Of course, banking execs might have been meeting with Geithner because they were experiencing financial difficulties or being closely monitored for other reasons—in other words, not reasons likely to have resulted in strong ties. So the study also uses a measure based on Geithner’s personal ties listed on Muckety, a website that maps the connections among America’s rich, famous, and influential. The authors supplement Muckety’s list by examining the nonprofit boards that Geithner sat on to see where his board affiliations overlapped with those of banking executives. (It’s a sure bet that investment analysts were poring over these and other sources back in 2008 to figure out who to bet on when news of the Treasury appointment broke.)
How much was it worth to chat with Geithner at, say, a board meeting of the National Academy Foundation, as American Express CEO and fellow Academy board member Kenneth Chenault might have in 2008? According to the study, stock prices of companies whose executives had personal ties to Geithner went up by around 10 percent relative to comparable banks that lacked such connections. They also estimate a benefit—albeit a smaller one—for banks who show up frequently in Geithner’s New York Fed appointment calendar. (The study shows that the share prices of New York–headquartered banks in general made out better as the market reacted to the Geithner announcement. The authors argue that this indicates a benefit of connections based on geographic proximity.)
Were investors’ expectations borne out? Did Geithner-connected firms actually benefit from a Geithner-run Treasury? It’s hard to say for sure. One of the virtues of looking at stock market responses is they allow researchers to see how investors respond to a specific piece of news. But over the longer run, the effect of any particular news item (like Geithner’s appointment) is usually washed out by the noisy ups and downs of equity markets, making it hard to look at what happened to companies’ prices over Geithner’s tenure at Treasury. Connected companies were, for example, more likely to renegotiate the terms of their “stress test” with the government, and big banks—all of them Geithner-connected—also did well by the government’s bailout of insurance giant AIG. But it’s hard to say exactly what would have happened in Geithner’s absence, and the authors shy away from accusing the secretary of any particular cases of favoritism.
Still, investors were willing to bet that well-connected banks would benefit under Geithner’s tenure, as evidenced by the bidding up of those banks’ stocks. This is somewhat surprising given that Geithner doesn’t fit any of the standard storylines around the value of connections. No one—not even his harshest critics—has ever accused Geithner of taking bribes or any other variant of trading money for influence. Nor was it plausible, the authors argue, that Geithner would help his friends in exchange for lucrative positions down the road: As outgoing New York Fed president, he could easily have walked straight into a seven- or eight-figure Wall Street salary without a low-paid stint in Washington. Nor was Geithner beholden to donors as many elected politicians are—both Fed president and Treasury secretary are appointed positions. And unlike a senator or congressman, he wasn’t beholden to the interests of his home state.
The authors argue that the enormous value that investors conferred on connections may have been somewhat unique to the panicked circumstances in Washington when Geithner’s appointment was announced. It was an unusual time to be Treasury secretary. Hundreds of billions in bailout funds were to be spent; Geithner and his team had considerable leeway in how cheap capital was to be distributed to financial institutions and how troubled assets would be removed from banks’ balance sheets. A senior administration official described the benefits of one Geithner-era program as having been “designed by Wall Street, for Wall Street.” And who, presumably, would Geithner turn to for advice on how to implement such programs? Those he trusted, knew, and perhaps had conferred with in the past. Key Geithner hires were in fact drawn from the ranks of connected firms like Goldman Sachs, Blackstone, Lehman-Barclays, and Citi, and a look at Geithner’s publicly accessible calendar while at Treasury indicates that he met with a number of his friends from banking immediately prior to the passage of the Dodd-Frank Act, a package of financial reforms.
In the end, what the study points out, more than any kind of nefarious cronyism, is the uneasy relationship between the government’s need for well-informed advisers in order to develop good policies and the extent to which those advisers might exploit their connections for financial gain. In most instances, there may be sufficient checks and balances in place, as well as sufficient scrutiny from the media and watchdog groups, to ensure that policymakers don’t play favorites. But desperate times call for desperate—and quickly implemented—measures, which may afford more opportunities for policymaker discretion and fewer opportunities for oversight. That is the argument implied by the study’s title: “The Value of Political Connections During Turbulent Times.” (As Kermani, one of the study’s authors, pointed out to me by email, there’s further anecdotal support for this view in the awarding of a massive no-bid contract to Halliburton—a company formerly run by Vice President Dick Cheney—during the chaotic Iraq War years. Back in the more tranquil era when George W. Bush surprised the American electorate by picking Cheney as his vice presidential candidate, the markets didn’t change their valuations of Cheney-connected companies.) Investors, at least, were willing to bet that the circumstances would redound to the benefit of well-connected banks.
The new study also points to the challenges of reforming the way that businesses interact with the U.S. government. While we’re nowhere close to a Putin-style kleptocracy, there’s ample evidence that connections in Washington get you greater access. But if we outlawed anyone with connections to special interests serving in office, who would be left to govern the country? If we completely did away with the lobbying industry, what channels would allow well-informed parties (albeit with vested interests) to make their case to lawmakers? None of this is to suggest that we are governed by the best of all possible political systems—look no further than the recent government shutdown for evidence to the contrary. But there are trade-offs in the messy realities of designing democratic institutions. Maybe the best we can hope for is some variant on the current system, which includes the participation of investigative journalists, activists, and researchers calling attention to situations where there’s reason to wonder whether officials’ interests are aligned with those of the people they’re meant to serve.