Economics

Re: ‘capitol gains’

In his excellent post on Peter Schweizer’s new book, Throw Them All Out: How Politicians and Their Friends Get Rich off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison, Mark Perry notes that the empirical data support Schweizer’s claims that the inside information members of Congress have is extremely valuable when it’s used for personal trading. Mark points to a 2011 study showing that the personal stock portfolios of 300 House members outperformed the overall stock market by 55 basis points per month on average, or by 6.6 percent on an annual basis.

It turns out that members of the U.S. Senate do even better.

In his book, Schweizer cites a 2004 study in the Journal of Financial and Quantitative Analysis which examined 4,000 stock trades by U.S. senators. The researchers found:

•         The average American investor underperforms the market.

•         The average corporate insider, trading his own company’s stock, beats the market by 7 percent a year.

•         The average hedge fund beats the market by between 7 and 8 percent a year.

•         The average senator beats the market by 12 percent a year.

Schweizer notes that “it is unclear why senators are better investors than are representatives. Perhaps it is because they have relatively more power and therefore greater access to market-moving information.”

Whatever the reason, the fact that senators and congressmen can legally buy and sell stock based on non-public information they have obtained through their official positions is an outrage. Legislation to ban this practice, the STOCK Act (Stop Trading on Congressional Knowledge), has languished in Congress for years.

Yesterday, Senator Scott Brown (R-Massachusetts) introduced a version of the bill in the Senate, and Senator Kirsten Gillibrand (D-New York) is reportedly introducing a slightly different version of the legislation today. In the wake of Schweizer’s book, it is hard to imagine they will have difficulty finding co-sponsors or securing quick passage.

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