Tag Archives | financial crisis

Galbraith to Senate: There Must be a Radical Cleaning

James Galbraith gave written testimony to the Senate Subcommittee on Crime, Senate Judiciary Committee, on May 4, 2010. His testimony was blunt and worth reading in whole. Here are a couple of short bites:

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud?    Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. I have also heard the expression, “IBG,YBG;” the meaning of that bit of code was: “I’ll be gone, you’ll be gone.”  …

Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.

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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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How Politics Shaped the Political Economy of Global Finance

The Political Economy of Global Finance Capital by Richard Deeg and Mary O’Sullivan review 6 influential books on the topic in light of the recent financial crisis.

The most important developments highlighted:

  • the move from a predominant focus on state-centered patterns of regulation to a more comprehensive understanding of the role of states and private actors in building a transnational governance regime that mixes public and private regulation;
  • the intensified effort to understand the causal forces that shape the political economy of global finance based on more complex models that allow for an interaction among interests, institutions and ideas; and
  • increased attention to new sources of systemic risk in the global financial system, as well as a greater consideration of the consequences for domestic politics of interactions with the global financial system.

They argue that we must do more to understand the behavior of actors who enact the rules of global finance, not just those who generate the rules. More must be done to assess the costs and benefits of financialization at the global and national levels.

Some interesting points highlighted:

  • The financial crisis emanated not from the periphery but from the very core of the system.
  • Facilitated flows from poor countries to rich countries, rather than the historically opposite direction.
  • Coordinated market economies that rely on welfare production regimes for promoting and protecting the investment by firms in skill sets and specific assets may have a competitive advantage with financial globalization, the opposite of conventional thinking.
  • These protections inhibit convergence in corporate governance.
  • Financialization, where maximization of short-term shareowner value through dashboard metrics, has compromised the interests of other stakeholders and corrodes the coordinated system of capitalism.
  • Extraordinary incentives contributed to willingness to pursue aggressive strategies without due attention to risks.

How is it that false illusions were conferred sufficient legitimacy to deafen alternative views and stymie reform? In our thinking, a lot may come down to the power held by CEOs and their organizations like the Business Roundtable and the Chamber of Commerce. They can spend shareowner money like there is no tomorrow in defending a system that still gives CEOs virtually dictatorial power. On the other side, institutional investors are held to fiduciary duties that limit such lobbying efforts, even by the few that don’t have direct conflicts of interests, such as in trying to attract those 401(k) accounts from CEOs.

Happy Holidays: More, More, More: Gifts For the CEO Who Has Everything (clip from Nightly Business Report via The Corporate Library Blog, 12/24/09)

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