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Fed Leak Fuels Fears That Congress Is Engaging in Insider Trading

This week, the Federal Reserve released early the minutes from its recent FOMC meeting after a leak to lobbyists.

The gist of the minutes, from a Federal Open Market Committee held March 19-20, was that some Fed members continue to speculate about halting quantitative easing before year-end, though broadly everyone remains “concerned” about the market and the economy while seeing little change in outlook.

It wasn’t that big of a deal on paper, since the minutes came out at 9 a.m. instead of 2 p.m. as forecast. However, there’s a bigger narrative work here: Namely, that beltway insiders are getting inside information on the market — and could be making a pretty penny from it.

Remember the fuss a few years ago over Spencer Bachus, a Republican from Alabama who chairs the House Financial Services Committee? In 2011, 60 Minutes aired a damning look at several members of Congress. Apparently while the mortgage crisis was toppling the financial sector like a house of cards and Bachus was having closed-door meetings with the Treasury and Federal Reserve, he also was buying put options to turn a tidy profit.

Classy. Check out the entire report here.

Here’s another gem. Senate Majority Leader Mitch McConnell, a Republican from Kentucky, doesn’t own stocks because he thinks it makes him look above reproach for such specific shenanigans as Bachus was involved in. However, in 2008 right as the stock market was in turmoil and 500-point swings for the Dow were common, he moved around as much as $200,000 in his mutual fund holdings to profit from the passage of the stimulus.

This, from the Washington Post:

“The stimulus train is grinding to a halt,” McConnell told reporters on Jan. 31, following several calls with Paulson in the previous week. That same day, he made trades worth between $60,000 and $200,000, rearranging four mutual funds and selling shares in an international fund, buying shares in another and reconfiguring investments in two domestic funds.

No surprise that McConnell’s wealth exploded around the financial crisis to outpace the already ridiculous amount of money that his peers in Congress were worth.

mcconnell

There are assuredly legislators who are honest and come by their money through hard work. There are others who are honest and come by their money through luck — or in the case of John Kerry, who just made a mint on the Heinz (NYSE:HNZ) buyout, through marriage.

And it’s worth noting that the STOCK Act — an acronym for Stop Trading On Congressional Knowledge — was passed about a year ago and looks to prohibits the use of non-public information for private profit of government employees and legislators.

But hey, there have been SEC regulations against insider trading on the books forever — as well as some hefty fines and jail time served up. But are you going to tell me this one bill will fix the problem?

I find it hard to believe that McConnell and Bachus are outliers here. After all, the median net worth of a freshman in Congress is over $1 million more than the typical American family. And those who have been in Washington for a long time, like McConnell, see their already substantive wealth balloon at an extraordinary rate the longer they serve in a position of power.

I suppose some might give our Congress the benefit of the doubt and say that the best and brightest of America serve there, so it’s natural for them to be smarter and better with their money.

Unfortunately, I don’t know a single person who would claim our current crop of elected representatives are honest and smart. You might not either, since a March Gallup poll shows Congressional approval at 15% in February. That’s about 1 in 8 voters supporting Congress.

Given the recent leak of FOMC minutes, I find it hard to believe that there isn’t a wealth of insider information that legislators are privy to that the investing public is not. And given the past antics and current maliciousness I see in Congress, I find it hard to believe that those in power wouldn’t abuse that information if they had the chance.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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