Study Finds Political Ties to TARP Bailouts

U.S. BanksA new study finds that banks with connections to members of Congressional finance committees, and banks whose executives served on Federal Reserve boards were “more likely to receive funds” from the Troubled Asset Relief Program, the government’s primary bailout program.
“Banks with strong political connections were more likely to receive bailout money from the government — and more of it — in the past year than those with weaker ties,” concluded the study from Ran Duchin and Denis Sosyura, professors at the University of Michigan’s Ross School of Business.
Their analysis also found that TARP investments were “positively” related to banks’ political contributions and lobbying expenditures.
“Overall, the effect of political influence was strongest for poorly performing banks,” said a statement released by the Ross School of Business.
Duchin and Sosyura focused on the Capital Purchase Program, the largest bailout program measured by the number of participants, and the amount of expended capital. As of late September, nearly 700 financial institutions had received about $205 billion under the program, the professors said.
“The effects of political ties on federal capital investment are strongest for companies with weaker fundamentals, lower liquidity and poorer performance — which suggests that political ties shift capital allocation towards underperforming institutions,” said Sosyura, assistant professor of finance.
The pair found that a board seat at a Federal Reserve Bank was linked to a 31 percent increase in the “likelihood of receiving CPP funds.” And that a bank’s connection to a House member on key finance committees was associated with a 26 percent increase.
The researchers used these four variables to measure political influence:

  1. Seats held by bank executives on the board of directors at any of the 12 Federal Reserve banks or their branches; 
  2. Banks with headquarters located in the district of a U.S. House member serving on the Congressional Committee on Financial Services or its subcommittees on Financial Institutions and Capital Markets;
  3. Banks’ campaign contributions to congressional candidates; and 
  4. Banks’ lobbying expenditures.

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