Wednesday, October 21, 2009

Adventures in Campaign Financing: Part 24387 in a series...

BlogHouston pointed to a instance of what appeared to be minor, but questionable, personal loans to a candidate's campaign fund, with what appeared to be rather high interest rates being charged. David Jennings researched further and found that the case was basically an instance of a candidate taking cash advances from his personal credit cards, loaning the money to the campaign, and then paying the money back (plus the interest that the card was charging) with campaign funds. In this instance, we are talking about relatively small amounts that appear to be legitimate transactions. But if this practice is legal, (which it would appear that it is.) it opens up a huge can of ethically challenged worms.

A candidate could take out a home equity loan on his house for a term of say two years (most banks require a longer term, usually 5 or 10 years, but I'm trying to keep the math within the typical election cycle) at say 6% (probably high given the length of the loan.), loan that money to his or her campaign fund, then have the campaign pay it back at say 25% APR interest and pocket the profits.
For example the total cost of a 2 year loan of $250,000 at 6% APR is $265923.60 with payments of $11,080.15 a month. A similar loan at 25% APR however would cost a total of $320,229.12 with payments of $13342.88 a month, with the candidate being able to pocket $2262.73 a month of pure investment profits. A lobbyist who wished to keep a legislator in his good graces could almost certainly arrange such a loan and then arrange to donate money to the candidate's campaign fund and use such a mechanism to launder the money and convert it to personal income for the candidate. Probably on even better terms than what I present here.

If this is in fact legal (and at this point I have no indication that it is not.), this a loophole in the campaign finance laws big enough to fly a 747 through. We need to close this loophole in the next session of the legislature.

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