Wednesday, May 27, 2009

How Lobbying Exacerbated the Financial Services Bubble

Oxford Analytica via Research Recap:
Guest post by Oxford Analytica.

A recent report by the Center for Public Integrity, an advocacy group, documents the extensive, long-term lobbying efforts of 25 firms involved in fostering the hectic growth of the sub-prime mortgage industry. During the peak years of the sub-prime market in 2005-07, these leading securities and investment companies made millions of dollars in campaign donations to both Democrats and Republicans with a stake in overseeing the industry.

While the report has received widespread media coverage in the United States, there is nothing particularly remarkable about its conclusions. Business lobbying is as old as the US republic and is constitutionally protected under the First Amendment. Indeed, furious lobbying and overt political corruption (which would be impossible under current rules) facilitated the post-Civil War railroad construction boom — and bust.

However, lobbying may have helped exacerbate the size of the financial services bubble — and the consequences of its implosion.

  • • One credible estimate suggests that over the course of the last decade, the financial services sector collectively donated 2.2 billion dollars to political campaigns, and spent 3.5 billion dollars on lobbying activity in Washington.
  • • This may have helped produce a sanguine political response to the surge in sub-prime lending: from 2000-07, the most active 25 originator firms issued approximately 1 trillion dollars in sub-prime mortgages to over 5 million borrowers — generating billions of dollars in additional revenue.
  • • Of course, the sector’s implosion ultimately created a surge in systemic risk, led to the collapse of several major financial institutions, and necessitated hundreds of billions of dollars in federal bailout outlays.
  • Financial lobbying tactics. In their lobbying efforts, the financial services community has pursued two key tactics:...MORE