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Insider Trading on Capitol
Tuesday November 16, 8:58
By Selena Maranjian
of us have probably ever looked forward with great anticipation to the publication of an article in a financial academic journal.
But there's one appearing in the December issue of the Journal of Financial and Quantitative Analysis that may make
for gripping reading. It raises a troubling question: Are there financial shenanigans going on on Capitol Hill? Specifically,
are (some) senators engaging in insider trading, acting on early knowledge they may have regarding what legislation will be
passed when, which companies will be awarded big contracts, and which companies' drugs will be approved?
Wall Street Journal article last month addressed the forthcoming report, saying, "A study suggests that U.S. senators
possess stock-picking skills that even the most seasoned money manager would envy. During the boom years of the 1990s, senators'
stock picks beat the market by 12 percentage points a year on average, according to the study. Corporate insiders, meanwhile,
beat the market by about six percentage points a year, while U.S. households underperformed the market by 1.4 percentage points
a year on average, according to separate studies."
It went on to note, "Looking at the timing of cumulative
returns, the senators also appeared to know exactly when to buy or sell their holdings. Senators would buy stocks just before
the shares suddenly would outperform the market by more than 25% [and would sell with similar prescient timing]. What explains
this miraculous performance? Given that the senators are producing returns that best even such stars as Peter Lynch and [Berkshire
Hathaway's (NYSE: BRK.A - News, BRK.B - News)] Warren Buffett, shouldn't they go manage mutual funds instead of running the country?"
Something sure looks fishy, doesn't it? But it appears
that the Securities and Exchange Commission (SEC), which saw no reason not to go after Martha Stewart Living Omnimedia's
(NYSE: MSO - News) leading lady over less than $100,000 in gains, isn't interested in what might be going on in the Senate.
Hmm… could it be that the SEC, which has personnel and budgets approved by senators, doesn't want to bite the hands
that feed it?