IMF Report: Banks used Political Influence as Collateral to Issue Bad Debt

A new study commissioned by IMF economists to evaluate the causes and culprits of the 2008 sub-prime mortgage driven financial crisis revealed some intriguing correlations. According to the report, firms that were heavy pre-crisis Congressional lobbyers were 7% more likely to have received bailouts following the economic fallout. Not only did lobbying firms receive more bailouts, they were also more likely to take greater financial risks in extending less reliable lines of credit in 2007-2008, that were more likely to become delinquent when the crisis broke later in 2008.

In addition to news that big-lobby corporations were significantly more likely to get federal bailouts, these firms also tended to┬áreceived larger amounts of those bailout funds, and enjoyed a “27 percent greater increase in their market capitalization in October 2008, the month the bailout program was announced.” According to the results of the report, firms with more political influence were effectively able to increase their confidence in extending bad credit lines and hedge themselves against greater risk-taking by securing federal backing and re-assurance.

This begs the question of why the government effectively served as a cover-all backup for these companies after they blew it in the housing crisis, and why taxpayer dollars ended up blanketing the tracks of Wall Street bankers who squandered their money and reputations by taking miscalculated risk and over-extending credit (Check Out “Should Regulators Favor Bankruptcy 2.0 or Bailouts?“).
The role of political influence in government economic policy is controversial topic. Ideally we’d like there to be as little exchange between federal regulators and private businesses as possible, but practically we have to acknowledge that some degree of communication between the two sectors might ultimately be a good thing in helping the economy right itself.

Regardless, the results of the IMF report are discouraging. Although no particular act of foul play was identified and individual allegations of corruption have yet to emerge, financial service providers should not be permitted to use their lobbying influence as a form of collateral against silly and miscalculated risk-taking. Perhaps the causes of the recent financial meltdown had more to do with this interchange than we thought.

Don’t Miss: Uncle Sam is Dumping Stocks in Bailed Out Companies