CJR: "The Journal Comes Up Short on Lawmakers’ Short Selling"

From the Columbia Journalism Review:

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?>>>MORE