Investing Decisions Congress Insider Trading

Investing Decisions Congress

Insider Trading

The recent global financial crisis, and the heavy government intervention that has followed it, has indicated that the U.S. Government is set to play a bigger role in the private sector than at any time in history. The Government's designation of certain companies as "too big to fail" proves that it presumes to pick winners and losers in regulating the market. In light of the government's increasing influence on the success and failure of private companies, it is imperative that Congress enact regulations to prevent insider trading.

Congressional staff have a number of ways that they can gain an important advantage on the stock market through the knowledge they gain in the legislature. As stated in the Wall Street Journal, legislative aides have advanced knowledge of pending legislation that is favorable or unfavorable to a particular industry. Regulatory risk is a huge consideration in certain industries so the insights that congressional staff come across in the course of drafting or negotiating legislation is a huge advantage to them. Also, congressional staff may come across knowledge of legislation that they are not even involved with through the inevitable acquaintances and associates they among other congressional staff.

Perhaps more dangerous than the individual advantages congressional staff derive from knowledge of legislation is the risk that they might try to affect the course of legislation on account of their ownership or interest in certain companies or industries. Considering the huge effect corporate lobbying already has on legislation, it is not difficult to imagine congressional staff altering legislation to benefit their own interests.

It is important to note that insider knowledge is a very elastic term and that there are a number of explanations for the success of congressional staff in the market. Although congressional staff had outperformed the market by 12% in during the 1990s, this may be due to the fact that legislative aides tend to be a more intelligent group than the average investing population. They are definitely a group that is picked for their passion for government affairs and who keep abreast of economic trends that affect the country.

Also, it is not necessarily the case that one who has insider knowledge will necessarily use it. One legislative aide remarked that he bought his shares at 12:50 P.M. On a date well after it was widely reported in the media.

It is extremely important that the Government create regulations to address insider trading. However, it may prove futile to prevent insider trading only, as the real danger of insider knowledge is that it might be passed on to larger groups of investors associated with congressional staff. Considering this, it may be necessary to create a new non-partisan agency to investigate the dealings and associations of congressional staff.