Conflicts of Interest Not New to the Age of Trump: Many Politicians Voting for the TARP Bailout Protected Their Own Wealth

Jerri-Lynn here: This post reminds us that conflicts of interest– when politicians or public servants make decisions based on calculations of their own self interest rather than the public interest– is not a phenomenon new or unique to the age of Trump.

If you have time, take a look at their complete paper, linked to herein. If you don’t, I particularly enjoyed their dry conclusion from the end of this post:

While Congress has recently approved the Stop Trading on Congressional Knowledge Act, purportedly aimed at preventing politicians from taking advantage of non-public information gleaned from their activities as lawmakers, our evidence suggests that politicians don’t have to trade on information to become better off; they also have the ability to pass bills that benefit themselves financially. Researchers in both political science and economics need to look much more closely at this possibility than they have done, so far.

Indeed!

By Ahmed Tahoun and Laurence Van Lent. Tahoun is an Assistant Professor of Accounting at London Business School. He has been a visiting research scholar at the University of Chicago Booth School of Business and the Wharton School, a faculty member at the London School of Economics, a research fellow at the University of Valencia, and a banker at HSBC in Egypt. His primary research interests are the economic consequences of transparency and the politics of financial markets. He has published his research in the Journal of Financial Economics and the Journal of Accounting Research and he is a member of the editorial board of the Journal of Accounting Research. Van Lent is a Professor of Accounting at the Tilburg School of Economics and Management, Tilburg University. He holds the chair of Empirical Research in Accounting. His research is published in a variety of journals and has won the David Solomons Prize awarded by the journal Management Accounting Research. He has also received distinctions for his work as a reviewer, winning Outstanding Reviewer Awards from Contemporary Accounting Research and BuR Business Research. His current research interests include (1) organizational design and performance management, (2) the biological roots of executive behavior, and (3) the political economy of accounting and finance. Cross posted from INET Economics.

Amid heightened focus on conflicts of interests, new research shows how legislators’ votes on the 2008 bank bailout tracked with the exposure to peril of their personal stock portfolios
President-Elect Donald Trump recently announced that “in theory, I could run my business perfectly, and then run the country perfectly.” Since the President and Vice President enjoy the singular privilege of being exempt from conflict-of-interest statutes, he can perhaps make that position stick, though not everyone is convinced and his claim has touched off a lively debate.

In theory, the position of those elected to the U.S. Senate and House of Representatives is different. The current code of ethics of both chambers stresses the importance of not compromising their role as lawmakers, in which they are required to represent the interest of their voters rather than personal financial interests.

Mr. Trump’s ascendancy to the presidency has certainly given new urgency to the broader question of how the personal wealth interests of politicians could influence their voting and lawmaking. This is not only a question in the U.S., but should concern voters, policy makers, and academics across the world. It is this question that we address in our recent research, which investigates how the asset holdings of politicians in financial institutions affected their vote in Congress on the bailout of the financial sector during the crisis of September-October, 2008.

While scholars widely agree that a politician’s vote depends on their ideological position and their electoral prospects — which in turn are related to the politician’s ability to convince voters that he or she is the best advocate of their interests, and also by his or her ability to raise campaign funds — we show that the effect of the vote on a given politician’s personal wealth can also influence his or her voting on legislative proposals.

Using the politicians’ voting records on the bill that eventually became the Emergency Economic Stabilization Act — which bailed out American banks in the wake of the 2008 financial collapse — and detailed data on the equity stake of individual politicians in those financial institutions, we document that politicians whose portfolios were exposed to the stricken financial institutions are almost 60% more likely to vote in favor of the bailout plan than politicians whose wealth was relatively immune to the crisis.

[Jerri-Lynn here: Figure 1 is found on page 3 of the original paper linked to above.]

Figure 1 illustrates these effects. Together, members of the House of Representatives held investments worth between $23.3m and $74.5m in the financial sector, with approximately 30 percent of the representatives owning shares in banks and other financial institutions. Our detailed data on the asset holdings of politicians (scraped from their financial disclosure forms), allow us to isolate the effect of personal wealth from competing determinants of voting, which include ideology and electoral prospects as well as a vast range of other potentially confounding effects.

In our empirical approach, we attempt to underpin our claim that it is the asset holdings of politicians per se that affects their voting, rather than these asset holdings reflecting the beliefs of politicians in the importance of financial institutions in the proper working of capital markets. Such “finance-friendly” politicians would then be more in favor of supporting a bailout regardless of the contents of their own portfolios. We use proxies for a politician’s beliefs in the importance of the financial sector derived from biographical details such as work experience in finance, educational background, and membership on finance-related congressional committees to tease out the effect of beliefs. We also consider, separately, the voting of politicians who had asset holdings in financial institutions before the 2008 crisis, but crucially not during this period. These “ex-investors” should share very similar beliefs about the sector’s importance as would current investors in the financial sector. Nevertheless, neither the biographical-based proxies for beliefs, nor the past asset holdings of politicians explain their vote on the bailout.

