OLEAN -- Now that we've thrown out the tree, burned all the gift wrappings, packed away the ornaments, saved all the ribbon bows, trembled at opening the credit card statement, and in general dispensed with the forced commercial merriment of another Yule season, let's return to more sober pursuits and questions, shall we?
Here's one. Do you think U.S. senators, in general, are honest?
OK, overly broad and unfair question. You are asking: In what regard?
In regard to financial dealings. Let's get specific and put it in terms of a multiple choice question:
Which group do you think did best, as measured by the recently published results of a multi-university study, in playing the stock market over a six-year period?
A) Corporate insiders
B) Ordinary slobs like you and me
C) Mutual fund managers
D) U.S. senators
If you answered D, you are correct. You win nothing, but are suitably skeptical to continue reading this column. Here's another multiple choice:
How many of the 100 U.S. senators are millionaires?
A) 12
B) None
C) 5
D) At least 60
If you answered B, then you are hopelessly naive. If you answered D, you are correct and may keep reading.
That three-fifths of the most powerful lawmaking body in America should be millionaires may not be surprising on its face, but it is counter-intuitive from the standpoint of salary.
Just a decade ago, a U.S. senator's salary was a little over $133,500 -- impressive, yes, but not enough for easy entry to millionairehood. Heck, lots of big-time Washington journalists make that amount and watch it evaporate in the high cost of living in the nation's capital. Today, a U.S. senator's base salary is $162,100 -- again very nice and way above average, but still on the upper fringes of what the Internal Revenue Service views as middle class.
But consider this: Just a decade ago, only 28 senators were millionaires.
Yes, yes, I know what you're thinking. Many senators were already rich when they were elected to the upper chamber -- they had to be to run for that expensive seat in the first place. True. But once in that lofty office, well-heeled or not, they performed phenomenally in picking stocks.
Let's get back to the stock market study and see what's really happening. The study is titled "Abnormal Returns from the Common Stock Investments of the United States Senate."
The authors of this laborious look are business and finance professors: James Boyd (Kent State), Ping Cheng (Florida Atlantic University), Alan Ziobrowski (Georgia State), and Brigitte Ziobrowski (Augusta State). The study covered the years 1993 to 1998 and much of the material came from the annual Financial Disclosure Reports that members of Congress are required to file.
The four professors examined more than 6,000 stock transactions by the senators under study.
Now, keep in mind that private groups and government officials who, for two recent decades, kept track of the stock trades of corporate insiders -- legal, illegal, or based on privileged information -- reported such executives only beat the average market return by about 6 percent.
And as national reporter Max Holland observed in the January issue of The Washington Spectator -- an excellent newsletter published by The Public Concern Foundation -- any mutual fund manager "who regularly beats the market by as little as two percent annually is considered an investment genius."
Yet, the senators outperformed the stock market by about 12 percent annually. They did twice as well as the corporate insiders!
The four-university study showed no statistically significant difference between Democrats and Republicans.
"Nobody gets results like this in the financial world consistently and over the long term," Thomas Ferguson, a professor at the University of Massachusetts and an expert on political money, told Holland.
Writer Holland concluded that "the most plausible explanation for this achievement is that senators, by virtue of their powerful office, are made privy to such privileged information, and that some choose to capitalize on it."
The four professors who authored the study were more polite, but offered pretty much the same reason, tagging the stock-trading acumen as a result of being "embedded in social networks that provide them with access to valuable information."
The stocks in which the senators under study invested -- according to Brigitte Ziobrowski (yes, Alan is her husband) -- "yielded unusually high profits, beginning shortly after the senators bought them. The senators continued to earn extraordinarily large returns for a full year. The stocks' performance returned to normal when sold."
Alan Ziobrowski was a bit blunter in his characterizations on a Georgia State University Web site: "This certainly suggests that some senators knew precisely which stock to buy, when to buy them, and when to sell them."
Well, I guess. Who can time the market like that without insider help?
The male Ziobrowski this week told The Hill, a capital newspaper fancied by congressional insiders, that "it was very clear that there was some form of informational advantage here."
None of this seemed to surprise Spectator writer Holland, who appears about as unimpressed with the current crop of senators as I am. He even quoted Mark Twain in that humorist's century-old observation that if your member of Congress comes home for re-election after an initial turn in Washington and is not yet a millionaire, he is a "fool" and should be turned out of office.
The senators may have done even better than the academic report indicates. That's because the vaunted Financial Disclosure Reports -- required for the last 27 years and touted by federal officials as an effective way of preventing conflicts of interest leading to self-enrichment -- have a deliberately built-in flaw.
The members of Congress are only required to report their investment gains within about a dozen wide bands of profit -- less than $1,000, then $1,001 to $15,000, then $15,001 to $50,000, then $50,001 to $100,000, and so on. The precise profit cannot be measured, and neither can total assets. It is possible, for instance, for a House or Senate member to list his total assets as between $2 million and $8 million -- make your own guess.
As Holland accurately writes, "the supposed transparency of the FDRs (Financial Disclosure Reports) is not all that it is cracked up to be."
Thus, the Financial Disclosure Reports are little deterrent at all. This banding problem, as Max Holland notes, "obscures almost as much as it reveals."
It certainly hasn't prevented senators like Republican Ted Stevens, the body's senior GOP member, who has represented Alaska for 36 years, from -- the FDRs show -- investing in technology and telecommunications companies that fall under the direct jurisdiction of, and are supposedly legislatively regulated in part by the Senate Commerce Committee. Stevens, by the way, is chairman of that committee.
None of this, of course, constitutes an illegal activity. Senators are just as free to trade stocks as their constituents are. Many do. Some don't. The professors who did the study wouldn't match up a profit figure with specific senators -- knowing that insider information would be impossible to prove without subpoena powers and prosecutorial abilities.
Some senators, like Republican Richard Lugar of Indiana, put their money in diversified mutual funds to avoid the appearance of conflict. Some, like Democrat Chris Dodd, put any stock buys under a 401(k) retirement fund. Others, upon election, place investments in neutrally run "blind" trusts -- which recent criticism of Senate Majority Leader Bill Frist (R-Tenn.) has implied are not so blind at all. Some senators just don't buy and sell stocks at all.
But attention to the senatorial stock study -- published last year in the academic "Journal of Financial and Quantitative Analysis" -- has remained keen in Washington, especially during a time when scores of capital politicians are as nervous as ticks on a hot griddle now that Republican uber-lobbyist Jack Abramoff, the central figure in an influence-peddling scandal, has pleaded guilty to a long list of federal charges and has admitted trying to bribe lawmakers.
The prosecutorial theory is that Abramoff, in return for reduced charges and time spent in the slammer, will begin naming names and mentioning sums.
Maybe federal prosecutors should ask him about insider stock tips, too.
| Niagara Falls Reporter | www.niagarafallsreporter.com | Jan. 10 2006 |