Throw Them All Out by Peter Schweizer

Author:Peter Schweizer [Schweizer, Peter]
Language: eng
Format: epub
Publisher: Houghton Mifflin Harcourt (www.hmhco.com)

With the passage of the Emergency Economic Stabilization Act, the Treasury Department had $700 billion to make available to financial institutions, and with it the unprecedented authority to pick winners and losers. Access to TARP money was not guaranteed. And the terms of the loans were unclear. There was no transparency and no openness to the process. As the economist Robert Kuttner put it, the TARP proceedings were "being done largely behind closed doors, and the design is by, for and in the interest of large banks, hedge funds, and private equity companies. Because there are no explicit criteria, it's very hard to know" if anyone got special treatment. The entire process, he said, "reeks of favoritism and special treatment."9

Having the correct political connections was critical, as usual. A study conducted by four researchers at the Massachusetts Institute of Technology documented the power of those connections as a general phenomenon, before the TARP program began. When Timothy Geithner was announced as President Obama's nominee for Treasury secretary, it "produced a cumulative abnormal return for Geithner-connected financial firms of around 15% from day 0." The stock market reflects the cumulative thinking of all investors, and they assumed Geithner would be able to reward his friends directly or indirectly. Conversely, when there was word that Geithner's nomination might be derailed by tax issues, those same firms were hit hard with "abnormal negative returns." The MIT researchers systematically examined firms that had corporate ties to Geithner, had executives who served with him on other boards, or had other direct relationships. According to the researchers, "The quantitative effect is comparable to standard findings" in Third World countries that had weak institutions and higher levels of corruption.10 Think of it: our markets react to these government actions the same way they do in a corrupt developing country. Crony capitalism pays, and the market knows it.

Of course Buffett was not the only one connected in Washington. Goldman Sachs also had a direct line to Treasury Secretary Hank Paulson, its former managing partner, as well as incoming officials in the Obama administration. But Buffett was far better liked by the American public than the executives at Goldman Sachs. Politically, he was a far more effective advocate for bailout funds than Paulson could ever be.

Another study, from the University of Michigan School of Business, found that "firms with political connections" were much more likely to get TARP funds than firms that were not well connected. The study looked at how much money firms contributed to election campaigns, through PAC contributions and donations by executives, as well as how much companies spent on lobbyists. Ironically, the study found that those politically connected firms actually underperformed unconnected firms despite the infusion of federal funds. In other words, poorly run, well-connected firms got the loot.11

The fact that politically connected banks got good deals from the Treasury was not lost on the banking industry. Robert Wilmers, the chairman and CEO of M&T Bank, said at the time, "The pattern is clear, the

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