Did connections in Washington help major financial institutions get bailed out after the crisis?
A new study from the National Bureau of Economic Research suggests so. The paper, from three economists at the International Monetary Fund, finds that financial institutions and lenders who actively lobbied the federal government in the years leading up to the financial crisis were more likely to benefit from government bailouts beginning in 2008.
The study also found that politically-active lenders typically had faster-growing portfolios of high-risk loans -- an offshoot of relaxed regulations by the federal government.
"These lenders lobbied more aggressively; the ensuing lax regulatory environment allowed them to engage in riskier lending; and such lending exposed them, directly or indirectly, to worse outcomes during the crisis," the three economists, Deniz Igan, Prachi Mishra and Thierry Tressel, note in the report.
"Interestingly," they continue "the market anticipated lobbying lenders to benefit more from the bailout, and they indeed did, perhaps because they were hit harder by the crisis and/or because they had closer connections to policymakers."
The report does not provide a comprehensive list of the lenders used in the analysis. But the appendix does show sample lobbying forms for Citigroup, which spent more than $3 million in lobbying in 2002, and which received $45 billion in funds from the federal government after the financial meltdown in fall 2008. Bank of America and Wells Fargo, which also had major lobbying activity in Washington, received $45 billion and $25 billion in bailouts, respectively.
All three banks have since repaid the bailout funds.
The study takes a comprehensive look at lobbying reports and all congressional bills relating to mortgage lending and securities laws from 1999-2007. The authors also analyze the delinquency rates of loans issued by non-political and politically active lenders, and measure the companies' performances during the crisis.
They find that during 1999-2006, 93 percent of all bills that sought tighter regulation of lending never became law. During that time period, parent companies for the lenders spent nearly half a billion dollars lobbying the federal government.
Perhaps not surprisingly, the most politically-active lenders tended to have the largest market and assets.
"While pinning down precisely the motivation for lobbying is difficult, our analysis suggests that the political influence of the financial industry contributed to the financial crisis by allowing risk accumulation," the authors conclude. "Therefore, it provides some support to the view that the prevention of future crises might require a closer monitoring of lobbying activities by the financial industry and weakening of their political influence."
Casey B. Mulligan, an economics professor at The University of Chicago, noted in The New York Times' Economix blog about the study:
"The authors did not disentangle the path by which lobbying brought forth bailout funds, but it is likely to have followed some combination of political access enjoyed at the time and the lobbying lenders' assertions of need -- created by the lax lending that had gone before, itself facilitated by lobbying during the housing boom years."