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: