The trades prompted renewed calls for stricter regulation of congressional stock ownership, with proposals ranging from a ban on trading stock while in office to an outright prohibition on stock ownership for elected officials.
New research from political scientists Jordan Carr Peterson and Christian Grose underscores why tighter regulations might be necessary. They found that members of Congress who own stock tend to vote in ways that benefit their portfolios and that these decisions can’t be explained away by other factors, such as ideology or constituent interests.
Lawmakers’ decision-making on issues such as financial regulation or economic intervention is “significantly associated with the legislators’ ownership interests in the very companies subject to regulation, intervention, and potential rescue,” according to a paper written by Peterson and Grose and published in the journal Legislative Studies Quarterly in August. Like any other investor, they “maximize their wealth and the size of their asset portfolios.”
Peterson and Grose reached their conclusions after combing through U.S. House members’ stock holdings, as described in mandatory financial disclosures, and comparing their votes on four bills with “immediate and direct impacts” on the stock market:
- The Financial Services Modernization Act of 1999, which allowed “the functional components of investment banks, commercial banks, and insurance companies to operate as a single institution,” as Peterson and Grose describe it.
- The Commodity Futures Modernization Act of 2000, which loosened regulations governing complex financial transactions such as credit default swaps and, in the view of many experts, helped pave the way for the financial crisis of 2007 and 2008.
- The Emergency Economic Stabilization Act of 2008, which created the Troubled Asset Relief Program (TARP) to allow the Treasury Department to purchase assets from failing banks to prevent a collapse of the financial sector.
- The Auto Industry Financing and Restructuring Act of 2008, which bailed out U.S. automakers Ford, General Motors and Chrysler.
All four measures “represent significant deregulatory or interventionist actions by Congress in the nation’s economy in the contemporary era,” Peterson and Grose wrote. They had direct effects on the stock market broadly and in a number of cases on the stock prices of specific companies.
Next, they examined whether there was a relationship between lawmakers’ stock holdings and their votes on these measures. They controlled for factors that could influence those decisions, such as party, ideology, net worth, income and unemployment in their home district, and political contributions from the affected industries.
Peterson and Grose found parallels between lawmakers’ stock holdings and their votes, even after controlling for potential confounding factors. Lawmakers with large stakes in financial companies directly affected by the Financial Services Modernization Act, for instance, were about 1.1 percentage points more likely to support that bill than those with no stock in those companies.
In 2008, lawmakers with considerable holdings in financial companies were about five percentage points more likely to support the creation of TARP than those without similar stakes. And lawmakers with automotive stocks were roughly eight percentage points more likely to vote for the auto bailout than those without.
These findings cut across party lines. Most of the votes examined attracted broad bipartisan support. “Legislators’ financial self-interest, and in particular the amount of their personal investments in the industries subject to regulation, oversight, and intervention, play a larger role than district characteristics and play a role that is relatively large even when compared to the impact of legislator party,” Peterson and Grose wrote.
This behavior, it’s worth noting, is perfectly legal. While the 2012 Stock Act prohibits members of Congress from insider trading, there is nothing to prevent them from casting votes that increase the value of their assets based on public information. “Further,” Peterson and Grose wrote, “it is not prohibited by law for members of Congress who are exposed to the stock market generally to allow this exposure to influence their policy decisions.”
As with any study of this nature, the authors caution that the associations they describe are not necessarily causal: It may be the case that legislators who support things such as deregulation and bailouts are naturally inclined to hold more stock in companies potentially affected by those policies.
But regardless of whether stock holdings drive policy or vice versa, the end result is the same: Lawmakers are empowered to let their personal financial interests influence policy decisions affecting millions of Americans.