California Congresswoman discovers get-rich-quick scheme

posted at 9:15 am on February 14, 2009 by Ed Morrissey

People who wonder how elected officials come to Congress on modest means and retire wealthy should study Rep. Grace Napolitano of California.  Few have found campaigning as personally enriching as Napolitano … literally.  And according to the FEC, her scheme is apparently completely legal:

During a decade in Congress, California Representative Grace Napolitano has pocketed more than $200,000 of political contributions by charging as much as 18 percent interest on money she loaned to her own campaign.

The suburban Los Angeles Democrat made the $150,000 loan in 1998, when she was first elected to the U.S. House of Representatives. Through Dec. 31, her campaign committee has used donations to pay Napolitano $221,780 of interest while reducing the principal by just $64,727, a review of her Federal Election Commission filings shows.

As recently as June 2008, Napolitano held a fundraiser asking supporters and political action committees for money to pay down the 1998 debt. Napolitano, her spokesman and her campaign’s lawyers didn’t respond to requests for comment.

Here’s how it’s done:

  1. Withdraw money from a pension or tax-protected savings account to justify charging yourself an interest rate that would make most credit-card companies blush.
  2. Pay only the interest as long as possible on the loan.
  3. Hold fundraisers specifically to retire the debt you owe to yourself, and make sure donors understand exactly where that money goes.
  4. Give yourself all the donations from those fundraisers.

Once you have that system established, it allows contributors to stuff money into your pockets as long as the loan remains outstanding. At 18% interest, that could go on for decades, and in Napolitano’s case, she already has one decade on the books.  Napolitano has managed to keep more than half of the debt alive as principal while earning almost 150% just on interest payments — and at this rate, she could do this for another twenty years.

The best part of this is what Napolitano converted to create her donor-funded ATM.  She worked as a secretary for Ford Motor Company, and cashed out stock at $45 a share in 1998 out of her retirement account.  It’s now trading at less than $2 a share, and she’s had a 150% return in ten years without risking the principal at all.

And she’s done it while giving contributors a direct line to her checking accounts — and it’s all legal.

But it still stinks.

Update: I didn’t play Name That Party, and thankfully neither did Bloomberg.  It’s in the second paragraph of the news story: she’s a Democrat.


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Napolitano

She got an offah you CA donors no canna refuse!
Oops–was that PC?

jgapinoy on February 14, 2009 at 9:17 AM

Loopholes? I thought loopholes like these on Wall Street were being tightened up in the Swindle Us Package? Looks like we need another package for campaign contributions.

Notorious GOP on February 14, 2009 at 9:19 AM

Are we playing “guess the party” on this one?

Dr.Cwac.Cwac on February 14, 2009 at 9:20 AM

Yeah, but at least she’s paid her taxes. Ummmm….I think.

bloggless on February 14, 2009 at 9:21 AM

When Rep. Robert Walker (R., Pa.) and Rep. Pat Schroeder (D., Colo.) retired in 1997 they had each accumulated $4.1 million ….. which they took with them when they left.

http://www.opinionjournal.com/columnists/pdupont/?id=110002368

JellyToast on February 14, 2009 at 9:24 AM

Eeegads!!!!! That picture!!!!!!!!!

bloggless on February 14, 2009 at 9:25 AM

Imagine my surprise….

Funny – when a Democrat contributes/loans money to their own campaign, it’s usually portrayed as some form of “putting their own money” where their mouth is, with a little David versus Goliath thrown in. But when a Republican does it it’s usually played as “deep-pocketed Rethuglican digs into ill-gotten gains to keep floundering campaign alive”….

darkpixel on February 14, 2009 at 9:25 AM

My, my!

Johan Klaus on February 14, 2009 at 9:25 AM

Plus, don’t they get a pension and other perks the rest of us can only dream about????? Throw the bums out.

bloggless on February 14, 2009 at 9:25 AM

Hmmm, Hillary loaned her campaign six mil?

Sort of akin to the term, and reasonable attorney fees.

Speakup on February 14, 2009 at 9:26 AM

Does this woman perchance belong to any identifiable political party? Just wondering… and also whether HA is going MSM on us.

drunyan8315 on February 14, 2009 at 9:26 AM

If all of these upstanding and hard working politicians had spent as much time really considering the true impact of the Stimulus bill they just passed as they do calculating how to game the system we would be in a different place this morning.

