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Our Elected Insider Traders

Mises Daily: Thursday, November 04, 2004 by

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As Martha Stewart languishes in jail, one supposes her duties in the prison laundry or garden allow her little time for reading the Wall Street Journal if, indeed, she's allowed to receive it in her mail. But if she had time to work her way back to Section D of the edition of October 26, she might have happened upon a small article on the second page that would have galled her no end.

Titled "U.S. Senators' Stock Picks Outperform the Pros'," it describes a study to appear in the December issue of the Journal of Financial and Quantitative Analysisthat analyzed some 6,000 stock trades of members of the US Senate over the period from 1995 to 1998.

It turns out that our senior legislators somehow are very astute stock pickers, whose transactions, when evaluated at published market prices, delivered an overall performance twice as good as that of all the corporate insiders themselves, who must report their every trade in their respective stocks within hours of making them so that they can be published promptly.

Could the senators (those who reported trading, anyway) know something the rest of us don't know? While we think about that question, consider that US households overall underperformed the stock market in the same period by 1.4 percent, while their elected representatives in the senate outperformed the market by 12 percent (those corporate insiders outperformed by 6 percent). A rising tide like the 1995–1998 stock market raises (almost) all boats, but somehow, certain boats got raised a lot more than other boats.

As we continue to ponder what our lawgivers might know that would affect the prices of certain stocks, and how they came to know (or even bring about) these things, we might consider a few of the ways in which government insiders have profited from their guardianship of the public trust.

Senator Hillary Rodham Clinton (Dem., N.Y.) was not a senator at the time of her "astute" fling in commodities futures. But she was the wife of Bill Clinton, then (1978) governor of Arkansas, which calls to mind a question as to what sort of stock trades the spouses, relatives, staffers, and other members of the senators' retinues might be making, all at the expense of other and less-well-connected players on the very un-level playing field that is the stock (and commodities) market.

An example involving John F. Kennedy, while it doesn't relate to trading securities, serves admirably to illustrate at least the style, if not the substance, of the tradition, and the fact that highly revered figures such as JFK engaged in it with impunity. Told with unseemly humor and undeniable affection for his boss by co-conspirator Pierre Salinger, Kennedy's press secretary, the story concerns the embargo on goods imported from Cuba after the abortive 1961 Bay of Pigs invasion launched from the United States.

As Salinger recounts, one evening fellow cigar smoker Kennedy called Salinger in and asked him to go out and buy 1,000 of Kennedy's favorite Cubans by the next morning. When Salinger reported to work the next morning with 1,200 of the fragrant smokes under his arm, Kennedy pulled the bill enacting the embargo from his desk drawer and signed it, making purchases like those his press secretary had made at his orders henceforth illegal. Cigar devotees in the nation's capital may have seen a disappearance of their favorites rather faster than those at further range from the president's favored circle of confidants.

Perhaps, we may have concluded by this point, the people who formulate the laws (more with every passing Congress) of this land aren't above unloading some cats and dogs on a public that knows less—much less—than they do about what the law is going to be. But they aren't subject to any insider regulation of the sort that Martha Stewart's friend Sam Waksal was subject to. Waksal, by the way, is in jail for his insider trading, while Stewart is in the cooler merely for telling lies when the government asked her questions about trades that, made by her, were ultimately not prosecutable. One wonders how truthful the senators might be if asked about their trades as part of a criminal investigation.

So, it seems these lawgivers are indeed above the laws that are so vigorously enforced on unpopular public figures who are supporters of the wrong political party. As in such matters as corporate transparency and sound finances, the government's message is crystal clear:

Do as I say, not as I do.

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N. Joseph Potts studies economics at his home in South Florida.  pottsf@msn.com Comment on the blog.