There are 13 members of Congress who at least seem to understand more than the average senator or representative about how equity markets work. From The Wall Street Journal:
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.
Short selling is a critical part of our equity markets: It’s a way for market participants to send a negative signal about the direction of a particular investment or the markets more broadly. That kind of information is important to have in a decentralized marketplace, even if you wouldn’t know it from listening to members of Congress rail against “speculators.”
Georgia’s own Sen. Johnny Isakson is one of the 13. He’s also one of the four members whom the Journal cites as making negative comments about trading behaviors that were very similar to the trades he did or had done on his behalf:
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.
Another of the 13, Rep. Shelley Berkley (D., Nev.), made several well-timed shorts as markets were falling, moves she attributed to a money manager. Berkley no doubt wasn’t talking about that money manager or those kinds of trades when she said in February, “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.”
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.