“I don’t think he would steal a red-hot stove.” That was the response of Congressman Thaddeus Stevens, when asked by Abraham Lincoln about the honesty of war secretary Simon Cameron
For many Washington watchers, not that much has changed since Cameron shuttled between the Senate, the War Department and his private business interests.
That is shown in Americans’ lack of belief in the honesty of Congress. A recent US poll by Gallup showed 63 per cent of respondents believed the honesty and ethical standards of members of Congress were low or very low.
There are plenty of reasons, of course, to be sceptical of the intent of politicians — Washington is never short of scandals. But one issue that stands out is trading in individual stocks by elected representatives while in office.
Members of Congress have access to all sorts of price-sensitive information about companies — from colour on the progress of legislation, to confidential information supplied to committee hearings, to knowledge of the attitude of regulators towards a company or sector.
It took a couple of hundred years of shaming the shameless, but there is a law against politicians trading unfairly on such information — the “Stop Trading on Congressional Knowledge Act of 2012”, or Stock-A Act.
Introduced in the wake of controversies over stock trading by politicians around the financial crisis, it seeks to stop members of Congress “using non-public information derived from their official positions for personal benefit, and for other purposes”. The trouble is that does not seem to have made much difference. Even some representatives believe it has proven to be too weak.
Senator Jeff Merkley, Congressman Raja Krishnamoorthi and other Democratic and Republican colleagues introduced a “Ban Conflicted Trading Act” on March 3 to end Congressional trading in individual stocks.
As Merkley said then, “This practice is deeply corrupt. First, it biases the viewpoint of members when working on legislation related to a stock they own. Second, members trade on information they hear that the general public doesn’t. And that’s just wrong.”
Proposals for the act came after an outcry over trading by representatives as the Covid-19 pandemic broke out. In the most high-profile example, Richard Burr, the then chair of the Senate Intelligence Committee, was investigated over the offloading of stock worth up to $1.7m worth of shares on February 13 last year.
Although Burr insisted that he acted on public information and news reports, questions were raised whether he relied on non-public information that he received at senators-only briefings. The Department of Justice told Burr in January it would not pursue charges against him. Three other senators investigated over trading were also cleared.
But as long as trading in individual stocks by representatives is allowed, questions of the propriety over transactions will arise. Consider, for example, congressional trading in the shares of Wells Fargo. This is a bank where regulation and oversight is critical to its future share price.
In 2016, details emerged of corrupt practices encouraged by the bank’s upper management. Eventually, dramatic Congressional hearings were held and regulators put a $1.95tn cap on the bank’s size until it cleaned up its act. In February 2020, the new Wells management agreed to pay $3bn in penalties in a deferred prosecution agreement with the Justice department.
Key to the bank’s recovery will be whether it escapes the regulatory straitjacket on its size. Over the past year, hopes that it will, have been one of the factors behind a 77 per cent rally in Wells Fargo shares. Among those willing to bet on the bank are members of Congress.
I asked Quiver Quantitative, a Wisconsin based research firm, to pull together some data on Congressional trading in Wells shares over the past few years, while the regulators have been considering its fate. Quiver sent a list of trades, in small type, that ran over two and a half pages. Given how public the travails of Wells Fargo, this might simply be a bet on the recovery of the bank. But it is still not a good look.
Consider that. If, say, the chair of a regulatory body for banks such as the Federal Deposit Insurance Corporation was caught speculating in bank shares, they would be fired on the spot and probably prosecuted. But the politicians that regulators report to, and who control their budget and priorities, pile in and out of shares in those heavily regulated companies.
The proposed Ban Conflicted Trading Act might be a bit late, but correct.