Cash and the candidacy

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At a recent fortnightly gathering of some of Washington’s most experienced foreign policy experts, Zbigniew Brzezinski, the former national security adviser and chairman of the group, persuaded the 19 attendees to participate in a secret ballot.

They were asked which among the large field of Republican and Democratic presidential aspirants would be most likely to restore America’s reputation in the world. Nine of the seasoned veterans voted for Barack Obama, the 45-year-old freshman senator from Illinois. Hillary Clinton, the most experienced Democratic candidate, received zero votes. Rudy Giuliani, the former mayor of New York, polled highest among the Republicans with just two.

By no means could Mr Brzezinski’s impromptu sounding be described as representative of public opinion. But it did capture something about what is already the most expensive and competitive presidential race in modern US history – its even higher than usual importance for America and the world, and its sheer unpredictability.

“It is no exaggeration to say that this will be the most momentous presidential campaign in recent memory,” says Jim Thurber, a veteran political scientist at American University in Washington. “And it is no accident that it is already the most expensive.”

American politics is experiencing hyperinflation. Whether it is the bitterly controversial legacy of President George W. Bush, the war in Iraq, the “global war on terror”, the threat of climate change, a deteriorating US healthcare system or the fear of a further loss of jobs to outsourcing, rarely has so much been invested in the outcome of one presidential election.

Candidates from both parties together raised more than $150m (£76m, €112m) in the first quarter of 2007, six times as much as the equivalent period in 2003 and eight times as high as 1999. By the end of this year – more than 10 months before polling day – the leading candidates will have raised at least $100m apiece.

“The final two nominees will probably spend $1bn between them – we are going to have America’s first billion-dollar president,” says Michael Toner, who stepped down as head of the Federal Election Commission in March. “There is nothing to compare to this level of spending. We are off the charts.”

What is driving America’s record campaign spending? And what does the gargantuan cost of the 2008 election say about the state of American democracy? There are two clear propellants driving runaway costs. The first is the fact that it is the most open presidential race since 1952, which was the last time that the outgoing White House did not have a candidate in the race (either a president seeking a second term or a vice-president seeking the ultimate job).

Both parties are thus running open contests. Both are also beginning their campaigns much earlier. There are already 18 candidates in play and the prospect of several more to come. Potential candidates who have yet to take the plunge include Newt Gingrich, the Republican former House speaker, Fred Thompson, a Republican former senator and star of the television series Law & Order, and possibly even Al Gore, the losing 2000 Democratic nominee turned environmentalist hero.

The crowded field and the fact that there is everything to play for mean candidates have to make an impression quickly or risk being drowned out by their spendthrift rivals.

Mitt Romney, the former governor of Massachusetts, who is running third in the Republican polls but first in fundraising in the first quarter with $23m, has been running television spots in Iowa (site of the first presidential caucus next January) to exhibit his conservative credentials. The leading candidates have also hired state campaign managers in several states, which is unprecedented at this early stage.

“If you look at the infrastructure the candidates have set up and the number of field operatives they have hired already, then you appreciate that you need a lot of money to fund these large overheads,” says Jack Quinn, a leading Democratic lobbyist and former chief of staff to Mr Gore. “If anything you would expect the candidates to raise even more money in the second quarter than in the first.”

The second factor driving costs is the fact that so many of America’s states, including Texas, California, New York and Illinois, have brought their primary elections forward to the same day – February 5. That day, which will choose 62 per cent of the national delegates for the nominating conventions later in the year, has been dubbed “tsunami Tuesday”, since there are so many more states involved this time round than on what was known as “super Tuesday” in previous electoral cycles.

Although the 20 “tsunami” states brought their dates forward to increase their influence in the selection of the candidates, the effect is likely to be the opposite. Since candidates will be unable to lavish the same kind of intimate attention on so many large states as they do on voters in the early primary states of New Hampshire, South Carolina and Iowa, they will have no choice but to reach voters through broadcast media – a much costlier option.

In the past, candidates who won in Iowa or New Hampshire could train their financial resources on the next state to sustain their momentum. This time they will have to focus resources on the most expensive and populous markets in the US – simultaneously.

