Full Disclosure: Financial Profiteering in Congress

While the threat of the pandemic loomed, Senator Richard Burr (R-NC) was busy stuffing his personal coffers. On Feb. 13, just one day after he was briefed on the severity of COVID-19, Sen. Burr sold over a million dollars in stocks. One week later, the market crashed. Even some of his family members had the “foresight” to offload ill-fated securities. In public, Burr proceeded to downplay the virus. Privately, however, his conduct prompted FBI, SEC, and Senate Ethics Committee insider trading investigations. When the story broke, public outrage was intense, but the investigations into Burr and three of his colleagues—Sens. Kelly Loeffler (R-GA), Dianne Feinstein (D-CA), and James Inhofe (R-OK)—have since been closed. Senator Burr has since pledged not to seek reelection in 2022, and it seems he has been held accountable.

Burr’s actions are only the tip of the iceberg in a larger narrative of conflicts of interest and corruption in Congress. Defense Department profiteering ran rampant during the Bush Administration and the early days of the wars in Iraq and Afghanistan. In 2008, Congress passed a $700 billion bailout primarily benefitting the unsecured creditors of Fannie Mae and Freddie Mac, Citigroup, and AIG. During the pandemic, loans meant for small businesses were disbursed to large companies affiliated with elected officials. Meanwhile, the average American only received a $600 stimulus check. Corruption threatens our democracy by eroding faith in our political and economic institutions. It is easy to see that actions like Sen. Burr’s are wrong, but exactly how common is corruption in Congress?

New research published in Legislative Studies Quarterly suggests that legislators’ financial interests often influence their voting behavior. Authors Jordan C. Peterson and Christian R. Grose assessed the voting patterns of House members from 1999 to 2008. They found that members were more likely to vote for legislation that supported their own financial interests. To reach this conclusion, Peterson and Grose compared members’ votes on five highly publicized financial regulations.

The first vote they examined was the Gramm-Leach-Bliley Act of 1999 (GLBA), which called for updated data privacy processes in financial institutions. The GLBA aimed to modernize the financial industry; it repealed the 1933 Glass-Steagall Act, which restricted financial institutions from offering investment and insurance services jointly. The GLBA was proposed ahead of the merger between Citibank and Travelers Insurance—which would have been illegal without the Act’s passage. Thus, Peterson and Grose proved that representatives with stock in Citibank or Travelers Insurance were statistically more likely to vote in support of the GLBA.

Second, they assessed the Commodities Futures Modernization Act of 2000 (CFMA). Intended to promote growth in the financial industry, the CFMA relaxed restrictions on credit default swaps and derivatives. Now, many blame the CFMA for causing the housing bubble and ensuing collapse in 2008. The study showed representatives with more than half of their assets in stocks, mutual funds, or retirement accounts were likelier to support the legislation.

The third and fourth votes examined were on the Troubled Assets Relief Program (TARP), otherwise known as the 2008 bailout. The initial roll-call vote failed, but instability in the market led to a second round of voting just a few days later. Predictably, representatives with more stock in failing financial companies were more likely to support the bailout. This proved true for members with a greater proportion of equities as well. Notably, this effect was bipartisan, as financial self-interest affected all members regardless of party affiliation.

Lastly, Peterson and Grose looked at the Auto Industry Financing and Restructuring Act of 2008, which bailed out Ford, GM, and Chrysler. The study showed that representatives with stocks in Ford and GM were 8% more likely to vote in favor of the bill. Although no direct causal link was proven, only correlation, the researchers hypothesize that “the drive for financial enhancement and protection is important” for members of Congress. They also encourage future researchers to conduct causal analyses of legislators’ financial holdings. Given the potential influence of financial self-interest in Congress, how can we ensure legislators avoid temptation going forward?

Historical efforts at ensuring ethical voting behavior have achieved mixed results. Modern disclosure laws got their start with the passage of the Ethics in Government Act of 1978 (EGA). The EGA was enacted to restore public trust in government following Watergate and other Nixon-era scandals. The EGA mandated that high-level members of Congress, the executive branch, and the judicial branch must file an annual financial disclosure, detailing the person’s income, property, securities, positions held in business entities, and the finances of immediate family members. The EGA also established the Office of Government Ethics and the Judicial Ethics Committee.

Soon, politicians added reporting exemptions to the EGA. In 1983, the bill was amended to allow qualified “blind trusts” to be exempt from disclosure. Blind trusts allow the owner (trustor) to sign over their assets to a third-party (trustee) who manages their investments. The trustee must maintain the assets in good faith, free from influence of the trustor. Meanwhile, the trustor must remain ignorant of investment identities, figures, and transactions. If used properly this tool reduces the risk of conflicts of interest.

The EGA was a step in the right direction, but it provided wide latitude for abuse by elected officials. That is, blind trusts can be “blind” in name only. They require both parties to abide by the honor system for it to work. Additionally, the disclosures are vague. Securities only need general value amounts such as “Over $5,000,000” or “$15,000 to $50,000”. Moreover, access to these records requires burdensome request forms, undermining the intended transparency of the EGA.

After the chaos of 2008, legislation aimed at correcting these deficits passed. In 2012, Congress passed the Stop Trading On Congressional Knowledge Act (STOCK) almost unanimously. The STOCK Act amended the Securities and Exchange Act of 1934, making it illegal for high-level officials to take part in insider trading. The STOCK Act also amended the EGA to require major financial transactions to be disclosed within 45 days—and released to the public within 75 days.

Sadly, the publicized disclosures are either handwritten or indexed in a manner that makes it incomprehensible. Even worse, in 2013, Congress amended the STOCK Act to repeal the rule that top-level employees must publish disclosures, citing security concerns and problems attracting talent to government service.

What is the way forward for ethical voting reform? Should we mandate full divestment by all public officials? This is unduly burdensome and would only discourage public service. A more reasonable approach would be to make all public officials transfer their assets into blind trusts. The trustees could be chosen by an independent ethics committee. This would reduce outside influence on the trustee while instilling public trust. This was the route voluntarily taken by Illinois Governor J.B. Pritzker who, upon election, placed much of his $3.2 billion fortune into a blind trust and divested from companies with which the state had a contract. Another option would be partial divestment, in which certain securities deemed problematic would be liquidated and placed into common stock funds.

Additionally, the STOCK Act could be amended to require transaction details to be made available within a week, and the EGA amended to require exact figures on financial disclosure forms. Another improvement is already underway: the STOCK Act 2.0, championed by Sen. Kirsten Gillibrand (D-NY) and Rep. Katie Porter (D-CA). The bill intends to create a searchable database of all public financial disclosures. It would also mandate the disclosure of all federal grants and loans by public officials, their spouses, and their dependents. At the very least, these changes will renew confidence in our elected officials.

Elected officials cannot afford to put their own interests ahead of their constituents. When they do, it diminishes faith in our Republic. While past legislation like the STOCK Act has had some positive effects, we can build on this progress with increased oversight and civic engagement.

---

Peterson, Jordan Carr and Christian R. Grose. 2020. “The Private Interests of Public Officials: Financial Regulation in U.S. Congress.” Legislative Studies Quarterly (August). https://doi.org/10.1111/lsq.12294.

Karadas, Serkan. 2019. “Trading on Private Information: Evidence from Members of Congress.” The Financial Review 54: 85-131. https://doi.org/10.1111/fire.12180.

Lucas, Deborah. 2019. “Measuring the Cost of Bailouts.” Annual Review of Financial Economics 11 (December): 85-108. https://doi.org/10.1146/annurev-financial-110217-022532.