Even Members Of Congress Bet Against Falling Markets (AIG, PST, TBT)

Some members of the Congress made risky bets with their own money on those US stocks and bonds which were likely to fall in the run up to the financial crisis. According to The Wall Street Journal's analysis of Congressional disclosures, investment accounts of 13 members of the Congress or their spouses reveal that they made bearish investments in 2008 through exchange traded funds-portfolios that trade like stocks and mirror an index.

Apart from being highly leveraged funds, they use derivatives and other techniques to monitor daily moves of the index. However, there is no evidence that suggests these members of the Congress and their spouses exploited their position by using privileged information or failed to follow rules on disclosures. According to the Congressional rules, lawmakers and their families are allowed to invest in—or bet against—publicly held companies they oversee through committee assignments, as well as broader markets or indices.

Earlier, some of these legislators strongly criticized practices of short selling, or bets on securities which are likely to decline. In February, Senator Johnny Isakson argued against these practices by saying, “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.”

But contrary to his comment, Isakson himself put money on a short-sale. Records show, on Oct. 8 and 9, 2008—as the Federal Reserve was bailing out American International Group Inc. (NYSE: AIG), an account held by Sen. Isakson showed that he had invested more than $30,000 in ProShares UltraShort 7-10 Year Treasury (ETF) (NYSE: PST) and ProShares UltraShort 20+ Year Treasury (ETF) (NYSE: TBT). These were “leveraged short” funds, designed to gain $2 for each $1 drop in the daily value of U.S. Treasury bonds. However, Isakson denied any involvement in short-selling. He said that his account was professionaly managed by Morgan Stanley Smith Barney; hence he had no control over it. "They make those decisions and I report what they do," he said. "I put money away in my career so I can hopefully retirne one day," he added.

Isakson said that he does support legislation to limit short selling but opposes the idea of a complete ban on it. Reacting over this issue, former Rep. Joel Hefley said, such trading involving members of the Congress or spouses “doesn't look real great when the economy is tanking and people are blaming the government.”