Yoop on February 14, 2009 at 9:26 AM

So many of the stories here are becoming one in the same. It’s about corruption in gov’t and our other institutions. It’s about the undermining of the rule of law. They should be numbered. When we get to a couple thousand, I suppose we’ll revolt. What # is this one?

JiangxiDad on February 14, 2009 at 9:26 AM

If that’s legal, shame on someone for not correcting it!

OldEnglish on February 14, 2009 at 9:27 AM

She has now met the criteria for appointment to a Cabinet position.

DL13 on February 14, 2009 at 9:27 AM

She could have charged her campaign fees, too. All sorts of stuff. And then, she could have paid herself late and rung up exhorbitant late charges that she charged her campaign … just like the banks and credit cards love to do. And she could have charged fees for the campaign’s late payments on other accounts, like the credit cards …

It sounds as though she left a lot of clean, easy money on the table, as it were. … Next time.

progressoverpeace on February 14, 2009 at 9:28 AM

Withdraw money from a pension or tax-protected savings account to justify charging yourself an interest rate that would make most credit-card companies blush.

She’s abusing the system, but 18%, unfortunately, is less than a lot of credit card companies are charging.

dedalus on February 14, 2009 at 9:29 AM

“The most powerful force in the universe is compound interest” – Albert Einstein.

Disturb the Universe on February 14, 2009 at 9:30 AM

plus a small charge for shipping and handling

billypaintbrush on February 14, 2009 at 9:31 AM

I wonder if she can successfully operate TurboTax.

Disturb the Universe on February 14, 2009 at 9:32 AM

Must be nice.

SoulGlo on February 14, 2009 at 9:34 AM

At least she didn’t use the money on Botox.

Disturb the Universe on February 14, 2009 at 9:34 AM

She has now met the criteria for appointment to a Cabinet position.

DL13 on February 14, 2009 at 9:27 AM

-
Perhaps… Did she also “forgot” to pay the taxes due on the scheme? Cause then she’d be a shoe in.

RalphyBoy on February 14, 2009 at 9:36 AM

It’s only legal because they make the laws to cover their own stinking asses.

Rangle
Dood
Schumer
Reid
Pelosi

The legal Mafia.

If Blago was only half smart he would have appointed himself to the Senate. That would have stopped any investigations against him.

Rick007 on February 14, 2009 at 9:36 AM

The most powerful force in the universe is compound interest” – Albert Einstein.

Disturb the Universe on February 14, 2009 at 9:30 AM

Yep. Your basic chain reaction. And the US is about to be on the wrong side of it.

progressoverpeace on February 14, 2009 at 9:36 AM

Skank!

Viper1 on February 14, 2009 at 9:38 AM

Reagan vs. Obama in their own words.

Mr. Joe on February 14, 2009 at 9:44 AM

Now that the Democrats have raped the treasury, just wait until you see the innovative ways they’ll find to pad their personal bank accounts.

rplat on February 14, 2009 at 9:44 AM

Does this woman perchance belong to any identifiable political party? Just wondering… and also whether HA is going MSM on us.

drunyan8315 on February 14, 2009 at 9:26 AM

She’s a Democrat. It’s in the linked article.

AZCoyote on February 14, 2009 at 9:44 AM

Update: …she’s a Democrat.

Shazam!

Zorro on February 14, 2009 at 9:48 AM

TERM . LIMITS .

clinker46 on February 14, 2009 at 9:58 AM

Typical!

It almost seems like the Liberal Party
is nothing more than a mob(community)
organization!

I bet Grace has her own little
banking operation in the Stimulus
Bill that nobody has read!!

canopfor on February 14, 2009 at 10:01 AM

Are we playing “guess the party” on this one?

Dr.Cwac.Cwac on February 14, 2009 at 9:20 AM

My thoughts exactly.

conservative pilgrim on February 14, 2009 at 10:01 AM

Reagan vs. Obama in their own words.

Mr. Joe on February 14, 2009 at 9:44 AM

Chilling.

genso on February 14, 2009 at 10:03 AM

This is news like reporting that you walked into a whorehouse and found prostitutes working there is.

Patrick S on February 14, 2009 at 10:04 AM

Heck, put her in charge of IRS… at least she is smart enough to find a LEGAL way to cheat!

