Congress Sells Secrets?

Compared to ordinary investors, US Congress members get huge returns on their investments, presumably via their inside line on upcoming government actions. In particular, Congress gets inside info on upcoming US-backed coups, and someone has been trading lots on that info. Gee I wonder who …

Researchers examined 16,000 common stock transactions made by … 300 House representatives from 1985 to 2001, and found … portfolios based on congressional trades beating the market by about 6 percent annually. … A study of senators … five years ago found members of the higher chamber even better at beating the market — outperforming it by about 10 percent. … Members of Congress … [can legally] trade on non-public information. (more)

We estimate the impact of coups and top-secret coup authorizations on asset prices of partially nationalized multinational companies that stood to benefit from US-backed coups. Stock returns of highly exposed firms reacted to coup authorizations classified as top-secret. The average cumulative abnormal return to a coup authorization was 9% over 4 days for a fully nationalized company, rising to more than 13% over sixteen days. Pre-coup authorizations accounted for a larger share of stock price increases than the actual coup events themselves. (more)

We let Congress profit from insider trading that would be illegal for corporate executives. Even so, I doubt it is legal to trade stocks using top-secret info on planned coups, thereby leaking that info to the world. But I’ll bet Congress has been doing a big share of that leaking – who else has access to that info and needn’t fear prosecution for such misdeeds?

Good thing we are cracking down on insider trading by CEOs …

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  • MDS

    Robin, do you know of any studies that have been done that have shown the benefits of legalizing inside trading in financial markets?

    In theory, the incentives should be better for catching fraudulent companies and reducing economic harm, but I am having trouble finding any such literature, one way or the other.

  • Douglas Knight

    The coups paper only looks before the Hughes-Ryan act, because they fell off when the CIA was required to tell Congress. So, no, Congress did not have this info.

    • http://hanson.gmu.edu Robin Hanson

      OK, a fair point. But even if disclosure wasn’t required, its not obvious that many in Congress didn’t have the info.

      • http://www.gwern.net gwern

        It’s not obvious, but it’s still a leap. Why can’t the inside traders be members of the respective agencies and their partners in the military-industrial complex and all their agents?

        For example, there’s a currently unfolding case of insider trading based on FDA approvals involving millions (http://pipeline.corante.com/archives/2011/03/30/insider_trading_at_the_fda.php) – conducted by an FDA chemist, not someone tied to Congress in any way.

  • Miley Cyrax

    How did researchers figure out what positions members of Congress had? Is this information publicly available?

  • Hul-Gil

    This is probably a pretty dumb question, since I don’t know much about finance, economics, or Congress. However: would it be possible to obtain similar returns by watching what investments, trades, or sales the members of Congress make?

    For example, I’m imagining seeing Congressman A buy a bunch of Company B’s stocks; then doing the same myself, thereby profiting from A’s presumed inside info. If it were this easy, I suppose it would be done more… but can someone tell me where I’m going wrong?

    • http://www.gwern.net gwern

      How do you get the information on the congressional buys in time to take advantage of their buys? They disclose a lot of information annually, yes, but even if that’s detailed enough to use, I imagine that most insider trading opportunities come and go before the filings are made.

      • Douglas Knight

        Yes, the window is narrow. The claim of insider trading is based on the claim that the trades are a lot better than if they were a month later.

        A natural follow-up would be to try to identify the specific reasons the stocks changed price.

      • Hul-Gil

        Ah, that makes sense. Thanks gwern and Douglas.

  • Buck Farmer

    Were severe economic restrictions on the Roman Senatorial class effective in aligning their behavior with national interest?

    I’m starting from the position that Congress leaking secret information via the stock market is a security risk.

    • komponisto

      I’m starting from the position that Congress leaking secret information via the stock market is a security risk.

      I wonder, does Robin have a standard answer to this — the inability to keep information secret — as a general argument against futarchy?

  • Pingback: Insider Trading Is Not Illegal | John Goodman's Health Policy Blog | NCPA.org

  • Cyan

    Insider trading by federal lawmakers banned.

    I anticipate that RH considers this bad policy, but on the other hand, a move towards less hypocrisy.