How Politicians Keep Getting So Rich

This is Representative Alan Lowenthal, a Democrat in California. He sits on the House Committee on Transportation and Infrastructure, which on the 6th of March 2020 released this report detailing the preliminary findings from an investigation into the Boeing 737 Max program. The report showed that costs, schedule, and production pressures at Boeing undermined the plane's safety and that Boeing had deliberately downplayed the faulty MCAS system to avoid scrutiny by the FAA. It's a damning report, and on its release, Boeing stock fell 5.6 percent. But it didn't stop there; just two weeks later, the stock had fallen another 62.5 percent.

But here's something curious: just one day before the committee's report was released publicly, Alan Lowenthal's wife conveniently sold her stake in Boeing, completely sidestepping the carnage that ensued. Or how about this: Bob Gibbs, a Republican representative from Ohio, sits on the House Oversight Committee. Now, during 2021, his financial disclosures showed that he was very busy buying shares of AbbVie, a large American pharmaceutical company. That all sounds fine, well I guess it would sound fine if he wasn't concurrently participating in the Oversight Committee's investigation into AbbVie and five competitors over high drug prices.

These are two headline examples described in a recent New York Times study that investigated the incidence of conflicts of interest among stock market trades made by U.S. politicians or their families, and the results are quite worrying. Quote: "From 2019 to 2021, 183 current senators or representatives reported a trade of stock or another financial asset by themselves or an immediate family member, and of those 183 people, 97 of them sat on Congressional committees that potentially gave them insight into the companies whose shares they reported buying or selling." So, more than half of the members of the U.S. Congress that participated in stock market trading between 2019 and 2021 had a conflict of interest. Let that sink in.

The study found that over the three-year period, more than 3,700 trades reported by lawmakers from both parties posed potential conflicts between their public responsibilities and private finances. And while conflicts of interest have always been prevalent within the U.S. political system, over the past few years, the public has grown increasingly frustrated with U.S. politicians either abusing their position of power to personally profit or by having an obvious conflict of interest, which interferes with them voting in the best interest of their constituents.

As you've probably seen on Reddit, Twitter, or even just in the media, the most commonly cited or scrutinized politician in this whole ordeal is the House Speaker herself, Nancy Pelosi. While Pelosi denies any sort of conflict of interest in her or her husband's stock market trades, there are still many examples of stock market trading activity that just looks very convenient. For example, one trade that really irked the public earlier this year was her husband's purchase of Nvidia stock.

On the 17th of June, Paul Pelosi exercised options he acquired a year earlier in order to purchase 20,000 shares of Nvidia stock at a price of a hundred dollars per share. Now, while in fairness the options were set to expire on that day, the public and the media still grew frustrated because the Pelosis owned a substantial Nvidia position literally a week before Congress was scheduled to vote on the Chips Act legislation that's designed to help boost research and manufacturing in the semiconductor industry in America.

It's worth noting that this isn't an isolated incident either. Pelosi has also come under fire for owning shares of Amazon and Apple, and Alphabet at the same time that Congress discusses supposedly regulating these tech giants. Even dating back to 2008, Pelosi bought $220,000 worth of Visa at its IPO only to then stall a bill poised to end lucrative swipe fees for Visa and other credit providers. In fact, that particular instance by Nancy Pelosi actually led to a new provision, colloquially known as the "Pelosi provision," to be added to the STOCK Act that was passed in 2012.

So, there are many examples of conflicts of interest in looking at the trades of the House Speaker and her husband, and surprise, surprise, the portfolio has done very well over time. Now, I won't get into the nitty-gritty of Pelosi's portfolio in this video, but if you're interested in what the House Speaker actually holds, I have actually put together a list of her stocks over on Simply Wall Street. So, if you're interested in checking that out and actually doing some analysis on some of these companies that she holds, definitely check out the link down in the description or in the pinned comment.

If you wanted to sign up to Simply Wall Street and use it actually as a proper analysis tool for your own portfolio, you can actually get 40% off at the moment if you use my referral link back to it. So, I guess at this point, we're probably all in agreement that the U.S. political system is rife with conflicts of interest. But the question I wanted an answer to is how is all of this actually legal?

The answer, as per usual, is a little bit murky. You see, back during the global financial crisis, insider trading within the U.S. Congress was actually fairly common. In 2008 and 2009, many politicians faced scrutiny after they were found to be enriching themselves at a time where the average American had their retirement account basically cut in half. Now, this activity led to the implementation of the Stop Trading on Congressional Knowledge Act in 2012, which drastically increased the reporting requirements of stock trading by members of Congress. It made it clear that there exists no exemption for members of Congress, Congressional employees, or for other federal officers or employees from the insider trading prohibitions in federal securities law and regulations.

