FORTUNE -- Move over "too big." There's a new knock on the mega banks: "Too connected to fail."
Two studies published in the past few weeks tackle the issue of whether big banks get special privileges because of their connections to top regulators and Washington officials.
Both studies focus on the early days of the financial crisis. The first, titled "The Value of Connections in Turbulent Times," came last month from a group of five economists including MIT's Simon Johnson, who has been a vocal proponent of breaking up the big banks. The Johnson study finds that shares of banks with stronger connections to Timothy Geithner rose 11.2% more than those that didn't after news was leaked back in 2008 that Geithner was to become Treasury Secretary. Remember, this was at the height of the financial crisis, when the possibility that the government would have to nationalize a number of banks, or all of them, was thought of as a real thing. The rise in stock prices could mean that investors thought that banks with better ties to a key Washington insider had a better chance of surviving the financial crisis intact, or at least getting better treatment.
The second study arrived earlier last week and focuses on the Federal Reserve and the loans it made to banks in 2007 and 2008. The study, by George Mason University economics professor Benjamin Blau, finds that banks receiving emergency loans spent significantly more --72 times as much -- on lobbying in the decade prior to the financial crisis than those that didn't get assistance. What's more, even after Blau adjusted for size, he found that banks with political connections got bigger loans than those that didn't.
This, of course, feels unfair. But it may not be all that surprising. Banks that deal in complex markets are often more likely to have stronger ties to regulators, who are making the rules. And since the financial crisis, in part, erupted because of the complexity of those markets, it makes sense that the banks that needed the most assistance were the ones that spent the most time with regulators.
The cynical way to interpret this data is that banks hire lobbyists and connected individuals in order to skirt the rules so that they can make risky bets that boost profits and bonuses in good times. In bad times, their connections lead to government bailouts on favorable terms, also boosting bonuses.
But that may not be exactly what's going on here. First, the Johnson study is only measuring perception, and the market could be getting this wrong. One of the biggest beneficiaries of the financial crisis was Wells Fargo (WFC). It was able to buy Wachovia and get huge tax breaks for doing so. And it also used the financial crisis to extend its dominance of the mortgage market. The Johnson study does show that Wells' stock did react positively to Geithner's appointment, but not nearly as much as Citigroup (C), which is still struggling post-financial crisis. Although, I guess, you could argue that without Geithner it would have been even worse.
The Johnson study didn't find any ties between Geithner and AIG (AIG). Yet Geithner was key in providing assistance to the large insurer. Johnson and Co. chalks that up to the fact that AIG was essentially a backdoor bailout for the big banks, but that doesn't really explain why Geithner defended paying bonuses to key AIG employees even after the firm -- and, by extension, the banks -- were bailed out.
To their credit, both studies point out that there could be something less nefarious going on here. The most benign comes from the Blau study that says banks that lobby were probably more likely to seek out Fed loans. But, in general, the studies claim that it is likely that Geithner and the Fed handed out assistance to the firms that they knew best. And if you are handing out taxpayer money and you hope to get it back, going with firms you know probably isn't a bad choice. But it's not as if all the spending on behalf of the banks has been free of misguided, or even corrupt, motivations and processes.
Traders are talking about the prospects of "dirty prices" and other default oddities.
FORTUNE -- On Thursday, the Treasury Department released a report anticipating what would happen if we have a debt ceiling default. One prediction: a financial crisis that could "echo the events of 2008 or even worse."
It's hard to see exactly how that could happen.
If Treasury bonds were to plummet after a debt default, that could cause other bonds MOREStephen Gandel, senior editor - Oct 4, 2013 9:49 AM ET
The government's bailout of Citigroup has finally ended. It was profitable, but it took a while.
FORTUNE -- Congratulations, taxpayers. Your Citigroup bailout is finally over.
On Monday, the Federal Deposit Insurance Corp. said it was selling $2.4 billion in Citi bonds. The bank debt is the last remaining piece of Citi (C) that is owned by any government agency tied to the bailout of the firm in the wake of MOREStephen Gandel, senior editor - Sep 10, 2013 5:00 AM ET
Here's one instance where you should give the Treasury an "F" for effort.
Correction: 5/24 12:57
FORTUNE -- A few weeks ago the Treasury Department put out its latest report of what the government's rescue efforts in the wake of the financial crisis cost taxpayers. The conclusion: Nada. In fact, the Treasury says that if you take a broad view of all the bailout programs, taxpayers actually are looking at a $9 MOREStephen Gandel, senior editor - May 21, 2012 1:59 PM ET
An outside critique of our analysis: "Surprise! The big bad bailout is paying off"
By Bob Eisenbeis, Cumberland Advisors
A recent column by Allan Sloan and Doris Burke in the Washington Post claims that the distasteful financial bailout not only worked but also generated a profit for the government of at least $40 billion and perhaps as much as $100 billion. Their conclusion is based on their working of the numbers, and the MOREJul 19, 2011 5:00 AM ET
Our recent analysis of the U.S. bailout caused quite a ruckus. Here is our response to the critics who say we omitted some key details.
FORTUNE -- When we wrote our story about the financial-system bailout turning a profit for taxpayers, my Fortune colleague Doris Burke and I (and our editors) decided that less was more. So we showed you our bailout numbers, but didn't give you much detail about how MOREAllan Sloan, senior editor-at-large - Jul 19, 2011 5:00 AM ET
The U.S. government's often maligned $14 trillion intervention not only staved off global collapse - but is making money.
With Doris Burke
FORTUNE -- The bailout of the financial system is roughly as popular as Wall Street bonuses, the federal budget deficit, or LeBron James in a Cleveland sports bar. You hear over and over that the bailout was a disaster, it cost taxpayers a fortune, we didn't really need it, it MOREAllan Sloan, senior editor-at-large - Jul 8, 2011 5:00 AM ET
When the government offered GMAC's old shareholders a free ride, how could they turn it down?
You would think, at this point, that there would be nothing left to be outraged about when it comes to government bailouts. But the more bailout rocks you turn over, the more well-connected players you find who aren't being forced to pay the full price of their mistakes. One of the little-noticed rocks I've MOREAllan Sloan, senior editor-at-large - Jan 19, 2011 5:00 AM ET
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