The best democracy money can buy?

Members of the United States Congress should know where they stand. The code of conduct that binds members of both the Senate and House of Representatives stresses that they must not let their personal interests compromise their duties as lawmakers. Their concern for their personal finances should not sway their choices when taking decisions on behalf of the voters who elected them.

It is an undoubtedly commendable principle. But how effective is it in practice? Do members of Congress succeed in putting their own financial interests aside when deciding what is best for their country?

Laurence van Lent of the Frankfurt School of Finance and Management and I looked at how members of Congress voted when they were asked to consider the bailout of the financial sector when crisis engulfed the global banking system in autumn 2008. In essence, we asked a simple question: was there any correlation between individual politicians’ support for the bailout and their stake in the financial institutions they were being asked to rescue?

The collapse of Lehman Brothers triggered a crisis: there was a real risk that the global financial system would seize up. Hank Paulson, then US Treasury Secretary, and Ben Bernanke, who was chairing the Federal Reserve, were fully aware of the danger. They approached Congress and sought backing for a comprehensive bank bailout.

Paulson initially outlined a scheme under which banks’ toxic assets would be bought by the government. The idea was controversial: George W Bush was still in the White House and bailing out failing companies – any failing companies – went completely against the grain of the Republicans’ free market rhetoric.

Paulson’s plan was rejected. But as the full extent of the threat to the global banking system and economy became increasingly evident, a new scheme was devised: it cleared the way for government money to be used to recapitalise banks.

Polls showed that the public didn’t like the idea of using $700 billion of taxpayers’ money to bail out Wall Street. Given the size of the sum, that was hardly surprising: it was equivalent to more than $2000 for every man, woman and child in the country.

Nevertheless, on October 1st 2008, the Senate approved the Emergency Economic Stabilisation Act. Two days later, the House of Representatives gave its blessing and the legislation was signed into law by President Bush. The banks were saved.

Politicians’ votes on the bill that led to the Act were clear and public: it was easy to see who supported the legislation and who didn’t.

Less obvious and less publicised was the extent to which the lawmakers had a personal financial interest in making sure that banks survived. But we were able to glean that information from the details of personal finances – assets, investments, borrowings – that Senators and members of the House are obliged to disclose.

So putting together these two sets of data – voting records and financial interests – what did we find? The result was striking: politicians whose investment portfolios were exposed to the financial institutions they were being asked to bail out were 60 percent more likely to vote for the act than those whose wealth was relatively immune to the effects of the crisis.

Around 30 percent of the members of the House of Representatives held shares in banks and other financial institutions: they were substantially more likely to back the bailout than other members of the House.

Overall, a politician with investments in finance were 60 percent more likely to vote for the bailout than someone without such investments.

But was this pattern simply because those with a personal stake in the banks didn’t want their own finances to suffer? Could there be other explanations?

Perhaps, for example, a politician’s willingness to support the bailout was a reflection of his or her ideological belief in the importance of financial institutions in a capitalist economy: such “finance-friendly” politicians would be inclined to support a rescue whether or not they held shares in banks.

We looked at the lawmakers’ backgrounds. Had they previously worked in finance or been members of finance-related congressional committees? If so, that could suggest that these people were “finance-friendly”. Our research showed that such experience did not per se significantly increase the likelihood of voting for the act.