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In stock market, US senators beat averages

(Page 2 of 2)



Ethics complaints are handled discreetly in the clubby atmosphere of the US Senate. The Senate Ethics Committee does not even publish allegations of wrongdoing it may be investigating. The code of ethics is fairly general, and a committee of peers interprets those rules.

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But in today's highly partisan climate, personal portfolios are an increasingly large target, especially in the US Senate, where the net worth of senators has been rising rapidly. Senate majority leader Bill Frist drew criticism for his family's financial interests in private hospitals during last year's Medicare debate. Last month, Rep. Billy Tauzin withdrew from negotiations over a top lobby job for the pharmaceutical industry, because of the appearance of conflict of interest over his role in supporting industry interests in drafting the final Medicare bill.

"Public financial disclosure provides the mechanism for monitoring and deterring conflicts," according to the Senate Ethics Manual.

But although the Senate's financial disclosure rules have been upgraded over the years, records are difficult for researchers to access.

For the new study, researcher Alan Ziobrowski of Georgia State University says that without the help of former Sen. Max Cleland (D) of Georgia, he could not have afforded to pay for the data.

The documents are available to view in the public documents room of the Hart Senate Office Building or can be ordered at a cost of 20 cents a page. In addition, individuals who access these files find that their name, professional affiliation, and date of access become part of the permanent record of the file - so lawmakers can see who's interested in them. "It can be intimidating," Ziobrowski says.

Moreover, by law, the disclosures are removed from the public record after seven years.

"If public disclosure is the first line of defense, it has obviously failed," says Thomas Ferguson, a political scientist at the University of Massachusetts, Boston. "These files were public in name only. It's very hard to get this information. Note that it took the team that did this research eight years."

The data are incomplete: Dollar amounts are reported only in broad ranges: increments such as $50,00-100,000, or "over $50 million." The researchers were able to estimate performance by following stocks for a year before and after transactions.

"We have the date of the transaction, then watch the stock after that date in time. They had an uncanny ability to pick the right things on the right days," says Mr. Ziobrowski.

"The behavior of common stocks purchased and sold by senators indicates that senators trade with a substantial informational advantage," says Mr. Ziobrowski, a professor of finance at George State University.

He concedes that some senators may have "just been lucky" with their trades. The report will be published in the Journal of Financial and Quantitative Analysis in December. It finds no difference between the returns of Democrats and Republicans:

Not a random result

Financial analysts say it is highly unlikely that such returns could be random or simply the result of good financial advice. "Senators may be just smarter, but it seems really unrealistic," says Eugene Fama, a professor at the University of Chicago's center for research in security prices.

Even more than corporate insiders, senators may have a broad knowledge of when things are going to come to pass. "They know people who run the companies, who are more than happy to see them whenever they want," says Roger Ibbotson, chairman of Ibbotson Associates in Chicago and a professor at Yale School of Management. "No one refuses to take the call of a US senator.

He cautions that trades in the Ziobrowski study all occurred in the boom 1990s, and many were likely in high-flying dotcom stocks. It means that a similar pattern of unusually high returns might not have persisted.

Ziobrowski says he began this project nine years ago, after reading a report that 3 out of 4 members of Congress who traded stock had investments directly affected by their legislative activity.

Still, some senators go out of their way to avoid the appearance of a conflict of interest. Sen. Richard Lugar (R) of Indiana says he sold all individual stocks in 1967. Sen. Ben Nelson (D) of Nebraska says he invests mainly in government securities and CDs for the same reason.

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