Main Street Runs Through K St.

Posted October 1, 2008 at 6:54pm

As Congress continues to struggle to pass the $700 billion bailout bill, much has been made of the pain that will be inflicted on Main Street should it fail.

But it’s not just mom-and-pop gas stations and manufacturing plants that are facing dire times. Many of the lobbyists pushing for the bill aren’t only concerned for their clients; they also have their own vested interests in mind as small-business owners.

One of the biggest problems lobby shops have been facing in recent weeks has been less credit available not only to them but also to their clients.

“The fear is the banks may decide to withdraw the line of credit, especially in the lobbying business,” said Michael Herson, president of American Defense International. “Even if you have a year contract with clients, they’re still month-to-month because you never know who’s going to stop paying because they’re in financial trouble themselves,” Herson said. “It’s impossible to project income in this business, so it wouldn’t be impossible for banks to decide this is a risky business.”

That fact has been especially apparent recently as many financial services lobbyists have lost lucrative, longtime clients such as Fannie Mae, Freddie Mac, Bear Stearns and Wachovia Corp.

The economic drag on K Street is already being felt as clients wait to pay their monthly retainers, sometimes stretching them to 60 or 90 days out.

Many large companies often pay their lobbyists on credit, so any tightening of the credit market could also hurt their bottom line.

“If you are on slow pay, people are going to have to make sure their employees get paid first and partners get paid last,” said Jack Kelly, the head of Kelly and Associates Inc.

While many small and independently owned lobby shops don’t typically rely on credit, the financial crisis is still weighing on their bottom lines.

Steve McBee, who owns McBee Strategic Consulting, said his company has always had an aversion to debt.

Still, he said, “the market meltdown is inevitably going to have consequences on the economy and businesses at every level.

“As balance sheets tighten up, being able to show [return on investment] becomes even more important,” he said. “And it puts more imperative and urgency behind our diversifying our company.”

Many lobbyists keep a line of credit with banks when unexpectedly large outlays of cash are needed.

“While I was independent, I kept a quarter-of-a-million-dollar line of credit with my bank,” said Jim Davidson, who ran his own lobby shop for 20 years and is now a shareholder in the D.C. office of Polsinelli Shalton Flanigan Suelthaus. “It’s a challenge that every small lobby firm has,” he said, referring to the ability to come up with extra cash — to cover a new hire, for example. “That flexibility will be ratcheted down.”

Even for lobby shops flush with cash, the news that one of the biggest banks in Washington, Wachovia, was being taken over by Citigroup Inc. was disconcerting.

“It was a challenging week for us because with the FDIC only being able to insure up to $100,000, we had to look at other options,” said Kelly, who banks at Wachovia.

Instead of drawing out all the firm’s funds, Kelly decided to move it within different parts of Wachovia to keep his investments safe.

“I didn’t want to abandon a bank in this circumstance,” Kelly said. “If one person abandons a bank, there is a trickle-down effect.”

One bright spot for all small businesses is the provision to increase the amount the Federal Deposit Insurance Corp. insures to $250,000.

“As a small-business owner, I really do feel like it makes a difference to people who need to make sure they have enough money to make payroll and estimated quarterly taxes,” said Linda Tarplin of health care boutique Tarplin, Downs & Young.

One lobbyist, whose firm is based in D.C., said that because the District taxes year-end profits at 10 percent, many K Street shop owners distribute those profits in the form of bonuses in December, emptying their capital reserves. As a result, this lobbyist explained, “many of us rely on our lines of credit to sustain our operations for the first month or two of the year.”

Other firms rely on credit even longer, especially those that make retirement contributions in March or firms that want to add additional personnel throughout the year before new client payments have actually come through.

Of course, a major economic downturn could create havoc across the economy, K Street included.

Ivan Adler, a lobbyist headhunter at the McCormick Group, said he hasn’t noticed a real change in the hiring practices on K Street as of yet. But the business of K Street will depend much on what Congress is able to accomplish this week.

“Those smaller firms that rely on credit could have some major problems,” Adler said. “The potential that they, like anybody else, could be subjected to a credit crunch is definitely there.”

Still, one GOP lobbyist said, a credit crunch is only one factor affecting K Street hiring.

“Our market is at 1600 Pennsylvania Ave. and right now that market is frozen,” the lobbyist said. “Why would I buy stock before I know which companies would do well? Unlike Wall Street, we trade in R’s and D’s.”

Kate Ackley and T.R. Goldman contributed to this report.