Dirty Harry Got Richer in 2008...and You Didn't

Posted: Apr 14, 2014 12:01 AM

Congress has inflicted frightful punishments on its members--now you know that. When they tried Mr. Fairoaks, and a cloud of witnesses proved him to be--well, you know what they proved him to be--and his own testimony and his own confessions gave him the same character, what did Congress do then?....Congress intimated plainly enough, that they considered him almost a stain upon their body; and without waiting ten days, hardly, to think the thing over, they rose up and hurled at him a resolution declaring that they disapproved of his conduct! Now you know that. –Colonel Beriah Sellers, The Gilded Age, Mark Twain, 1873

In the Transparent Age American’s are quickly finding out that Mark’s Twain’s adage that Congress is the only distinct criminal class in this country is as true now as it was in Samuel Clemens’ Gilded Age.

And, make no mistake; this isn’t a left-right problem. It’s a national problem that greatly needs attention if we can ever hope to restore the trust citizens must have that our political system works for us, not against us.

What’s becoming increasing clear is that the government exercises too much power in the daily life of our Republic and their own portfolio.

As more and more Bundy Ranches happen all over the country, and more green companies with ties to Harry Reid, Barack Obama or others with check writing authority amongst the Democrats, go belly up, people are getting the idea that the government is just playing a game on the rest of us.

You can find evidence of this in two easy-to-understand stock market phenomena that defies the typical left-right bias.

The first evidence is what’s known as the Congressional Effect.

“Specifically, since 1965, 46 years of empirical data demonstrates,” write fund manager Eric Singer, who manages a fund based on the data, “that over long periods of time the stock market performs dramatically better on days when Congress is out of session as compared to days when Congress is in session.”

Singer says that since January 1st, 1965 to December 31st, 2010 the market has returned less than one percent when Congress is in session versus a 16.57 percent return when Congress isn’t working. The numbers get worse for the last decade too. Since 2001 to the end of 2010 the market has lost 7.58 percent annualized when in session versus a gain of 12.68 percent annualized when Congress is out of session.

Evidence also shows that our legislators enjoy a greater advantage when trading in the market by virtue of inside government information than even the corporate insiders they like to rail about.

A report from four scholars, Alan J Ziobrowski; James W Boyd, Ping Cheng; and Brigitte J. Ziobrowski, titled Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives, shows that between 1985 and 2001 members of Congress enjoyed a considerable advantage over members of the public in their investment returns.

The article was published by Berkeley Electronic Press and is a follow up to a similar study done on investments by US Senators.

“A previous study suggests that U.S. Senators trade common stock with a substantial informational advantage compared to ordinary investors and even corporate insiders,” says the introduction to the report. “We apply precisely the same methods to test for abnormal returns from the common stock investments of Members of the U.S. House of Representatives. We measure abnormal returns for more than 16,000 common stock transactions made by approximately 300 House delegates from 1985 to 2001. Consistent with the study of Senatorial trading activity, we find stocks purchased by Representatives also earn significant positive abnormal returns (albeit considerably smaller returns). A portfolio that mimics the purchases of House Members beats the market by 55 basis points per month (approximately 6% annually).”

Actually 12 times .55 percent comes out to 6.6 percent annually. That .6 percent return accounts for an additional $130,000 over a 17 year period.

So how lucrative can the 6.6 percent advantage be for Senators and Representatives?

A portfolio of $100,000 getting average stock market returns of 11 percent over a 17 year period would have grown to $589,000. If you were a member of the United States House of Representatives, though, enjoying the advantage that inside government information can bring you, your portfolio would have reached $1,573,000, according to an investment calculation I did using the finding from the study.

Assuming only average market returns for the next 20 years, a Representative would grow their portfolio to close to $13 million.

Under the same circumstances US Senator would have grown the portfolio to $18 million.

The conclusion of the study favors some sort of reporting mechanism similar to those imposed upon corporate insiders.

“We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain. That having been said, abnormal returns earned by Members of the House are substantially smaller than those earned by Senators during approximately the same time period. These smaller returns are due presumably to less influence and power held by the individual Members.”

While the sky hasn't fallen since reporting requirements were imposed on members of Congress, the report misses the most obvious point.

Why do we have a federal government that can so substantially ensure winners and losers in investments and our economy? Isn't a system like that prone to corruption? Don't we witness the effects of that corruption in legislation like Obamacare, or the Cadillac benefits offered public employees.

For example, in 2008, one month before oil prices took an historic plunge, Senator Harry Reid (D-Healthcare) sold between $15,000 and $50,000 of energy holdings he owned in the Dow Jones Energy Index. In return, he purchased between $15,000 and $50,000 worth of healthcare holdings in the Dow Jones Health Care Index at a time when he was contemplating rewriting healthcare laws. Try convincing members of the public- or anyone outside the DSCC- that the sale and purchase of these indices were just coincidental.

The report from Berkeley Electronic Press points out the even corporate insiders don’t enjoy the return advantages that members of Congress enjoy. While we’re trying to reform Wall Street, maybe we should take a stab at reforming Washington as well by restricting the amount of power they have over our economic life.

This business of picking winners and losers and then benefiting from it are some of the most damning indications yet that the scope of government has gotten wildly out of control. It’s also another example of laws and rules that Congress passes for the rest of us but won’t consider following for themselves.

Congress today has enough power to make sure the rate of return for politicians continues to be just fine, but somehow they just don't have enough power to figure out how to create real jobs for ordinary citizens.

This must end if we want to restore confidence in government and, frankly, not end up with violence in the streets.