Over the last couple of years, more and more attention has been drawn to members of Congress trading stocks and, reportedly, absolutely demolishing the index.
In some cases, this is true; some trades have been extremely profitable for some members of Congress, with Nancy Pelosi getting some of the most attention. However, not all trades have been great. Nancy Pelosi and her husband purchased over $500,000 worth of call options on Alphabet (GOOG) on December 17th. Google is down about 2.6% since then and, as a result of the leveraged nature of the calls, it means the Pelosis are down even more. The 18.8% decline in Roblox (RBLX) since their December buy of over $500,000 worth of options in that company means they’ve lost even more money than that.
Of course, no one is expecting the Pelosis to get it right every time…or are they? Financial bloggers and vloggers on YouTube, Tiktok, and elsewhere are encouraging people to trade alongside the Pelosis and pointing to their insider position as reason to expect them to make the right move all of the time. But that clearly isn’t happening, and mirroring their trades (which, it is often overlooked, are disclosed weeks after they happen) is not going to always work.
Still, there are interesting ethical and legal questions about the appropriateness of congresspeople making money on stock trades, and now there is a sequel to the STOCK Act being proposed that would limit investing in individual stocks and force congresspeople to instead invest in funds or through a blind trust.
This would not limit congress members trading on what has recently been called insider information among the populace (although, legally, the term doesn’t fit quite as well). Take for instance the most egregious and outlandish instance: Senator Kelly Loeffler and her husband, who sold over a million dollars worth of stocks after a Senate Committee meeting about COVID-19 and the risk of a pandemic in January 2020. Similarly, David Perdue, Richard Burr, Jim Inhofe, and Dianne Feinstein sold millions of dollars of investments before the market began to crash in late February. All members were aware of the real economic risks of a pandemic in private meetings and were dismissive or flippant about accusations of unfairness. When asked about Burr’s trading, Burr’s spokesperson Caitlin Carroll replied with “lol”. The Justice Department has not pursued charges of insider trading against anyone involved.
There are a few things to note in these trades. First, the sells were obviously well timed and dependent on material non-public information that, while legally doesn’t fall under the current definition of insider information, is very clearly as much insider information as getting a company’s earnings results from a buddy a day early. Secondly, and more interesting from a financial perspective, these were very defensive bets and not as aggressive as they really should have been. If Burr had gone from selling shares to buying puts on the S&P 500, he could have made many millions of dollars instead of avoiding the loss of maybe $500,000.
Most importantly from both a financial and a regulatory perspective, the newest proposed legislation does not fix the problem and would not have stopped Burr from avoiding the losses he avoided or, in our theoretical universe where Burr is a bit financially savvier and aggressive, earned millions from a massive economic catastrophe. A Senator who can buy ETFs can still buy leveraged ETFs that go up on higher volatility, like the VelocityShares Daily 2X VIX Short-Term ETN (TVIX), which went up over 450% from early February to March 2020.
This isn’t to say that the proposed legislation is bad or not a step in the right direction; at the very least, restricting individual stock ownership would stop, for instance, a Senator on a committee approving a contract with Raytheon (RTX) to profit from buying short-term call options on RTX as soon as the deal is decided and before it is announced. But when it comes to truly fixing the problem, the only solution is to make MNPI rules that are ironclad in the financial sector apply to legislators, publicly elected officials, and employees of Federal agencies.
