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December 7 2011

To the Victor Go the Spoils?

Nicole Kurokawa Neily

A few weeks ago, 60 Minutes did an illuminating – albeit depressing – story on insider trading in Congress. The CBS special was sparked by the findings of the Hoover Institution’s Peter Schweizer, who found that members of Congress were making well-timed investments and trades in companies that often were being regulated by the members themselves. Coincidence? Um, probably not.

But wait… there’s more!

It seems like the people who profited from this type of government-related knowledge weren’t just members of Congress. Apparently, former Treasury Secretary Hank Paulson used to feed information on the feds’ pending action to his former colleagues at Goldman Sachs.

The Cato Institute’s Walter Olson has an interesting take on the conundrum, noting:

So the question is: is all this legal? While there’s some difference of opinion on the issue among law professors, the proper answer to that question is most likely going to be, “Yes, it’s legal.” As UCLA’s Stephen Bainbridge points out, existing insider trading law, developed by way of a long series of contested cases under the Securities and Exchange Commission’s Rule 10b-5, assigns liability to persons who are not corporate insiders if they are violating a recognized duty of loyalty to those for whom they work. As applied to the investment whizzes of the Hill, this implies that trading on inside information might be a violation if done by Congressional staffers (since they owe a duty of loyalty to higher-ups) but not when done by members of Congress themselves.

 Of course, even if it’s LEGAL, that doesn’t make it RIGHT.

Certainly, the problem of trying to apply outdated laws to modern-day problems is not a new one (see: campaign finance, wiretapping codes, etc). But I’m concerned that in trying to address a narrow issue, the government will attack the problem in a feel-good manner – making it look like they’re getting “tough” while creating enough loopholes that they can continue to profit secretly… you know, that old saying about a fox and a hen house.

I’m also worried that this will be a straw man thrown up about “the evils of capitalism” (Hank Paulson was a Republican, after all.) It’s important to point out that this sort of behavior isn’t the market at work – it’s CRONYISM, where powerful people use their positions to act with impugnity and are exempted from accountability for their actions. Without a doubt, if these actions had been taken by someone in the private sector, they’d be prosecuted in a heartbeat.

If we, as a society, think that government officials’ insider trading is something so reprehensible that we must ban it – let’s make the ban clear, ironclad, and with no carve-outs. And let’s enforce it across the board – pursuing Cabinet officials and Congressional leadership with the same zeal that we would average citizens.

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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