Did financial firms with personal ties to then-Treasury Secretary Tim Geithner fare better in the economic meltdown than those who weren’t connected?
Using Muckety maps and other data, researchers from MIT, the University of California at Berkeley and the University of Connecticut have determined yes, they did.
Their study (pdf), initially released in May 2009 and updated in September of this year, found that companies with connections experienced abnormally high returns - as much as 11.2 percent - after President Obama’s announcement that he was nominating Geithner for the job.
Geithner was already well connected in the financial community, having previously served as president and CEO of the Federal Reserve Bank of New York.
The report suggests that the market “may have subscribed to a ’social connections meets the crisis’ hypothesis: that personal connections would matter during a time of crisis and increased policy discretion.”
It was perhaps reasonable to suppose that immediate action with limited oversight would have to be taken, and that officials would rely on a small network of established confidantes for advice and assistance. Powerful government officials are no di¤erent from the rest of us; they know and trust a limited number of people. It is therefore natural to tap private sector
people with relevant expertise when needed - including asking them for advice and hiring them into government positions. Even with the best intentions, beliefs are presumably shaped by self-interest, particularly when the people involved were, are, or will be executives with fiduciary responsibility to shareholders. These tendencies can be checked during ordinary times by institutional constraints and oversight, but during times of crisis and urgency, social connections are likely to have more impact on policy.
The importance of personal networks is likely to decline as the crisis ebbs, researchers wrote.
Geithner left Treasury in January and is now a fellow with the Council on Foreign Relations.