“The change in the calendar has had the effect of elongating the money element of the election and compressing the time that candidates spend with voters,” says Sheila Krumholz, executive director of the Centre for Responsive Politics, a non-partisan group that monitors campaign finance. “Campaign donors are even more important relative to the voters than they were before.”

Yet on some measures there are more Americans participating in the 2008 election than ever before. Last month Mr Obama captured the headlines when he announced he had raised $25m in the first quarter, just behind Mrs Clinton’s $26m, although the former first lady had been considered to have an overwhelming fundraising advantage.

But Mr Obama’s most impressive achievement was to have raised money from 100,000 donors – twice as many as Mrs Clinton. Moreover, half of his donations were made over the internet. Four years ago Howard Dean, the governor of Vermont, made a splash by signing up 160,000 internet supporters more than six months before the primaries.

Mr Obama is already comfortably heading towards 1m – several hundred thousand more than Mrs Clinton – many of whom have appeared out of nowhere from websites such as MySpace or Facebook. Meanwhile, Mrs Clinton is frequently broadcasting online “Hillcasts” as a way of maintaining her “conversation with America”. No longer new-fangled, the internet looks like having a critical impact on the 2008 election.

“The internet is making it much easier for people to participate in politics and much easier for them to donate money,” says Simon Rosenberg, president of NDN, a Democratic advocacy group. “In the past, elections were about 30-second television ads and press conferences on the airport tarmac. Now it is about 10m people going to work every day and interacting with their favourite candidates on social networking sites.”

Whether Mr Obama can translate this mostly youthful enthusiasm into hard votes – as well as hard cash – is another matter. Measured, however, by the proportion of Americans who are donating serious money to candidates, the 2008 election looks more like a Sheraton ballroom gathering of the country’s economic elite than a cyber-meeting of its idealistic youth.

According to Ms Krumholz, whose centre has meticulously broken down the source of all presidential donations, fewer than 0.1 per cent of Americans donated the maximum $2,000 to candidates in the entire 2004 cycle. This time only a fraction of the $150m given so far comes from donations of $200 or less.

Among the leading candidates, Mr Obama has attracted the highest proportion of small donors, who account for 21 per cent of the money he raised. That is good news for his fundraising prospects since he can return to his database to tap the same people until they have hit their legal ceiling of $2,300 for the 2008 primary contests. In contrast, a large proportion of Mrs Clinton’s donors are thought to have “maxed out” already.

More significantly, the fact that candidates are devoting so much time to raising money means they have less time to interact with voters – and thus less exposure to the concerns of ordinary Americans and less time to prepare credible and coherent policy platforms.

Given their gruelling fundraising schedules, it is unsurprising that many of the candidates come across as repetitive or unimaginative when questioned about policy. At a Democratic debate in Nevada a few weeks ago, Mr Obama was forced to admit he had not yet had time to develop a health care plan [he finally came up with one on Tuesday].

Among the Republicans the lack of original thinking is even more glaring. At a recent debate, most candidates’ talking points seemed to stretch no further than “praise Ronald Reagan, don’t praise George Bush”. “The truth is that many of the candidates are seriously overstretched and looking dangerously thin on policy,” says Bill Galston, who was campaign manager to Walter Mondale in 1984 and later an adviser to Bill Clinton. “The potential to get caught out and exposed is very real.”

Add in the ubiquitous presence of cameras and the power of YouTube and other wildfire technological novelties to destroy a candidacy overnight – after his $400 haircuts were publicised, Mr Edwards in particular should avoid being filmed anywhere near a pair of scissors – and the 2008 race also starts to look uniquely volatile.

Underlying and driving America’s extraordinarily intense, unpredictable and momentous presidential election, however, is the dominance of money. “Every day there is a conference call with all the finance people – and the candidate is often in on the call,” says a senior policy adviser on one the leading campaigns. “If we’re lucky we talk about policy in the scraps of time in between fundraisers. It doesn’t happen very often.”

New tycoons are taking a not entirely altruistic interest

By Alex Barker

As America’s presidential campaigns seek fresh sources of finance, an industry that long shunned the limelight is finding its political voice.

Young, flush with cash and anxious to fend off legislation that might cut into their considerable profits, hedge fund and private equity executives have become the political fundraisers’ new best friends.

People working at private investment companies donated about $2.5m (£1.3m, €1.9m) to presidential candidates in the first quarter of this year, according to the Center for Responsive Politics. That represents a ninefold increase on the first quarter of 2003, the last comparable election period.

