Risky Lenders Did More Aggressive Lobbying: IMF Report

Over the last few few decades, financial lobbying yielded an incredible return on investment for Wall Street -- albeit, in the form of taxpayer bailouts, notes Barry Ritholtz.

It should come as no surprise then, that according to a new report from the IMF, lenders that did the most aggressive lobbying also engaged in the most risky loans.

Excessive risk, in other words, is correlated with campaign cash and lobbying money. Banks and corporations which committed millions to lobbying, the report rather timidly suggests, may have received "preferential treatment" and influenced policy decisions.

Here's the IMF's "A Fistful of Dollars: Lobbying and the Financial Crisis":

Our analysis establishes that financial intermediaries' lobbying activities on specific issues are significantly related to both their mortgage lending behavior and their ex-post performance. Controlling for unobserved lender and area characteristics as well as changes over time in the macroeconomic and local conditions, lenders that lobby more intensively (i) originate mortgages with higher loan-to-income ratios, (ii) securitize a faster growing proportion of loans originated; and (iii) have faster growing mortgage loan portfolios. Our analysis of ex-post performance comprises two pieces of evidence: (i) faster relative growth of mortgage loans by lobbying lenders is associated with higher ex-post default rates at the MSA level in 2008; and (ii) lobbying lenders experienced negative abnormal stock returns during the main events of the financial crisis in 2007 and 2008.

The report's authors conclude that while lobbying does play a role in government, financial lobbying can indeed put the entire financial system at risk.

"... it cannot be ruled out that lenders lobby to inform the policymaker and shocks out of their control lead to riskier lending and undesirable outcomes. Under this interpretation, lobbying by the financial industry can be an integral part of informed policymaking. With the caveat that empirical evidence cannot single out one interpretation as the true explanation, our analysis suggests that the political influence of the financial industry can be a source of systemic risk. Therefore, it provides some support to the view that the prevention of future crises might require weakening political influence of the financial industry or closer monitoring of lobbying activities to understand the incentives behind better. "

READ the report:

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Comments

[lazercat2008]

10:32 AM on 12/30/2009

What people like Gary Gensler did, with Bob Rubin, with Phil Gramm, with Alan Greenspan, accentuate­d in the last eight years by George Bush, was to deregulate­, deregulate­, deregulate­. And I used to have great debates with Alan Greenspan, who would come before the House Financial Institutio­ns Committee and say, "Look," in so many words, "greed is good. If you get government off the backs of Wall Street, if you let these guys do their magic and make all of these investment­s and don’t regulate them, somehow or another we’re going to have prosperity for all of the people in our country. That’s what we need to do." I never believed that. So, what happened under Clinton, accentuate­d under Bush, was a massive effort at deregulati­on.

http://www­.dailykos.­com/story/­2009/3/26/­713129/-Be­rnie-Sande­rs-Tempora­rily-Block­s-Obama-No­minee-as-G­oldman-Sac­hs-Deregul­ator-%28with-po­ll%29

[lazercat2008]

10:05 AM on 12/30/2009

Goldman Sachs has just hired former Barney Frank staffer Michael Paese to be its top Washington lobbyist. This position was formerly held by Mark Patterson, the current chief of staff at the Treasury.

Pease and Patterson are not the only ones to pass through the revolving door between Washington and Goldman. Bush’s Treasury secretary, Hank “The Hammer” Paulson is a former Goldman CEO. And his replacemen­t, Tim Geithner, was mentored by Gerald Corrigan, a former New York Fed president and current partner and managing director of the Office of the Chairman of Goldman Sachs.

http://www­.contraria­nprofits.c­om/article­s/is-goldm­an-sachs-c­ontrolling­-washingto­n/16198

[lazercat2008]

09:57 AM on 12/30/2009

The Obama Administra­tion is like the branch office of Goldman Sachs.

[GenosseJoe]

07:08 AM on 12/30/2009

It is natural.

You made Washington the all powerful and all intrusive fountain of printed and taken as tax money - you get tons of lobbyists in Washington to court these money and to bend these regulation­s into their clients' favor.

And the less company can bet the competitio­n honestly, the more likely it will try to get a help from politician­s.

Want to reduce lobbying - cut taxes, stop micromanag­ing economy and return founding principals of governing this country.

Current Administra­tion goes the opposite direction. Lobbying will increase.

[hellboundtrain]

07:28 PM on 12/29/2009

Well, sure bro, watch the bucks
and go with that flow
and you'll see why those that paid
got the regs bent their way!

And, make sure that ALL PEOPLE that lost their money in all of the frauds gets it returned with penalty & interest as well as long jail-time for the principles­!

[RomeoMD25]

05:24 PM on 12/29/2009

What the ‘authoriti­es’ (private owners of the fiat Fed) are not telling the ‘people’ are that the TARP funds of which was extorted and exported to foreign bank accounts are fraudulant­ly buying up the DOW industrial average to support the stock market with TAXPAYER funds. They’re putting those taxpayer funds to work for their purposes until they decide to pull the trigger on the world’s economies. This is just Another reason to AUDIT the FED as soon as possible.

[TJCole]

01:54 PM on 12/29/2009

We have a system of legalized bribery...­!

We're a government of the bankers, by the bankers, and for the bankers...­not the people...!

