In mid-September 2008, U.S. Congressman Spencer Bachus, a senior member of the House Financial Services Committee, was called to a confidential briefing on the subprime mortgage crisis held in the Capitol Hill office of Nancy Pelosi, then Speaker of the House.
Treasury and Federal Reserve Bank officials had gathered congressional leaders to brief them on the escalating financial crisis. The politicians were reportedly shocked to learn that the central bank expected equity prices to collapse along with housing values.
But Bachus didn’t panic over the thought of millions of Americans losing a significant amount of their savings. Instead, he left the meeting and coolly used the confidential forecasts handed to him as a representative of the American people to short the market and set himself up to profit off the eventual crash.
A few months ago, I blogged about how Washington politicians regularly beat hedge fund managers at investing in the stock market, likely by trading on non-public information gained by performing their public duties. The blog was based on a study by Georgia State University professor Alan Ziobrowski who, along with other academics, examined congressional stock filings and found delegates in the House of Representatives achieved abnormal returns that smelled foul.
“We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain,” reported the authors. “The returns outperform the market by 55 basis points per month (over 6% annually). As additional evidence of information advantage, the trade-weighted portfolio of purchased stocks significantly outperforms the equal-weighted portfolio indicating that Representatives invested much larger amounts in those stocks that performed.”
Since I wrote about the study, insider trading by U.S. politicians, which is 100% legal, has blown up into the raging scandal it deserves to be thanks to Throw Them All Out, a book by Hoover Institution author Peter Schweizer, which exposes in detail Washington’s dirty insider game, including at least 40 questionable transactions in Bachus’s personal trading records from July 2008 to November 2008.
After the book was profiled on 60 Minutes in November, Bachus, now chairman of the House Financial Services Committee, announced plans to schedule the first-ever House hearing on legislation to prevent U.S. lawmakers from trading on non-public information.
Don’t laugh. That’s progress in Washington.