Lawmakers short the economy

A newspaper analysis shows that some in Congress made bets against the economy through ETFs.

By Kim Peterson May 4, 2010 2:39PM
Washington, D.C. © Bilderbuch/Design Pics/CorbisSome members of Congress bet against the U.S. economy in recent years, placing money down in hopes that stocks and bonds would fall.

It's entirely within their right to make those bets, and smart investors were doing the same thing all around. Still, there's just something unsettling about a lawmaker shorting the economy.

The Wall Street Journal analyzed congressional disclosures and found that 13 members of Congress (or their spouses) made bearish bets in investment accounts in 2008 through exchange-traded funds, or ETFs.

An account owned by Sen. Johnny Isakson of Georgia, for example, plowed more than $30,000 into funds that would gain $2 every time the daily value of U.S. Treasury bonds dropped by $1, the Journal reported. Those funds were the ProShares UltraShort 7-10 Year Treasury (PST.IV) and UltraShort 20+ Year Treasury (UBT.IV).

This is the same Johnny Isakson that said in February: "We don't need those speculating in the marketplace to take unfair advantage of the values of equities that are owned by Americans all over this country for the sake of making a buck on a short sale."

Ouch.

Now, Isakson says that "short selling has a role to play in the market," according to the Journal. He said he would not try to prohibit it. Post continues after video:
And as far as his account goes, Isakson told the Journal that he has no control over the investments. Those decisions are made by Morgan Stanley Smith Barney.

That same year, Rep. Spencer Bachus of Alabama made four dozen trades in shares and options of ProShares UltraShort QQQ(QID.IV), the Journal reported. This fund goes up as the Nasdaq goes down.

Bachus is the ranking Republican on the House Financial Services Committee. But he told the Journal he never makes trades based on nonpublic information and he doesn't trade financial stocks.
The spouses of other lawmakers were also making short trades during that time. The husband of Sen. Kirsten Gillibrand, for example, was very active in his E-Trade account, making 250 transactions in options, the Journal reported.

Some of those options bet that homebuilder stocks would fall. He also bought call options on ProShares UltraShort Real Estate. The senator said she was not involved in the trading.

Finally, the husband of Rep. Shelley Berkley made 57 trades in ETFs designed to profit when the value of a market index fell. Some of those trades included ProShares UltraShort Financial and ProShares UltraShort S&P 500.

Berkley also said that a money manager made those trades and that neither she nor her husband were involved in the decision.

The Atlanta Journal-Constitution sees the silver lining in all of this:

But at least Berkley, Isakson and the other members, or the people around them, recognize in practice that markets don’t only go up, and that investments — yes, even “speculations” — anticipating a decline in the markets are legitimate. That’s a fuller grasp of the subject than many of their colleagues in the Capitol display.

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