The House yesterday passed a new "reform" measure aimed at curtailing the practice of trading on securities with inside information amongst members of Congress and their staff.
Suprise! Some members of Congress were arriving in Congress and becoming rich on the experience.
Ever wonder how people go to Congress and become millionaires?
The publication last year of a new academic report cleared up for us at least one way the millionaires' club known as Congress benefits.
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 6.6 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, acco