political risk

As the financial stimulus plan plays out in Washington, we hear voices in Congress rage about the financial services industry lobbying to influence the bailout using taxpayer dollars. While I find this outrage to be rather duplicitous, I thought it would be informative to take a look at the numbers. They are staggering.

Financial sector lobbying in Washington has achieved impressive results. Though the return on the political investment made by the companies and their surrogates are dramatic, the risks associated with this political largesse are only now becoming apparent.

The Investment in Political Activity

For 2008, the last full year of disclosure, lobbying expenditures by banks, insurance companies and the real estate sector were phenomenal. The Securities and Investment sector spent more than $92 million on lobbying. Commercial banks spent more than $55 million and the insurance industry spent a whopping $152 million on lobbying that year. If that weren’t enough, their political giving went through the roof.

In 2008, the three industries combined made more than $296 million in contributions to members of the House and Senate and affiliated campaigns. The vast majority of this money, approximately $244 million was given to incumbents in both parties.

As the Center for Responsive Politics notes in a report on their OpenSecrets.org site, “the financial sector is far and away the biggest source of campaign contributions to federal candidates and parties, with insurance companies, securities and investment firms, real estate interests and commercial banks providing the bulk of that money. ”

The CRP goes on to note that several industries within the sector supported bankruptcy reform legislation, privatization of social security and data security regulation, which would have limited the liability of banks in the event of on-line security breaches.

However, as we have witnessed in recent months, the acts of omission in Washington contributed to the variety of factors that brought about the collapse of the global economy thereby showing us the flip side of this return, namely, political risk.

Political Risk Factors Exceed the Investment Returns

Unless you have been living in a remote cave these last few months, it would be next to impossible to ignore the fact that the financial services sector bears the brunt of the global economic crisis.

The risk equation in this situation is not just the risk associated with the political giving act but the outcomes achieved by both lobbying and political giving. Regulators failed to regulate, legislators failed to legislate and as the world changed nothing happened in Washington to ensure that what could and did happen in the industry to the detriment of the world was not prevented.

Thus, in looking at the political risk equation, it is apparent that, along with other risk factors that these companies ignored, political risk was completely overlooked as the returns achieved from the political spending flowed.

Popularity: 6% [?]

Wall Street’s Investments on Capitol Hill

It’s Wednesday. Time for a pop quiz.

I know, most of you are already whining like school children but trust me, when you read these few questions, your should be forthcoming.

Let’s get started. Shall we?

1. Can Congressional representatives properly oversee the bailout of the financial sector when they get hundreds of thousands of dollars from the banks receiving hundreds of billions in public support?
2. Is it a potential conflict of interest for members of Congress to own stock in the companies that they are overseeing?
3. Is disclosure of political contributions by bank to Congressmen and Senators sufficient when hundreds of billions of taxpayer money are involved?

Okay, time is up. Put down your pencils.

If you think this is an academic exercise, you are wrong. These are questions that every American should consider since these are real problems in Congress today.

Yesterday, the Center for Responsive Politics posted an interesting story on their Open Eye blog about the contributions received by member of Congress from the banking industry. Their findings were shocking. Here is an excerpt from the story:

The eight CEOs testifying Wednesday before the House Financial Services Committee about how their companies are using billions of dollars in bailout funds may find that the hot seat is merely lukewarm. Nearly every member of the committee received contributions associated with these financial institutions during the 2008 election cycle, for a total of $1.8 million. And 18 of the lawmakers have their own personal funds invested in the companies.

All of the companies represented at the hearing have received millions, even billions, from the government’s Troubled Assets Relief Program (TARP), including Goldman Sachs, JPMorgan Chase, Bank of New York Mellon, Bank of America, State Street Corporation, Morgan Stanley, Citigroup and Wells Fargo. These companies’ PACs and employees gave $10.6 million to all members of the 111th Congress in the 2008 election cycle, with 61 percent of that going to Democrats.

It was noted in the piece that68 Congressional representatives sitting on the finance committee overseeing the TARP program received approximately $1,848,803 in contributions from the financial services industry.

As we have noted in previous posts at Global Investment Watch, political contributions by financial service companies and corporations as a whole are not a new phenomena. As companies and regulators develop better risk models for doing business, we must reconsider the political risks associated with their business activities. As the core of this political risk assessment is how Congress receives money from the very businesses they oversee. It’s not just about disclosure and transparency. Being honest about the disclosures is only the first step.

At the end of the day, preventing this sort of sanctioned corruption must be stopped. What do you think?

[poll id="9"] [poll id="10"] [poll id="11"]

Popularity: 9% [?]

On December 1st, the international Brotherhood of Teamsters filed a shareholder proposal at Chevron Corporation. The proposal asks Chevron shareholders to demand that the company disclose the risk factors it considers when doing business in foreign countries. This resolution, though obscure in its intentions, addresses a major problem facing Chevron and other companies in the oil and mining industries, namely political risk. [click to continue...]

Popularity: 6% [?]

Rob Kellogg of Global Investment Watch reviews the current problems at Adidas, the second largest apparel manufacturer in the world next to Nike, along with Westpac, Australia’s fourth largest bank. GIW’s parent company – JMR Portfolio Intelligence Inc. – has recently given Adidas a “non-compliant” investment rating.

Popularity: 8% [?]