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The Amazing Money Machine


Just six months ago, Louis B. Susman, national finance director for John Kerry's Presidential campaign, was one frustrated fund-raiser. His man was sinking fast in the polls and, says the Citigroup Global Markets (C) vice-chairman, "I was begging for contributions, but people weren't returning my phone calls." Then Kerry gambled everything on winning the Jan. 19 Iowa caucuses. He rejected federal matching funds so he could bust the state's spending cap and even mortgaged one of his houses to lend the campaign $6.4 million.

The shoot-the-moon strategy worked: Kerry won Iowa and went on to take New Hampshire and 10 other states by Feb. 10. Susman's perseverance paid off, too. On July 20, Kerry reported that his fund-raising, as of June 30, totaled $185 million, just 18% less than President George W. Bush's $226 million cache. But that hardly tells the whole amazing story of the comeback kid of campaign cash. When you add in what allied groups are spending to help oust Bush, Kerry and the Dems are remarkably competitive.

LAGGARDS NO MORE

A BusinessWeek scorecard tallying receipts by the Presidential campaigns, national political parties, congressional candidates, business and labor organizations, and shadow committees known as 527s shows that the Democrats have pulled in $912 million, vs. $1.03 billion for the GOP. When funds raised by nine other Democratic primary candidates are counted, however, the overall Dem figure rises to $1.09 billion, exceeding the GOP's by $57 million. After decades of lagging, especially among low-dollar donors, "Democrats have caught up," says Michael J. Malbin, executive director of the think tank Campaign Finance Institute (CFI).

If anything, the BusinessWeek figures, largely based on funds raised and reported to the Federal Election Commission or the IRS, undercount overall campaign spending. The tally does not include voter turnout efforts by AFL-CIO affiliated unions, such as the $65 million the Service Employees International Union says it will spend. Nor does the tally count programs by numerous tax-exempt groups, from Planned Parenthood to the National Rifle Association, because election laws do not require them to disclose their spending.

The Democrats' success defies predictions made by most campaign-finance experts after Congress passed the McCain-Feingold reforms of 2002. The gurus said that Dems couldn't possibly replace the unlimited soft-money checks that business, unions, and wealthy people gave to the party and that the new law banned. They predicted the party would never build a small-donor base to match the GOP's. And they projected that Bush would outraise his opponent by at least 2 to 1.

The Chicken Littles of campaign cash were wrong on all three counts. Democratic-leaning 527s -- named after a section of the tax code -- have pulled in $125 million, and the two largest, America Coming Together and the Media Fund, say they have an additional $50 million in hard pledges. By law they can't coordinate with Kerry, but it hasn't been too difficult to dovetail their message with his.

The Democrats have also leapfrogged over a traditional weakness in direct-mail fund-raising by using the Net to reach contributors -- vastly increasing their take from small donors who give less than $200. Democratic Presidential candidates raised a mere $10.5 million from small donors in 2000. This time, Democratic candidates upped that by 927%, to $107.8 million, the CFI says.

So what explains the outpouring to Dems? Many experts believe donors are driven less by a zeal to install Kerry than by a fervor to oust Bush. Dissatisfaction with the growing federal deficit, economic jitters, and Bush's rush to war in Iraq and management of the aftermath all feed the Kerry financial machine. And Kerry's ability to keep up with -- and sometimes pull ahead of -- Bush in the polls has inspired givers. "This sense of inevitability that Bush was going to be reelected a year ago has really disappeared," says Kerry supporter Steven Rattner, managing principal at private investment firm Quadrangle Group.

TECHIES WOOED

Silicon Valley has especially rallied to Kerry's side. Even Intel (INTC) Chairman Andrew S. Grove recently contributed $2,000. Intel is a leader in the push to stop an accounting-rule change requiring companies to expense stock options -- a position Kerry does not support. To woo high-tech execs, Kerry dispatched key economic adviser Roger C. Altman, chairman of New York investment firm Evercore Partners Inc., to California. On July 13, Altman camped out at Yahoo! (YHOO) headquarters for one-on-one meetings with Valley execs. One invitee, Marc Andreessen, chairman of software-maker Opsware Inc. and a founder of Netscape Communications Corp., had previously spoken out against Kerry's views on trade, but was won over. While he's not giving Kerry money yet, he says: "They're doing a full-court press and doing it pretty effectively."

But it's people like Andy Rappaport, a Menlo Park venture capitalist, who are key to Kerry's catch-up fund-raising. Rappaport and wife, Deborah, have "maxed out" by giving a combined $190,000 to Kerry, party committees, and other Democratic candidates. Overall, the couple has donated $5 million to liberal causes, including 527 groups that now accept the soft money that the party can't. Rappaport reports that he gets daily calls from people who say: "I've been a Republican my whole life, and I never thought I'd vote for a Democrat. But I am so angry at what this Administration is doing that I'm not only going to vote for John Kerry, but I want to have a fund-raiser for him."

But nothing has succeeded for Kerry like the Internet. Kerry has raised $57 million through online donations, or nearly one-third of his total. Bush, by comparison, has raised a mere $9 million online. The beauty of these contributions, says Kerry Internet fund-raising director Josh Ross, who took a leave from his job as a vice-president at Silicon Valley company USWeb, is that the donations are "low-effort and high-margin." The cost of raising $1 via the Net is about 3 cents, vs. 15 cents for a telemarketing call or a piece of direct mail. And five-course dinners that attract high-rollers who can give up to $2,000 apiece can eat up 25 cents of every $1 raised.

Still, Bush has a couple of advantages. He has $64 million in cash on hand, against Kerry's $36 million. And although both candidates are expected to accept $75 million in public funding for the general election, Bush has the upper hand there as well. Public money kicks in as soon as candidates accept the nomination. After that, they can't raise or spend private funds. Kerry's problem is that the clock starts on July 29 -- five weeks before the GOP convention. So Kerry has five fewer weeks in which to raise private money and must stretch his $75 million over 13 weeks, vs. Bush's 8 weeks, until Election Day on Nov. 2.

One way Kerry is expected to conserve his treasury is by "going dark" for much of August. After the Democratic Convention, he may forgo TV ads while traveling through 10 battleground states, banking on free media. He will distribute surplus money to the Democratic National Committee and state parties, which can run TV ads -- as long as they don't coordinate with his campaign.

The 527s will also be able to run TV ads in August. But on Sept. 2, most will have to turn off the spigot. McCain-Feingold bars them from paying for ads that identify a specific candidate 60 days before the election -- even though they can keep spending on voter turnout. In the end, Kerry may not have to dip into his public funds until Sept. 3, when Bush begins doing the same.

These days, Kerry finance chairman Susman is a lot less frustrated. Since March, "I never asked anybody for money and got turned down. Not once," he says. In fact, money is walking in off the street. A woman recently strolled into Kerry's Washington headquarters and handed Susman an Ann Taylor shopping bag. In it was $40,000 in checks.

By Paula Dwyer in Washington, with Robert D. Hof and Jim Kerstetter in Silicon Valley and Marcia Vickers in New York


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