Lawmakers Trade Bank Stocks While Working on U.S. Bank-Failure Fallout

Trades could intensify calls to restrict congressional stock trading

By Rebecca Ballhaus of The WSJ. Excerpts:

"Two lawmakers reported trades in bank stocks last month as they worked on government efforts to address fallout from two of the largest bank failures in American history.

The disclosures, by a New York Republican and an Oregon Democrat, mark the latest instance of congressional stock trading intersecting with official business.

Rep. Nicole Malliotakis (R., N.Y.) bought stock in a regional bank before a subsidiary agreed to take over Signature Bank’s deposits following its closure. Days before she bought the stock, she said she met with financial regulators to discuss the bank’s closure.

Rep. Earl Blumenauer (D., Ore.) reported three trades in bank stocks as he co-sponsored legislation seeking to strengthen restrictions on financial firms in the wake of the bank failures."

"beyond rules mandating regular disclosure and the laws against insider trading, they face no other restrictions on what stocks they are allowed to own or trade. 

They are required to disclose any trades by them or their spouses of $1,001 or more in stocks, bonds, commodities, futures and other securities within 45 days, and must disclose their assets and liabilities every year in broad ranges."

"Lawmakers aren’t required to disclose the time at which their trades were made, making it impossible to determine how much money they made or lost on stock trades. 

Ms. Malliotakis bought $1,001 to $15,000 in New York Community Bancorp Inc. stock on March 17, soon after she met with financial regulators."

"On March 17, she bought the New York Community Bancorp shares. On March 19, the Federal Deposit Insurance Corp. announced that NYCB’s Flagstar Bank would take on Signature’s deposits.

NYCB stock rose 32% on the news the next day.

Ms. Malliotakis’s disclosure said the stock purchase was made by her spouse. She is unmarried. A spokeswoman said that was an error and that the report will be updated."

"Rep. Earl Blumenauer of Oregon reported selling between $1,001 and $15,000 in Bank of America stock on March 9, as panic was spreading and shares of the four biggest U.S. banks—including Bank of America—slid. The next day, federal regulators announced they had taken control of SVB, marking the second-biggest bank failure in U.S. history.A week after the sale, the stock was down 5%."

But  government officials (or legislators) acting on their self interest is not new. Charles Beard wrote about this in his book An Economic Interpretation of the Constitution of the United States. He argued that self-interest was a big force in how the framers wrote the constitution.

In the 1950s, Forrest McDonald We the People : The Economic Origins of the Constitution, in attempt to refute Beard. But more recently, economic historian Robert A. McGuire wrote a book called To Form a More Perfect Union: A New Economic Interpretation of the United States Constitution. He used modern statistical analysis to show that the Beard thesis may be legitimate.

My students might recall something like this that I used to talk about on the first day of the semester. Congressmen in the early 1790s voted on the "Funding and Assumption Act" based on how much money they would receive if that bill passed. The bill paid back all of the debts from the Revolutionary War at full value (they were not getting paid back before the Constitution was passed because under the Articles of Confederation all states had to agree to a tax increase-this did not happen much so taxes were never raised to pay back the money the government borrowed to finance the war). But under the Constitution if both the House and the Senate passed a tax increase and the president signed it, it became law.

The debts were securities or bonds. Some congressman owned them. I found how much about half the congressmen owned in these bonds from McDonald's book. The ones who voted yes on the bill had an average of about $6,000 while the ones who voted no had about $700. So it is possible that money influenced the vote. 

Here is a passage from John Spencer Bassett's book about the "Funding and Assumption Act" The Federalist System, 1789-1801:

"All the speculating class, in Congress and out of it, were zealously in favor of the scheme; and while it was still being debated they were trying to by all the means known to their class to buy up, even in the remote parts of the country, the old bonds at the depreciated values."

Here are they guys who voted yes and their dollar value of their bond holdings:

AMES 35
BASSETT 0
BURKE 5252
BUTLER 0
CLYMER 14000
DALTON 12
DCARROLL 227
ELLSWORTH 5985
FITZSIMMONS 2668
GALE 4252
GERRY 50000
GROUT 0
IZARD 20865
JOHNSON 0
KING 10000
LANGDON 27921
MORRIS 11000
PARTRIDGE 2195
PATERSON 0
READ 341
SEDGWICK 1680
SHERMAN 7729
STRONG 10903
STURGES 189
SUMTER 0
WADSWORTH 1625
WHITE 1619
WLSMITH 11910

Now the no votes

BALDWIN 2500
COLES 0
FEW 640
GILMAN 1025
GRIFFIN 0
HARTLEY 0
LIVERMORE 0
MADISON 0
MATHEWS 0
MJSTONE 3814
MOORE 0
MUHLENBERG 0
SCOTT 127
WILLIAMSON 2600

Related posts:

Looks Like Some Pretty Good Capitalists Run The Congress (2009-lawmakers were making better rates of return than the market averge)

Did U.S. government officials make money buying and selling stocks based on their inside information about Covid policy? (2022) 

Hundreds of Energy Department Officials Hold Stocks Related to Agency’s Work Despite Warnings (2023)