In a recent study University researchers found that banks with connections to the federal government tended to receive more federal bailout money than those that did not.
Business Profs. Ran Duchin and Denis Sosyura — the authors of the study that has yet to be published — relied on databases from the Federal Deposit Insurance Corporation and the Federal Reserve to access detailed information about the banks that received bailout money.
Duchin said the numbers revealed that banks with ties to the government often received more money than those that are politically independent.
“Our study is able to show that there is a positive correlation between political connections of different types, be it connections to the Federal Reserve, connections to House members, or simply being politically active in terms of spending money on lobbying the treasury or contributing to political campaigns,” and getting more bailout funds, Duchin said.
Duchin said the study showed a direct relationship between politics and public policy.
“It is a very interesting area of investigation to see how, in general, politics affects public policy, allocation of funds and markets,” he said.
The researchers looked at about 700 financial institutions, considering individual histories, organizational size, demographics and quarterly reports. In particular, they examined the relationship between banks that received aid from the Troubled Asset Relief Program (TARP), the amount received and their political associations.
Duchin said he and Sosyura found that the original goal of the TARP — to give monetary aid to financially unsound banks — was violated when politics became involved.
“The fact that political connections actually played a role in TARP investments implies that it is not necessarily the (financially unsound) banks that should have gotten the money that actually ended up getting the money,” Duchin said. “There is evidence of a misallocation of funds that is inconsistent with the original TARP goals.”
These findings, Duchin wrote in a press release, are important because taxpayer dollars are not being appropriated to “support systematically institutions experiencing financial distress.”
Because information is only made public for banks that actually received TARP money, Duchin said the status and political involvement of banks that were denied are unknown and complicate the issue.
“We’re not suggesting that there is a causal relation, we’re simply documenting a positive relation between a political connection or activism and actually receiving TARP money and the amount being received,” he said.
Duchin added that in any case, the findings oppose any idea that the market is free from political influence.
“I think that is surprising that given all this scrutiny and given all the exposure that we are able, using public data, to actually show such a strong statistically significant relation between political connections and between allocations of TARP investments,” he said.