Friday, November 19, 2010

Congressmen Bail Out Firms to Protect their Own Investments

Equity ownership, stocks and shares owned by politicians, influenced their legislative and financial monitoring activities. The financial interests of politicians increased the probability that banks received bailout money, how much support these institutions received and how quickly.

Representatives’ stock ownership influenced members of the US House of Representatives to bailout the financial sector by voting for the bills HR 3997 on 29 September and HR 1424 on 3 October, 2008. In the initial vote, the likelihood of voting for the bailout was 41 percent for non-investors and 58 percent for equity owners. In the final vote, the likelihood was 55 and 69 percent respectively.

Congressional equity ownership in a given firm was also shown to affect the probability of receiving a bailout, the bailout amount and the timing of government support to that firm. Congressional committees with jurisdiction over the finance sector can affect regulatory outcomes. Equity ownership of members of these congressional committees affects bailout decisions, largely due to the powerful members in each committee, the chairs and ranking members.

Lobbying is indubitably an important means of exerting influence in politics. In the United States, campaign donations also matter. What has gone virtually unnoticed thus far though is that politicians also are investors. Part of their wealth rests with firms whose wellbeing falls under their legislative and regulatory influence.

Professor of Business Laurence van Lent of Tilburg University in the Netherlands and Ahmed Tahoun of Manchester Business School (UK) drew these conclusions on the basis of an analysis of 555 publicly listed financial sector firms, 295 of which received government support under the Troubled Asset Relief Program (TARP).

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