Strong and powerful linkages between corporations and politicians often lead to mutual benefits (Acemoglu et al. 2016, Blanes i Vidal et al. 2012, Bertrand et al. 2007, Faccio et al. 2006, Fisman 2001, Johnson and Kwak 2011, Sapienza 2004). For example, firms invest large amounts of money in campaign contributions and lobbying in addition to being a natural employer after a political career (Cooper et al. 2010, Luechinger and Moser 2014, Mironov and Zhuravskaya 2016, Shleifer and Vishny 1994). 

The fast-spinning ’revolving door’ is especially noticeable in the financial sector. This fact, together with the financial sector’s large lobbying expenditures, has attracted substantial media attention since the 2008 Global Crisis. The banking sector and its political connections are particularly interesting as, for example, the US financial sector is by far the largest donor to political campaigns, contributing roughly $260 million to politicians in 2006 alone – this is more than twice that of the healthcare industry, for example, which ranks a distant second (Johnson and Kwak 2011).

The long-lasting controversial relationship between Goldman Sachs and the US government is one of the most prominent cases. Former Treasury Secretary Henry Paulson and former US senator and former Governor of New Jersey Jon Corzine are both former CEOs of Goldman Sachs. Furthermore, former Goldman Sachs lobbyist Mark A. Patterson was selected as chief of staff to Treasury Secretary Timothy Geithner.

A crucial, yet unexplored, question in the literature is the role of private information exchanges between government officials and corporate executives before government decisions are publicly announced. To analyse this question, we focus on banks. In particular, we exploit the connections between financial sector regulators and top bank executives surrounding the Troubled Asset Relief Program (TARP) bailout announcement. 

A recent episode underscored the strong linkages between financial regulators and the top banks. On 14 October 2008, the US government announced that the Department of Treasury would invest up to $700 billion in financial institutions through the Capital Purchase Program (CPP). This bank bailout, also known as TARP, became the largest federal investment programme in recent US history. Bank bailouts not only generate social outrage by using taxpayers’ money to help revitalise financial institutions, but they also potentially create moral hazard as it confirmed the notion that banks were, indeed, too big to fail, too many to fail, or too important to fail. Understanding the political economy of banks is therefore a crucial question for both policymakers and academics alike. 

In Akin et al. (2020b), we use insider trading data, defined as buying and selling shares of one’s own bank, to explore whether there is statistical evidence to support the notion that political connections lead to private information flows from regulators to bankers before bank-specific TARP bailout decisions were made public. Our empirical strategy follows the approach employed in the insider trading literature. As we do not have the insiders’ private information set, or any variable that is perfectly related to it, we use forward-looking variables. To the extent that insiders’ trades are also based on private information about their company that is not known by the market, these trades will have predictive power of the firm’s future performance.

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The other key variable is political connections. Following Duchin and Sosyura (2012), we measure political connections by the previous employment history of top bank directors and officers obtained from BoardEx, which provides biographical information on board members and senior executives. We define an individual as connected if before joining the bank she worked in a financial regulator, the Treasury, or Congress. A bank is defined as connected if at least one of its board members is connected. Furthermore, we exploit within the same bank variation across connected and unconnected insiders. 

In a cross-sectional analysis of banks, we measure banks’ stock performance, defined as the buy-and-hold return in the five days following the bank-specific TARP announcement (thereafter, post-TARP period). We explore whether a positive abnormal bank return can partly be explained by political connections and insider trading in the pre-TARP period, defined as the period between the Lehman failure date (15 September 2008) and the bank-specific TARP announcement date. Our detailed data on insider trading and connections allows us to not only analyse banks’ behaviour, but also to exploit heterogeneous behaviour across connected and non-connected individuals within the same bank. 

The bulk of TARP announcements were made in late 2008 (58% of cases), though several announcements still took place during the summer of 2009. Our mean bank loses 2.3% in the five-day period after the bank-specific TARP announcement compared to the market average return – the large standard deviation (9.3%) indicates a large variation in stock performance. Our sample consists of 1,062 individuals and 225 banks. Of those banks, 40% have a positive abnormal return.

In our first set of results, we find that connected banks whose insiders bought more shares in the pre-TARP period are more likely to experience positive abnormal returns in the post-TARP period, i.e., in the days following the bank-specific TARP announcement. However, this result does not hold for unconnected banks, as insider trading and returns are uncorrelated. Furthermore, connected banks as a whole do not buy more shares in the pre-TARP period nor do they experience positive abnormal returns relative to unconnected banks. Moreover, when including separate terms for political connections to the arms of the government that deal with either financial sector or non-financial sector issues, we find that the latter are not associated with positive abnormal returns. This suggests that government connections per se do not matter to obtain positive abnormal returns in the post-TARP period. Rather, it is connections related to TARP decision-making that matters.

