A major investment risk: Congress at work

In the past year, in the name of saving us, the government has been administering leeches and boiling new herbal brews in a burst of activity. And to be fair, in some cases these changes didn't come directly from Congress.

Washington Mutual was forced into receivership without the shareholders having any chance to contest the action. And AIG was rescued with full payments made to creditors such as Goldman Sachs, which received $12 billion. In a fair fight in bankruptcy, Goldman might have gotten a partial payment of, say, $5 billion, saving taxpayers $7 billion.

In that game, Goldman scored the 12 runs. Lehman Brothers was denied the same resources made available to AIG, with the result that the credit markets seized up. As far as its competitors were concerned, that game was called on account of rain with the sky completely blue.

In recent months, consider how much uncertainty investors have had to confront:

•Massive financial interventions with simple-sounding acronyms but complex, changing features: TARP, TALF, PPIP, and others.

•The drama over how much Washington would bail out Detroit automakers, probably throwing good money after bad.

•A budget deficit that has gone from bad to unbelievable. Washington wants to spend its way out of this crisis, forcing the Federal Reserve to print unheard-of sums.

•New rules for homeowners facing foreclosure and bankruptcy. These rules could empower judges to rewrite mortgages and lower principal obligations. Such actions could have a far-reaching effect on banks, bondholders, and mortgage lenders.

•Threats that credit-card companies are about to have their rules drastically changed, as well – not to mention wholesale changes in healthcare, labor, and food industries. The changes on credit-card rules are intended to help consumers, but they may ultimately make credit less available and perhaps much more expensive, because they will limit consumer choice and put lenders at greater risk.

How much more change lies ahead? Would you invest in this climate?

My concern about the impact of political risk on the markets prompted me to open a mutual fund called the Congressional Effect Fund.

It is very simple. When Congress is in session, the fund invests in Treasuries and other cash equivalents. When Congress is on vacation, it invests in instruments that track the S&P 500 Index.

The fund opened last May 23, and for 2008 it was down –2.2 percent, as compared with –34.2 percent for the S&P 500 Index from the same date, a difference of 32 percentage points. So far this year it is down less than 1 percent, while taking on less risk.

I have two goals for this fund. The first and primary goal is to do well for my investors. The second is to help people understand the impact government in general and Congress in particular can have on their investments.

If the net result of launching the fund is simply that Congress takes another three weeks of vacation a year, a grateful nation will be much better off.

• Eric Singer is the founder of the Congressional Effect Fund.

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