Highway Robbery on Capitol Hill

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Salary of members of the United States Congress: $174,000.

Average annual Civil Service Retirement System benefits for retired members as of 2007: $63,696.

But the profits they can make by trading on inside information?


Ever since we discovered Goldman Sachs' marketing so-bad-they'll-probably-fail investments, investors have wondered whether certain players in the stock market are playing by the same rules as the rest of us. Leading the criticism of lapses in disclosure this year are, of course, our honorable people in Congress: They of the feigned outrage and pithy sound bites. But could it be that some of these politicians are just as guilty of engaging in financial shenanigans as the bankers they love to castigate?

It could be. And in fact, it is.

Something's rotten in the District of Columbia
Now, no one's ever accused the U.S. Congress of being pure as the driven snow. But every year when spring rolls around and the weather starts to warm, an especially putrid scent begins to waft down from Capitol Hill. It's the odor of malfeasance. And its source just might be your friendly neighborhood congressman.

Here's how the story unfolds: The U.S. stock market is designed to offer a level playing field, right? Everyone's free to buy and sell as they like, and ever since Regulation FD passed nearly a decade ago, everyone's supposed to do their trading based on the same information. The problem is that "everyone" apparently doesn't include members of Congress.

You may be surprised to learn this, but the laws forbidding trading on insider information -- the ones Congress passed to keep the rest of us on the straight and narrow -- generally do not apply to Congress itself. That means that lawmakers can generally trade on information they obtain by virtue of their status as guardians of the republic. They just have to report their holdings  once a year.

And what do these reports tell us, you ask? As The Wall Street Journal discovered, they show some of our elected representatives:

  • Shorting U.S. Treasuries -- through buying the ProShares UltraShort 20+ Year Treasury exchange-traded fund (NYSE: TBT  ) -- at the very time they were bailing out AIG, adding tens of billions of dollars to the federal debt, and weakening our national balance sheet in the process.
  • Shorting the housing market, as one congressional spouse reported buying puts on homebuilders such as Beazer and Hovnanian on at least 34 separate occasions in 2008, betting the stocks would fall.
  • Shorting the whole dang stock market, by purchasing ProShares UltraShort QQQ (NYSE: QID  ) -- an ETF designed to give you 2% gains for every 1% the Nasdaq declines.

Worst of all, to this Fool's eye, was congressional cynicism in the face of financial catastrophe. As TARP and other bank bailouts wended their way through Congress, the very people shaping the bills bet on their effect as they traded tens of thousands of dollars worth of stock in Wells Fargo (NYSE: WFC  ) , Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , and JPMorgan Chase (NYSE: JPM  ) , according to their own financial disclosure reports.

The more things stay the same, the more they stay the same
Shameful? Certainly. But it's also lucrative. In 2004, Professor Alan Ziobrowski of Georgia State University examined the performance of more than 6,000 separate trades by members of the U.S. Senate and their relatives. His conclusion: On average and over time, senators outperformed the overall market by about 12 percentage points annually. 

Now, I certainly understand the temptation to profit from what you see happening in the future. And because members of Congress have a clearer view than most of where things are going, perched up there on Capitol Hill, the temptation must be enormous. But still, it's sad to see our elected representatives succumbing to the temptation.

Politician, legislate thyself
Sadder still, it didn't have to be this way. Four years ago, Representatives Brian Baird of Washington and Louise Slaughter of New York tried to pass a law that would change the rules, remove the temptation, and subject Congress to the same restraints it imposes on the rest of us. The "Stop Trading on Congressional Knowledge Act," better known as the STOCK Act, would forbid lawmakers from trading on nonpublic information. And just to be safe, when they did trade, they'd have to disclose trades publicly within 90 days of settlement.

The problem is that these ideas weren't particularly popular with the politicians' peers. Only 14 representatives signed on to the proposed legislation when it was introduced. Four years later, this year's version of the bill has attracted six signatures. And support in the Senate? That would be precisely nil.

Titanic hypocrisy, and ...
Words fail me as I struggle to describe my outrage at learning these facts. Titanic hypocrisy sounds too tame. "A betrayal of public trust of truly epic proportions" barely scrapes the surface. But however you choose to describe it, one thing is clear: This must not stand.

A modest proposal
We've said for years here at the Fool that investing in the stock market is the best way to build individual wealth. I would not deny members of Congress that privilege, just because they choose to pursue public service for the modest sum of $174,000 per year plus pensions in perpetuity. But even the STOCK Act doesn't go far enough. Although most members of Congress balk at the modest requirement of disclosing their trades once per quarter, that doesn't come close to what we should demand of them.

In my humble, Foolish view, members of Congress should take a page from what we do here at the Fool. Rather than disclose their stock trades once per year, or even once per quarter, after the fact, they should do what our real-money portfolio services do: Announce their intent to trade beforehand. Make it public. Reveal their cards before playing them. I think that's financial disclosure that even Caesar's wife could support.

Editor's note: A previous version of this article said that the transactions related to homebuilders were put sales rather than put purchases. The Fool regrets the error.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.

