The Value of Connections in 2008

By James Kwak

These days, some papers get more attention when they are in draft form than when they are published, in part because of the length of the review and publication cycle. Recall the Romer and Romer paper on the impact of tax changes, or the Philippon and Reshef paper on the financial sector, both of which made huge splashes years before they were finally published. My best-known paper also falls in that category. “The Value of Connections in Turbulent Times” began knocking around the Internet in 2013, and is only now being published by the Journal of Financial Economics—nine years after we began working on it, and at a time when the world seems to have completely moved on from its subject. (Note: that link will allow you to download the published version of the paper for free, but only until September 4, 2016. Thanks Elsevier, I guess.)

The paper, as you may have heard years back, shows that financial institutions with connections to Tim Geithner experienced abnormal positive market returns when his nomination to be treasury secretary was leaked and then announced in November 2008, and suffered abnormal negative returns when the news of his tax issues threatened to undermine his confirmation in January 2009. The interesting thing is that this is not ordinarily supposed to happen in the United States. Having connections to important government officials is not supposed to provide financial benefits to a company, and therefore nominations of those officials do not usually produce stock market bumps. The evidence is not completely one-sided, but in one representative example, researchers found that companies with connections to Dick Cheney did not experience abnormal returns in response to unexpected news about Cheney. This is in contrast to developing countries, where numerous studies have found that connections to important politicians are reflected in stock market valuations.

But it’s less clear why the markets (which, remember, are made up of at least some supposedly rational investors) thought that having connections to Geithner would pay off. Our main argument—after testing and discarding a bunch of other possibilities, like the effect was due to Citigroup, or to very large banks—is that, in the confusion of the time, it seemed likely that the treasury secretary would be given a large amount of discretion; and the more discretion that is available to an official, the more valuable it is simply to be able to get a meeting with him, or get him to return your phone call. You don’t have to think that Tim Geithner would consciously help out someone he served on a board with, or someone he had spent time with as president of the New York Fed; you just have to think that people are influenced by the people they spend time with, and so access matters.

This isn’t how we think our government is supposed to operate, but of course it’s how we all realize that it does operate. That’s one reason why individuals and corporations are willing to donate huge amounts of money to super PACs—so they can get access when they need it. What was unusual about the financial crisis was that, with the financial system and economy apparently falling apart, the value of those connections was much higher than usual. It also showed how, when push came to shove, the United States’ political institutions behaved more like those of a developing country than we would care to believe—the central point of Simon’s famous Atlantic article.


7 thoughts on “The Value of Connections in 2008

  1. And Cheney’s voice in the administration had no bearing on Halliburton’s mid east contracts nor did Roger Ailes behavior contribute to Fox’s success in the past; me smells a dead rat in the house which has yet to be found.

  2. Simon’s Atlantic article was a good read, thank you for sharing.

    Which goes to the point, when morally bankrupt oligarths are able to deform the universal evolution of mankind because they do not agree with the conclusions made at the beginning of the century that mankind’s true destiny (Life, Liberty and the Pursuit of Happiness) is predicated on eliminating slave labor,

    then do NOT continue to evolve a specialist class of “modern” ethics professors who do nothing but mentally masturbate for the iniquitous oilygarths….these capitanos of industry are unhinged from law and order that has been righteously earned by humanity, itself, over centuries of brutal struggle. “Crimes Against Humanity” are REAL. To support the evasion of “crimes against humanity” from justice is ethical. moral, spiritual, cultural, economic, and even SCIENTIFIC – depravity. These depraved soulless “leaders” now wanna talk about who is “inconsistent” in POLITICS? ROTFL

    Being tagged and bagged like cattle with an algorithm that tracks you to eliminate you as slave labor when the economic bell rings is NOT the destiny of HUMANITY. At least, it is not the free will CHOICE of the majority of humanity. It is a crime against humanity.

    Like I keep opining, the Shamans of Gizmology are the worst priest class yet to torment and deform humanity for the $$$$.

  3. Now Annie, it’s long since been proved that today’s USA gvt is the most corrupt gvt in the history of the planet. And we all know from history that quite a few corrupt gvts have existed in the past. So why wouldn’t the most corrupt gvt in the history of the planet use every trick in the book to control their own citizens and once successful there, move on to the rest of the planet. The answer is they would, and at any cost I might add.
    So with that now as the premise rather than the conclusion, we can determine who contributes to today’s problems. The answer is anyone and everyone working in gvt, anyone conspiring in a court room at any time to manipulate people to their like minded thinking cohorts. They will use communicative manipulation, financial manipulation, and if they don’t succeed there, physical manipulation until the victims succumb to their demands.
    Sure it’s a crime against humanity, just not their humanity, and in their minds that’s all that counts. A financial eugenics to rule them all and their is nothing anyone can do about it either, the future is encouraging aint it? Wouldn’t you WANT to bring children into this environment to feed the beast, they pay good money to do so, and then with the turn of a birthday, you are a slave to money, it’s formula tic.

  4. USA government is not the most corrupt in history – total bs.

    End The Patriot Act and you scatter the roaches into the land where we can step on them….

    Get outta my face, you bilious nayers

  5. Yeah, the gvt cronys can buy off just about anyone these days, but not me, no sir re.

  6. Gotta get this FAKE “Patriot Act” government outta our faces – they do nothing except put the hurt on the INDIVIDUAL…

  7. You know both the Fed AND Treasury are going to default on their debt, you know that right? Good!

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