An Analysis of the Financial Services Bailout Vote

Abstract

Washington’s remedy to the financial problems that began in 2008 was the Troubled Asset Relief Program (TARP) — the so called bailout of the banking system. Whatever its merits, it was, for the most part, unpopular with the American public. Lawmakers, fearful that the economy might actually collapse without some action, were likewise fearful that action — in the form of a payout to the Wall Street financiers — would prove to be harmful to them at the polls. Thus, politicians sought to assure the public that their vote on the measure would reflect Main Street virtues, not Wall Street greed.

Members of Congress, addressing the public’s misgivings about the bailout, asserted that they were wrestling with difficult issues such as fairness and equity, banking regulation, executive pay, job losses, moral hazard, 401(k) values, and the proper role of the state. Furthermore, they argued, these complex issues were difficult for the public to understand, and legislators, vigilant in carrying out their duty, were weighing the pros and the cons in order to cast a vote that was in the best interest of the nation.

But it turns out that when one moves beyond the speeches, the underlying motivation behind most votes cast was hardly complex and actually quite simple. In this article, we construct a model to analyze the bailout vote of each legislator. A simple reelection model of legislator behavior explains a majority of the votes taken either for or against the measure from politician to politician.

Keywords: too big to fail, bank bailouts, U.S. financial crisis, American economic crisis, Congress, Great recession, TARP

JEL Classification: D70, D72, G01, G18, G28, O16