Read/Post Comments (29) | Recommend This Article (142)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2010, at 3:45 PM, FleaBagger wrote:

    What did you mean by this:

    "Shorting the housing market, as one congressional spouse reported selling puts on homebuilders such as Beazer and Hovnanian on 250 separate occasions in 2008, betting the stocks would fall."

    Selling puts on homebuilders is bullish on the housing market, and betting that the stocks will not fall. So did they report selling those puts or not? If so, you're (intentionally or carelessly) completely misrepresenting what happened there.

  • Report this Comment On May 18, 2010, at 3:47 PM, Retired31B5M wrote:

    And one of the reasons they get away with this is because nobody gives us their names.

    Maybe you should have provided us with some names in your article.

  • Report this Comment On May 18, 2010, at 3:50 PM, TMFGalagan wrote:

    @FleaBagger -

    The transactions involved buying puts rather than selling them. We regret the error and are correcting it now.


    dan (TMF Galagan)

  • Report this Comment On May 18, 2010, at 5:01 PM, majestik wrote:

    Not surprising--Congress just emulating bad behavior of the ruling elites from the old Roman Empire. History just keeps repeating itself.

  • Report this Comment On May 18, 2010, at 7:42 PM, RegLeCrisp wrote:

    This might be the most disturbing article I've ever read in any genre, please tell me it's a joke. This is 100 times worse than Goldman being Goldman. As soon as I finish throwing up in my mouth I'm probably going to throw up in my mouth again. Why is this not written up in the Wall Street journal, or at least Mother Jones?

  • Report this Comment On May 18, 2010, at 8:30 PM, Anishinabe wrote:

    These facts are appaling and I wish it were not true.

    I'm going to write my congressman and ask him about it.

  • Report this Comment On May 18, 2010, at 9:14 PM, toshara wrote:

    Maybe what we need is a rule that Congress cannot be exempt from any other regulations that affect the rest of the country. They get paid better than most of us, have huge expense accounts, and get vested in a retirement fund the like of which the average American never sees. It seems to me that during the time they are in office, they should be acting like representatives of the people (what a thought!) and not hogs feeding at the trough.

  • Report this Comment On May 18, 2010, at 10:08 PM, esmn89 wrote:

    This is appalling. So much for the congressmen and women charging after Lloyd Blankfein for betting against securities while selling the same to clients. Its a ridiculous case of the pot calling the kettle black. I wonder why more people haven't reacted to your article.

  • Report this Comment On May 18, 2010, at 10:57 PM, TMFDitty wrote:

    @RegLeCrisp: The WSJ actually did cover the story -- but buried it deep within the paper. Maybe because it's considered "old news," this bill having wandered around the halls of Congress for four years now. See:


  • Report this Comment On May 18, 2010, at 11:03 PM, TMFDitty wrote:

    @Retired31B5M: Here are a few names for you:

    Judith Biggert (D-IL)

    Ginny Brown-Waite (R-FL)

    Carolyn McCarthy (D-NY)

    Shelley Moore Capito (R-WV)

    Jackie Speier (D-CA)

    Charlie Wilson (D-OH) (No. Not *that* Charlie Wilson.)


  • Report this Comment On May 19, 2010, at 12:59 AM, 11x wrote:

    Americans are finally becoming aware of this type of stuff, and voting out. It doesn't matter if you're Republican or Democrat, if you are in office, you are going to have a hard time keeping your job this election season.

  • Report this Comment On May 19, 2010, at 8:38 AM, mtf00l wrote:

    Vote them out...

    They're smiling all the way to the bank! Permanent retirement benefits, free health care, fat lobbying contracts... and the newly elected already know the game...

    How do we get control of our "Public Servants" that is the primary question.

  • Report this Comment On May 19, 2010, at 10:36 AM, smjcee wrote:

    How can we get this information OUT to the public so we can do something about it. Voting people out wont help, they will just be replaced and the temptation will still be there.

    Laws need to be changed and in order to start the process the public needs to know.

  • Report this Comment On May 19, 2010, at 12:00 PM, clanza875 wrote:

    It didnt take any insider knowledge to know housing was due for a big correction

  • Report this Comment On May 19, 2010, at 12:17 PM, TMFDitty wrote:

    @smjcee: A few ideas off the top of my head:

    1. Post a link to this article on your Facebook page.

    2. Call in to Rush Limbaugh's show, or Glen Beck's, and quiz them about it. Find out if they are in the loop.

    3. Call Cramer during the Lightning Round and ask *him* about it.

    4. Call your Senator and ask why there's nothing similar to the House bill being floated in the Senate. Suggest it might be a good idea to get ahead of the curve on this, and sponsor some legislation.


  • Report this Comment On May 19, 2010, at 12:18 PM, brooks1980 wrote:

    To Whom It May Concern,

    Thanks for putting this article on the front page of your Web site - where all can see it. It is upsetting that our politicians are taking advantage of an uncertain economic climate instead of focusing on ways they can help the American people. We need leaders who care!

    The job of a politician isn't to profit from their position but rather to serve their constituents. When politicians choose to be self=serving this creates problems. I'm glad that the Motley Fool has created a forum where we can discuss corrupt political practices and individuals.

