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Monday, December 5, 2016

When I began investing decades ago, one of the earliest versions of hedge fund strategies was to simultaneously buy the stock of a “target” company in a takeover and sell the stock in the company that was doing the purchase.

They call it “risk arbitrage,” where the risk is that the announced deal might not happen.  While not nearly as profitable on a percentage basis as guessing ahead of time which company will be taken over, it nearly always works.

There was a profit to be made as long as the deal got completed, something that usually happened and usually resulted in a 10 percent or higher return in a couple of months.

Today I saw evidence of the modern version — making political contributions to “freshmen” politicos to help them retire campaign debt.  How cool is that?  Lobbyists who seldom make political contributions to challengers can endear themselves to the winner after the election, yet before they get sworn in.  The lobbyists can put their money to work on newcomers without having to take the large risk that they’ll lose to the incumbents.

This brings to mind a book topic I’ve been trying to figure out how to research.

The premise of the book is that, for the largest companies, no matter what business they’re in, the single highest return on investment they can make is spending money on lobbyists.

The steady increase in pay for lobbyists right through the recession that crushed almost every other profession’s payscale should give us a clue.  So should the steadily increasing cost of elections.

And then there’s the massive difference between the supposedly high corporate tax rate (35 percent) in America and the actual amount paid by US corporations (roughly 15 percent).  When GE earns multiple billions but pays zero in corporate income tax, you can see that they are getting a massive return on the millions they spend with lobbyists and politicos.

Or look at Wall Street and the banks.  After engineering the collapse that crushed savers and borrowers alike, they made out like bandits.  They even got their pet politicians to turn to them to “help” write the regulations to fix the problem.  How much is that worth?  It sure beats the profit margins in taking in deposits and lending to people or small businesses, right?

Just to be clear, the return on political investments isn’t limited to the big national issues, either.  In fact, much smaller contributions to state legislators can be an even better percentage return.  Does anyone doubt that a thousand dollars contributed to a state legislator in a relatively small state gets that lawmaker’s attention?  Throw in a “force multiplier” like the legislative language clearinghouse called ALEC, and a five-figure investment can return tens of millions in profit.

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