The American public’s approval rating of Congress is lower than that of BP during the oil spill, the U.S. going communist and Hugo Chavez. With the congressional approval rating standing at 9%, it suffices to say that we are collectively dissatisfied by our representatives on Capitol Hill. But if you are one of the holdouts, you might be convinced when you learn that congressmen actively trade on inside information—legally.

A CBS 60 Minutes report last month investigated the practice of representatives using knowledge gained through their governmental duties when making personal investments. Specifically, it focused on the proposed Stop Trading On Congressional Knowledge (STOCK) Act, a piece of legislation that would make such trading illegal. While the STOCK Act has been around since 2006, unsurprisingly it hasn’t gained any traction or publicity from Congress.

Insider trading laws prevent people to trade on material, nonpublic information. The goal of such laws is to prevent those who are privy to nonpublic information from gaining from the transaction at the expense of other disadvantaged market participants. The SEC, the financial regulatory body, actively enforces these laws and everyone from Martha Stewart to hedgefund manager Raj Rajarantnam has served jail time for it. However, those who wrote the laws conveniently excluded themselves.

The loophole works as follows: legislators cannot trade on material nonpublic information from within a given company, however they are free to trade on nonpublic information on the governmental end. For example, if Congressman Bob is on a subcommittee in charge of granting agriculture subsidies and they know that Company A will be granted subsidies while Company B will not, they are free to buy Company A and short Company B. Or, more specifically, when Ben Bernanke and Hank Paulson briefed congressmen on the severity of the financial crisis days before the Lehman collapse in a closed door meeting, they were free to short the market and profit while Americans’ retirements were crushed — which they did.

Being able to trade on such information is an incomprehensible advantage, which yields equally outlandish returns. A study of congressmen’s personal financial performance during the 1990′s showed that the average congressmen outperformed the market by 12%. For some perspective, Warren Buffet’s holding company Berkshire Hathaway has managed to outperform by 10%. Unless the House and Senate is full of investors smarter than Mr. Buffet, something is wrong — but perfectly legal.

This disturbing use of power doesn’t only hurt market participants directly, it also creates an amazing conflict of interests. If a legislator’s personal finances will affect legislation, how can we expect him or her to have interests solely in line with their electorate? Inevitably, we the people have been shortchanged.

With all the talk of reform on Wall Street, it seems an appropriate time to rethink the financial system in Washington. Until Congress’s interests are truly aligned with the people they represent, any redesigned financial system will still be lacking fairness and transparency.

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