Corporations that are pouring campaign cash into the midterm election cycle have accumulated at least $1.7 trillion dollars in debt, according to a MapLight analysis of Securities and Exchange Commission documents.
The 20 largest corporate PACs operated by publicly traded, non-financial companies have given $31 million to candidates since 2017, even while borrowing record amounts that are being eyed as a potential source of an economic crisis that could rival the 2008 financial collapse in size and scope.
The donations by the heavily indebted companies highlight the importance of their political connections. At least one-third of the biggest corporate donors, including titans like Northrop Grumman and Lockheed Martin, are major government contractors who rely upon tax dollars for their financial survival. All of the major corporate donors, which include giants such as Amazon, Walmart, and General Motors, have a vested interest in the government’s rules for handling corporate debt. And all would be affected by any government policies designed to pull the economy out of a tailspin.
“The growing concern … doesn’t mean we’re on the verge of a recession,” William Cohan, an author and former investment banker, wrote in an August op-ed for the New York Times. “But the corporate debt bubble inevitably will play a role in causing it.”
Potato Chip Theory
Both Congress and the Federal Reserve Board generally encouraged the accumulation of debt during the last decade. Although stock prices are often viewed as a key indicator of the nation’s economic health, the $40 trillion U.S. bond market is currently worth roughly $10 trillion more than the stock market.
Corporate borrowing, which has been financed heavily with bonds, has been boosted by two factors: Record low interest rates and the tax deductibility of interest from borrowing. The interest rates set by the Federal Reserve Board have remained low since the aftermath of the 2008 financial crisis, and the most important rate that affects corporate borrowing only recently edged past 2 percent.
The new debt has been used for traditional purposes, such as refinancing high-interest debt and acquiring other companies. But it’s also been used to repurchase corporate stock, which has the effect of goosing share prices, pleasing both investors and corporate executives whose salaries are tied to company stock prices. For example, Boeing Co., which reported almost $90 billion of debt for the most recent quarter, announced in late 2017 it would buy back $18 billion in shares of its own stock during the next two to three years.
Prior to the 2017 Republican tax overhaul, corporations were allowed to deduct all of their costs for borrowing money. The GOP measure lowered the top corporate tax rate from 35 percent to 21 percent, but in an effort to curb excessive corporate debt, lawmakers also limited the deductibility of borrowing costs to 30 percent of a corporation’s income.
Even so, higher interest rates and new tax rules may not curb corporate appetite for debt. A November 2017 study by the Stanford Graduate School of Business and Max Planck Institute found corporations can become addicted to borrowing.
“It’s similar to eating potato chips,” said Paul Pfleiderer, a Stanford finance professor. “You may be fine if you can commit to eating just a few chips. But if you can’t stick with that commitment, you might be better off if you hadn’t started eating them at all.”
The largest corporate PAC donor, AT&T Inc., has given $2.8 million to candidates during the current election cycle. The Dallas-based telecommunications company has borrowed heavily to fund its proposed $85 billion acquisition of Time Warner Inc., the cable television giant. AT&T has borrowed more than $237 billion, according to its latest quarterly report -- $68.6 million in “current,” or short-term debt, and another $168.5 million in long-term debt.
AT&T’s PAC has made its largest contributions to candidates running in special elections. It gave $14,000 to Rep. Karen Handel, a Georgia Republican who won the most expensive House race in U.S. history in June 2017, and $13,000 to Rep. Ron Estes, a Kansas Republican who won an April 2017 special election to replace former Rep. Mike Pompeo, who has worked in the Trump White House as CIA director and secretary of state. Rep. Martha Roby, an Alabama Republican, was the third-largest recipient of AT&T donations. Roby, who won a primary runoff in July, has received $10,500 from AT&T.
Roby also has been the biggest congressional recipient of contributions from Lockheed Martin Corp., the government’s largest contractor. The Bethesda, Md.-based aerospace company’s PAC has reported making $2.2 million in donations during the current election cycle. Lockheed, which received $50.5 billion in tax dollars from government contracts during the 2017 budget year, reported $27.4 billion worth of short- and long-term debt in its most recent filing with the SEC.
The second-biggest midterm recipient of Lockheed PAC contributions has been Rep. John Larson, a Connecticut Democrat who’s co-chairman of the Congressional Joint Strike Fighter Caucus, a lobbying organization for a controversial, Lockheed-built fighter jet that’s become the most expensive weapons system in Pentagon history. Larson has raised $1.5 million for the midterm election, including $14,000 from the Lockheed PAC; his Republican challenger, Jennifer Nye, has raised less than $5,000 from all sources.
The 20 largest operators of publicly traded, non-financial corporate PACs reported roughly $1.1 trillion in long-term debt, or money that doesn’t have to be repaid within a year. The corporations reported $643 billion in current liabilities, which includes short-term debt that has to be paid within a year.
‘Mother of All Bubbles’
Almost two-thirds of non-financial corporate bonds are currently graded as junk or near-junk, according to a McKinsey & Co. study. Although junk bonds offer higher dividends for investors, heavily indebted companies (or households, or governments) typically will be charged higher interest rates, increasing the possibility of defaults. The rising interest rates can crowd out productive economic activity, since they direct money that could be used to buy goods and services to less-productive avenues, such as debt servicing.
The rising interest rates eventually can spur unemployment, as businesses cut back on salaries and capital investments to meet their obligations. As unemployment rises, consumers -- who make up 70 percent of all economic growth in the U.S. -- spend less, and the economy tumbles into a recession.
The U.S. Treasury Department’s Office of Financial Research said in its 2017 Financial Stability Report that debt-to-asset ratios, a key figure used to describe risk of corporate bonds, are “flashing red … Business debt levels are at all-time highs.”
Corporations are also resorting to riskier venues to attract bond buyers, including exchange traded funds (ETFs), which are used to treat pools of bonds like stocks that can be traded easily, and collateralized loan obligations (CLOs) -- high-yield, risky securities with linguistic and financial echoes of the mortgage-backed securities that exacerbated the 2008 economic meltdown.
“The mother of all bubbles exists, and it is in the debt markets,” Steve Blumenthal, co-founder of CMG Capital Management Group, wrote in a May blog post. “It is global in scale, and there is no easy way around the problem. Like bubbles past, this too will pop.”
This story was produced by MapLight and published in partnership with Fast Company.