A Founding Father, a federal bailout and the press were at the center of the only documented congressional insider trading case in U.S. history.
It was 1789, and state-backed revolutionary war bonds had become virtually worthless. Treasury Secretary Alexander Hamilton moved in to shore up the investments.
Before word spread, members of Congress secretly scooped up thousands of the bonds from unsuspecting farmers and war veterans, paying pennies on the dollar.
What followed set the stage for how Congress would respond to public outrage over such conflicts of interest for the next 200 years.
In response to the scandal, lawmakers prohibited Hamilton and future Treasury secretaries from buying or selling government bonds while in office.
But members of Congress did not extend the ban to themselves, a pattern that persists to this day.
“Congress has no problem imposing rules on others. We have a more difficult time doing it for ourselves,” said former representative Brian Baird (D-Wash.), who in 2006 co-authored the original Stock Act that called for greater financial disclosure about lawmakers’ stock trades.
In its ethics rules, Congress presents a twofold argument for why it creates different rules for itself than it does for federal judges and the executive branch officials.
First, Congress views itself as a “citizen legislature.” As such, lawmakers think their investment portfolios should mirror those of their constituents: The farm belt is best represented by farmers, who should serve on agriculture committees. Oil-rich states are best represented by oilmen, who should serve on energy committees.
The second argument for the disparate rules is that members of Congress are elected officials, while other federal workers are not. If voters think a lawmaker is too deeply conflicted, they can vote him or her out of office.
Congressional ethics experts say this logic is outdated.
“The problem now is Congress has become much more specialized. The chairman of the banking committee, for example, represents not just his state, but all of us,” said Dennis Thompson, an expert on congressional ethics and a public policy professor at Harvard University. “But unless I live in that congressman’s state, I don’t get the chance to vote him out.”
The modern conflict-of-interest laws came in response to the Watergate scandal, prompting Congress to pass the 1978 Ethics in Government Act.
Again, the rules were far stricter for the executive branch than for Congress. The act created the public financial disclosure form, requiring members of Congress, their staffs and those in the executive branch to annually disclose most of their assets but reveal their dollar value only in broad ranges.
Congress determined that, from these forms, voters could evaluate a member’s conflicts.
However, the forms were put to a different use for executive branch officials.
Officials in the newly established Office of Government Ethics began using the forms to identify potential financial conflicts.
Federal employees — particularly presidential appointees — are routinely ordered to divest themselves of holdings that pose a potential conflict. They are also ordered to refrain from making any new investments in industries that they oversee and can influence. For example, in 2006, Henry M. Paulson had to divest himself of $500 million in Goldman Sachs stock before his appointment as Treasury secretary from Congress.
When Baird introduced the first version of the Stock Act with Rep. Louise M. Slaughter (D-N.Y.) in 2006, it was again in response to scandals, including insider trading at Enron. Congress responded by passing strict laws for corporate officials that required them to publicly disclose trades in their company stock within 48 hours.
Baird thought Congress should follow similar rules. “I thought if we require this of others, than we should require it of ourselves,” he said recently.
Several media outlets began exploring the issue, including The Washington Post.
In 2009, a Post story explained how lawmakers invested in medical supply companies as they crafted health-care overhaul provisions that applied to those companies. In 2010, reporters revealed that senators on the Armed Services Committee own stock in firms that do business with the Defense Department even though Pentagon officials are forbidden to do so.
The newsmagazine show “60 Minutes” ran its own piece on congressional stock trading last year on Nov. 13. The next day, the phone lines and e-mail boxes of members of Congress were jammed with messages from outraged constituents.
After six years of ignoring the Stock Act, members rushed to pass it, openly saying they hoped to quell voter anger. But first, members of the House argued that the bill would be too weak if it failed to include executive branch officials.
When White House press secretary Jay Carney was asked in a Feb. 8 news briefing whether inclusion of the executive branch was an issue for the president, he said the argument was “humorous.”
“The absolute fact is that there are far more stringent rules and restrictions on the executive branch already in place, as I’m sure they know,” Carney said.
Two weeks earlier, at his State of the Union address, President Obama had called on Congress to send him the bill so he could sign it into law.
He also said it was time for them to place greater restrictions on the type of stocks they are allowed to own — just as they do for the executive branch.
“Let’s limit any elected official from owning stocks in industries they impact,” Obama said during the Jan. 24 address.
The House ultimately passed the Stock Act, 417 to 2, followed by the Senate, 96 to 3. The final bill — signed into law by Obama on April 4 — makes clear that members of Congress cannot use inside information gleaned from Capitol Hill to profit on Wall Street.
But the law does not, as Obama requested, limit elected officials from owning stock in industries they oversee. It also did not include the 48-hour reporting requirement that Baird had originally sought.
Instead, lawmakers, their staffs and top executive branch officials must now report stock trades within 45 days.