Romeo13 on February 14, 2009 at 10:06 AM

“The most honest,

most open,

most ethical Congress,in history”!
-Nancy Pelosi.

canopfor on February 14, 2009 at 10:06 AM

“The most honest,

most open,

most ethical Congress,in history”!
-Nancy Pelosi.

canopfor on February 14, 2009 at 10:06 AM

They need to publish a dictionary of liberal phrases. You know, just to be clear when they say something. Its like reading Japanese translated into English by a Chinese.

genso on February 14, 2009 at 10:10 AM

They need to publish a dictionary of Liberal phrases!

genso on Feb 14,2009 at 10:10AM

genso:Or a gizmo,like a Liberal De-Speak-alator for
quick translation!

And a rule book,what the liberal Party can get a way
with,

and,what the Liberal’s will allow what Republicans
can get away with!(sarc)!

However,as the track record shows,Republicans aren’t
the crooks,their trying to make American lives better,
while Democrats are coniving,and lining their own
pockets!:)

canopfor on February 14, 2009 at 10:21 AM

Never mind fellas, IT’S OKAY, she’s a democrat.

Mojave Mark on February 14, 2009 at 10:23 AM

However,as the track record shows,Republicans aren’t
the crooks,their trying to make American lives better,
while Democrats are coniving,and lining their own
pockets!:)

canopfor on February 14, 2009 at 10:21 AM

You know, it is easy to paint all of congress as crooks. I am beginning to believe that your statement is true. If the GOP was as corrupt as the DEM in Congress, I’m sure it would be all over the media. So, not corrupt, merely incompetent and compliant.

genso on February 14, 2009 at 10:25 AM

She worked as a secretary for Ford Motor Company, and cashed out stock at $45 a share in 1998 out of her retirement account. It’s now trading at less than $2 a share, and she’s had a 150% return in ten years without risking the principal at all.

I think the game that this woman has played is deplorable.

That said, there’s a suggestion in the excerpt I quote that she did something untoward by cashing out of Ford shares in 1998, when it traded it $45 a share, now that Ford shares trade at $2. That is completely irrelevant. Stupid as Democrats seem to be about handling money, not even a Democrat is required to be stupid enough to keep retirement account assets in the stock of one company in perpetuity. Indeed, any decent investment adviser would have invariably advised her to cash out of the Ford stock in 1998 and roll it over into an IRA and from there invest it in a diversified portfolio of investments. For crying out loud, ask Enron employees about keeping all of their retirement assets in company stock.

If you want to criticize her for having $150K “invested” in a loan that will surely be repaid, rather than in the stock market, in which the Dow has gone from 14,000 to 8,000 in the past year. Fine; that’s arguably a valid point. I still don’t think it’s necessarily a criticism that can be made because she could have also buried her $150K in muni-bonds or Treasury securities in 1998 too. Whatever the case, to suggest that she be criticized for not retaining her $150K in one stock that’s gone from $45 a share to $2 a share since 1998 is absurd.

The outrage here is that she’s been allowed to charge herself a Tony Soprano rate of interest when there seems no risk that she won’t be repaid. Under general lending principles, shouldn’t the interest rate reflect the risk of default involved? This is a scam; no question about it. Wherever the rules are housed, the rules should be amended, say, to limit these kinds of loans to some mid-term length–say, three to nine years. And if so limited, the interest rate could simply be tied to the federal mid-term interest rate that the IRS announces every month for its purposes. That interest rate is a market rate derived from some objective factors, and it’s probably not more than 3%.

This is a worthwhile post, but I have to disagree with the point suggested by mentioning the decline in the value of Ford shares between 1998 and today. A totally irrelevant point has somewhat clouded an otherwise excellent account of an outrageous scam.

BuckeyeSam on February 14, 2009 at 10:34 AM

Just another politician doing what politicians do best, SCREW THE TAXPAYER. Unfortunately the public only looks at them during election time.

Any time I stand near a politician, I keep my hand on my wallet. Keeps me safe, keeps them honest.

GarandFan on February 14, 2009 at 10:35 AM

Wow. That amounts to $238 per week. Can you feel the corruption?

tommylotto on February 14, 2009 at 10:38 AM

The legal Mafia.

