Stock trading on inside information is legal for members of Congress.

I’m in the financial services business and I know that trading on non-public information is illegal.  I assumed this was a general rule so I was surprised to find out that Congress had exempted itself.

Here's Veronique de Rugy at NRO making the startling claim that it's perfectly legal for memebers of Congress and their staffs to trade on inside information.

This is really crazy. Yesterday, the Wall Street Journal had this front page story about how congressional staffers are allowed to use information about policies about to be implemented to invest in stocks and make money.

At least 72 aides on both sides of the aisle traded shares of companies that their bosses help oversee, according to a Wall Street Journal analysis of more than 3,000 disclosure forms covering trading activity by Capitol Hill staffers for 2008 and 2009.

The Journal analysis showed that an aide to a Republican member of the Senate Banking Committee bought Bank of America Corp. stock before results of last year’s government stress tests eased investor concerns about the health of the banking industry. A top aide to the House Speaker profited by trading shares of Freddie Mac and Fannie Mae in a brokerage account with her husband two days before the government authorized emergency funding for the companies.

Now, this is called insider trading in the private sector, and people are going to jail for it. Now, whether one thinks that insider trading is a crime that deserves punishment is not even the issue here. What is stunning is that while insider trading is illegal in the private sector, it is totally legal for government employees to do it, because insider-trading laws don’t apply to Congress. Basically, Congress passed a law making insider trading illegal for the private sector and exempted itself.

This special exemption is bipartisan.

Some lawmakers find the double standard shocking, and a few years back, a few of them proposed a bill that would prevent members and employees of Congress from trading securities based on nonpublic information they obtain. That bill went nowhere. Here is the interesting part — according to the Journal:

When the bill was introduced nearly five years ago, just 14 other lawmakers endorsed it. The current version of the bill has fared worse: Only nine lawmakers support it. There is no companion legislation in the Senate.

What is especially troubling about this is that the government and business are becoming more closely intertwined.  It becomes more important to know if the government is going to award a contract or if it’s going to bail someone out that if there is a takeover or a surprise earnings report (the usual “illegal” reasons for insider trading).  Government employees have access to much more valuable information.