Peter Schweizer - Throw Them All Out

The House ethics manual notes that there may be cases when legislation may affect the price of stock shares owned by a congressman, but adds that a member should not necessarily recuse himself from a vote, since by doing so he might be "denying a voice on the pending legislation." 16

In other words, when a member of Congress trades stock based on information not yet shared with the public but revealed to him as part of congressional business, it is legal. It is even deemed "ethical." It can also be very, very lucrative.

Some economists argue that insider trading laws should be abolished. Professor Henry Manne, for example, makes this argument in his classic book Insider Trading and the Stock Market. Manne contends that insider trading gives corporate executives "positive incentives" to increase stock values. Whether you agree with Manne or not, however, not even he believes that such latitude should be extended to politicians. In an e-mail to the website Procon.org, Manne writes: "In my 1966 book I said unequivocally that insider trading by any government official on information received in the course of their work should be outlawed. We do not want them to receive extra compensation or outside compensation for doing their job. And, of course, all too frequently their access to this information is merely another form of a bribe, and that sure as hell is not legal."

In Manne's mind we have it exactly backward in our current laws: corporate executives can't do it, but politicians can.

In fact, politicians and their staffers not only can trade on inside information they passively receive, they can do the equivalent of an athlete betting on his own game. They can and regularly do introduce legislation and then buy or sell stock in companies that will be affected by that legislation.

"It is difficult to imagine a more obvious betrayal of the public trust," writes Andrew George, discussing this practice in the Harvard Law and Policy Review. "It is even more difficult to imagine that such behavior could be completely legal." 17As Stephen Bainbridge, a law professor at UCLA, puts it, "Congressional insider trading creates perverse legislative incentives and opens the door to serious corruption. Yet, both Congress and the SEC have turned a blind eye." 18Congresswoman Louise Slaughter adds, "Congress and the federal government are now so enmeshed in the operations of our financial markets that the potential for abuse by members of Congress, congressional staff and federal employees is staggering."

So are there any limits on this bad behavior by our lawmakers? If you ask a member of Congress, he or she will insist that financial disclosure requirements are sufficient. Politicians must disclose their financial transactions once a year for the previous year. In practice, however, as we have seen, it's nearly impossible to link their trades with contemporaneous legislative activity at such a distance. They can, and often do, file for extensions, meaning that their disclosures come, in some instances, eighteen months after they traded shares. Transactions are also reported in broad general ranges, making it difficult to establish volume price and profitability. Then there is the added problem that many politicians submit incomplete forms, obscuring either the dates or the amounts of their transactions.

Disclosure statements may actually encourage conflicts of interest and embolden politicians who believe that since they report a certain transaction, it becomes okay to do it. Indeed, several studies by behavioral economists demonstrate that disclosures may make things worse, by producing "perverse incentives": once politicians sign a form, they may believe they are free and clear to do what they want. 19

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So much for insider trading. What about broader conflicts of interest?

There are conflict-of-interest rules that apply to everyone in the executive and judicial branches of government, from the file clerk to the truck driver to judges to the secretary of defense. They are supposed to apply to the President too, and when it comes to personal finances, it does. But it is not illegal for a President to put fundraisers in charge of dispersing grants and loans to contributors and friends. Were a school superintendent to do this, he or she would be charged. But for a President? That's okay.

But these rules do not apply to legislators. They have their own. For the U.S. Senate, when it comes to raising conflict-of-interest concerns, the bar is set amazingly low: as long as a senator can prove that at least one other person besides himself benefits from a particular decision, he can pretty much use taxpayer money to enhance his own financial interests. The House rules are even worse. There is no such requirement. 20

What this means on a practical level is that politicians can and often do use taxpayer money to help their own businesses and enhance the value of their own real estate. They can procure federal funds to develop a site where they own a sizable chunk of real estate. As long as it also benefits a neighbor, this is entirely acceptable. A member of Congress can secure federal transportation money and extend a light rail transit system right in front of her own commercial building and it is acceptable. Were a corporate executive to do this with corporate funds, she would more than likely be in trouble.

If you work anywhere in America—a corporation, the government, or the nonprofit sector—there are whistleblower laws to protect you if you report financial crimes. In 1989, federal ethics rules protected whistleblowers from retaliation if they exposed financial corruption in government. The Sarbanes-Oxley Act of 2002 extended those same protections to corporate America and nonprofit organizations. If you see your boss engaging in insider trading or fraud, you can report him to the authorities and you will be protected from retaliation. But Congress conveniently exempted itself from those requirements. Its members are effectively the only group of powerful people in America who can retaliate against whistleblowers who expose their financial crimes.

Another example: extortion, a crime defined as a person getting or attempting to get money, property, or services from someone through coercion. That coercion may include the threat to harm someone, physically or otherwise.

When ordinary Americans engage in extortion, they get arrested. Consider the case of a Bradenton, Florida, businessman who owned a tanning spa. One customer claimed that she was burned by his tanning lamps, and she sued him. The case was settled by his insurance company. The businessman was upset, however, and after the settlement he sent a letter to her two attorneys demanding $5,000 from them or else he would send complaint letters to local and state agencies, the state bar association, and the attorney general's office. The attorneys called the police. The businessman was arrested for attempting to "extort money" from the lawyers. 21

Politicians have the power to extract wealth and favors based on their ability to help or harm people. While not as explicit as the extortion by the tanning spa owner, congressional extortion goes on regularly in Washington. When they want campaign contributions or preferential treatment, members of Congress may threaten businesses or individuals with harmful legislation. There is a name for this type of coercion: "juicer bills" or "milker bills," designed to "juice" and "milk" campaign contributions and favors from businesses and industries. Professor Fred McChesney, who teaches law at Northwestern University, says this is nothing short of "political extortion." Politicians threaten to tax something or regulate something in order to extract a campaign contribution, or even for personal financial gain. 22

How powerful is this weapon? The mere threat of adverse legislation can affect a company's stock price. Two academics looked at thirty cases in which businesses were threatened with political action and the threats were later retracted. The study found that those threats "significantly" affected the stock prices of companies. 23