Study Finds That Of All Factors Determining The "Bailoutability" Of Crappy Banks, Ties To The Federal Reserve Are Most Critical

Tyler Durden's picture

Adam Smith, Charles Darwin and George Washington are not only rolling in their graves, they are dancing the macarena. A new study by the UMich School of Business has found what everyone has known since the crisis began, if not centuries prior: that the biggest, crappiest banks were guaranteed to get more bailout funding the more political ties they had (and more kickbacks they had offered). Is this sufficient to claim that capitalism in its purest sense has been corrupted beyond repair, courtesy of political intervention and constant pandering? Probably not, but it sure makes a damn good argument. In any case, the data is sufficient for all bears to start keeping a track of which banks are increasing their lobbying efforts and funding: those are the ones where the greatest weakness is likely still to be uncovered (if it hasn't already). And while the political relationship probably is not a big surprise to any realistic readers, another finding of the study makes a solid case for abolition of the "apolitical" Federal Reserve:

A new study by Ross professors Ran Duchin and Denis Sosyura found that
banks with connections to members of congressional finance committees
and banks whose executives served on Federal Reserve boards were more
likely to receive funds from the Troubled Asset Relief Program, the
federal government's program to purchase assets and equity from
financial institutions to strengthen its financial sector.

The unsupervised Federal Reserve gets to make or break banks, presumably under the gun of its one and only master, Goldman Sachs, which has already destroyed its major historical competitors: Bear Stearns and Lehman Brothers. This is a sufficient condition to not only audit the central bank but to immediately seek its abolition, and also to commence anti-trust proceedings against Goldman Sachs which is not only a monopoly, but by extension has veto power over the very regulatory mechanism that is supposed to keep it "fair and honest." The system is truly broken.

More findings from the study:

Further, their research shows that TARP investment amounts were
positively related to banks' political contributions and lobbying
expenditures, and that, overall, the effect of political influence was
strongest for poorly performing banks.

Can someone reminds us what the core premise of capitalism is again, and why we pretend to live in anything other than a hard core socialist society?

One of the professors of the study had this to say:

"Our results show that political connections play an important role in
a firm's access to capital
. The effects of political ties on federal capital investment
are strongest for companies with weaker fundamentals, lower liquidity
and poorer performance — which suggests that political ties shift
capital allocation towards underperforming institutions."

The US financial system now need a new four letter acronym: everyone knows TBTF. We hereby annoint the Too Blatantly Briby To Fail (TB2TF) category of financial institutions. We posit that in 5 years there will be two banks in the former group: JP Morgan and Goldman Sachs, while every single other bank will make up the latter.

Among the specific data findings:

The researchers used four variables to measure political influence: 1)
seats held by bank executives on the board of directors at any of the
12 Federal Reserve banks or their branches (the Federal Reserve is
involved in the initial review of CPP applications from the majority of
qualified banks); 2) banks with headquarters located in the district of
a U.S. House member serving on the Congressional Committee on Financial
Services or its subcommittees on Financial Institutions and Capital
Markets (which played a major role in the development of TARP and its
amendments); 3) banks' campaign contributions to congressional
candidates; and 4) banks' lobbying expenditures.

They found that a board seat at a Federal Reserve Bank was
associated with a 31 percent increase in the likelihood of receiving
CPP funds
, while a bank's connection to a House member on key finance
committees was associated with a 26 percent increase, controlling for
other bank characteristics such as size and various financial
indicators.

The last data point is truly troubling: while it is one thing to pander to corrupt politicians, at least when their transgressions are made public they can and will be booted out. Yet what checks and balances exist to punish current and former Fed staffers who endorse near-bankrupt companies, in self-evident conflict of interest acts, for enhanced survival? As the Fed is accountable to nothing and nobody, save Goldman Sachs, one can argue that Goldman decides the fate of the very core of the US financial system: which firms get the thumbs up and down treatment. This is an unbelievalbe travesty of both the constitutional and the tenets of capitalism and must be rectified immediately. It certainly helps that the president, being a Constitutional law professor, will surely get right on it.

