How To Get a Bailout for Your Bank in Four Easy Steps

If you run a financial institution, what factors can make a difference in ensuring whether you can get a bailout from the federal government if your firm runs into the proverbial fiscal iceberg?

If the findings of recent research into the bailouts of the 2008-09 financial panic are any indication, the single best predictor of whether a distressed financial institution received relief from the U.S. government was whether or not elected politicians owned stock in it! Ahmed Tahoun and Laurence Van Lent write in the abstract to their working paper Equity Ownership and Campaign Financing of Members of Congress and the Bailout of the Financial Sector:

We examine whether the equity ownership in financial institutions held by members of the U.S. Congress is associated with these institutions receiving government support under the Troubled Asset Relief Program (TARP). We find that the equity ownership of members of the House of Representatives, but not the Senate, is positively associated with voting in favor of key legislative proposals to bailout the financial sector. In a sample of 555 publicly listed financial institutions, we also find that the equity ownership of Congress members seated on the Senate Finance, the House Financial Services and the Senate Banking, Housing and Urban Affairs committees is positively associated with both the amount of bailout these institutions receive, as well as the timing of that bailout. We find that when the chairpersons and ranking members of these committees hold larger investments in a given financial institution, the amount of support committed thereto as well as their likeliness of receiving this support at an earlier time increases. In contrast, institutions’ campaign donations to the members, including the chairpersons and ranking members, of these committees are not associated with either the amount of bailout received or the timing of its receipt; rather, we find that the bailout is positively associated with the total donations made to all non-financial-committee members. In addition, we find a positive association between government support and the presence of a (former) politician on an institution’s board of directors.

So, did you get all that? Let's summarize Tahoun and Lent's major findings into a bulleted "to-do" list for your firm:

• Make sure your firm's stock is part of the investment portfolios of members of the House of Representatives.
  
• Make sure your firm's stock is a larger part of the investment portfolios of the House and Senate members' who sit on their respective legislative body's committees overseeing financial and banking matters. Especially the committee chairs and the committee's ranking members.
  
• Contribute broadly to the election campaigns of politicians who do not sit on these committees.
  
• Hire a former politician who served on these committees to serve on your board of directors.
  

Note the difference between Congressional banking and financial oversight committee members and non-committee members in the funding mechanisms by which your firm would be more likely to secure the necessary votes to get a federal government bailout. Those who do not sit on the Congress' financial and banking oversight committees would not have the same concerns regarding the appearance of conflict of interest that those sitting on these committees have, which might largely explain the difference in how your firm can directly fund these individuals.

It's also important to send the current members of these committees a clear message that their service on your behalf today will help secure their financial future when they are no longer serving in Congress, so having former members of Congress on your Board of Directors today helps ensure they see that connection.

The real trick to success in getting bailed out though is making sure your stock becomes part of the investments held by elected officials. For that, you'll just have to count on your inside political connections to create a business and regulatory environment that will naturally attract politicians to your stock due to its relative performance advantages over other firms who don't play the same insider games.

And that's it! Now, the next time you run into trouble, you'll be among the first in line to get a massive check from Uncle Sam!