Bar insider trading by Congress

Back in the dark days of September 2008, Alabama Congressman Spencer Bachus and other lawmakers were briefed privately on the unfolding financial crisis by then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

The next day, Bachus invested in options that would gain value if the stock market went down, at least according to a new book critical of congressional stock-trading practices. At the time, Bachus was the ranking Republican on the House Financial Services Committee; he's since become chairman.

So was Bachus' trade based on inside information? Or was it, as he insists, only obvious that the economy and financial markets were in trouble? We'll never know -- which is why it's important to put tough new limits on how lawmakers can invest while they're in office.

Bachus' dealings are in the news because the new book, "Throw Them All Out" by Peter Schweizer, and a provocative "60 Minutes" segment arising from it, have focused attention on allegations that members of Congress routinely profit by trading on inside information -- knowledge that isn't public. Trading on such information can be illegal if, for instance, you gained it from your employer. But it doesn't appear to be illegal for members of Congress, and a study of Senate trading from 1993 to 1998 found that lawmakers outperformed the market by 12 percentage points a year, an advantage so large it implies access to inside dope. A later study of House members from 1985 to 2001 showed a 6 percent annual edge, smaller but still huge.

The "60 Minutes" episode has renewed interest in legislation proposed by Rep. Louise Slaughter, a Democrat from western New York, to bar insider trading by lawmakers, or anyone else who gets inside information from Congress or the executive branch. It would also make lawmakers disclose their trading, and make Washington's burgeoning "political intelligence" firms register if they get information directly from Congress. These firms troll for inside information, often by hobnobbing with lawmakers, and then sell it to big investors. After languishing for years, the bill has drawn dozens of co-sponsors since the "60 Minutes" piece and deserves to become law.

Insider trading may not be as big a problem as critics say. Another study of congressional investing found that lawmakers underperformed the market. And trading by House Speaker John Boehner (R-Ohio) and the husband of House minority leader Nancy Pelosi (D-Calif.) highlighted in the "60 Minutes" episode is probably innocuous. It's unlikely Boehner opposed the public-insurance option during the health overhaul debate because he owned health insurance stock; every House Republican opposed that option. And while Pelosi's spouse got a taste of the initial public offering of Visa, she's long been a formidable antagonist to the credit-card industry in Congress.

But appearances matter. Why not make lawmakers put their investments into a blind trust, or limit stock holdings to an index fund that mimics the market? That won't end spousal trading, but it sure beats the free-for-all that present rules allow.