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After STOCK: Four Financial Perks Still Enjoyed by Congress

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Trading on inside information may no longer be allowed for members of Congress, but that doesn't mean there aren't other benefits.

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Congress has made a half-hearted attempt to crack down on its own insider trading brought to the public's attention last November by a 60 Minutes report (also see Congressional Insider Trading: Story Finally Sticks) and Peter Schweizer's book Throw Them All Out.

Both sources pointed out that high-ranking members of Congress traded shares of Citigroup (C), Goldman Sachs (GS), Bank of America (BAC), Apple (AAPL), and other companies' stocks when receiving news about the coming financial crisis in 2008. Congress quickly introduced the Stop Trading on Congressional Knowledge Act, or STOCK Act, in the same month to respond to the negative PR, and the Office of Congressional Ethics has begun looking into the trading activities of Republican Congressman Spencer Bachus during the 2008 financial crisis.

The original sense of urgency has dissipated, though, as the Senate passed a weaker House version of STOCK and sent it to President Obama for approval last week. This watered-down version of the bill would not require the political intelligence industry, an industry based on selling inside information to the highest bidder, to register as lobbyists and would dull the teeth in the original law to prosecute government corruption, such as bribery and theft of public money. To hurt Congress's image even more, the law will also cost $1.7 million just to implement the necessary programs and software.

Congress's settling for a weaker STOCK Act is not surprising; Congress has legislated itself into a political class with financial benefits that extend beyond access to valuable stock information. Listed below are four financial privileges still enjoyed by members.

Legislating to Capital Gains

Ostensibly, using Congressional information to increases one's net worth is illegal. Both the House and Senate Ethic Manuals state that members of Congress "may not use their official positions for personal gain." However, these ethics manuals create several loopholes that allow lawmakers to circumvent this rule. (You can read the House Ethics Manual here, and the Senate Ethics Manual here; both manuals are PDFs.)

According to page 234 and 235 of the House Ethics Manual, it is ethically permissible for House members to vote on legislation that will directly impact the value of stock they own as long as it does not solely benefit them or small group of people. This differs from the trading activity banned in the STOCK Act because the law only bans trading on nonpublic information or disseminating nonpublic information to select individuals. (See the law here.) Lawmakers can still vote on legislation that will lift the value of their investments, despite the obvious conflict of interest.

The House Committee on Ethics, which is run by House members, reasons that as long as the legislation impacts "the thousands of men in the country who [own] similar positions" the House member may vote on the law. Affecting a "class" rather than "individuals" legitimizes the vote of a House member with a financial interest. This distinction, however -- between a nebulous class of individuals and other individuals -- relies on determining whether or not a group of individuals is large enough to constitute a class, creating no clear ethical parameters on how a member of the House should vote when he or she stands to gain from casting a vote. The Senate Ethics Manual also makes a similar statement on page 69.

The Committee on Ethics concludes that since lawmakers hold many assets that can potentially conflict with legislation, they should not recuse themselves from voting as long as it benefits other citizens. Congress claims to fear the inability to vote on important national matters because the consequent abstention would result in lawmakers not adequately serving their constituency.

Yet, loopholes even exist for the mandate that the legislation must aid the general public. The House Ethics Manual uses the reasoning of the late former Speaker of the House Carl Albert to support the conclusion that owning a small share of a company does not create a conflict of interest. Albert's rationale being that since lawmakers own such a small share of the total company, they, unlike other individuals, don't care as much about their small investments for some unnamed reason.

So, what does Congress use for accountability and transparency? The ethics manual requires lawmakers to fill annual Financial Disclosure Reports, or FDRs, the idea being that the electorate will determine if abuses of power have occurred. However, the forms only request value ranges of the investments, which creates a rough sketch of Congressional financial profiles, and it seems doubtful that a majority of the population even know of the existence of FDRs.

Health Care Plans

Our government has aimed to overhaul our health-care system, but Congressional members (and all federal employees) already enjoy a selection of 300 private health-care plans subsidized through the Federal Employees Health Benefit Programs, or FEHB, and funded by taxpayers. The US Office of Personal Management, or OPM, states on its own site that "Federal employees, retirees and their survivors enjoy the widest selection of health plans in the country."

