Political connections influenced bank access to TARP funds, study claims

23 December 2009

Political ties influenced government decisions over which financial organisation to offer bail out money, a new survey has claimed.

A study by researchers at the University of Michigan's Ross School of Business revealed that organisations whose members had sat on Federal Reserve boards or had connections to congressional committees were more likely to receive funds from the Troubled Asset Relief Program (TARP).

The amount was related to a bank’s lobbying expenditures and political contributions, the research showed.

A board seat at a Federal Reserve bank was found to improve an organisation’s chances of receiving funds via the Capital Purchase Program by 31 per cent.

Denis Sosyura, assistant professor of finance at the institution, said: “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."

By the end of September 2009, almost 700 financial institutions had benefitted from $205 billion distributed through TARP.

By Jim Ottewill

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