Rick007 on February 14, 2009

I think I have more respect for the mafia than I do for Democrats in congress.

JellyToast on February 14, 2009 at 10:50 AM

I think the old adage is true; where there is money, there is corruption.

cjs1943 on February 14, 2009 at 10:56 AM

Wow. That amounts to $238 per week. Can you feel the corruption?

tommylotto on February 14, 2009 at 10:38 AM

That’s about $10,000 a year, right?

I suppose that’s why you give Dodd and Geithner passes. It’s only until you get to Daschle-level money that it becomes a problem.

Sorry, no sale. This wasn’t immaterial. Campaign funds shouldn’t be run as private inurement funds. If so, they shouldn’t enjoy tax-exempt status. In other words, if games like this are permissable, the campaign funds raised by politicians should be subject to income tax.

In the end, it’s really a matter that because she can’t be trusted to be honest in smaller matters, why should she be trusted to be honest in larger matters?

BuckeyeSam on February 14, 2009 at 10:58 AM

I don’t remember politicians walking out of WDC multi-millionaires before the age of Clinton.

jukin on February 14, 2009 at 11:03 AM

If it’s that easy, foolproof and legal, my guess is the same tactic is used by others in congress.

Waxman, another investigation please!

fogw on February 14, 2009 at 11:18 AM

BuckeyeSam:
I agree with you 100%. The potential lost value of the stock is totally irrelevant and distracts from the story.

QUESTION: Why isn’t this considered personal income? It doesn’t sound like she has to pay taxes on it.

Suppose I took a loan out of my 401k, charging an outrageous interest rate (which I don’t believe the IRS would OK). But then suppose I as friends and family to help me pay it back….100′s of thousands of $$ over 20 years. Does anyone really believe the IRS wouldn’t consider that taxable income?

Are the rules different for her SIMPLY because she can say she was raising political contributions (which just HAPPEN to enrich her personally)?!

Sheesh. I just can’t believe all the new ways the pols have found to pad their own pockets. (Like the Boston lawyer who’s now collecting a public pension for “volunteering” on his local Library Board.) We’re way beyound “Throw the Bums Out”. They’d just find a way to grab more money on the way out the door. No, it’s time to strip them of their pensions and send them to jail!

jeanneb on February 14, 2009 at 11:20 AM

Maybe not a crook but certainly a swine.

Mason on February 14, 2009 at 11:44 AM

jeanneb on February 14, 2009 at 11:20 AM

QUESTION: Why isn’t this considered personal income? It doesn’t sound like she has to pay taxes on it.

I’m not sure what income you’re asking about, because there are two income items discussed.

First, her withdrawal of her retirement account assets (presumably from a rollover IRA after she rolled her Ford retirement account into the IRA). That withdrawal should have been fully taxed back in 1998 or whenever she withdrew it. One might argue that she made a stupid financial move by removing all that money from a tax-sheltered account and paying the income tax on the withdrawl. But I suppose she gambled on replacing it all with the pension she’ll receive upon retiring from Congress and the interest on her loan. I don’t know the rules relating to the pension benefits available to members of Congress, but my impression is that they ain’t bad.

Second, the interest she’s received from her campaign fund on the loan should be taxable interest to her.

In any event, I don’t get the impression that she’s evaded income tax on the retirement asset withdrawal in the late 1990s or on the receipt of interest on the loan since she undertook her loan scam.

Suppose I took a loan out of my 401k, charging an outrageous interest rate (which I don’t believe the IRS would OK). But then suppose I as friends and family to help me pay it back….100’s of thousands of $$ over 20 years. Does anyone really believe the IRS wouldn’t consider that taxable income?

In your example, I think 401k plans prescribe the interest rate that can be charged on plan loans, so you couldn’t play the interest rate game that she is. Beyond that, any payments that friends or family members would make on your behalf to pay off your loan would simply be gifts to you. No tax consequences (income or gift) for you. But your friends and family members would be making taxable gifts to you, which, as a practical matter, would be ignored if each donor’s gift didn’t exceed the gift tax annual exclusion ($13K for 2009) in any year.

Are the rules different for her SIMPLY because she can say she was raising political contributions (which just HAPPEN to enrich her personally)?!

