Wall Street’s rational Romney bet

November 14, 2012

It was never a secret that much of Wall Street put its money behind a Romney presidency. The publicly available tally shows that extent of their support: $19.6 million to Romney directly and more than $100 million to Romney and Republicans via other channels like Super PACs and advocacy groups. Beyond dollars, financial heavyweights like Steve Schwarzman and Leon Cooperman publicly criticized Obama in hyperbolic terms. Other executives, most notably Jamie Dimon, took almost every chance possible to make their deep displeasure with the administration’s policies clear. Some lifelong Democrats, like Lloyd Blankfein, remained pointedly disengaged.

And yet, unlike in 2008 when Wall Street backed Obama, their guy lost.

How stupid, right? Time to mock bankers for screwing this up too! Backing Romney, the argument goes, was Wall Street’s “second worst trade of 2012” (after JP Morgan’s CIO blowup). Couldn’t they see that the numbers pointed to an Obama win? New York Magazine went back to the well of masculinity metaphors, with Kevin Roose saying Obama’s win was a defeat for “Wall Street’s impotent billionaires“. And the statistically savvy Paul Krugman ridiculed their “bad investment decision“:

The limits of their power have been cruelly exposed, and the reelected president now owes them nothing. Did I mention that Elizabeth Warren is going to the Senate — a Senate that will be substantially more progressive and less Wall Street friendly than before?

Bad move, guys.

It’s hard to imagine, though, what other decision Krugman thinks would have been a good move (for Wall Street and their policy preferences, not for Paul Krugman and his policy prefences). There was a small but meaningful chance that Romney could win — and Romney very clearly supported laxer financial regulation than Obama. What’s more, Wall Street had already made its choice in the contest over Dodd-Frank. Trying to kiss and make up this late in the game wasn’t going to change the president’s policy positions.

Sure, you can get people on the record saying silly things (the best here, from Max Abelson). But that’s a separate issue from whether Wall Street’s support of Romney, writ large, was dumb. Their money definitely could have been spent smarter, but as a preference, it makes perfect sense –  Wall Street, depending on the timestamp, had roughly an 8% to 35% chance of getting what it really wanted. Why not give it a go? Won’t someone  think of the option value?

First, let’s assume that without Wall Street’s money, Romney’s chances would have dropped lower than 8% and into the realm of near-real world impossibility. Second, assume that financial firms believe what they say about the costs that come with Dodd-Frank implementation. S&P, for instance, estimates that the eight largest banks will lose as much as $34 billion in earnings because of it. Even if a Romney presidency trimmed just 10% off those costs, banks’ the ROI from their campaign donations would look stratospheric.

At a more basic level, Wall Street was donating to Romney to keep an unlikely outcome within the bounds of plausibility. At the levels of disposable income in this demographic, that’s no a hard call to make: they paid millions for an 8-35% chance of saving billions — rather than paying nothing for an almost certain loss of billions. Romney’s campaign team spent just over $1 billion to Obama’s $932 million, and while Obama’s campaign spent smarter, without Wall Street’s money, Romney’s slight spending advantage would have narrowed even more. You can argue that smarter spending can make up for being outspent — and use this campaign as a proof point. But there’s no way that Romney could have won by spending less and still spending it less intelligently than Obama.

Wall Street’s money kept Romney at least marginally in the game until the very end. Just because he lost, that doesn’t mean he was a bad bet or dumb investment. As Daniel Engber said, “the fact that Obama won doesn’t make Nate Silver right, any more than a Romney win would have made him wrong.” The reverse is true of Wall Street: it’s hard to think they were ever doing anything other than playing the odds.

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