to every single problem around here.)
A much more complicated solution — probably what we are going to get — would entail additional disclosure rules and penalties for violating disclosures.
I don’t think I’m naive on this topic. It honestly baffles me why members of Congress do not either choose the blind trust or index fund route, because buying and selling individual stocks so obviously opens them up to criticism and attacks from opponents and journalists. It requires a combination of investigative journalism and an alert public to make this risk clear to every senator and representative.