Photo by Darren McCollester/Getty Images
Most Americans have become cynical about the cozy ties between business and government—a recent poll found that a sizable majority believes that government contracts are awarded primarily on the basis of connections rather than merit. We reserve particular disdain for the country’s bankers, and it’s easy to see why, after Wall Street executives walked away more or less unscathed from the financial crisis thanks to a government rescue. That rescue left many Americans wondering whether the bailout was designed to save the economy or just line the pockets of well-connected bankers.
The question of whether well-connected banks got special treatment during the financial crisis is the focus of a study, which has been in limited circulation in academic circles in recent weeks, by a group of authors that includes the eminent MIT economists Daron Acemoglu and Simon Johnson, along with Amir Kermani, James Kwok, and Todd Mitton. (Johnson and Kwok are longtime and vocal critics of the finance industry.) It won’t shock an already jaded public to learn that having friends in high places seems to have helped a lot: The paper shows that when Tim Geithner’s appointment as Treasury secretary was announced in November 2008, investors bid up the prices of banks run by Geithner’s friends and associates by as much as 10 percent (relative to the stocks of other banks) in expectation that they stood to gain from a Geithner-run Treasury.
But the study’s explanation of those stock price jumps is subtler than you might be expecting, as is the picture painted by recent research on ties between American business and government. We’re not talking about corruption of the Jack Abramoff–Rod Blagojevich variety. Rather, government leaders needed to get information from people they trusted in the private sector, which in turn created opportunities for those trusted sources to exploit their privileged access. As unsatisfying as it may seem, this is less a story about outright villainy than about human nature and the rushed decision-making required in a time of crisis.
Before addressing the question of how political connections might deliver value to executives and their companies, it’s worth assessing whether such ties deliver higher profits in the first place. Researchers have often turned to the stock market to answer this question. News that makes investors more optimistic about future profits—like a biotech firm announcing a cure for cancer—will make the company’s stock go up. Likewise, bad news will drive share prices downward. If investors believe political connections are valuable, the waxing and waning of the careers of politicians should induce similar ups and downs in the share prices of companies they’re connected to. Why should investors’ beliefs reflect the realities of a company’s future profits? While stock market investors can certainly be wrong (as they were when they bid up financial stocks in the first place, only to see them crash in 2008), there’s a lot of money riding on these decisions. The investors who move equity markets have every incentive to put in the time and resources to make the best-informed decisions possible.
This “political event study” method was pioneered by political scientist Brian Roberts in a 1990 study on the market’s reaction to the news of Sen. Henry “Scoop” Jackson’s sudden death in 1983 from a heart attack. Jackson, a Democrat from Washington state, was serving at the time as chair of the Senate Armed Services Committee, and his death was bad news for local companies like Rockwell International, whose profits were reliant in part on military contracts. News of his death led to a 2.5 percent drop in the share prices of Washington-based companies that made campaign contributions to Jackson. But one tricky part of using the stock market to understand what’s good or bad for companies is that the market-moving news has to be unanticipated. You can’t, for example, expect to learn much about what a second Clinton term would mean for corporate America by looking at stock returns on Election Day: Since Clinton was a heavy favorite, investors had already placed their bets on companies under the assumption that he’d win another term.
The just-released study exploits a news leak on Nov. 21, 2008—amid the deepest turmoil of the financial crisis—that Geithner would get the nomination as Treasury secretary. (Geithner had been on the short list for the job, along with Larry Summers, Jon Corzine, Paul Volcker, and Sheila Bair. The news leak effectively narrowed the field from five credible candidates to one overnight.) Who might have been expected to benefit from the nomination? The study’s authors develop two measures of connectedness to Geithner, based on his appointment book and his social activity in the years leading up to his nomination. Since Geithner’s meetings as New York Federal Reserve president were a matter of public record, the researchers were able to count the number of times executives from various banks met with him during 2007–2008. It’s not surprising that Geithner met often with leaders from big banks—a total of 34 times with Citi execs and 12 times with J.P. Morgan bankers. But among smaller financial institutions there are some banks that also found time on Geithner’s calendar—Lazard and Astoria Financial, for example—while others didn’t, like E-Trade or State Street.
Source: http://www.slate.com/articles/business/the_dismal_science/2013/10/tim_geithner_did_well_connected_bankers_profit_from_his_appointment_to_the.html
Tags: Dario Franchitti What Does Government Shutdown Mean cnn Mayweather vs Canelo NFL Network
![[ Back to EurekAlert! ]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_u1N9vLKAUCEHyGRK72obWTt7xGcR00RUVLm730YUcSyK1GVBC2SFc4x-F70rspAdusHSygQ1zVGL-kPZGsw62Sr0BPu9-lB7105j9D900=s0-d){kind=small}
Share
Source: