Risky Lending and Lobbying – Connection?

An International Monetary Fund report entitled: A Fistful of Dollars, Lobbying and the Financial Crisis, reports that those lenders pursuing high risk lending practices did the most lobbying.

The actual report is found here: http://www.dnb.nl/binaries/Deniz%20Igan_tcm46-223260.pdf

Perhaps we should think of the risky lenders on Wall Street less like ivy league educated scum individuals and more like bold Western heroes. Here let me provide some music.

However, some of you may not feel that the mantle of Western hero does not fit them well. How about this one?

Well, now that I’ve got that off my chest. Let’s discuss the issue. First a quote from the actual study:

We find that, after 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, especially after 2004; (ii) securitize a faster growing proportion of loans originated; and (iii) have faster growing mortgage loan portfolios.

This is research language, an arcane format similar in many ways to spell casting in Lord of the Rings. Let me translate: We worked hard to do a fair study and we discovered that lenders who did a lot of lobbying made stupid decisions.

So, here we come to the meat of the matter. The more lobbyists you hire, the more money you spend on influencing the government; the more likely you are to take risks.

Of course, you could turn it around. The more money and lobbyists financial institutions send to Washington, the more Washington protects them from laws and regulations while simultaneously shielding them from the effects of their ridiculous decisions.

We all learned in civics class that bankers and financiers are careful to protect their investors from loss while our Senators, Representatives and President would never fail to protect us from financial sector decisions that could destroy millions of jobs and damage the economic fabric of the planet.

We all know that a new Democratic President wouldn’t appoint all of his economic advisors from the very firms receiving bailout money. We all know that no Congress would give hundreds of billions of dollars of loans to private companies without setting up a mechanism to get the money back. We all know that should by some mischance all our protections fail and our financial system comes within a matter of minutes of total collapse that new rules and regulations would be put in place to stop that from happening again.

I guess I’m just cranky. I am getting older. Of course, I do teach Business Ethics and watching these event unfold hits me in the gut. It’s like teaching medicince in a place where they just kill the patients to save money.

But I’m probably just cranky.

James Pilant