Perhaps even stronger evidence that our findings do not arise from differences in beliefs, but rather from the personal wealth effects of holding assets in the financial sector is provided by a test that uses information about the participation in defined contribution pension plans by the spouse of the politician. The return on these plans over 2008 should be a source of independent variation in personal wealth interest, in the sense that it is likely uncorrelated with other determinants of the politician’s voting behavior. Consistent with wealth interests per se and not beliefs affecting the vote on the bailout, we find a strong correlation between the returns on the spousal pension plans and the vote on the EESA. The data show that where the spouse was down in the market, the probability of voting in favor of the bailout rose.

While Congress has recently approved the Stop Trading on Congressional Knowledge Act, purportedly aimed at preventing politicians from taking advantage of non-public information gleaned from their activities as lawmakers, our evidence suggests that politicians don’t have to trade on information to become better off; they also have the ability to pass bills that benefit themselves financially. Researchers in both political science and economics need to look much more closely at this possibility than they have done, so far.

Print Friendly
Tweet about this on TwitterDigg thisShare on Reddit23Share on StumbleUpon0Share on Facebook0Share on LinkedIn4Share on Google+0Buffer this pageEmail this to someone

9 comments

  1. SteveB

    Interesting work although my initial reaction was….. isn’t this like finding the correlation between walking in the rain and getting wet.
    Congress was threatened by Paulson and Jawarski that if they didn’t vote to bailout, the world would go into a deep depression.

    I’ve always questioned whether that was true. No doubt some banks and related companies would have gone bust. But the fed/Gov’t could’ve taken over and cleaned up the mess… That option may have been less expensive in the long run and better for the economy as a whole. I’m not saying it wouldn’t have been bad. But imo the recovery would have been quicker and more robust by cleaning out the deadwood..
    It would be interesting to hear Yves thoughts on how this other option may have turned out.
    (I seem to remember Elizabeth Warren on a talk show expressing a similar opinion in 2010)

    1. sheila massey

      Absolutely right. Simon Johnson, British economist (MIT Economics Instructor, previous IMF head) practically begged the Obama administration to consider the non-bail-out approach, leaving capitalism to work as it should. Risky investments can sometimes end in big losses, and the investor takes the hit. This certainly holds true for you and me, since we don’t have lobbyists. Johnson laid it out. Bank shareholders would be wiped out, since banks were insolvent. Bondholders would take a massive haircut. What was left, assuming there were still assets with some value, was a much smaller but solvent bank. Johnson also described the process so it could be done in an orderly and controlled manner, conducted by the government, to avert bank runs and chaos. He had overseen this process when Argentina went bankrupt. This solution would have avoided printing and spending trillions in bailout money. I always thought that if Johnson’s solution was too tough a pill for the banks to swallow, Obama could have at least bargained in our (taxpayers’) behalf for splitting the bill: i.e., we taxpayers make them 30% or even 50% whole, but they absorb the rest of the loss. But, no, Obama, Mr. Idealist, bailed the banks out 100% and stuck us with the bill.

  2. John Wright

    There is a quote: “While Congress has recently approved the Stop Trading on Congressional Knowledge Act, purportedly aimed at preventing politicians from taking advantage of non-public information gleaned from their activities as lawmaker”

    This does not tell the complete story, because the law was passed with great fanfare, then quietly and greatly weakened about a year later..

    http://www.npr.org/sections/itsallpolitics/2013/04/16/177496734/how-congress-quietly-overhauled-its-insider-trading-law

    “”It’s really shocking that they used basically the situation of questions about whether some language in the bill was overbroad to just gut the bill — to gut the transparency measures that apply to themselves,” she says.”

    “Still, two major elements of the law remain. Insider trading is illegal, even for members of Congress and the executive branch. And for those who are covered by the now-narrower law, disclosures of large stock trades are required within 45 days. It will just be harder to get to them.”

  3. cocomaan

    What might make this article stronger is that stocks and other investments are mostly held by the richest people in the country and that representatives aren’t exactly hurting for investments.

    http://www.salon.com/2013/09/19/stock_ownership_who_benefits_partner/

    As of 2010, the richest 5% of U.S. households owned about two-thirds of all outstanding stock, a number that is likely as high as 70% today.

    There’s probably better sources for this information out there, but my point is that there’s not much economic diversity among our elected reps.

    1. Jerri-Lynn Scofield Post author

      Excellent point. I wrote a post sometime in August or September where I made a similar point about Supreme Court Justices– but there the common factor was law school attended.

  4. polecat

    Grifters gotta grift …. at the plebs expense .. right …….. RIGHT ?!?!?

    Treasonous Bastards ! (and Bitches !) … don’t want to play favorites now ….

  5. SJB

    Interesting how in the past few years, we have had academic researchers come out with findings that journalists should have been onto long ago.

Comments are closed.