Needs of Presidential Aspirants Create Unusual - and Unfamiliar - Loan Market; Matching Federal Funds Provide Collateral for the Politically Ambitious
Garsson, Robert M., American Banker
In 1980, Sen, Edward M. Kennedy received a $1 million bank loan to fund an acquisition that never materialized.
He wanted to acquire the presidency.
Mr. Kennedy is only one of many politicians -- front-runners and long-shots alike -- who have turned to bankers for "mortgage" loans on the White House. And for bankers, campaign financing has become one of the most unusual areas in the lending field.
An experienced lending officer might have judged Sen. Kennedy's 1980 challenge of President Carter to be risky business. For despite the Massachusetts Democrat's mystique and charisma, he was, after all, taking on an incumbent president -- the political equivalent of contesting, say, General Motors for supremacy in the auto industry.
New York's Chemical Bank thought it was a good bet, though, or at least a safe one: It coughed up a $1 million loan for the campaign, at the prime rate plus half a percentage point -- a rate that ranged as high as 16-1/4% that year.
That loan was backed in part by prints of an Andy Warhol painting of Sen. Kennedy, donated by the artist to the campaign and judged by an appraiser to be worth $300,000.
But the largest part of the credit was backed by matching federal funds. Available to qualifying candidates since 1976, matching funds have grown into a source of collateral for borrowers who might otherwise appear about as creditworthy as Argentina.
As a result, bank loans have begun to take on increased importance to presidential campaigns. A Way to Ease Cash Flow Problems
In some cases, the credits are used as "seed money" to get a campaign rolling. Most are sought, however, to tide a campaign over during rough spots in the primary election schedule, when cash is needed and matching funds are expected, but not yet available.
"Candidates" sometimes have cash flow problems," said Herbert Alexander, a professor of political science at the University of Southern California. He has written extensively on campaign finance.
"It's not that they can't get money, but that they can't get it when they need it. Broadcast companies won't put commercials on the air without cash up front, and others are demanding as well -- printers, newpapers, and so forth.
"So candidates are more inclined to raise money by means of bank loans, using matching funds as collateral."
In Sen. Kennedy's case, the campaign agreed to channel the matching funds through an account with a trustee, National Savings and Trust Co. of Washington, D.C. The agreement provided that one-third of the funds would be transferred by wire to Chemical after each payment.
The issue of collateral is a key one in the murky world of political lending. Federal election law not only requires that campaign loans be made "in the ordinary course of business," but that they carry a normal rate of interest, and, most important, that they be repaid. Unpaid Loan Becomes Contribution
A loan that is not repaid becomes a campaign contribution, and it is illegal for banks to make contributions to political campaigns.
No one, including the Federal Election Commission, which enforces the law, is quite sure how a bank would compel a bankrupt campaign to cough up money it does not have, nor is anyone entirely sure how a bank would escape liability in such a case.
Indeed, Frederick S. Eiland, a spokesman for the election commission, notes that the agency is outside its area of expertise in evaluating bank loans.
"In this respect, the commission finds itself dealing with institutions it ordinarily has no control over," he said.
The commission can find out what "is the ordinary course of business" for a bank by asking the institution. But the issue of what it should do if a loan goes sour is unclear, he added.
Prof. Alexander, however, said "the burden would be on the banker, if the Justice Department or the FEC ever went in, to show that special preference was not given. …