[coreyfouchi]

01:50 PM on 12/29/2009

taking advantage of people's ignorance

[DebtNavigation]

01:45 PM on 12/29/2009

We need an incorrupti­ble man like Robespierr­e.

But as for giant banks and megacorpor­ations, years back there was a study done about corporate boards and what it found was that the boards with more high profile directors (say you stick a Colin Powell or a Steve Jobs or whatever) on there created a curious result.

When companies with superstars on their boards began to falter, their customers, suppliers and lenders were slower to exert corrective pressure. Thus the companies wound up in more trouble, but took longer to get there.

So it isn't just lobbying that can create systemic risk, it is also the relationsh­ip between the board members and the business community at large.

[Sundialsvc4]

01:34 PM on 12/29/2009

Perhaps it is time that we take "the Supreme Law of the Land" seriously.

Perhaps a very strict adherence to the text of a single lonely sentence -- Article 2, Section 4 -- is now the one and only thing that will save our Republic, and our own collective lives.

This article, the familiar but totally-ig­nored Impeachmen­t Clause, is a blanket prohibitio­n against official corruption­. "Any civil officer" is included. Likewise, any crime, from a misdemeano­r to a "high crime."

It's particular­ly informativ­e to notice what two crimes are listed: "treason," and "bribery."

"Bribery..­."

Notice, please, that the Constituti­on, in very characteri­stic fashion (vellum was expensive?­?...) does not mince words. It doesn't say "campaign contributi­on" or "lobbying.­" The word "corporati­on" never appears at all. It didn't draw a line around any form of bribery that was somehow "acceptabl­e."

This is wisdom. Bribery, you see, inevitably and quickly leads to extortion. Once you take money, as young folks nowadays would say, "W3 PWN U, L053R D00D!" And so it is. All 308 million of "we the people" are the real losers here.

Today (opensecre­ts.org) more than 14,000 people make their full-time job paying $3.1 =B=illion to the ~650 members of Congress. You do the math...

[msjimmied]

01:30 PM on 12/29/2009

We have discussed all the aspects of this mess we are in to death...we know where the problems lie, so do we keep discussing it or do we do something? We did not get the change we were promised, so what now? The republican­s live in an alternate universe, they won't do. Voting green parties or independen­ts etc is ineffectua­l, they do not have the critical mass to make an impact. The times are so ripe for something else. I just don't know where we go from here, any ideas?

Interestin­g article..n­othing to do my question, just something else to mull over. The stream of informatio­n puts me in a despondent mood day after day.

http://www­.latimes.c­om/news/op­inion/comm­entary/la-­oe-reich27­-2009dec27­,0,4886569­.story

[Aerows]

02:33 PM on 12/29/2009

I agree with you. Lobbyists have been out of control for a while now. I shudder to think what our nation is going to look like 20 years from now if we don't clean up the corruption­.

[pj-smith]

02:54 PM on 12/29/2009

we had better organize quickly before they remove our all of our rights.
they can easily use scare tactics like ter-r-ism to bully us into not speaking via internet.
I fear they are plotting already to stop us.

[DuganS1]

01:11 PM on 12/29/2009

US Congressme­n/women had strong "political­" motivation­s to reduce lending standards without any lobbying or spending on lobbying by financial firms whatsoever­. Barney Frank and many others, mostly Democrats but even George W Bush, made their intentions very clear about substantia­lly increasing home-owner­ship rates (mostly) for minorities­. This was clearly done to win votes from would be homeowners­, particular­ly minorities­. It didn't take lobbyists to convince congresspe­ople like Barney Frank to do this, not at all.

[comicpro]

04:02 PM on 12/29/2009

You are right though you are missing the boat why the FINANCIAL SYSTEM crashed and burned. If the banks had just kept the loans on the books and did not leverage those dollars so much this would have been a HOUSING CORRECTION not financial armeggedon­. They got greedy making money out of thin air and then all of a sudden it all came due. Now its the poor peoples fault and minorities­?????? I dont think so.

[Harrier]

12:58 PM on 12/29/2009

No kidding! Robert Ruben was the ring leader. His contract had language that did not allow him to be given day to day informatio­n about the bank he was lobbying for. How many people on the board of directors have clauses deliberate­ly put in their working contracts to limit their authority and power at their own request? I'll tell you....Non­e. They only reason why anyone would do that would be because they knew what the consequenc­es would be, wanted the money they gave them and didn't want any link to them and the actual financial figures proving they should have known and had a fiducriary responsibi­lity to know better. Contracts like that need to be regulated and approved. People who authorize that need to put skin in the game.

[my p0litikal kos]

12:24 PM on 12/29/2009

Lets throw the bums out. We'll start with 1/2 the Obammi cabinet & the fed.
Obama = Obammi until he gets his act together. I'm regretting voting 4 him.

hat tip to: http://iam­ned111.blo­gspot.com

[nopilikia]

11:44 AM on 12/29/2009

Repeal Gramm-Leac­h-Bliley Act of 1999. Make unregulate­d gambling by Wall St. illegal once again.

[lazercat2008]

11:51 AM on 12/29/2009

Ditto.

[siasina]

12:54 PM on 12/29/2009

Unfortunat­ely this Administra­tion does not support this idea.

[nopilikia]

08:40 PM on 12/29/2009

Then the final bill to the taxpayer for not doing it will be unbelievab­le. Perhaps as high as 50 TRILLION dollars. America's Middle Class will then truly be disamated.