A Fistful of Dollars: Lobbying and the Financial Crisis by Deniz Igan, Prachi Mishra, and Thierry...
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Transcript of A Fistful of Dollars: Lobbying and the Financial Crisis by Deniz Igan, Prachi Mishra, and Thierry...
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“[…] 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)
QUESTIONSI. 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?
SUMMARY OF FINDINGSI. 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
INTERPRETATION OF FINDINGSLender 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
RELATED LITERATUREMian, 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
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
DATA
Lending
Lobbying
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
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 total amount 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)
Table 1a. Targeted Political Activity Campaign Contributions and Lobbying Expenditures
(millions of dollars)
Election cycle1999-2000
2001-02
2003-04
2005-06
Overall lobbying expenditure 2972 3348 4081 4747
Share of finance, insurance, and real estate industry FIRE in overall lobbying (in percent) 14.7 14.3 15.8 15.2
Contributions from PACs 326 348 461 509
Total targeted political activity 3298 3696 4542 5256
Firm-level lobbying constitutes 90 percent of targeted political activity
11
8
81
Match Statistics (Fraction of lender-MSA-year observations)
Lobby on specific issues related to mortgage marketsLobby on other issuesDo not lobby
Total number of lender-MSA-year observations (1999-2006)=650,000
Are lobbying lenders different?
Asset
s (in
logs
)
Mar
ket s
hare
of l
ende
r
Regul
ator
is H
UD
Lend
er is
sub
prim
e
Loan
-to-in
com
e ra
tio
Propo
rtion
of l
oans
sol
d
Growth
in lo
ans
(in p
erce
nt)
Bailo
ut0
20
40
60
80
100
120
140
160
180
Lenders that lobby on specific issues 1999-2006 (index=100)Lenders that do not lobby on specific issues
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
Lenders that lobby for specific issues have higher LIR after controlling for area and lender characteristics and other factors
changing over time
Table 3. Lobbying and Loan-to-Income Ratio
Dependent variable: LIR at (lender, MSA, year) level, 1999-07
[5] [6]
Lobby dummy 0.145*** 0.142***
Lobby on other issues dummy
-0.017***
MSA FE YesYesYesYes
YesYesYesYes
Year FE
MSA*year FE
Lender controls
Observations 648,938 648,938
This finding does not change in specifications with lender fixed effects…
Table 4: Lobbying Expenditures and LIR
Dependent variable: LIR at (lender, MSA, year) level, 2000-07
[1] [5]
Log (lobby exp), lagged 0.007*** 0.002***
Lender FE No Yes
MSA FE No Yes
Year FE No Yes
MSA*year FE No Yes
Lender controls No Yes
Observations 406,035 406,035
Lenders that lobby tighten their lending standards more when an anti-predatory lending law is in place
Table 5: Lobbying Expenditures and LIR: Diff-in-Diff
Dependent variable: LIR at (lender, MSA, year) level, 2000-07
[4]
Log (lobby exp), lagged 0.007***
Dummy=1 if lending law 0.006
Log (lobby exp), lagged*lending law -0.005***
Lender FE Yes
MSA FE Yes
Year FE Yes
Lender controls Yes
Observations 406,035
Lenders that lobby securitize larger proportion of loans and expand credit faster…
Table 6. Lobbying, Securitization and Credit Growth
Dependent variables Proportion of loans sold
Credit growth
Log (Lobby exp) 0.007*** 0.321***
Lender controls Yes Yes
Lender FE Yes Yes
MSA FE Yes Yes
Year FE Yes Yes
MSA*year FE Yes Yes
Observations 406,035 406,996
Bottom line….
Lobbying is associated ex-ante with more risk-taking
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
Areas where the lobbying lenders gained more market share have higher delinquency rates
Table 7. Lobbying and Loan Outcomes
Dependent variable: Delinquency rate at the MSA-level in 2008
Δ(market share) of lobbying lenders, 2000-06
0.718*** 0.734***
Δ(market share) of lobbying lenders, other issues
-0.032
MSA controls Yes Yes
Observations 305 305
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
Table 12. Lobbying and Abnormal Stock Returns
Dependent variable: Market- and risk-adjusted stock return
(1) & (2) (2)
Bear Stearns and Lehman failures
Lehman failure
Lobbying dummy -0.210*** -0.369**
Lender controls Yes Yes
Event fixed effects Yes No
Observations 92 45
Bottom line….
Lobbying is associated ex-post with worse performance
LOBBYING & BAILOUT
Event study around announcement of the bailout program
Determinants of the likelihood of receiving bailout
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.
Table 8. Lobbying and Abnormal Stock Returns
Dependent variable: Market- and risk-adjusted stock return
(3)
Bailout announcement
Lobbying dummy 0.274***
Lender controls Yes
Observations 45
Lenders that lobby more likely to be bailed out
Table 9. Lobbying and Bailout
Dependent variable D=1 if lender got funds under TARP
Lobby dummy, 2000-06 0.069***
Assets (in logs) 0.001***
Market share of lender 0.079*
Lender controls Yes
Observations 13,172
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
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
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
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
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
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
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
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