JASON ZWEIG, TOM MCGINTY And BRODY MULLINS | Online.WSJ.com
Some members of Congress made risky bets with their own money that U.S. stocks or bonds would fall during the financial crisis, a Wall Street Journal analysis of congressional disclosures shows.
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.
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.
Some of these legislators have publicly criticized practices such as short-selling, or betting on a security to decline. In February, Sen. Johnny Isakson (R., Ga.) argued 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.
Sen. Isakson said his account is professionally managed by Morgan Stanley Smith Barney and he has no control over it. “They make those decisions and I report what they do,” Mr. Isakson said. “I put money away in my career so I can hopefully retire one day.”
Sen. Isakson said, “Short selling has a role to play in the market.” He said he supports legislation to limit it but wouldn’t prohibit it.
Such trading involving members of Congress or spouses “doesn’t look real great when the economy is tanking and people are blaming the government,” said former Rep. Joel Hefley (R., Colo.), once head of the House Ethics Committee. Still, he said, “You can’t have people not using their best judgment on their investment portfolio.”
According to The Journal’s analysis of the disclosures, collected by the Center for Responsive Politics, few members of Congress made more than a dozen securities trades in 2008. Typical trades were for a few hundred or a few thousand dollars.
While some lawmakers trade for their own accounts, others delegate trading to a spouse, stockbroker or financial adviser. A few legislators keep their money in blind trusts and don’t know how it’s invested.
Jonathan Gillibrand, husband of New York Democratic Sen. Kirsten Gillibrand, 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.
Sen. Gillibrand, in an April 22 news release on White House financial-regulatory proposals, praised the effort to “rein in excessive risk and leverage in the pursuit of short-term profits.”
“The senator was referring to activity by some institutions that were leveraging in excess of 20 to one, using taxpayer money on extremely risky short-term bets rather than long-term strategies that benefit the broader economy,” said spokesman Matt Canter. Any comparison of those remarks with her husband’s trading “is wrong,” he said, adding that the senator “was not involved in his trading.” Her office declined to make Mr. Gillibrand available for comment.
As previously reported by The Journal, in 2008 Rep. Spencer Bachus (R., Ala.) made roughly four dozen trades in shares of ProShares UltraShort QQQ and its options, according to disclosure records. This fund is designed to go up twice as much as the Nasdaq 100 stock index goes down.
Rep. Bachus makes his own trades through a Fidelity account. He is the ranking Republican on the House Financial Services Committee, which has legislative oversight over the capital markets.
“I don’t trade on margin”—money borrowed from a broker to raise potential returns—Rep. Bachus said in an email, “and don’t consider my investments leveraged to any risky extent.” He added: “Never have I traded on nonpublic information, nor do I trade in financial stocks.”
Rep. Bachus made roughly $28,000 on his trades in options and leveraged ETFs in 2008, according to a Journal analysis, a figure he called “essentially correct.”
On July 14, 2008, Rep. Bachus said in a letter to Financial Services Committee Chairman Barney Frank that it was “quite apparent” the challenges facing mortgage companies Fannie Mae and Freddie Mac were caused partly by “short-seller activities.” A spokesman for Rep. Bachus didn’t respond to requests for comment on the letter.
Rep. Shelley Berkley (D., Nev.), a member of the House Ways and Means Committee, has been a critic of Wall Street. In a statement on the House floor Feb. 23, she said: “Representing Las Vegas, let me assure you, no casino on the planet behaves as irresponsibly and recklessly as Wall Street does. Wall Street ought to be ashamed, and take a lesson from the casino industry.”
An account held by her husband, Lawrence Lehrner, shows 57 trades in 2008 in ETFs designed to gain $2 for each $1 drop in the value of a market index, the disclosures show. Between July 25 and July 29, 2008—four months after Bear Stearns Cos. fell—records show four trades in and out of ProShares UltraShort Financial fund.
On Sept. 16, 2008, the day after Lehman Brothers filed for bankruptcy, the account added ProShares UltraShort S&P 500, a fund that thrives when blue-chip stocks tumble.
It was sold over the next two days at a 5% profit, according to disclosures. The account earned a modest net profit of a little over $700 on the trades in leveraged funds in 2008, based on The Journal’s analysis of trading records.
“All trades were done by a licensed money manager without any input from my husband or me,” Rep. Berkley said. “This is exactly the way many people handle whatever monies they may have in the stock market. I know in our case, he operated wholly within the existing regulations.” Her office declined to make her husband’s money manager available for comment.
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