All federal workers receive a generous subsidy with the government picking up 72% of the cost of the premiums on average. Click here to see the monthly premiums for Health Management Organization, or HMO, plans available to Federal employees in 2012. These plans cover workers by state, and they give federal employees access to medical care in a specific region of the country based on the plan they purchased. The most expensive HMO family plan for a federal worker costs $1,578.61 per month in Delaware; the government picks up the other $897.76 of the $2,476.37 monthly premium. The cheapest family monthly premium is $132.50 in Hawaii; the government covers the other $397.49 of the cost. The Fee-for-Service Plans, or FFS, provide services through various health care providers, such as Blue Cross and Blue Shield, anywhere in the nation, and the highest family monthly premium for 2012 is $660.49. Some FFS plans cost as low as $200.72 a month. Of course, the taxpayer is really the one paying the the government subsidized portion of the health care costs in addition to paying lawmakers their annual salary of $174,000.

Comparatively, the average cost of health care per US citizen for the entire US population is $8,000, and it looks to increase in the foreseeable future.

Earmarks

Wouldn't it be great if you could allocate funds from your employer to projects that would directly or indirectly benefit you or your family members? Just imagine -- you could increase the value of your real estate holdings and other assets.

Well, this isn't a whimsical fantasy. All you need to do is get elected to Congress. Schweizer dedicates a whole chapter to members of Congress, such as Democratic Senate Majority Leader Harry Reid, Former Speaker of the House Nancy Pelosi, Republican Judd Gregg of New Hampshire, Republican Congressman Ken Calvert, and others who insert earmarks, or additional appropriations for specific, local projects, that increase the value of personal real estate holdings. The White House Office of Management and Budget candidly states that an earmark "circumvents otherwise applicable merit-based or competitive allocation processes." By law, senators can include earmarks as long as they benefit at least one other person in addition to him or herself according to Senate Ethics manual. The House doesn't burden its members with such stringent rules, making no requirement.

An example of this would be Senator Reid's sponsorship of an earmark for a bridge connecting Laughlin, Nevada, and Bullhead City, Arizona. The two towns already had a connecting bridge, but coincidentally, Reid owned a 160-acre piece of land in Bullhead City a few miles from the bridge. Passing the earmark enhanced the value of the land, which developers wanted because Bullhead City had become a booming commuter town. When questioned about the earmark, Reid's office insisted that "Senator Reid's support for the bridge had absolutely nothing to do with property he owns."

Members of Congress have also been giving money to their relatives by funneling earmark appropriations to their businesses and organizations. Democratic Senator Todd Johnson from South Dakota, for example, has allocated $4 billion to the Starbase program, which teaches engineering, math, and science skills to children, through his position on the Senate Appropriations Committee. What's the problem with this? His wife received an annual salary of $80,000 as a contract employee to evaluate the program. The ethics committees allowed this behavior, though, for the same reasons that lawmakers can vote on legislation that impacts their financial assets. It "helps" people other than family members.

Real Estate

Since members of Congress can use earmarks to enhance the value of their real estate, it should come as no surprise that the congressional ethics committees have deemed the purchase of land that will benefit from a future piece of legislation as "ethical."

Although this information must be listed on the FDRs, the information can easily be masked, hiding it from the electorate. The size of the property and value of a property can be stated in numerical ranges, making the exact value unclear. Former Speakers of the House Dennis Hastert and Nancy Pelosi are among the politicians who have profited from knowledge of forthcoming legislation that would raise the value of real estate, while also supplementing the value of their real estate through earmarks.

A case involving democratic Congressman Heath Shuler of North Carolina illustrates how this real estate entrepreneurship works. He owned a $5 million- to $25 million-stake in a real estate property called Cove at Blackberry Ridge. Schweizer writes that the investors of Cove wanted to convert it into a residential property, but they lacked water access rights. Conveniently, the Tennessee Valley Authority, or TVA, announced a new water access deal for the investment group in August of 2008. The timing coincided with Shuler's stint on the congressional subcommittee that had oversight of the TVA.

Ironically, the House Ethics Manual highlights a case on page 249 in which the House reprimanded a member for proposing legislation for land that he owned. Why wasn't Shuler also investigated? The ambiguities mentioned in the ethics manuals and the enforcement of its rules suggests that a lawmaker will only get prosecuted if he or she incurs the wrath of his or her fellow lawmakers.

The Constitution does not grant Congress any financial prerogatives. Maybe with the help of a little more publicity, the electorate can persuade Congress to pass an amendment that will force Congress to hold itself accountable to the laws it passes and stricter ethical standards.

No positions in stocks mentioned.
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