Congress needs to stop day trading

Congress needs to stop day trading

  • Big Tech is a newsletter about technology and society by a freelance journalist Alex Kantrowitz.
  • Virginia Senator Mark Warner says members of Congress should not be allowed to trade individual stocks.
  • He says that doing so is a major conflict of interest as members often know upcoming events that will affect the market.

Mark Warner has a different background than his fellow senators, and it’s more common in Silicon Valley than in the halls of Washington. Before Virginians elected him a US senator in 2008, and governor six years earlier, Warner was a venture capitalist and entrepreneur. He co-founded Nextel, a wireless company now owned by Sprint, and has invested in hundreds of startup companies. Today his fortune amounts to hundreds of millions of dollars.

When I sat down with Senator Warner this week on the Big Technology Podcast, I wanted to know why his big game colleagues have talked about organizing Big Tech but have done little else so far. They risked losing credibility by constantly calling tech executives and then sitting on their hands. Given Warner’s background, he was the perfect person to bring up.

Our conversation covered familiar areas — tech optimism, tech ignorance, lobbyists — but then turned to stock trading. Members of Congress can trade stocks of individual companies while claiming to check their excesses, a startling conflict of interest that puts the prospects of their portfolios against those of the state. This practice is common, supported by the party leadership, and may influence the legislative process. Warner said it should end.

“Members should restrict themselves from playing in the market,” he said. “If you take on those responsibility jobs, you have to be willing to give up something.”

Warner is part of a broader awakening within Congress about individual stock trading, a looming issue around the federal legislature’s push to regulate Big Tech, and its relationship with big companies in general. Democratic House Speaker Nancy Pelosi, known as the House’s best trader, has always favored the freedom of circulating members. But after years of acceptance, there is finally a movement within the building to stop this legal form of corruption.

Among stock traders, it is well known that you can’t beat the market consistently if you don’t have an edge. Firms that do this regularly tend to find themselves in trouble for insider trading, such as Stephen Cohen’s SAC Captial, or above a Ponzi scheme, such as Bernie Madoff. Then there is the Congress. Federally-elected lawmakers often know the details of massive spending packages and potentially catastrophic events, such as COVID-19, long before their constituents. They have an advantage. They are not supposed to trade based on that knowledge but – wink of an eye – they do.

“There were members of Congress trading daily from their congressional desk, daily trading in bulk,” Brian Bird, a former congressman who served from 1999 to 2011, told me. “The idea that, in any way, the knowledge gained from their role in public service did not affect them in any way, is just ridiculous. Humans don’t work that way.”

Some of the most egregious stock trading in Congress occurred when several senators dumped large amounts of stock in the winter of 2020, right after Congress was briefed on the scale of the COVID threat. Senator Kelly Loeffler sold millions of shares. Her fellow Georgian Senator David Bordeaux made windfall by dumping shares and buying them back. Senator Richard Burr offloaded more than $1.6 million in stock before the market crash (and then made a suspicious call to his son-in-law, who immediately called the broker). Loeffler and Purdue lost their races, the Department of Justice investigated Burr, and the public became more attuned to the business habits of their representatives.

Loeffler, Purdue and Burr disclose their investments under the Stock Act, a law originally introduced by Baird in 2006 that requires timely disclosure of trades by federal representatives. The law did not prevent members of Congress and Senate from trading individual stocks – which seemed very aggressive at the time – but it did ensure that the public would recognize their behavior. In this regard, it worked. Nobody misses her now.

“The ability to trade, especially on a day trading basis, even if you don’t do anything wrong, looks bad,” Senator Warner said. He said he keeps his investments in a fund that doesn’t buy individual stocks.

Today, momentum is building to end the job that Bird started. Democratic Senator John Osoff, who replaced Purdue in the Senate, introduced legislation this week along with Senator Mark Kelly to ban members of Congress and their families from trading stocks. The bill would force them to put their assets into blind trusts. And if they break the law, they will be fined their full salary. Republican Senator Josh Hawley, after failing to unite with Ossoff, introduced his own stock-trading ban to members of Congress. Bridging the gap between the parties will not be easy, but the interest of both parties is fundamentally different from what it was only a few years ago, when such a ban was unimaginable.

Nancy Pelosi’s argument for allowing stock trading is that federal representatives should not be restricted from participating in the economy. “We are a free market economy,” she said in December. “They should be able to participate in that.”

But while Pelosi’s colleagues contemplate organizing the tech giants, her family has been trading in their stocks. Last July, her husband, Paul Pelosi, made $5.3 million by exercising call options to purchase Alphabet stock. His transactions took place just a week before the House Judiciary Committee introduced a slew of antitrust bills targeting big tech companies. The market didn’t think much of the banknote, which raised Alphabet’s stock, and Pelosi spent the money.

“The spokesperson had no involvement or prior knowledge of these transactions,” Pelosi’s spokesman Drew Hamill said at the time.

Congress can Participate in a free market economy without this apparent conflict of interest. Putting their assets into blind trusts, Ussoff suggested, would solve the problem while allowing them to participate in the market. Even restricting federal representatives to broad index funds would help.

The S&P 500 did nearly 27% in 2021, for example, a good result for anyone. Restricting members with more public money can give them a market advantage, help them focus on the entire economy, and remove the temptation to commit wrongdoing.

As he leaned back in his chair in his Washington, D.C. office, Senator Warner, a seasoned investor, brought the point home. “Stock pickers, you look at their averages against the actual market returns over the past five or 10 years, and picking a market-based fund over and over is cheaper and probably has a better return.” And that is precisely the reason why Congress should limit itself to this option, unless it has nothing to hide.

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