Bailout

The Congressional insider-trading non-story

By Felix Salmon

The WSJ splashes the results of a major investigation on its front page today — so major, indeed, that it has its own ominous “On The Inside” logo. Clearly, a lot of work went into this:

At least 72 aides on both sides of the aisle traded shares of companies that their bosses help oversee, according to a Wall Street Journal analysis of more than 3,000 disclosure forms covering trading activity by Capitol Hill staffers for 2008 and 2009.

I’m glad that the WSJ is keeping Congress accountable, here — but I’m much less impressed by the way in which the newspaper is over-egging its findings.

The WSJ story is shot through with the implication that there’s a big scandal here, but I don’t see it. Instead, I see a lot of subtle rhetorical tricks, like the way in which the paper leads with a single profitable trade by a single staffer.

The fact is that if you took two years of trading data from 1,700 upper-middle-class American households, you’d certainly find a handful of profitable trades in there. And there’s no indication in the WSJ story that what they found was anything more than you’d expect from chance alone.

For instance, the WSJ says that just 72 of those 1,700 Congressional staffers “traded shares of companies that their bosses help oversee”. That’s about 4%. And the WSJ doesn’t say how many other stocks those 72 staffers traded — there’s no indication that any of them traded disproportionately in stocks that might be considered to lie in an ethical grey area. My feeling is that if you took 1,700 upper-middle-class American households and assigned them randomly to various Congressional representatives, you’d find 72 of them trading companies those representatives oversee.

There’s also no indication of how those 72 staffers fared in their trading activities overall — did they even beat the market? What’s more, after examining trading records spanning the biggest stock-market decline in living memory, the WSJ has found exactly zero suspicious trades on the short side. Even the trades in Fannie and Freddie were long-only day-trades made by the husband of a staffer for Nancy Pelosi.

The story talks about a going-nowhere piece of legislation which would prevent members and employees of Congress from trading securities based on nonpublic information they obtain. It’s a good piece of legislation, and its passage would strengthen civil society. But as far as I can see, there’s nothing in this story which implies that the bill needs to be passed in order to solve a clear and present problem.

If there were Congressional staffers who were making lots of money by taking advantage of nonpublic information, then the case for the bill would be even stronger. The WSJ went digging in an attempt to make that case. But ultimately what they came up with, I think, was pretty thin stuff. Which is good news: it’s not like anybody wants Congressional staffers to be doing such things. But let’s not try to gin up a scandal where none exists.

Full post as published by Macroprudential on October 11, 2010 (boomark / email).