About a week ago, I wrote a few words here on the subject of "insider trading" in Congress. Was someone reading my mind?

For years, we've heard tales of congressmen trading the stocks of companies their laws affect. During the Troubled Asset Relief Program debate of '08, our elected representatives were spotted trading thousands of shares of "too big to fail" banks, including Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C). As Washington wrangled over the rules for stress-testing banks, more shares changed hands. It happened again when Congress was debating stimulus funding for alternative energy as a way to jump-start the economy. It seems that anytime a law comes up for debate, the switchboards at E*TRADE light up.

Highway robbery on Capitol Hill
Insider trading: Congressmen are doing it. Their families are doing it. Their staffers, too. But yesterday, I discovered someone wants to do something about it.

Right now, the big legislative debate in Washington involves whether to raise the ceiling on the U.S. national debt. The alternative to raising this is to keep the ceiling where it is, and stop borrowing the money needed to pay interest on that debt, delay or decline payment on Medicare claims, stop paying soldiers, and so on.

Not an attractive option, I think you'll agree. If Congress doesn't raise the roof on our national IOU warehouse, all [heck] could break loose. For example, the nation's biggest banks -- and even smaller banks like BB&T (NYSE: BBT), Regions Financial (NYSE: RF), and US Bancorp (NYSE: USB) -- all have heavy exposure to government securities on their balance sheets. If the government has to suspend interest payments on these securities, the banks will take an immediate hit. On the other side of the silver dollar, precious metals miners will doubtless become even more popular than they were before, as investors flee the suddenly unsound paper currency, boosting demand for the shiny rocks Yamana Gold (NYSE: AUY) and Hecla Mining (NYSE: HL) dig out of the ground.

Recognizing all this, a well-placed congressman with his ear to the legislative ground could make a pretty penny betting for or against the beneficiaries of a debt ceiling vote. But seeking to head off legislators at the pass, Rep. Betty McCollum (D-Minn.) has introduced a resolution to combat such corruption in Congress, House Resolution 280:

Resolved, That ... A Member, Delegate, Resident Commissioner, officer, or employee of the House may not buy or sell any stock, bond, currency, commodity, or precious metal within seventy-two hours before or after a vote in the House to change the statutory limit on the public debt.

Lone Ranger: riding to the rescue?
For the thousand-plus Fools (and counting) who signed the petition urging passage of the Stop Trading on Congressional Knowledge Act last week, this feels like a victory. (McCollum's proposal preceded this year's edition of the STOCK Act, but the act is now in its fifth year of trying to become law.) But it's still not enough.

McCollum's resolution is only a muted version of the STOCK Act, you see. The STOCK Act would outlaw trading on any knowledge gained from work on legislation -- period. McCollum's proposal, in contrast, is much more limited:

  • To make insider trading an ethical violation.
  • To impose no penalty for it, other than a scolding from other congressmen.
  • And to limit the restriction to instances when the debt ceiling is up for a vote.

What's more, in addition to making congressional "insider trading" an actual violation of the law, the STOCK Act already also contains an ethical stricture like the one McCollum proposes. And it applies to all trading on "material nonpublic information" -- not just knowledge of whether the debt ceiling is going to bump up a notch.

Foolish takeaway
Much as I applaud the idea of Congress not trading on knowledge of one particular law, for six whole days, I really do think we can do better than that. Pass the STOCK Act, and we will.

The Motley Fool owns shares and has created a ratio put spread on Wells Fargo, but Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.

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