"Our findings also suggest that qualified financial institutions were
more likely to receive an investment from CPP if they were bigger and
had lower earnings and lower capital
," said Duchin, U-M assistant
professor of finance. "This is consistent with an investment strategy
seeking to support systematically important institutions experiencing
financial distress."

If this study's finding are confirmed and repeated independently by other research teams, it is safe to say that any pretense America has to being an efficient capitalism system (where those who can no longer compete, disappear) can be used to wipe the nation's collective backside. Between this, and a choice of US dollars and Treasuries, Cottonelle is starting to see some serious competition.

h/t Geoffrey Batt

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
JohnKing's picture

Rewarding failure is our new ethos. It won't end well, the best we can hope for is that it ends rather quickly.

phaesed's picture

Hmmm.

Would you say rewarding failure or rewarding lobbying and political connections?

Small businesses failed and one could easily argue that they weren't rewarded because they have neither lobbyists or political connections.

Skill means nothing when you have a rich daddy and rich friends.

 

JohnKing's picture

Yes, the politically connected get rewarded for failure, others simply fail.

 

 

AngryVoter's picture

It isn't enough that they get to print money via fractional reserve money they still can't run their business.  It isn't enough that the Fed controls their cost of goods (interest on deposit and short term funding) manipulating it lower when they have trouble... they still can't run a profitable business.  It isn't enough that the government injects $1 TRILLION dollars ($5,000 for every man woman and child in USA) they still can't make it.  It isn't enough that the FED buys up all the worthless mortgage securities for whatever price is asked... there are still having troubles.

 

Yet this whole time their CEO's and employees are among the highest paid in the country.  WHAT THE FUCK...  WHAT THE FUCK...  YES I'M PISSED... AREN'T YOU??????

Anonymous's picture

As a nation we the masses are lucky our herdsmen think we are a totally pathetic sheeple bunch of morons who believe everything they tell us. The day we come to question our pathetic existence will be the end of us.

shadowboxer's picture

 It wont end well, SO END IT

Order of Business:

STATE RECALL TO REPLACE CORRUPT CONGRESS

***SEND IN THE MARINES***

LOCK DOWN GOLDMAN, JPM, and THE FED

RECLAIM GOLD AND SILVER ASSETS FRAUDULENTLY ACQUIRED BY THESE INSTITUTIONS. 

ELECT A PRESIDENT WITH A US BIRTH CERTIFICATE

STOP ALL FOREIGN AID, UN AND IMF SUPPORT

TREASURY WILL ISSUE ALL NEW MONEY TO US CITIZENS,  FOREIGN HOLDERS OF FED BACKED DEBT SETTLE WITH INTERNATIONAL BANKS AT FINANCIAL CRIMES TRIBUNAL

 ...well its a start,  quit mincing and get it moving!

Anonymous's picture

At least Cottonelle has utility value.

Cognitive Dissonance's picture

He who has the Gold makes the rules. The oldest tricks are still the best tricks.

Sqworl's picture

Merry Christmas CD...x

fav russian proverb: He who pay's, picks the music...

Bearish News's picture

The political capital ratio is clearly most important for judging a bank's risk of failure.

Anonymous's picture

One. Big. Circlejerk.

I need more asshats's picture

That's one way for UMich to get some shut the fuck up money...

Hey, shouldn't the ZH Santa be holding bars of Gold? What's up with the fiat?

Maybe like this Chumbawamba Snowman:

http://i50.tinypic.com/241l5lj.jpg

blindfaith's picture

Yes, and I am confused...the U of Mich is ruled by gobs of ex-Goldman boys...you know making up all those dependable 'reports' the the Government and Wall Street dance to. Now, why would 'they' come up with a report like this, unless it got out the door without "proper review" by by the NY and DC supervisors?

Miles Kendig's picture

This essential formula has been applied over every segment of society, not just the crossroads of commerce.

Daedal's picture

My investment research will now be primarily weighted toward political connections.

Current strategy will be the pharma and medical insurance companies. Come up with the ones that have the best political connections. Long them, short the sector.

Must read btw:

http://online.wsj.com/article/SB1000142405274870439830457459813044016495...

