Goldman Sachs was considered so influential that it was referred to as Government Sachs by many observers
ALLEGATIONS THAT politicians are in the pockets of big business have rarely been as current as they are today. Suspicions of an incestuous relationship between Fianna Fáil and property developers continue to dog the former, with the ever escalating rescue bill for Anglo Irish Bank further fuelling public distrust.
In the US, the apparent revolving door between Goldman Sachs and government, coupled with questionable decisions that have benefited the mighty investment bank to the tune of billions, has been a catalyst for widespread disquiet.
It is always wise to take a big picture view of such matters, however, to ascertain if political impropriety is really the issue it is made out to be. Can politicians actually be bought off so easily?
Do companies really profit by cosying up to senior public servants?
Do financial markets share the popular perception that success is as much a question of who you know as what you know?
Yes, yes and yes, according to many academic researchers. The authors of Political Connections and Corporate Bailouts, an academic paper that analysed government bailouts of financially distressed companies in 35 countries between 1997 and 2002, concluded that "politically connected firms" were nearly three times as likely as their non-connected peers to be rescued.
Such bailouts tended to be “especially wasteful”. While non-connected bailout recipients frequently returned to economic health, politically inspired rescues were far less successful.
Another study found that US companies that fattened party coffers beat the overall stock market by 2.5 per cent a year over the past 25 years.
For companies that contributed to the highest number of political candidates, the outperformance increased to 6 per cent a year.
The “contribution effect” was most evident among companies that donated to the most powerful politicians, with congressional contacts proving more valuable than senatorial ones – unsurprising, given that budget and tax laws originate in Congress.
Other studies found that 25 per cent of Congress members in the 1990s were investing in companies facing legislative action.
A 2004 study that looked at stock trading by US senators in the 1990s found that they beat the market by 12 per cent per year.
That’s an incredible achievement – not only did US households underperform the market during the same years, professional fund managers typically fail to match market returns. Even company directors failed to come anywhere close to the returns enjoyed by the senators. Stocks bought by senators “tended to stagnate prior to purchase, soar after purchase, and then stagnate again after sale”. Market-timing of this calibre is “robust evidence” of insider trading, the authors conclude.
The general public tends to scoff when politicians deny allegations of ethical impurity. So do financial markets, which are quick to price in the value of political influence. One paper looked at companies headquartered in a politician’s home town. When such politicians suffered sudden deaths, the companies’ share price fell by an average of 1.7 per cent.
In Indonesia, the share price of companies linked to president Suharto declined when bad news regarding his health was revealed. Another paper looked at 157 announcements across 35 countries and found that a company’s share price typically increases by 2 per cent when a large shareholder enters politics. Just as many papers confirm that markets prize political connections, many others confirm they are right to do so. In Italy, when senior politicians are directly involved in private firms, the profits of these companies increase by an average of 5 per cent.
They fall by a similar degree when the connection expires. Other international studies confirm that the loss of a political connection is typically followed by a drop in the rate of sales growth and access to credit.
Few firms are as politically connected as Goldman Sachs, or Government Sachs, as many like to call it.
Goldman Sachs is “a political organisation masquerading as an investment bank, and they’re sitting at the table with the top people in government”, charges Christopher Whalen, a high-profile banking analyst and managing director of Institutional Risk Analytics.
Hank Paulson, the US treasury secretary charged with making seismic decisions at the very height of the banking crisis, was once chief executive of Goldman. He appointed former Goldman vice-president Neel Kashkhari to oversee the $700 billion (€549 billion) TARP bailout fund.
Robert Rubin, treasury secretary in the Clinton years, was previously co-chairman of Goldman. Robert Zoellick, once a managing director at Goldman, is now president of the World Bank. Arthur Levitt, once head of the Securities and Exchange Commission, is now a Goldman adviser while former House majority leader and presidential candidate Dick Gephardt is a paid lobbyist for the firm.
Goldman employees contributed more money (almost $1 million) to Barack Obamas presidential campaign than any other company. Bill Gross, the world’s biggest bond manager, said this year it “amazes” him how politicians “can be bought so cheaply”.
Gross estimates that corporate interests spent “just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-$100 billion annual return”.
He’s right – politicians come cheap. The aforementioned study that found the most generous donors are the best stock market performers noted that companies were better off distributing modest amounts of money to as many candidates as possible rather than lavishing large sums on a handful. Smaller donations were just as likely to achieve share price gains, it found. Politically-connected firms enjoy better access to finance, lower taxation, more government contracts, higher market returns, relaxed regulatory oversight and government bailouts.
It may be different in Ireland. Yes, the academic literature is largely unanimous in concluding that big business profits by buying off politicians. Yes, this appears to be an international phenomenon. Maybe our politicians are a better bunch and decisions are made purely on their own merit.
No, probably not.
