Study finds campaign contributions influenced bailout vote

Yesterday, Treasury Secretary Henry Paulson announced that equity injections are now the most “effective” way to bolster balance sheets of financial institutions and get credit flowing again while minimizing taxpayer losses.

How different were things roughly 40 days ago. On October 3rd, after the second roll call, the dust had finally settled over the Emergency Economic Stabilization Act (EESA) and its centerpiece the Troubled Asset Relief Program (TARP), everybody thought Paulson would mainly use $700 billion tax dollars to buy up toxic mortgages and other troubled assets of banks.

Given that nobody in the private sector even wanted to come near this toxic material, it was no wonder that TARP was perceived as a huge wealth transfer from “Main Street to Wall Street”, at least in the short run.

These perceptions shaped the voting behavior of members of the House of Representatives, according to a recent study.

In determining their “Nay” or “Yea,” representatives balance their own ideology, the interests of their constituents, and the interests of their campaign contributors. Not suprisingly, the study finds that ideology matters. This can also be simply observed by the fact that 25 percent of Democrats and 55 percent of Republicans voted against the bill.

But, more intriguingly, the study also discovered that higher campaign contributions from the financial services industry are associated with a higher chance of a representative saying “Yea”. By one estimate, a representative that received a one-standard deviation increase in his campaign contributions also had a 10 percentage points higher likelihood of supporting the bill. Could this perhaps be because many people in their district work in financial services? Yes, say the authors, but the direct contribution channel still remains important in explaining their voting behavior.

This result needs to be interpreted with care, though. For example, it could be that the financial services industry just gave campaign support to like-minded legislators that do not suddenly change their views in proportion to the contribution. Yet, while being very cautious about interpreting their findings, the authors do mention that “the [statistical] evidence suggests that campaign contributions influenced the EESA vote.”

And that makes TARP a bit troubling.