Members of Congress Beat the Market


Last week, Ken Silverstein, in reporting a story on Rep. Tom Feeney, R-Fla., and his sweetheart condo deal, began the piece this way:

A few years back, university researchers found that during the 1990 stock market boom U.S. senators beat the market by 12 percentage points a year on average. By comparison, corporate insiders beat the market by 5 percent, and typical households underperformed by 1.4 percent, the Christian Science Monitor said of the research. Financial experts . . . say the senators’ collective achievement is a statistical stunner, too big to be a mere coincidence.

It’s not the first time I’ve come across the results of that study, and when I do I can’t help wondering exactly how this phenomenon works. Professor Bainbridge quotes a bit from a Wall Street Journal article that reported on the same study (and available, sadly, only with a subscription):

The researchers say senators’ uncanny ability to know when to buy or sell their shares seems to stem from having access to information that other investors wouldn’t have. “I don’t think you need much of an imagination to realize that they’re in the know,” says Alan Ziobrowski, a business professor at Georgia State University in Atlanta and one of the four authors of the study.

Senators, for example, are likely to know which tax legislation is apt to pass and which companies might benefit. Or a senator who sits on a certain committee might find out that a particular company soon will be awarded a government contract or that a certain drug might get regulatory approval, says Prof. Ziobrowski.

I suppose it comes down to how precisely one is “in the know.” It’s hard for me to imagination, for example, that a lawmaker could look at a change in depreciation rules and then pick the winners from among the 2,600-some publicly traded companies listed by the New York Stock Exchange. But a change in a rule narrowly tailored to benefit a particular company, on the other hand, wouldn’t require quite as much analysis.

Does the phenomenon extend beyond stock deals? Recently, The Chicago Tribune traced the growth of House Speaker Dennis Hastert’s fortune from the his first term in Congress (when they estimated his net worth to be a maximum of $290,000) to his most recent filing, from which they calculated the speaker’s worth at just over $6 million. It may be an apples and oranges comparison (although I think such things are sometimes helpful), but if Hastert had invested his initial $290,000 net worth in the S&P 500, he would have ended 2005 with a bit more than $1.46 million in the bank. In any case, The Tribune’s history makes fascinating reading, and is the sort of thing I would like to see done for other members of Congress.

Take Rep. Nancy Pelosi, for example, the Democratic Leader. She entered Congress, after winning a June 1987 special election, as a wealthy woman: in 1988, the Associated Press noted that she was one of a then-small group of House millionaires (the article lists a dozen). She and her husband had a net worth then of at least $3.6 million. (Financial disclosure forms require members to value their assets within ranges–$1-to-$1,000, $1,001-$15,000, and so on; the AP regrettably didn’t provide the maximum figure.) I did some back of the envelope calculations, and found that the Pelosi’s current minimum net worth is $22.2 million–which is a significantly better return than had they invested in the S&P 500 (which over the same time period would have increased a $3.6 million nest egg to one worth $18.2 million). Like Hastert, a good chunk of the Pelosi’s investments are in land–whether it’s vineyards, office properties or condos. I think it would be worth looking into those kinds of histories.

And speaking of looking, I just wanted to note that one of our congressional volunteers had found that same line item on Rep. Feeney’s form, the one that Ken did such a masterful job exposing, as a troubling item. What else is in those forms?