How Congress Trades During National Emergencies?

When Americans face uncertainty, fear, and economic turmoil, some elected officials trade stocks in ways that raise questions about ethics, fairness, and transparency. This guide explores how Congress trades during emergencies, the potential conflicts of interest involved, and what reforms are proposed to address this issue.

What is congressional stock trading?

The STOCK Act was designed to prevent insider trading based on non-public information gained through their position in government. Unfortunately, the act’s enforcement has been weak, and many believe the law has loopholes that allow unethical behavior to go unchecked.

“The powerful shouldn’t get to create one set of rules for themselves and another set of rules for everybody else.” — Barack Obama, 2012, during the signing of the STOCK Act.

In times of national crisis, such as during the COVID-19 pandemic, these trades have come under intense scrutiny. Why? Because members of Congress often have access to information that the public doesn’t.

Furthermore, officials attend private briefings, hear from top-level officials, and learn about impending government actions that could affect markets before the information becomes public. This gives them a unique position to make stock trades at critical moments.`

Notable examples of crisis trading

During national emergencies, certain members of Congress have been accused of using their position to benefit financially. One of the most controversial examples occurred at the beginning of the COVID-19 pandemic.

As the virus spread globally, some members of Congress were briefed on the severity of the pandemic. Not long after these briefings, several lawmakers sold off millions of dollars in stock, presumably to avoid losses from the economic downturn that would soon follow.

On the other hand, others bought stocks in sectors that were likely to benefit from the pandemic, such as technology and pharmaceuticals. While these actions were technically legal, they raised serious ethical concerns.

Let’s take a look at a few notable cases:

• Senator Richard Burr: Burr sold over $1.7 million in stock after receiving classified briefings on the pandemic’s potential impact. His actions were heavily criticized, leading to an FBI investigation;

• Senator Kelly Loeffler: Loeffler, along with her husband, sold stocks after similar COVID-19 briefings while also purchasing shares in companies that would benefit from the pandemic;

• Senator Dianne Feinstein: Feinstein’s husband sold stocks during the early days of the pandemic, though Feinstein denied any involvement in the trades.

How national emergencies affect the stock market

National emergencies can have profound effects on the stock market. From natural disasters to terrorist attacks, the market’s response can be unpredictable. As such, investors often react with fear, selling off stocks, or with opportunism, buying stocks that they believe will benefit from the crisis.

Here are some ways national emergencies can impact the stock market:

• Uncertainty and panic: During the early stages of a crisis, uncertainty can lead to market volatility. Investors may sell stocks to avoid potential losses, driving down prices;

• Sector-specific benefits: Certain industries might benefit from emergencies. For example, during the COVID-19 pandemic, the pharma and tech sectors saw gains as demand for vaccines, remote work solutions, and medical supplies increased;

• Government Intervention: In many emergencies, the government intervenes in markets with stimulus packages, bailouts, or specific industry support, affecting stock prices.

Ethical concerns and potential conflicts of interest

The ability of members of Congress to trade stocks during national emergencies presents several ethical concerns. The most significant is the potential conflict of interest.

Elected officials are in a position where they can make decisions that affect industries and markets while also potentially benefiting from those decisions financially. This undermines public trust in government and raises questions about fairness.

Here are the key ethical issues:

• Access to non-public information: Members of Congress receive briefings and information that the public doesn’t have. Using this information to trade stocks is unfair to ordinary investors;

• Transparency issues: Although the STOCK Act requires lawmakers to disclose trades within 45 days, they are often delayed or incomplete, meaning that by the time the information is available to the public, the market impact of these trades has already occurred. This lack of transparency limits public oversight and weakens lawmakers’ accountability. Additionally, loopholes, like trades made by spouses or family members, further obscure transparency;

• Conflicts of interest: Lawmakers may be tempted to make policy decisions that benefit their financial portfolios rather than prioritizing the public.

Proposed reforms to stop crisis profiteering

A 2022 study by Thomas Bauer analyzed stock trades by US Representatives during the COVID-19 pandemic and found no significant abnormal returns, suggesting the STOCK Act may limit insider trading. However, the ethical concerns surrounding stock trades by lawmakers remain pressing.

In response to public outrage over congressional stock trading, several lawmakers and watchdog groups have proposed reforms aimed at preventing conflicts of interest and restoring public trust in government.

Here’s a list of proposed changes:

• Ban on stock trading by Congress: Some recommend a total ban on members of Congress and their spouses trading individual stocks;

• Blind trusts: Another suggestion is requiring all lawmakers to place their investments in a blind trust while in office, preventing them from making trades;

• Tighter disclosure requirements: Increasing the frequency and detail of stock trading disclosures would help ensure more transparency;

• Stronger enforcement of the STOCK Act: Reformers call for tougher penalties for violations of the STOCK Act, including substantial fines and potential criminal charges.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

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