US lenders involved in risky mortgage lending that contributed to the 2007 financial crisis were also some of the fiercest financial lobbyists, according to a report by International Monetary Fund economists.
In the report “A Fistful of Dollars: Lobbying and the Financial Crisis,” the economists said their studies showed that lenders taking on the most risk were also the most active in lobbying against laws and regulations related to mortgage lending.
The study did not name any of the lenders but the language in it implied that they were among the biggest banks and mortgage brokerage companies in the nation.
“Lenders that lobby more intensively on these specific issues have (i) more lax lending standards measured by loan-to-income ratio, (ii) greater tendency to securitize, and (iii) faster growing mortgage loan portfolios,” the report said.
“Ex post, delinquency rates are higher in areas in which lobbying lenders' mortgage lending grew faster, and, during key events of the crisis, these lenders experienced negative abnormal stock returns,” it added.
The study is the first to document how lobbying may have contributed to excessive risk-taking in the US housing market that led to the 2007 financial crisis, economists Deniz Igan, Prachi Mishra and Thierry Tressel said.
More than two years after the onset of the worst financial crisis since the Great Depression, the Obama administration is pushing to impose tougher regulation on the financial services sector to try to prevent it engaging in the kind of excessively risky behavior that triggered the crisis and severe global recession.
The IMF economists said lenders that spent millions of dollars lobbying also expect preferential treatment.
“Such preferential treatment could be a higher probability of being bailed out, potentially under less stringent conditions, in the event of a financial crisis,” they said.
Their studies showed that in the current crisis, 16 of the 20 lenders that spent the most on lobbying between 2000 and 2006 received financial bailouts from the government.
In total, lenders that lobbied on specific issues received almost 60% of the funds allocated under the US government's Emergency Economic Stabilization Act set up by the Bush administration to rescue banks from failure. (Reuters)