To be fair, this act did help tidy up the fully fledged insider trading. A 2004 study of the outcomes of stock trading by United States senators during the 1990s found that senators, on average, beat the market by 12 percent per year, while, in sharp contrast, U.S. households on average underperformed the market by 1.4 percent per year. However, recently a study by Dartmouth College found that the specific stocks that members of Congress reported buying and selling between 2012 and 2020 did not, on average, perform any better or worse than other similar stocks. They noted that "house and senator stock returns are consistent with random stock picking."

So, it does seem as though the introduction of the STOCK Act vastly reduced the ability for U.S. politicians to enrich themselves by trading stocks on insider information. But the one problem that the act does not stamp out is conflicts of interest. For example, a senator might have bought, say, a multi-million dollar stake in Meta, let's say 12 months ago. Now, in that time, Meta shares have fallen 60%, while the general market has only fallen 17%. So they certainly haven't beaten the market with that one. But the problem still remains that if, for example, Congress was discussing whether to crack down on social media companies to protect the privacy of American citizens, our mate Mr. Senator obviously has a vested interest in voting for whatever outcome is best for Meta, which could mean he votes against the best interests of his constituents.

And that's what many Americans now want to stamp out. They simply want politicians' stock trading to be illegal. In fact, a recent poll conducted by Morning Consult and Politico found that two-thirds of all respondents want to see an outright ban of stock trading amongst U.S. politicians. The trend doesn't change across Democrat or Republican voters. Even some politicians have come out in support of such actions as well. Now, whether you believe them or not, that's another matter entirely. But, for example, the New York Times article we've been discussing quotes Texas Republican Chip Roy, saying, "The American people don't want to see trading for profit and engaging in active trading of the very equities that are connected to the policies that we are deciding on and voting on every day."

But with that said, is there anything actually being done about it? Well, actually yes. Now again, whether this all gets through or not, and whether it genuinely does stamp out conflicts of interest, that all remains to be seen. But there is some movement to restrict politicians' ability to buy and sell stocks, namely the Combating Financial Conflicts of Interest in Government Act. Actually, just a few weeks ago, the House Democratic leaders released the text of this bill, which seeks to ban members of Congress and other government officials—including Supreme Court justices as well as their spouses and dependent children—from owning or trading stocks. It also increases penalties for violating federal conflicts of interest law.

Well, the penalty has now gone up from two hundred dollars to a thousand dollars, so I don't think it's going to break the bank of these politicians. But what this bill requires is for officials to transfer all of their stock holdings into a blind trust, which is then managed independently and to stop ongoing conflicts of interest. Any individual stock that goes into the newly formed blind trust needs to then be sold within 18 months of the trust creation so that lawmakers don’t know what’s in there. This, on face value, does seem to be a sensible way to fairly transition politicians away from their personal stock holdings. They don't have to dump the shares immediately, which potentially forces them to take big capital losses, but they do have to step away from being able to buy and sell stocks themselves, and in the medium term, the stocks they did hold personally will get sold by an independent portfolio manager.

But unfortunately, as with most laws that go against politicians' financial motives, there's already a loophole. Former Obama administration ethics chief Walter Shaub has already raised concerns about the new act on Twitter, saying, "In reaction to the Watergate scandal that toppled the Nixon presidency, Congress passed the Ethics in Government Act. Among other things, that act created strict new requirements for blind trusts in the federal government. Pelosi's bill would eliminate all of these requirements by authorizing each ethics office to allow anything they want and call it a blind trust. Literally anything. There are no limits in this bill as to what these officers can do."

So the bill would replace the one strict statutory standard that applies to all these branches of government with five different standards of varying degrees of permissiveness. There's plenty of reason to be concerned about throwing out the current strict uniform standard for blind trusts across the government. For one thing, the House and the Senate ethics committees are notoriously loose. They've spent the last 10 years not enforcing the STOCK Act. With that, he links to an article that describes that across the past 14 years, the Senate Select Committee on Ethics has refrained from issuing any disciplinary sanctions.

So effectively, if the bill goes through in its current state, the definition of a blind trust becomes very malleable. Shaub's argument is that unless the definition is black and white, the conflicts of interest simply won't be stopped; they'll just be masked by another layer of complexity. So it seems the world Congress is actively working on a bill to stop stock trading and thus conflicts of interest. More effort is definitely needed to ensure this legislation is really tight and thus effective.

But with that, guys, definitely let me know what you think down in the comments section below. You know, should these U.S. politicians be allowed to trade individual stocks? That's up in the air, so definitely let me know down in the comments section below. Leave a like on the video if you did enjoy it, and of course, subscribe if you'd like to see more. But guys, that'll just about do us for today. Thanks for watching. I'll see you guys in the next video.