Political Option Power

It’s time to start developing a watch list of companies that can take fate into their own hands and steer it in the direction that maximizes profit.

Now that our Supreme Court saw fit to redefine the rights of citizens to apply to corporations (wherever they might reside), the field is wide open for companies to buy cheap political put and call options that can pay off 1000-1 or more.

We know that advertising has become a precision tool, and that a good ad campaign can sell almost anything.  The question is — what will unlimited political advertising do for shareholders of corporations that use it effectively?

We can get a clue which companies will enter the fray from their current lobbyist spending. Even now, a significant fraction of the health care proposals from both sides of the aisle were actually drafted by lobbyists that work for companies in the industry.  The reason (and it’s legit) is that the bright-eyed staffers who work in the trenches for Congress simply don’t have the experience or expertise.

The staff members, most of them relatively young, can’t possibly have the detailed knowledge on every topic the Congress might take up, and their ability to write specific legislation can’t be based on what they can find in Wikipedia, or even in a comprehensive web search.  They’re stuck turning to the older hands that have put decades into acquiring the specialized knowledge required — the lobbyists.

Some of the obvious investment choices are probably already priced into the market to the point that new direct spending to elect or defeat particular candidates for office won’t make much difference.  An example might be airport body scanners supported by national security hawks.

There is also “issue” advertising, which was already permitted, but now the gloves are off with respect to specific races.

The nice thing about gubmint contracts under national security mandates is that they tend to have no budget limits or cost effectiveness standards applied to them.

But that horse is already out of the barn.

I’m thinking that the largest benefit will come from negative advertising against politicians that might cost companies money.   ADM or Cargill could pull out all the stops to defeat “nut jobs” that want to keep genetically modified (GM) foods out of our food supply.  Chances are they will also go after those less radical, but still irritating and expensive, lawmakers that want to force labeling and disclosure throughout the food chain once GM feedstocks become part of the precursors for a given processed food.

Let’s look also at the cost-benefit analysis to see whether these kind of outsized returns are really possible.   Even in our modern world of expensive campaigns, a million or more dollars is a lot of money in a Congressional district race.  And the payoff can be huge.

Nancy Johnson was a Representative for 24 years, and primary author of the Medicare Part D (prescription drug benefit) legislation, which was passed using “reconciliation” because it could not garner a super-majority in the Senate.  A key controversy, both before and after its passage, was the “no price negotiation” provision in the law.  If you just assume Medicare could negotiate the same prices as the VA paid for the same drugs, the difference in pharmaceutical profits changes by billions every year until that law changes.

[Nancy lost her position in 2006 by 12 points, in spite of being in a district that was so heavily controlled by her party that her opponent dropped out of the 2004 race just a month before the election because he couldn’t afford any advertising, even yard signs.  The local paper theorized that her 2006 TV ad campaign claiming her opponent coddled sex offenders and drug dealers was just too offensive for her constituents.]

Another example from the recent past was the explicit protection from prosecution or civil lawsuits for telecom companies giving out subscribers’ private information in response to any law enforcement request that claims to be for “national security” reasons.  How much was that “get out of jail free” card worth?

The beauty of this new age of super-citizenship for corporations and unions is that most laws and most spending produce particular concentrated benefits and protections.  Even laws that provide incremental benefits to millions of voters can provide enormous concentrated benefits for a few corporations.  The Medicare prescription benefit proved that, should there be any doubt.

I liken the risk-benefit analysis to option pricing.  Let’s say, for example, that a smallish war costs $500 billion, and that a military contractor has 2% of that market.  At a 25% ROE level, easily achieved when executing additional business on top of a healthy base, that contractor stands to gain $10 billion in additional contracts if the war happens, or $2.5 billion in additional profits.

When we benchmark with the $651 billion military budget for 2009, that 2% market share company currently might expect around $13 billion a year in business.  Even assuming the ROE for the first billions are the same as for the extra billions ($3.25 billion per year), you can see that the company would make an extra $600 to $800 million per year in profit over a three or four year war (20% to 30% bump in profits).

If the potential for going to war is a 50/50 proposition after the company spends its advertising dough, the value of that option they buy would be hundreds of millions of dollars, enough to swing even a Presidential election.

On the other side of the coin, those against a new war could also run political ads.  Unfortunately, their cost/benefit analysis predicts a much lower value.  They save their share of additional taxes, taxes that are likely to be spread out over ten years or more.

Even for Bill Gates, the option is probably worth no more than $10 million or so.

For a look at the history of corporate-sponsored political spending, we might use Ken Lay and Enron as a good example of a politically active corporate CEO who succeeded in helping “his guy” over nearly two decades.  Access to corporate jets, direct cash, etc. was spent, and records show it amounted to several million in real dollars until limits came in under McCain-Feingold, and then hit annual six-figure limits after that. using those pathetic speech-stunting vehicles called PACs, which our Supreme Court found too limiting.

What was the payoff?  Huge.  Completely secret meetings and authorship of a national energy policy.  Not bad.  Worth at least a few billion to the most active trader/speculator in a deregulated energy market.

What is the treatment of annual management fees as deferred income subject only to long-term capital gains if and when hedge funds or private equity managers repatriate the money?

Well, for John Paulson in 2008, he didn’t pay income tax on nearly $5 billion in fees earned from investing other peoples’ money for them, and even if he took that pay now as cash, he’d only owe 15% instead of 35%.  Not bad — $1.75 billion owed in 2009 vs. $650 million owed in 2010 on the same income.  If he waits longer, the comparison only gets better.

How much might Mr. Paulson and his buddies be willing to pay to buy the political put options that keep their special tax treatment as it is?  It might pay to simply make an example of a couple of Congressmen to keep the rest in line.

After all, they have to run for office every two years.  The new campaign begins virtually the day after the last election, and the money-raising never stops.  A few million spread around and lots of populist rhetoric spent to defeat those in districts with “uppity” Representatives might bring the rest of them right in line, and teach them that they had better listen, behind closed doors, to the instructions from those former Congressmen working as lobbyists.

The only thing worse than a majority voting to give benefits to everyone in that majority would be a small focused financial effort by a non-person to buy elections to give benefits to itself.

Can we come up with some investments that are likely to use this grand opportunity?

hh

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2 Responses to Political Option Power

  1. George R. says:

    The cynics will say the best plays will still be the micro caps who get a Senator or Representative’s earmark instead of a thank you note.

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