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A Fistful of Dollars: Lobbying and the Financial Crisis

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  • Deniz Igan
  • Prachi Mishra
  • Thierry Tressel

Abstract

Has lobbying by financial institutions contributed to the financial crisis? This paper uses detailed information on financial institutions’ lobbying and mortgage lending activities to answer this question. We find that lobbying was associated with more risk-taking during 2000-07 and with worse outcomes in 2008. In particular, lenders lobbying more intensively on issues related to mortgage lending and securitization (i) originated mortgages with higher loan-to-income ratios, (ii) securitized a faster growing proportion of their loans, and (iii) had faster growing originations of mortgages. Moreover, delinquency rates in 2008 were higher in areas where lobbying lenders’ mortgage lending grew faster. These lenders also experienced negative abnormal stock returns during the rescue of Bear Stearns and the collapse of Lehman Brothers, but positive abnormal returns when the bailout was announced. Finally, we find a higher bailout probability for lobbying lenders. These findings suggest that lending by politically active lenders played a role in accumulation of risks and thus contributed to the financial crisis.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17076.

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Date of creation: May 2011
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Publication status: published as Deniz Igan & Prachi Mishra & Thierry Tressel, 2012. "A Fistful of Dollars: Lobbying and the Financial Crisis," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 195 - 230.
Handle: RePEc:nbr:nberwo:17076

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Citations

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Cited by:
  1. William R. Kerr & William F. Lincoln & Prachi Mishra, 2014. "The Dynamics of Firm Lobbying," William Davidson Institute Working Papers Series wp1072, William Davidson Institute at the University of Michigan.
  2. Thierry Tressel & Thierry Verdier, 2014. "Optimal Prudential Regulation of Banks and the Political Economy of Supervision," IMF Working Papers 14/90, International Monetary Fund.
  3. Michael Dorsch, 2013. "Bailout for sale? The vote to save Wall Street," Public Choice, Springer, vol. 155(3), pages 211-228, June.
  4. Rodney Ramcharan & Rajan G. Raghuram, 2012. "Constituencies and legislation: the fight over the McFadden Act of 1927," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-61, Board of Governors of the Federal Reserve System (U.S.).
  5. Buck, Florian & Schliephake, Eva, 2013. "The regulator’s trade-off: Bank supervision vs. minimum capital," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4584-4598.
  6. James R. Barth & Apanard Penny Prabha & Wenling Lu, 2014. "Do Interest Groups Unduly Influence Bank Regulation?," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 11(4), pages 19-25, 01.
  7. John M. de Figueiredo & Brian Kelleher Richter, 2013. "Advancing the Empirical Research on Lobbying," NBER Working Papers 19698, National Bureau of Economic Research, Inc.
  8. Dennis Veltrop & Jakob de Haan, 2014. "I just cannot get you out of my head: Regulatory capture of financial sector supervisors," DNB Working Papers, Netherlands Central Bank, Research Department 410, Netherlands Central Bank, Research Department.
  9. Daron Acemoglu & Simon Johnson & Amir Kermani & James Kwak & Todd Mitton, 2013. "The Value of Connections in Turbulent Times: Evidence from the United States," NBER Working Papers 19701, National Bureau of Economic Research, Inc.

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