Anonymous's picture

Here is a relevant story that pretty much confirms what you are saying.
http://www.npr.org/templates/story/story.php?storyId=121609815

blindfaith's picture

hum...that a bit like being a "long" working capital partner with drug gangs, who pay off the local police (who arrest granny for growing a bit of medical pot in her backyard, you know "short the sector").  It is a good idea, but somehow don't you think they will know you are coming and play against you in a heart beat and leave you on the street with the rest of us?

digalert's picture

Am I going to have to call for matching chrome bracelets on members of CONgress and/or FED? Where are the damn cops?

For cryin out loud, I'm concerned and being questioned by the IRS about a little deduction I took for 08'. Yet in Washington the crooks roam the hallways in broad daylight, BAU with a wink and nod.

Anonymous's picture

Where are the cops?

You and I, my friend, we are the cops along with every tax-paying citizen of the US.

...Perhaps Rusty still wants to subscribe to my newsletter.

Anonymous's picture

Come on EVERYBODY lets not let this Health care Bill pass without a fight, get your heads out of Christmas for 2 minutes and call/E-mail your Senators.

JR's picture

The trouble is, they aren't "our" Senators...  We're going to have to vote them out, first by knocking them out in the primaries with grassroots candidates WE select.

drbill's picture

In another study by the same university, "The sun will most likely rise tomorrow".

Neither study comes as a surprise...

saladbarbeef's picture

Fie and wrath on those that still think the Fed is "unpolitical." 

Anonymous's picture

As a quasi-governmental, quasi-private (quasi-modo?) institution, isn't the Fed doing exactly what it's supposed to be doing? OK, the "Congressional mandate" they talk about of inflation control and full employment kind of sucks. But maybe they are fulfilling the private-side mandate really well! Whatever that is...

Thomas's picture

I hate big banks as much as the next guy and have not read the study, but it smacks of suffering from a lurking variable. Unfortunately, academic economists are not the sharpest knives in the drawer, so they might not think of that. (Apologies to academic economists who are reading this. You must be the Black Swans!)

Cistercian's picture

 Win for Tyler and ZH.Epic.

Crab Cake's picture

I believe the premise made by the author to be pointed in the wrong direction, but not entirely incorrect.

Ties to the Fed = A higher chance that a well connected entity receives Bernie bucks and survival. 

Only somewhat correct.  The Fed is actually just an intermediary for those that actually own this country; lock, stock, and barrell.

The more share of the Fed one has, the more insurance, profit, and Bernie buck wealth.

A bailout is just desserts for having a share of the oligarchy. 

Ties to the Fed = Ownership of America

We are essentially permanently indentured servants, living on varying stipends, and imprisoning ourselves in a company store from sea to shining to sea.

There is absolutely not one, good, reason why the people of this country should allow our monetary policy to be "hacked" by private interested parties acting for their own profit and interest, god damnit. 

Monetary policy by and for the people.  Now.

AngryVoter's picture

+++ Well Said!

It is a shame that # of shares in the New York Fed and other district branches isn't available for the analysis.  How can the institution in charge of printing money be more secretative than a public corporation?

Yes I'm PISSED... and calling my senators every day to remind them they should not confirm Bernanke.  I WANT AN INTELLECTUAL REVOLUTION!

Andrei Vyshinsky's picture

"There is absolutely not one, good, reason why the people of this country should allow our monetary policy to be "hacked" by private interested parties acting for their own profit and interest, god damnit.

And if it were only that monetary policy that has been hacked. The outcome of the "insurance/drug care" debate should make clear as hell who's hacked policy in health and human services. And did you know that there is a law - yes, actually, a law, an AIPAC sponsored law - mandating America's commitment to maintaining Israel’s qualitative military edge in the Middle East and one that requires the president to report to Congress periodically on the steps taken to insure this advantage!

One of the greatest dividends of this financial crisis has been its force in confronting the American people with both their slavery and the theft of their democracy. In my view, righting these wrongs will be achieved only through mass demonstrations and strikes. The corruption is so egregious in Washington as to preclude parliamentary remedies.

Rick64's picture

What is that law called and when was it passed? Curious.

