While the middle class is facing a tax hike because of yet another congressional stalemate, Wall Street hedge funds and their investors are increasing their worth by employing a strategy of secret meetings with Capitol Hill lawmakers to glean insider information that impacts stock prices and guides investment strategy.

As I noted here,the legal yet secretive political intelligence industry uses connections to lawmakers to find out whether stocks are likely to rise or fall in the face of upcoming congressional action. Yesterday, the Wall Street Journal reported on the practice, documenting dozens of meetings between political intelligence firms and Members of Congress that helped hedge funds make investment decisions yielding hefty profits.

It is outrageous that political intelligence firms acquire market-moving information before anyone else, and can do so without any transparency. Unlike lobbyists, who at least have to disclose who their clients are and what issues they are working on, political intelligence operatives are subject to no disclosure mandates.

The Stop Trading on Congressional Knowledge Act (STOCK Act) would require anyone collecting information for the purpose of investment decisions to register and report their activities. The bill would also explicitly ban insider trading by Members of Congress and their staff.

Unfortunately, despite 241 cosponsors in the House and companion legislation in the Senate, some in Congress are attempting to derail the bill, or at the very least weaken its provisions. According to the Journal story, Sen. Joe Lieberman is pushing to require a government study of the issue, rather than immediately impose disclosure requirements.

In response, Rep. Slaughter, a lead sponsor of the bill said in a press release, “Let me tell you, we don’t need a study to understand this industry; we need transparency and regulation so that the public, Members, staff, and regulators know who is speaking to Congress to gain an advantage on the financial markets.”

We couldn’t have said it better ourselves.

Rep. Brian Baird and Rules Chair Louise Slaughter reintroduced an important transparency bill that would ban lawmakers, executive branch officials, congressional staffers, and others from trading stocks, bonds, and commodities by using nonpublic information obtained in their official capacity. The legislation - Stop Trading on Congressional Knowledge Act (H.R. 682) - also carries important transparency elements including requiring lawmakers to disclose stock transactions of $1,000 or more within 90 days and requiring "political intelligence" firms to register with the government just like lobbying firms.

With the amount of influence the legislature and the executive are currently exerting within the financial sphere it is paramount that they are not using information gleaned from closed-door meetings or information peddlers to play the market. Currently, disclosure provisions only require lawmakers and others to disclose stock, bond, and commodity trading once a year, and the system is spotty. The only way to ensure that elected and appointed officials are not using their positions to grow their wealth is to mandate regular disclosures as exist in the Baird-Slaughter bill.

For more information about "political intelligence" firms and trading on Capitol Hill see below (from the Baird press release):

Currently Members of Congress and their staff do not owe a duty of confidentiality to Congress, and therefore are not liable for insider trading.  Because of this, the temptation exists for Members and government employees to use government information only they have access to when making investment decisions.  A 2004 report from Georgia State University showed that United States Senators received investment returns that were approximately 25% higher than what typical Americans were able to achieve.

Similarly, there is currently nothing to stop Congressional staffers and executive branch employees from sharing inside information with their friends.  Armed with information not available to the general public, these people are able to make potentially lucrative investment decision that can either make them a windfall profit, or save them from a devastating loss.

Political intelligence firms have created a multi-million dollar industry to traffic this information.  Since they first showed up in the 1970s, these firms have operated in secret, and largely without government controls.  They provide investors with inside information about impending legislative action that can be used to inform investment decisions. One recent questionable example of these firms’ influence appeared in late 2005:

On November 15, 2005, the stock of a building materials company in Chicago (USG Corp) suddenly doubled, despite the fact that there was no publicly available news about the company, or industry, which explained the increase in volume. What the public didn’t know yet, but what some investors discovered through back channels and political intelligence companies, was that then-Senate Majority Leader Bill Frist had quietly decided to move forward with legislation to relieve companies, such as USG Corp, of their liabilities in asbestos related lawsuits.