Bailouts and political connections go hand in hand according to a just released academic study. The study, which was conducted by the Ross School of Business at the University of Michigan researchers, shows concretely that lobbying, campaign contributions, and the finance/federal government revolving door has helped the most damaging banks despite the dangers they pose to our economy.

In the age of the bailout, blaming the revolving door between corporate lobbying and politics is so obvious that it has become almost cliche. But the reason why it is one of the greatest handicaps to our political system is critically important. The revolving door turns "survival of the fittest" on its head by masking failure, propping up underperforming companies, and hiding inefficiencies in the markets. The new study shows the extent to which political connections influenced how TARP bailout funds were paid out.

But the research hits just the tip of the iceberg. Zach Carter at The Nation recently reported on a much deeper case of how the revolving door shapes U.S. policy. Our" major conflict of interest with the banks he is supposed to regulate, Carter reports. John Dugan is now chief regulator of the largest US banks at the Office of the Comptroller of the Currency. In one of his former positions at the Treasury, he was a chief architect of the three most influential pillars of banking deregulation that have been blamed for causing the financial meltdown last year (hat tip The Big Picture). In 1991, Dugan published a 750-page book where he successfully pushed for policies allowing banks to operate in multiple states without additional regulatory oversight, to repeal the Glass-Steagall Act allowing safe commercial banks to merge with risky investment and insurance companies, and to allow corporations like General Electric and Sears to own banks.

"[Dugan's book] was unquestionably the blueprint for the major Clinton-era deregulation," says Arthur Wilmarth Jr., a longtime banking scholar at George Washington University Law School. "It was the first real recipe for too big to fail."

A few years after publishing his book, Dugan was out of government and in a new job as a lobbyist with the American Bankers Association working his political connections to help pass the financial deregulatations he described in his book. From his earlier years in government, he had enough pals in Congress and the Clinton administration to get many of his policies enacted. Now he’s back playing the game from the government side as one of the country’s chief regulators. Same guy, same mind, same mission; just working from the inside at the moment. Indeed, "as head of the Office of the Comptroller of the Currency, Dugan played a leading role in gutting the consumer protection system, allowing big banks to take outrageous risks on the predatory mortgages that led to millions of foreclosures," Carter reports.

The revolving door actively hurts our economy because it puts our country on a path of survival of the richest, most connected lobbyists with cover-ups of market inefficiencies and bad consumer products.  Dugan helped dangerous-for-the-consumer, highly-profitable-for-the-bank consumer products pop up throughout the 90′s as subprime and adjusted rate loans.   The Ross researchers agree that "the effects of political ties on federal capital investment are strongest for companies with weaker fundamentals, lower liquidity and poorer performance — which suggests that political ties shift capital allocation towards underperforming institutions." When money determines political power, the political system itself encourages corporations to put profit and lobbying above developing consumer products people actually need.

Dugan’s role in aiding the creation of too-big-to-fail banks was born out of industry.  Because Dugan has a highly influential political position, his weaving of politics and private interests which has spanned a career is problematic: "Over the course of nearly a quarter-century, Dugan has proved himself a staunch ally of the American financial elite as a Senate staffer (1985-89), a Treasury official (1989-93) and a lobbyist (1993-2005), building a career that culminated in 2005 when George W. Bush appointed him comptroller of the currency. When the financial system finally succumbed to its own excesses in September 2008, Dugan’s fingerprints were all over the economic wreckage, but almost nobody noticed." Dugan’s work is exemplary of the phenomena of policy being determined by webs of influence.

To be fair, lobbying presents opportunities for busy politicians to learn about issues.  But, unfortunately the weaving of long tentacles in private and public sectors is a prerequisite to effective lobbying. Last week in DC, I met young career politicos who saw Capitol Hill jobs as a first stop on the road to high-paying lobbying jobs later on. Their political connections are golden resume nuggets. This complicated climb to the top is bearing down on policies we see today – President Obama made a campaign promise to keep out the lobbyists in his administration and failed, but the disheartening part is the bottom to top entrenchment of Citigroup executives and lobbyists and their work on financial reform policy.

At its inception, corporations were allowed to exist when they served the public’s interest; the Supreme court ended that in the 1800-1900′s . No longer bound by public duty, shareholders’ returns have become a singular goal in the free market and politics race to the top  -  Congress seems to have understood less and less the impact these policies have on the economy at large.  The money and secret inner circle of influence in DC is unfair because it creates a snowball effect of making the powerful more powerful and policy less about policy. Thus lobbying and its powerful cousin, the revolving door serve to prop up companies that may be weak or have bad products, leading to an economy that is more likely than not to become fractured or in other words, too big to fail.