Tuesday, November 6, 2012

Campaign Contributions: Payback Time

Campaign Contributions:  Payback Time

When the all the campaign contributions are tallied, $6 billion will have poured into federal and state elections.  It’s safe to assume that 20% to 30% came from the financial services industry.   The lower percentage probably reflects what the industry and its executives contributed.  The higher end of the range is my estimate that includes contributions from people and companies closely tied to the industry, such as lawyers, accountants, and consultants.  In other words, we’re talking about $1.2 to $1.8 billion from people who are financially savvy about they put their money at risk.

Disposition Issues (1999)

Thus, it’s reasonable to assume that the industry expects to earn a return on their investment.   They don’t just give away their money.   And, since the election is close in so many instances, there’s a good chance that the industry’s preferred candidate or cause may lose, and they may get nothing on their investment    As an investment, these contributions look an awful lot like a high-risk bet, such as a commitment to venture capital.  In fact, this is a very expensive type of investment, as it has to be made in after-tax dollars and without the benefit of leverage.  Moreover, the tax code isn’t available to subsidize a big part of the cost of the investment or the consequences if it fails. 

I figure that this kind of highly risky, unleveraged, and unsubsidized investment probably requires an expected return of about 50% over the next fours years.  It might even be higher, given the risks involved in politics.  They will, no doubt, need to make follow-on (additional) investments in political causes in 2014 as well.  So how much money does the financial services industry need to get back on its $1.2 to $1.8 billion investment campaign investment?

In order to achieve a 50% return (known as an internal rate of return or IRR), the math suggests that the financial services industry is looking for direct benefits of $12 to $18 billion in “stuff.”  The “stuff” could be new tax breaks, expanded government programs they could underwrite or insure, or subsidies for building their new office towers or data centers.  My point is that the industry has big expectations for the money they poured into candidates, PACs, Super PACs, and 501(c)4 coffers (non-profit, non-disclosure “social welfare” organizations). 

I’m willing to bet they get even more of a return on their contributions, as the folks doling out public benefits are politicians, who aren’t as shrewd when it comes to finance.   By the way, if industry should manage to put the financial system back into crisis in the next four years, they expect that you’ll be there again to bail them out.

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