Connection? Three IMF economists think so. And they don't merely seek to prove that the financial industry's political clout contributed to the 2007 mortgage crisis. Deniz Igan, Prachi Mishra and Thierry Tressel find evidence that all this flesh-pressing in the corridors of power actually hurt -- not helped -- lenders' financial performance.
The researchers show that mortgage companies that lobbied intensively in the years leading up to the financial crisis had higher loan-to-income ratios; more aggressively securitized those loans; and had faster growing loan portfolios. These same lenders subsequently saw a higher rate of defaults, and their stock price fell more than average in 2007 and 2008.
Put another way, the firms that lobbied the most took the biggest risks. And they fared the worst when the real estate sector went to hell. Say the researchers:
Our analysis indicates that financial institutions that lobbied on specific issues experienced negative abnormal returns during the major events of the financial crisis, suggesting that these financial institutions were significantly more exposed, directly or indirectly, to bad mortgage loans.This is important. Lots of research has focused on how lax lending standards and dodgy financial incentives fueled the mortgage crisis. But I can't think of anything else that enumerates how lenders' political influence played into the debacle.
So why do hard-lobbying mortgage lenders appear to take bigger risks? Because companies used to getting their way with regulators and on Capitol Hill expect to get bailed out. They're also more likely "to exploit high short-term gains associated with riskier lending strategies," the researchers say. That certainly seems to cover someone like, say, hedge fund huckster Allen Stanford, whose gyrations with lawmakers is now coming to light.
Lots of industries engage in lobbying, of course. It's the American way. Yet financial, insurance and real estate interests are second to none in this department (click on chart below to expand). In 2006, industry firms spent an average of $480,000 each on lobbying, compared with roughly $300,000 for defense firms and some $200,000 for construction players.
We've known for some time that such activities torpedoed legislation that might've kept the Countrywides of the world in check. Now there's reason to believe that lobbying also resulted in a nasty bit of blowback, hitting companies and shareholders where it hurts.
The House recently passed its financial reform package, while the Senate is set later this month to take up its version of bill. These findings are something industry firms, lawmakers and investors alike would do well to consider.