Dow Jones News: Lobbying Contributed To Financial Crisis – IMF Report

Written by admin on April 30th, 2011

IMF report states the obvious, financial institutions lobbied against any proposed regulations which might have provided checks to the risky practices which led to the meltdown.

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Lobbying by financial firms contributed to lax regulations that helped cause the financial crisis, according to three researchers at the International Monetary Fund in a paper quietly released last month.

The researchers–Deniz Igan, Prachi Mishra and Thierry Tressel–argued the mortgage lenders that lobbied most aggressively in Washington for a more lax regulatory environment took more risks and exposed themselves to worse outcomes during the crisis.

The researchers also argued that these same lenders were more likely to receive money from the federal bank bailout, possibly because these firms were hit harder during the crisis and had relationships with key lawmakers.

The researchers said Citigroup Inc. (C), which nearly collapsed during the crisis and required $45 billion in government support to stay alive, lobbied intensely against a 2001 bill that aimed to put tighter restrictions on lenders.

Such lobbying was part of a trend of the financial sector’s push for more lax regulation. From 1999 through 2006, 93% of all the bills promoting tighter regulation were never signed into law, the study said. Two key pieces of legislation to promote lax lending in mortgage markets were enacted in 2000 and 2003.

A Citigroup spokesman declined to comment.

The authors said it is “extremely difficult to pin down the most likely motivation” for the financial industry’s lobbying efforts ahead of the crisis, though they said it is possible lenders were hoping for a lower probability of scrutiny by bank supervisors or a higher probability of being bailout out in the event of a financial crisis.

Kathleen Day, a spokesman at the Center for Responsible Lending, said the study appears to confirm the perception that what financial firms marketed to lawmakers as financial innovation was really the abandonment of “common-sense lending principles,” such as solid underwriting standards for home loans.

“What they were promoting as financial innovation turned out to be irresponsible risk taking,” she said

 

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