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In our second set of results, we restrict the sample to connected banks and analyse trading data for both connected and unconnected individuals within the same bank. We find that connected executives buy more shares during the pre-TARP period in the banks that experience positive abnormal returns in the post-TARP period. This result is not present for unconnected individuals. Put another way, our previous results hold when we compare connected and unconnected executives within the same bank. 

Additionally, we show that connected individuals are not simply better market timers than unconnected individuals in general – they do not experience higher positive abnormal returns than their unconnected colleagues, neither in tranquil economic times nor in crisis times other than during the period of bank bailouts. In addition, connected and unconnected insiders are not different in age or board membership experience. 

While our results show that connections matter, we have not explored the specific channel through which they matter. The terms of the TARP were standardised across banks and enabled the US Treasury to acquire preferred stock and warrants for the common stock. In the end, the CPP invested roughly $205 billion, but an important limitation of the TARP Transaction Report is that the Treasury did not disclose any information on the amount of TARP funds that individual banks had requested. 

Thus, the only individuals that, in principle, knew this figure were the financial regulators and the bank insiders (Sorkin 2009). Therefore, we obtained this information through a Freedom of Information Act (FOIA) request, which allowed us to compare the actual TARP funds allocated relative to the initially requested TARP funds by each bank. Indeed, we find that the ratio of received to requested funds is a strong predictor of abnormal positive returns in the post-TARP period. Increases in this ratio are also associated to more buying behaviour by insiders in the pre-TARP period, but only for connected banks.

Therefore, our results suggest that this information could be the channel through which connections matter. Remarkably, there are no results for ex-ante buying or ex-post returns if we use either the amount of received or the amount of requested funds, but not the ratio. 

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Overall, results are consistent with politically connected bankers using their connections for personal gain. These results are also aligned with Akin et al. (2020a) who show that bankers were unloading their shares before the financial crisis to avoid large losses that banks would ultimately experience some months later. These findings show that bankers were exploiting (or were not afraid of exploiting) their informational advantage both in normal and crisis times. Our results are also examples of the close connections between key government officials and Wall Street, which may in turn trigger social outrage and moral hazard. 

In a broader sense, they highlight the political economy of the financial sector, in particular, related to the biggest bailout in history. They also speak to the debate on ‘cooling off’ periods for revolving door employment opportunities and it provides insights into the discussion on potential reforms to money in politics.


Acemoglu, D, S Johnson, A Kermani, J Kwak, and T Mitton (2016), “The value of connections in turbulent times: Evidence from the United States”, Journal of Financial Economics 121(2): 368-391. 

Akin, O, J M Marín and J-L Peydró (2020a), “Anticipating the Financial Crisis: Evidence from Insider Trading in Banks”, Economic Policy, forthcoming.

Akin, O, N S Coleman, C Fons-Rosen, J-L Peydró (2020b), “Political connections and informed trading: Evidence from TARP”, Financial Management, 2020, 1-26.

Bertrand, M, F Kramarz, A Schoar, and D Thesmar (2007), “Politicians, firms and the political business cycle: Evidence from France”, Unpublished manuscript. 

Blanes i Vidal, J, M Draca, and C Fons-Rosen (2012), “Revolving door lobbyists”, The American Economic Review 102(7): 3731-3748. 

Cooper, M J, H Gulen, and A V Ovtchinnikov (2010), “Corporate political contributions and stock returns”, The Journal of Finance 65(2): 687-724. 

Duchin, R, and D Sosyura (2012), “The politics of government investment”, Journal of Financial Economics 106(1): 24-48. 

Faccio, M, R W Masulis, and J McConnell (2006), “Political connections and corporate bailouts”, The Journal of Finance 61(6): 2597-2635.

Fisman, R (2001), “Estimating the value of political connections” American Economic Review 91(4): 1095-1102. 

Johnson, S, and J Kwak (2011), 13 bankers: The Wall Street takeover and the next financial meltdown, Vintage Books, New York. 

Luechinger, S, and C Moser (2014), “The value of the revolving door: Political appointees and the stock market”, Journal of Public Economics 119: 93-107. 

Mironov, M, and E Zhuravskaya (2016), “Corruption in procurement and the political cycle in tunneling: Evidence from financial transactions data”, American Economic Journal: Economic Policy 8(2): 287-321.

Sapienza, P (2004), “The effects of government ownership on bank lending”, Journal of Financial Economics 72(2): 357-384. 

Shleifer, A, and R W Vishny (1994), “Politicians and firms”, The Quarterly Journal of Economics 109(4): 995-1025.