This is a small part of the some $150m raised by presidential candidates this year. Even so, the unusually sharp rise in donations is a telling sign of bigger changes afoot. In the middle of an extraordinary period of business success – and attracting unusual scrutiny from Washington – many executives have chosen to shed their political inhibitions.

Motivated by a mix of naked self-interest and appeals to civic duty, investment companies are building their presence in Washington to better reflect their growing economic power. “It is long overdue,” says one industry executive.

Many prominent private investment executives have been backing politicians for some time, not least George Soros, the billionaire investor, Steven Rattner of Quadrangle Group or James Simmons of Renaissance Technologies. By contrast, the new generation have fewer established ties to candidates. Fundraisers say this makes their role in this race all the more significant.

What has inspired this new-found generosity? First, growing prosperity and an exciting contest. “People simply have a lot more money now,” says James Rubin, a partner at One Equity who worked in the capital before moving into private equity. “They can get deeply involved with things they care about outside work. For some people it’s art or music, for others it’s politics.” Mr Rubin – the son of Robert Rubin, former treasury secretary – has thrown his own support behind Barack Obama.

Second, a number of candidates have either represented constituencies where many such companies are based or have worked in the industry themselves. Both Hillary Clinton and Rudy Giuliani, for instance, have built support in New York, their political home turf.

Mr Giuliani recently signed up Paul Singer, New York-based founder of Elliot Associates, a hedge fund, to be the east coast region finance chairman for his campaign. Staff at Elliot this year gave more than $150,000 to the former New York mayor who chairs Leeds Equity, a private equity group. Republican Mitt Romney received almost $100,000 from staff at Bain Capital, the private equity group that the former governor of Massachusetts founded.

Private investment companies account for almost 10 per cent of the money Christopher Dodd, chair of the Senate banking committee, raised in the first quarter. Staff at SAC Capital, the hedge fund run by Steven Cohen, contributed more than $209,400 to Mr Dodd’s campaign. This represents by far the biggest political donation given by this renowned but publicity-shy group, which accounts for some 3 per cent of daily trading on the New York Stock Exchange.

It is perhaps no coincidence that it was made to a local Connecticut senator who has opposed significantly tighter regulation of hedge funds.

Such support of candidates sympathetic to the sector hints at a third factor behind the enthusiasm of donors: concern about a political backlash. Executives have watched with unease the heated debates about the industry in Europe, where they have been denounced as “locusts” in Germany and “predators” by French President Nicolas Sarkozy in his own recent election campaign.

Popular discontent in the US is far less evident. But moves by private equity groups into more politically sensitive and regulated areas – such as student loans, carmakers and big utility groups – are raising the stakes. At the same time, Congress has begun to ask pointed questions about how the industry operates and pays tax.

Fears are growing that the sector is “going to get skewered by the pols”, in the words of one leading private equity executive. “We are too convenient a target,” he says. “It is great politics for both parties.”

Senators have been gently encouraging executives to raise their game in Washington. In response, leading buy-out groups recently came together to form the Private Equity Council to lobby on behalf of the industry in Washington. “We have to have a story to tell,” says Douglas Lowenstein, president of the PEC. “We have to back it up with good data and it has to be intellectually honest.”

Any industry establishing a presence in Washington cannot ignore the money side, he adds, but without a strong story you “may as well put the money under a mattress”.

Some of the seeming contradictions among donations, business interests and personal politics can be seen in recent donations to John Edwards. The Democratic former senator earned $479,512 advising Fortress Investment Group on a part-time basis and, with his wife, has investments valued at up to $25m in funds managed by the hedge fund and private equity group. Yet Fortress uses offshore structures to reduce the tax paid by its partners and some investors – a practice Mr Edwards has strongly criticised.

In addition, the family of private equity funds in which Mr Edwards has a stake recently bought a sub-prime mortgage lender – an industry Mr Edwards has scolded for predatory lending. These stances did not deter people working at Fortress from donating $182,250 to Mr Edwards, the biggest donation to his campaign by any single company.

Mr Edwards insists that, if elected, he would do “absolutely everything” in his power to eliminate offshore tax shelters, because they are not “the kind of things ordinary Americans can take advantage of”.

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