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A Fistful of Dollars: Lobbying and the Financial Crisis

A Fistful of Dollars: Lobbying and the Financial Crisis. by Deniz Igan, Prachi Mishra, and Thierry Tressel IMF NCAER , July 14, 2011 The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. MOTIVATION.

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A Fistful of Dollars: Lobbying and the Financial Crisis

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  1. A Fistful of Dollars:Lobbying and the Financial Crisis by Deniz Igan, Prachi Mishra, and Thierry Tressel IMF NCAER , July 14, 2011 The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy.

  2. MOTIVATION • “[…] From 2002 through 2006, Ameriquest, its executives and their spouses and business associates donated at least $20.5 million to state and federal political groups. […] Ameriquest became a player in the business of lending to low-income homeowners. The company persuaded many homeowners to take cash out of their houses by refinancing them for larger amounts than their existing mortgages. […] Home loans made by Ameriquest and other subprime lenders are defaulting now in large numbers.” (Wall Street Journal, December 31, 2007)

  3. QUESTIONS I. Did lobbying lenders behave differently from non-lobbying lenders during 1999-07? (ex-ante analysis) • riskier lending strategies II. How did lobbying lenders perform in 2008? (ex-post analysis) • worse outcomes III. Did lobbying lenders benefit more from the bailout program?

  4. SUMMARY OF FINDINGS I. Lobbying associated ex-ante with more risk-taking. (1) higher loan-to-income ratios, (2) higher securitization, (3) faster growing loan portfolios II. Lobbying associated ex-post with worse performance (1) higher delinquency rates in 2008 (2) negative abnormal returns during key events of the crisis III. Bailout-program more favorable to lobbying lenders (1) stock prices increased more with announcement of bailout (2) more likely to be bailed out

  5. INTERPRETATION OF FINDINGS • Lender characteristics that drive both lobbying and lending / certain lenders to benefit more from lobbying • specialized/overoptimistic (information motive for lobbying e.g. against tighter regulation) • short-termist/corrupt (rent-seeking motive for lobbying e.g. against tighter regulation/to get preferential treatment) • Lobby more intensively at time t; efforts successful; rules not tightened / under less scrutiny or have insurance • even if other lenders may “free-ride” • Allows these lenders to take more risks in t+1 • relatively bigger appetite for risk than non-lobbying lenders • Risky portfolio linked to worse loan outcomes

  6. RELATED LITERATURE • Mian, Sufi and Trebbi (AER, 2010; 2010) • Constituent interests, special interests and ideology explain voting patterns on two bills in 2008 / six bills during 2002-07 • Igan, Mishra and Tressel, 2011 • Different question • Novel lender-level dataset • disaggregate and precise measure of special interests • Igan and Mishra, 2011 • Voting patterns on all financial-regulation-related bills • Special interests and network connections between politicians, financial sector and lobbyists

  7. CONTRIBUTION • First to examine empirically the relationship between lobbying and mortgage lending • Unique dataset combining detailed information on lobbying and lending at the lender level

  8. DATA • Lending • Lobbying

  9. DATA – LENDING • Home Mortgage Disclosure Act (HMDA, 1975) Loan Application Registry • Data collapsed to lender-MSA-year level covering 1999-2007 • Main variable of interest: • Loan-to-income ratio (LIR) • Other variables of interest • Proportion of loans securitized • Credit growth

  10. DATA – LOBBYING • We compile a unique dataset at the firm-level • Center for Responsive Politics (CRP) and Senate’s Office of Public Records (SOPR) websites • 1999-2006 • Under 1995 Lobbying and Disclosure Act, lobbyists must file semi-annual reports • List name of client and total income received from each client • Firms with in-house lobbying required to file totalamount spent • Disclosure of issue category (76 categories) • We focus on 5 general issues – accounting, banking, bankruptcy, financial institutions and housing • Specific issue with which the lobbying is associated (e.g. bills)

  11. Firm-level lobbying constitutes 90 percent of targeted political activity

  12. Total number of lender-MSA-year observations (1999-2006)=650,000

  13. Are lobbying lenders different?

  14. EMPIRICAL ANALYSIS • EX-ANTE ANALYSIS (1999-2007):  Loan-to-income ratio (LIR)  Securitization  Credit growth • EX-POST PERFORMANCE (2008):  Delinquency rates  Event study with stock returns • BAILOUT PROGRAM (2008): • Event study with stock returns • Determinants of the likelihood of receiving bailout