    Many of us are confused about what has been going on; most aren't sure what to think or do such endemic corruption. What I am sure about, however, is that God is in control of the situation. The "Man Upstairs" knows what is going on, and these men (and women) will one day be held accountable. The Bible tells rulers and those in authority to serve the God with fear and respect (Psalm 2:10-11).

    Finally, my hope is that we will elect politicians with integrity. My prayer is that those elected politicians will serve the people - not their own selfish interests. It is their duty to serve.

    I'm thankful to be part of a wonderful country, the United States of America, and hope that I have in some small way contributed to our online discussion. Take care!

    “But the wisdom from above is first pure, then peaceable, gentle, open to reason, full of mercy and good fruits, impartial and sincere. And a harvest of righteousness is sown in peace by those who make peace.”- James 3:17-18

    Joshua Brooks

  • Report this Comment On May 19, 2010, at 12:23 PM, park94 wrote:

    I'm gonna call my congressman and ask him for an explanation. I will also call the president and while I'm at it I'll order a pizza.

  • Report this Comment On May 19, 2010, at 2:20 PM, ChrisBern wrote:

    Wow, this article was a real eye-opener. Thanks!

  • Report this Comment On May 19, 2010, at 2:42 PM, devoish wrote:

    Seriously? There are what, almost six hundred Congressman and after examining the records of their trades we have six bad ones accused of trading on inside information? Fine, vote them out and celebrate the other five hundred and something. Although I do not see how Jackie Speier trading ten days after C got its bailout is frontrunning on inside information. And it is possble the Carolyn McCarthy is telling the truth when she says her $2,275. JPM transaction was left "soley to the discretion of account managers". Wilson's trades seem much more suspect as do Ginny Brown-Waite's and the $100,000 trades of the Shelly Capito husband.

    Unless there is a lot more, this Congress is much cleaner than the days of Tom Delay. Maybe there is a difference in the partys?

  • Report this Comment On May 20, 2010, at 1:24 AM, SissyTheClown wrote:

    I think you'll find that America has had enough of the members of this congress PERIOD. They are all tarred with the same brush now, whether good or bad. It's too bad we will only be able to get 1/3 of the senate though. I'm sure our forefathers never dreamed people would make a "career" of serving in congress. Too bad they didn't set limits like they did on the presidency.

  • Report this Comment On May 21, 2010, at 9:11 AM, BMFPitt wrote:

    Force Congress to put their money in a blind trust like the President has to. If they are going to steal from taxpayers to destroy the conomy through bailouts, they at least shouldn't be able to directly profit from it.

  • Report this Comment On May 21, 2010, at 9:13 AM, BMFPitt wrote:

    "I'm sure our forefathers never dreamed people would make a "career" of serving in congress. Too bad they didn't set limits like they did on the presidency."

    Presidential term limits were enacted 60 years ago.

  • Report this Comment On May 21, 2010, at 2:29 PM, PerryDawg wrote:

    To BMFPitt,

    I think sissythe clown meant there are no term limits on Congressmen. She knows there is a limit on Presidents.

  • Report this Comment On May 21, 2010, at 6:38 PM, philkek wrote:

    MF- Thanks for this good article that tells me that our elected officials are tempted by GREED and FEAR like the rest of us fools. Voters can make a difference in who holds any political office. We better ALL do our homework - like reading this article - before voting. We are truly INVESTING in AMERICA'S future by what we do here NOW. Thanks and happy investing.

  • Report this Comment On May 21, 2010, at 10:55 PM, hnkplr wrote:

    Too much conflict of interest and they already have too many benifits as it is. They should not be allowed to trade at all while in public office. They are set for life anyway.

  • Report this Comment On May 22, 2010, at 8:57 PM, gnawbone wrote:

    And here's another angle on their corruption: My Senator, Evan Bayh, married his wife, Susan, when she was a low level lawyer in a firm in Indianapolis. She now sits on 6 boards and pulls in $800K per year.

  • Report this Comment On May 24, 2010, at 5:41 AM, MSmailbox wrote:

    I for one, do not believe that we should subject our legislators to temptation. I suggest a 12% capital-gains surtax, for all members of Congress, retroactive to 2004.

  • Report this Comment On May 24, 2010, at 6:46 AM, ragedmaximus wrote:

    Right now, it's legal for congressmen to use insider trading of stocks and a limbo bill to stop it .Sorry Martha Stewart sucks to be you should have run for congress.

  • Report this Comment On June 07, 2010, at 6:40 PM, Bennerob wrote:

    Of course all these sins and shenanigans are really accomplished by the brokers and Wall Street firms who manage the portfolios of these wealthy public servants, rather than the individuals themselves, through supposed insider deals. Remember, virtually all of our senators were multimillionaires even before they ever got elected. If our voters stopped believing the attack adds which only big money can buy (thus voting unqualified cynics like Meg Whitman into office) and dedicate some energy to campaign finance reform, we could save ourselves some of this fuss. How could these "revelations" be a wake-up call for anyone except the perennially politically dormant?

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