Andrei Vyshinsky's picture

Rick64,

My knowledge of this law comes from Glenn Greenwald at Salon. You'll find referrence to it about half way through this recent article of his:

http://www.salon.com/news/opinion/glenn_greenwald/2009/12/21/terrorism/i...

Johnny Dangereaux's picture

Leave it to some college profs to tell us what we already know!

 

system failure's picture

Its obvious, the UMich must be short on money. Simply trying to compete (outbid) against wall street for money. It appears UMich has become jealous due to thier dwendling funding verses banks and have changed the rules. They have chosen slandering them instead. I am watching the events unfold...to?

milbank's picture

This country is owned by an organized crime syndicate and as Lucky Luciano could tell you, it's not called La Cosa Nostra, Mafia, The Mob or anything like that.  It's called the Federal Reserve.  It's "families" consist of the banks known as the "Primary Dealers."  Sure, sometimes they have to "go to the mattresses" and there are casualties like Lehman Bros. and Bear Stearns but, these guys own and run the country.  I don't need professors Ran Duchin and Denis Sosyura to tell me that.  I've understood it all for decades.

Sqworl's picture

I find it truly ironic that our first black president passes legislation that makes us instant "Slaves"...

AngryVoter's picture

milbank, you are one hundred percent on target.  please help to educate those who don't understand.  information and public activism can make a difference if we reach critical mass.  we are a long way from where we need to be but are much farther than we were several months ago.

milbank's picture

Thank you AngryVoter but, you're not fully grasping what I said means.  It means there is nothing you can do about it.  "activism can make a difference if we reach critical mass" is true but, it's never going to happen and the only result that would matter is total destruction of the government of the United States as we know it.  You call yourself "AngryVoter," you also have to accept that there is no one you will ever be able to vote for for federal office, outside of the couple of "outlier" types who manage to get in, who isn't already in the pockets of this organized crime syndicate known as the Federal Reserve before you get to vote for them.  Doesn't matter which party.  They can't run without the money and support of the syndicate. 

In their pockets "like so many nickels and dimes" as Sollozzo said of Don Corleone's politicians and judges in "The Godfather."  The "two party system" is a false choice.  The only areas where there is real difference is where "the syndicate" has no skin in the game like civil rights, abortion rights and other purely social issues.

Like I said in my earlier post, they own the country.  You can't beat them. 

They got sloppy with greed and messed up a bit.  Now they are pulling out the muscle to put things back together without giving up anything.  All that is happening just makes it easier to see what is and has always been so about America, it's "two party" political system and it's "free-market capitalism."

The only real difference between us and the old Soviet Union is we have more stuff.  More stuff to amuse us and mollify us.  That's now going to change.

The standard of living for this country has for forty years now, been based on borrowed money.  Debt.  The Syndicate is doing the "Big Sweep" right now, the big transfer of money from the many to the few before the next phase of our country's economic saga kicks in.  That's the part where our standard of living drops to meet the standard of living of the rest of the world.  It's part of the One World Order.  Another aspect to understand, the standard of living for this country grew as long as we weren't allowing foreign competition in, once that happened and the car companies in Detroit had to compete with the car companies of other countries with lower standards of living, lower pay and lower priced vehicles well. . . you saw what happened to them.  The auto industry is just a microcosm of the United States versus the world as a whole.  The whole country in varying degrees is going to turn into Detroit over the next decade or so as our standard of living deleverages to meet the competition's.

WaterWings's picture

Soon, the arrests will come - if they have not already started. This is not paranoia - Stalin nearly perfected the system - if only he had the surveillance capabilities that now exist to predict behavior. There is a reason the wording of the 2nd Amendment finds itself among the other rights of the individual - and the wording 'shall not be infringed' was considered to be definitive. Yet we bicker back and forth over what the founding father's intended - were they redundant when it came to this portion of the Constitution regarding legislative powers?

  • To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;
  • To provide and maintain a Navy;
  • To make Rules for the Government and Regulation of the land and naval Forces;
  • To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;
  • To provide for organizing, arming, and disciplining the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Officers, and the Authority of training the Militia according to the discipline prescribed by Congress;

And the 2nd Amendment:

Amendment 2 - Right to Bear Arms. Ratified 12/15/1791. Note

A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.