  15. Lenders that lobby for specific issues have higher LIR after controlling for area and lender characteristics and other factors changing over time

  16. This finding does not change in specifications with lender fixed effects…

  17. Lenders that lobby tighten their lending standards more when an anti-predatory lending law is in place

  18. Lenders that lobby securitize larger proportion of loans and expand credit faster…

  19. Bottom line…. • Lobbying is associated ex-ante with more risk-taking

  20. LOBBYING & EX-POST PERFORMANCE • Delinquency rates in 2008 and lobbying at the MSA level • Growth in lobbying lenders market share in the MSA during 2000-2006 • Event study analysis on stock returns of lobbying lenders around key events of financial crisis

  21. Areas where the lobbying lenders gained more market share have higher delinquency rates

  22. Lenders that lobbied experienced negative abnormal returns during key events of the financial crisis • (1) March 11-16, 2008: JP Morgan acquires Bear Stearns after Fed provides $30 billion in • non-recourse funding; Fed expands liquidity provision • (2) September 15-16, 2008: Lehman Brothers files for bankruptcy; AIG is bailed out

  23. Bottom line…. • Lobbying is associated ex-post with worse performance

  24. LOBBYING & BAILOUT • Event study around announcement of the bailout program • Determinants of the likelihood of receiving bailout

  25. Lenders that lobbied experienced positive abnormal returns when TARP was announced (3) October 14, 2008: Troubled Asset Relief Program (TARP) making $700 billion available for asset purchases was announced.

  26. Lenders that lobby more likely to be bailed out

  27. SUMMARY OF RESULTS I. Lobbying was associated with more risk taking during 1999-2007 II. Lobbying was associated with worse performance in 2008 III. Markets anticipated lobbying lenders to benefit more from the 2008 bailout and they indeed did

  28. FURTHER ROBUSTNESS CHECKS • Alternative measures of lobbying expenditures • split among specific issues by share of reports • include expenditures by associations • scaled by assets • scaled by importance of law and regulations • Alternative clustering of standard errors • Drop outliers

  29. INTERPRETATION • Lender characteristics that drive both decision to lobby and lending behavior • Certain lenders more to gain from relaxation of rules • Lobby more intensively at time t • Lobbying efforts successful and rules not tightened • Allows these lenders to take more risks in t+1 • Given the risky portfolios, these lenders experience worse loan outcomes if hit by adverse shocks

  30. Which lenders more likely to benefit more from lax regulation? Information-based motives of lobbying (Grossman and Helpman, 2001) • Specialized lenders catering to riskier (e.g. low-income borrowers) lobby to signal private information on specialty • Some evidence inconsistent with specialization story • regressions control for some specialization effects e.g. whether lender is subprime, HUD regulated, area and lender characteristics; • cannot exclude specialization on other dimensions

  31. Which lenders more likely to benefit more from lax regulation? (contd.) Information-based motives of lobbying (Grossman and Helpman, 2001) • Overoptimistic lenders, genuinely underestimate the likelihood of default and lobby to signal private information about the “true” state of the world

  32. Which lenders more likely to benefit more from lax regulation? (contd.) Rent seeking motives of lobbying (Grossman and Helpman, 1994) • Lenders with greater desire to exploit short-term gains at the expense of long-term profits lobby to prevent tightening of laws that may reduce benefits associated with short-termist strategies • induces moral hard

  33. Which lenders more likely to benefit more from lax regulation? (contd.) Rent seeking motives (contd.) • “Corrupt” lenders lobby to increase chances of preferential treatment e.g. lower probability of scrutiny and even higher probability of getting bailed out in the event of a crisis • standard moral hazard; lobby to buy insurance • Some evidence inconsistent with this story • lobbying on any issue to establish connectedness; • falsification suggests otherwise – lobbying on unrelated issues not positively associated with risk-taking

  34. CONCLUSION • Did lobbying lenders behave differently from non-lobbying ones during 1909-07, and how they performed in 2008? • First paper to study relationship between lobbying and lending in the run-up and during the crisis • Construct a unique database at lender-level combining information on loan characteristics and lobbying on regulations related to mortgage lending • Results consistent with both information-based and rent seeking motives for lobbying

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