Fiddling (With ProShares) While America Burns

May. 6.10 | About: ProShares UltraShort (QID)

By Matt Hougan

According to an article in the Wall Street Journal, 13 senators (and their spouses) spent part of 2008—a time of profound instability for the global financial system—betting with inverse ETFs that U.S. stocks and bonds were poised for a sharp sell-off.

The article, by Jason Zweig, Tom McGinty and Brody Mullins, is one of the best pieces of investigative reporting I’ve seen in a while.

In it, Zweig and company lay out the startling hypocrisy of the “honorable” men and women who lead our country. An excerpt gives you the idea:

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. (NYSE:AIG)—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.

Other congressmen, Democrats and Republicans alike, were also shorting financials, the S&P 500 and other securities. It’d be funny if it weren’t so sad and, in a way, predictable.

Most of the criticisms here are blindingly obvious. It seems wrong for our congressmen to be shorting a market that they themselves are regulating. It seems wrong in general that they are shorting American stocks and bonds. And the excuses rendered—mostly that these assets were overseen by financial advisers and that the congressmen themselves played no role in the investment decisions—are transparent garbage. You show me a true “blind” advisory relationship for an individual investor that has no guidelines about appropriate and inappropriate investments and I’ll sell you a bridge.

Brokers do what you tell them. They’re very good at following instructions, like “don’t short America’s stocks and bonds during a liquidity crisis.”

But I have a much simpler concern than all that.

The Journal reports that Alabama Representative Spencer Bachus (R–Ala.) made “roughly four dozen trades” in the ProShares UltraShort QQQ (NYSEArca: QID) and related options during 2008, trading personally out of his own Fidelity brokerage account. Previous reporting by the Journal showed that Bachus traded more than just the ProShares fund, making more than 200 trades during 2008.

For all that work, he earned about $30,000 (and generated $2,000 in commissions for Fidelity).

My question: Didn’t he have better things to do with his time?

And this is a congressman, arguably the congressman, who should know better. Bachus is the ranking member of the House Financial Services Committee. At the time, the U.S. financial industry was in the throes of its worst crisis in the past 80 years. America was teetering on the edge, the possibility that money might not come out of your favorite ATM machine all too real. And Bachus was fiddling with $500 trades to try and profit in the chaos? I faced tighter trading restrictions as a junior analyst during the dot-com boom.

The situation is made all the worse because congressmen have access to one of the best, lowest-cost index-based investment platforms around: the Federal Thrift Savings Plan (TSP).

A word, then, to Representative Bachus: Spend less time trading ProShares and more time working on problems in the financial sector. If you’re worried about your retirement, plow more money into TSP.

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