In my view it is that a citizen is able to defend their rights, at all costs. The rest are not citizens, but slaves to the bidding of a corrupted state.

The current administration still fully supports the complete stripping of personal rights, including habeus corpus, if you are determined to be an 'enemy combatant'.

'I got this.'

One effectively becomes, as Orwell explained in one uncomplicated term, an 'unperson' - you cease to exist:

http://theragblog.blogspot.com/2009/12/supremes-suspected-enemy-combatan...

Rights cannot be given, only taken, away. Here is how they are protected, in order of ascending effectiveness.

  • Ballot box
  • Jury box (see 'Jury Nullification')
  • Cartridge box

At some point, going over and over political talk and reasoning is mental masturbation. Ask yourself why Posse Comitatus (http://en.wikipedia.org/wiki/Posse_Comitatus_Act) has been violated recently and repeatedly? 

http://www.lewrockwell.com/blog/lewrw/archives/23256.html

http://www.campaignforliberty.com/blog.php?view=25749

http://www.cnsnews.com/Public/Content/Article.aspx?rsrcid=45206

When would it ever be prudent to suspend the Constitution in order to save it?

(A special thank you to Thomas Jefferson and his always dissenting fellows, the Anti-Federalists)

JR's picture

Current "events" prove the Founders still on track as usual:

"Firearms stand next in importance to the Constitution itself. They are the American people's liberty teeth and keystone under independence. From the hour the Pilgrims landed, to the present day, events, occurrences and tendencies prove that to ensure peace, security and happiness, the rifle and pistol are equally indispensable. The very atmosphere of firearms everywhere restrains evil interference - they deserve a place of honor with all that's good." -- George Washington, Commanding General of the Continental Army, Father of Our Country and First President of the United States in a speech to Congress, January 7, 1790

AngryVoter's picture

I do understand and agree with a lot of your post.  I do however believe that there are real forces of change at work that we haven't seen before.  The internet allows a site like ZeroHedge to exist.  There is no reason that ZeroHedge cannot be more read then the WSJ.  Goldman Sachs is reading it.  CNBC is reading it.  Gerald Celente (future trends predictor with strong track record) is predicting a third party will emerge in strength in 2010.  It is just time.  The financial crisis, unprecedented corrupt government actions, blatant disregard for the populous, the internet, social networking, ZeroHedge.  These are all little pieces that are falling into place creating the environment for a real third party of real power to emerge quickly. 

I don't want to be crass, but you remind of the many people I work with in large corporations that bitch about the politics.  I remind that we all as a whole are responsible for it so if we don't like it we should change.  It is hugely ironic (and supports your thesis) that everyone thinks Dilbert is funny but than goes to work and continues propogate that world.

When you talk to people almost everyone agrees that they don't trust nor identify with either party.  But then they say but "we have to pick the better of the two evils".  Bullshit only because that is what the few controlling the parties want.  We need people to understand just how widespread the desire is for change and convince them that a vote for a third party candidate is not a wasted vote.  This wasted vote mentality has slowed real change in this country for decades.

The internet provides a low cost medium for like minded individuals to unite share ideas in a way that wasn't available a decade ago.  Like I said I understand your positions but I believe like the lungs provide a fertile environment for H1N1, our current state has provide the perfect incubator for a real intellectual revolution.  We just have to all quit saying there is nothing we can do. 

WaterWings's picture

There is bitching about mainstream politics (Hannity, Maddow...Rush, Olbermann), and then there's bitching about the essence of liberty getting pushed off a plank, i.e. actual violations of the Constitution vs. Washington freakshow machinations. The media tramples and distorts as well all know - and our fellow countrymen can no longer tell the difference; nor do they 'care'. So to them, all politics is just bitching. Worse than sad.

mtguy's picture

To digalert - Just tell those IRS agents you used the same accounting software that Timmy G does and thus you want the same penalty. Oh, wait, he didn't get a penalty. Your second option is to say you were preparing your resume for a csar position in the whitehouse as you knew when you filed that Hopey was going to win.

mtguy's picture

sorry, that's czar - with a 'z' as in zero hedge, not 's' as in the slimeballs in office.