I’m not sure what you’re asking. I fear that because Ed mentioned that she used assets that she withdrew from a retirement account you’ve been left with the impression that somehow she’s gaming certain retirement account rules that we cannot. She is not. This is why I think mentioning the original source of the funds for her loan to her campaign clouds the issue. I suggest that you remember that she (presumably) paid income tax on all of the assets that she withdrew from the retirement account to loan to her campaign. Just pay attention only to the loan transaction; ignore the source of the funds with which she made the loan.

Sheesh. I just can’t believe all the new ways the pols have found to pad their own pockets. (Like the Boston lawyer who’s now collecting a public pension for “volunteering” on his local Library Board.) We’re way beyound “Throw the Bums Out”. They’d just find a way to grab more money on the way out the door. No, it’s time to strip them of their pensions and send them to jail!

I’d like to see any link to an article about that lawyer. I don’t see how he can be entitled to a pension when he provided no compensable service aside from volunteer work.

BuckeyeSam on February 14, 2009 at 12:02 PM

She kicks Buffet’s ass. But I would bet this game is played on both sides of the aisle.

I remember a study that showed the best investors turned our to be Congressmen and women.

danking70 on February 14, 2009 at 12:09 PM

Why in the hell are you not playing Name That Party? Are you trying to take the high road?

Republican, Democrat, Independent, etc. — they all need to be exposed.

macummings on February 14, 2009 at 12:10 PM

The FEC should require, one, the advertising of the interest rate for money loaned personally to campaigns, and, two, the acceptance of bids/offers from banks or other interested parties that are lower.

Oh yeah, and, three, if the new loan offer is a replacement of a candidate’s existing personal loan, the personal loan would be attached to the new loan as collateral for repayment of it.

Dusty on February 14, 2009 at 12:23 PM

Wow. That amounts to $238 per week. Can you feel the corruption?

tommylotto on February 14, 2009 at 10:38 AM

i thought the lemmings were gone

Jamson64 on February 14, 2009 at 12:34 PM

Wow. That amounts to $238 per week. Can you feel the corruption?

tommylotto on February 14, 2009 at 10:38 AM

if that was taken from your pocket every week would you feel the corruption?

Wade on February 14, 2009 at 12:55 PM

“Why isn’t this considered personal income? It doesn’t sound like she has to pay taxes on it.”

[jeanneb on February 14, 2009 at 11:20 AM]

Well, it would be reported as personal income, via the interest line on the tax form, unless, and I don’t know if this can be done, she somehow keeps it qualified as a pension, in which case she wouldn’t pay taxes on it until she retired/started disbursement.

Of course, the above is all premised on the theory she wouldn’t forget to enter it on the form.

Dusty on February 14, 2009 at 1:05 PM

Ed,
I have a feeling a lot more politicians do this little shell trick. I would like to know if anyone keeps a running list of names of the players.

paulsur on February 14, 2009 at 2:21 PM

This Republic was not founded on the principal of professional politicians.

cryptojunkie on February 14, 2009 at 4:46 PM

Leo Getz would be so proud.

29Victor on February 14, 2009 at 5:06 PM

Finally! The missing steps between “collect underpants” and “profit”!

SteakRules on February 14, 2009 at 5:12 PM

Thank God McCain spent all that time working on campaign finance reform!

/sarc off

CP on February 14, 2009 at 5:13 PM

I’m guessing if Rangel hasn’t thought of this yet, he will start if he happens to hear about it.

CP on February 14, 2009 at 5:14 PM

Well, I’m just glad Nancy Pelosi was able to clear out that whole “Culture of Corruption” thing!/sarc

SuperCool on February 14, 2009 at 7:07 PM

I didn’t play Name That Party, and thankfully neither did Bloomberg. It’s in the second paragraph of the news story: she’s a Democrat.

You didn’t have to, it’s pretty obvious, also goes without saying, we won’t be hearing about this on any MSM channel except possibly FOX.

4shoes on February 14, 2009 at 8:10 PM

Must be expensive to maintain that hair.

hepcat on February 15, 2009 at 3:15 AM

Nothing to see here – move along.

Fuquay Steve on February 15, 2009 at 9:00 PM

Never pay down the loan, just keep paying the interest.
Then when all the money is gone from campaign funds.
Write off the loan as a bad debt and get a big tax write off.

MarkTheGreat on February 16, 2009 at 10:23 AM