The Wall Street Journal has good instincts today, looking for hypocrisy in a place it’s known to dwell: Capitol Hill.
Amid some pretty noisy congressional griping about the alleged evils of short-selling, the piece digs into financial disclosure statements filed by members of Congress, and look what it found:
Lawmakers Bet on Stock Falls
Private Trades Occurred as Congress Criticized Wall Street for Risky Moves
It’s good to see the Journal take the time to pore over these cumbersome filings (though the story notes that the documents themselves were gathered by the Center for Responsive Politics). As the piece sums up the context, and its findings:
Senators have criticized Goldman Sachs Group Inc. for profiting from the housing collapse. And Congress is considering legislation to curb Wall Street risk-taking, including the use of financial instruments known as derivatives and of leverage, or methods that amplify returns.
According to The Journal’s analysis of congressional disclosures, investment accounts of 13 members of Congress or their spouses show bearish bets made in 2008 via exchange-traded funds—portfolios that trade like stocks and mirror an index. These funds were leveraged; they used derivatives and other techniques to magnify the daily moves of the index they track.
But somehow, the piece falls a bit short of delivering the slam-dunk it seems to promise. Last spring, my Audit colleague Ryan Chittum noticed something similar, when the Journal went wild on stories about congressional expenses, even though there wasn’t much there there.
There is something to today’s story. But there’s also a bit of confusion, and a sense that the Journal is pushing its premise a bit too hard.
The story never makes clear how many disclosure forms reporters actually looked at. It found that 13 members (or their spouses) made bearish bets, but that’s out of how many? Everyone in the House and Senate? Just those who’ve been talking about the shorts? Readers could better understand the scope of this problem—if it is a problem—if we better understood where these findings came from. (Unfortunately, a chart that goes with the piece doesn’t provide too much help, except to show that the S&P 500 declined after four lawmakers bought leveraged short funds.)
The story contains the mandatory to-be-sure caution:
There’s no evidence the legislators and their spouses used privileged information or failed to follow rules on disclosure. Congressional rules permit lawmakers and their families to invest in—or bet against—publicly held companies they oversee through committee assignments, as well as broader markets or indices. While some made money, others lost.
And it does deliver a bit of outrage. Check out this bit about Sen. Johnny Isakson (R., Ga.), who declared back in February on the Senate floor that “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.”
On Oct. 8 and 9, 2008—as the Federal Reserve was bailing out American International Group Inc.—an account Sen. Isakson held invested more than $30,000 in ProShares UltraShort 7-10 Year Treasury and UltraShort 20+ Year Treasury, the records show. These are “leveraged short” funds, designed to gain $2 for each $1 drop in the daily value of U.S. Treasury bonds.
But Isakson told the Journal his account is professionally managed by Morgan Stanley Smith Barney, and that he has no control over it. No word on how accurate he’s being, but, assuming it’s true, isn’t that distance preferable to the senator making his own decisions about what, and when, to buy and sell?
It’s fascinating to know that Sen. Kirsten Gillibrand’s (D., N.Y.) husband “made more than 250 transactions in options in his E*Trade account in 2008, when his wife was in the House, according to disclosures.”
Almost all the trades were in put options, which convey the right to sell a stock or other instrument at a given price until a given date. At least 34 times, Mr. Gillibrand bought puts on stocks of home builders, including Beazer Homes USA Inc., Hovnanian Enterprises Inc., Meritage Homes Corp. and Ryland Group Inc. These were bets the builder stocks would fall; if they did, the puts’ value would rise.
Mr. Gillibrand also bought call options on ProShares UltraShort Real Estate. Although call options are bullish bets, this trade, too, was a bet against the property market, because the ProShares fund is designed to rise $2 for each $1 fall in real-estate stocks. His profit or loss couldn’t be determined.
But, in the end, I’m not sure what that adds up to. The Journal points out that in a press release late last month, Sen. Gillibrand “praised the effort to ‘rein in excessive risk and leverage in the pursuit of short-term profits.’” Asked about that in the light of her husband’s trades, a spokesman explained that she was talking about institutions that were leveraging more than 20 to one, “using taxpayer money on extremely risky short-term bets rather than long-term strategies that benefit the broader economy.”
The Journal talks to an excellent arbiter of congressional ethics, former Rep. Joel Hefley (R., Colo.), who led the House Ethics Committee for a time. Hefley says this kind of trading by lawmakers and there spouses doesn’t look good. But even he concedes, “You can’t have people not using their best judgment on their investment portfolio.”
Like I said, good instinct. But the Journal just didn’t find that much.Holly Yeager is CJR's Peterson Fellow, covering fiscal and economic policy. She is based in Washington and reachable at email@example.com.