A Fistful of Dollars: Lobbying and the Financial Crisis

On December 31, 2007, the Wall Street Journal reported that Ameriquest Mortgage and Countrywide Financial spent respectively $20.5 million and $8.7 million in political donations, campaign contributions, and lobbying activities from 2002 through 2006 to defeat of anti-predatory lending legislation. Such anecdotal evidence suggests that the political influence of the financial industry contributed to the 2007 mortgage crisis, which, in the fall of 2008, generalized in the worst bout of financial instability since the Great Depression.

Using detailed information on lobbying and mortgage lending activities, Deniz Igan, Prachi Mishra, and Thierry Tressel find that lenders lobbying more on issues related to mortgage lending (i) had higher loan-to-income ratios, (ii) securitized more intensively, and (iii) had faster growing portfolios. Ex-post, delinquency rates are higher in areas where lobbyist’ lending grew faster and they experienced negative abnormal stock returns during key crisis events. The findings are robust to (i) falsification tests using lobbying on issues unrelated to mortgage lending, (ii) a difference-in-difference approach based on state-level laws, and (iii) instrumental variables strategies.

These results show that lobbying lenders engage in riskier lending. The authors conclude their study 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.

Igan, Deniz, Mishra, Prachi and Tressel, Thierry, A Fistful of Dollars: Lobbying and the Financial Crisis (December 2009). IMF Working Papers, Vol. , pp. 1-71, 2009. Available at SSRN: http://ssrn.com/abstract=1531520

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