It takes big bucks to win a seat in Congress.
During the 2022 midterm elections, candidates and political action committees spent nearly $17 billion on state and federal campaigns. That marks them as the most expensive midterms ever.
Having money flow into Congress is one thing. But giving legislators time to snuggle into a seat of power is a whole different story… because it’s when they grab real opportunities to grow their wealth.
As I said in last week’s essay on term limits, political power is all about the money:
… congressional incumbents stay in power due to the money and corporations backing them… and if you keep your eyes on where this money is originating from, you can have a pretty good idea of which companies will be the government’s winners this year.
So this week, I will peer behind the closed doors of the House and Senate.… and explore the phenomenon of congressional trading, and what it means for you and your money.
It’s Not Just a Pelosi Problem
Representative Nancy Pelosi is the poster child for congressional trading.
She’s the third-wealthiest member of Congress.
Last year, Pelosi and her financial whiz of a husband, Paul Pelosi, executed 31 trades. That’s up from 19 trades in the year prior.
It’s safe to say Pelosi has a strong personal interest in what happens to the prices of shares she owns – and how that impacts her family’s portfolio.
And it’s for this reason that many people compare her to a market whale, capable of moving entire markets. According to public opinion, she is someone to always watch.
But, in 2021, Pelosi didn’t even make the list of the top five trading members of Congress. She was No. 6 (which is still impressive), but that’s not quite the top five. And in 2022, she didn’t even make the list of the top 10.
That’s why I find the whole Pelosi discussion distracting. It diverts our attention from the real problem: that there’s a bigger, more systemic issue at hand.
Our Government Is Broken
If you’re like most folks, you might wonder how it’s possible that a member of Congress who makes $223,500 per year is also worth over $171 million.
Well, that’s the story of Nancy Pelosi’s 35-year career in Congress. But it’s also a symptom of a much bigger issue, which is that our government is broken.
One hundred and eighty-three members of Congress reported making at least one trade between 2019 and 2021.
Of these 183 members, more than half of them sat on congressional committees that would’ve provided them access to insider information.
But there’s more. As of late, this whole situation has been spiraling out of control.
In 2022, members of Congress traded nearly $400 million worth of stocks. As you can see from the chart below, that was significantly higher (25%) than what they traded in 2021.
That’s despite the 40-year high inflation, interest rate hikes, a bear market, and increased public interest in congressional stock trading. Instead, you can see congresspeople diversified away from riskier assets into government debt and safe securities.
Now, the number of congresspeople that filed financial disclosures in 2022 was down to 131 compared to 147 in 2021. This means that there were fewer officials trading last year.
But it also means that a smaller group of people traded a significantly larger number of stocks. In fact, this amounts to about $3 million worth of shares traded per member, versus $2.16 million in the year prior.
That’s quite impressive when you consider that, unlike the prior year, 2022 was a terrible year for the stock market. In fact, it was its worst year since 2008, with many stocks trading near their multi-year lows.
Plus, the 131 number translates to just under a quarter (24%) of Congress. That’s a lot of people sitting in seats of power… making laws that directly impact certain companies they or their family members might have investments in.
And it gets worse…
Insider and several other news organizations identified 78 members of Congress who’ve recently failed to properly report their financial trades.
This means that many members of Congress do not comply with the law (which doesn’t bar them from trading securities, mind you). It’s that simple.
This specific law is called the STOCK Act, and its purpose is to combat insider trading in Congress. It’s also supposed to make elected officials more transparent about their personal financial dealings.
Even so, various members of Congress who violate the STOCK Act get off with a slap on the wrist, in the form of a $200 fine. Despite the small penalty, some members don’t actually end up making the payment.
To top it off, no public records exist yet to indicate whether lawmakers have actually paid the fines. These two factors only touch the tip of the iceberg as to why the STOCK Act is not enforced appropriately, but they illustrate how the current penalty system is inconsistent and ineffective…
What This Means for Your Money
Due to concerns about lawmakers’ trading, and the failure of the STOCK Act to hold them accountable, we’ve recently seen more push for the so-called PELOSI Act (short for the Preventing Elected Leaders from Owning Securities and Investments Act).
On January 24, 2023, Senator Josh Hawley (R-MO.) introduced the PELOSI Act to ban members of Congress from trading and owning stocks.
But getting politicians to take away their own ability to trade securities while in Congress would be like asking a bird not to fly. Do not hold your breath waiting for it to happen.
So, what can we do?
Well, we can follow where their money is going… and take advantage of it.
Tomorrow and next week, we’ll dive into the sectors and individual companies at the core of Congress’ investments.
And I’ll show you how you, too, can trade like a politician.
Happy investing, and I’ll be in touch again soon.
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins