Big Data Shows How Wall Street Profited From the Financial Crash
This article originally appeared on the International Business Times.
Big Data—those sprawling algorithms that can track and predict patterns in human behavior—often conjures up fears of a big-brother police state. But those same data-sets could be harnessed to uncover and expose Wall Street excesses.
That’s the implication of two new new academic studies about the financial crisis. One study suggests politically connected executives traded on non-public information about the government’s subsequent bailout after the crisis hit. The other suggests that despite their claims to the contrary, many bank executives understood the risks they were taking in the lead-up to the crash, and sold their personal holdings in their firms before the crisis hit.
The findings emerged as U.S. Sen. Elizabeth Warren, a Democrat, is demanding a formal investigation of why the Obama administration did not more forcefully prosecute financial firms after the crisis.
The first paper used publicly available information to chart the possibility that individuals with close ties to regulators and politicians engaged in insider trades in the aftermath of the 2007-08 financial crisis.
“Politically connected insiders had an information advantage during the crisis and traded to exploit this advantage,” concluded the study by researchers at the University of Colorado, Stanford University, the University of Navarra and the University of Pennsylvania. The study zeroed in on those who made trades after the announcement of the government's $700 billion Troubled Asset Relief Program (TARP), which bought up so-called “toxic” assets—mortgages and securities that had plummeted in value.
Crunching data from 7,300 corporate officers at 497 financial firms eligible to get cash from TARP, the researchers found political connections paid off—big time.
“We looked at bank boards who had a director or officer who had work experience, current or past, at a bank regulatory agency, the Senate or the House, and we found that the boards of those banks that had those political connections traded more heavily during the financial crisis,” explained Daniel J. Taylor an accounting professor at the University of Pennsylvania’s Wharton School, in an interview with the school's business journal.
In other words: while the government was supposedly deciding in private who would get TARP funding, politically-connected individuals traded as if they already knew the outcomes of those decisions—before the decisions were made public. That information translated into cash: The politically connected saw between 4 to 5 percent return in just three days. Those with political connections also traded more than three times the average volume in the 30 days leading up to the announcement of who would get how much in bailout funds....MORE