8/14/2019 Banks Offering Higher Interest Rates if Obama Wins!

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Banks Are Offering Higher InterestRates if Obama Wins

A Portuguese online bank,Banco Best, is offering deposits tied to the results ofthe U.S. presidential election: If U.S. Sen. Barack Obama, D-Ill., wins the WhiteHouse, Banco Best will pay 8% for the period between the deposit and Nov. 4; ifSen. John McCain, R-Ariz., wins, the bank will pay 2%. That reflects the generalpreference for Obama held in Europe; it’s worth noting that the bank’s not

offering an equivalent deposit product biased the other way, which by all the rulesof hedging it should be (opening branches in Arizona and Wasilla, Alaska, wheredemand might be expected to be greatest, for example).

You don’t need to go to Portugal to bet on the election. At Iowa ElectronicMarkets , or IEM, Obama is currently trading at 85 cents asked, so if you bet $85, you stand to be repaid $100 if Obama wins. You can get much better odds onMcCain; you only need to bet $16 to win $100 if he wins.

Aside from the amusement value, there’s actually a very real hedging question here.Most of the differences between Obama and McCain come down to questions ofpolicy preference that are difficult to express in a monetary form. Thus, the twocandidates’ policies on the Middle East have quite different implications, andthough you may have strong views on which candidate you prefer, it is impossible toput a monetary number on those preferences. Even on policies such as healthcare,the details are so complex – and the application to your own circumstances involvessuch indeterminable unknowns as your future health – that a net monetary numberis impossible to calculate.

There is one exception, and that is in the tax field. For those of moderate incomes,there is probably not much to choose from between the two: Obama may bringslightly higher taxes, but the additional government services he promises toinstitute may provide benefits to offset them.

For high-income people, however, there is a clear difference: Obama promises torepeal the Bush tax cuts (which lowered the top tax rate 4.6%) on incomes over

8/14/2019 Banks Offering Higher Interest Rates if Obama Wins!

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$250,000, and to institute Social Security contributions (at 6.2%, or possibly less)on those top incomes. Therefore, for someone with a steady taxable income of$500,000, an Obama presidency can be expected to cost about 10% of his or herincome above $250,000, or $25,000 per annum. Over a four-year presidential term

– the time that elapses before we get to choose again – that total cost will reach$100,000.

There are several ways to hedge this:

You can bet in the Iowa Electronic Markets. If you bet $85,000 at 85, youwill have $100,000 to pay your taxes if Obama wins, and nothing if he loses.On a net basis, you will be $85,000 poorer after the election, so you mayregret not having done this earlier, when Obama contracts were trading ataround 50.

You can place a deposit with Banco Best. As I penned this, there were 21days remaining before the election; at that point, the difference betweenthe two returns works out to 6% x21/360 or 0.35% on your money. Yourdeposit would thus have to be $28,571,428.57 to make $100,000 ofdifference between the two outcomes. Given the wobbliness of most bankscurrently, you may feel that’s a lot to risk (and Banco Best says its limit is 10million euros, about $14 million).

You can buy Obama-friendly shares like green energy and short McCain-friendly shares like defense. If you assume that an Obama win will increasethe return on Obama-friendly shares by 5% annually compared to McCain-friendly shares, then over the four-year term their returns will differ by20%. That means that an investment of $500,000 should cover you.

Alternatively you can shrug your shoulders and realize that political events, likethe weather, are mostly too difficult to hedge against