Bankers gear up for major lobbying campaign

Published by the Guardian

23 January 2010

"Banks are mobilising a smooth-running lobbying machine in Washington to ­battle Barack Obama's plans to limit the size and scope of Wall Street institutions, as financial services firms gear up to stop a shake-up that could slice away large chunks of their operations.

Their influence on Capitol Hill is broad – the top eight US banks spent $26m (£16m) on lobbying efforts last year, an increase of 6% on 2008 despite their financial woes, according to Congressional records. And in the first 10 months of 2009, the financial industry donated $78.2m to federal candidates and party committees – more than any other business sector – according to political research institute the Centre for Responsive Politics.

"The power of the financial services sector in this city has not dissipated at all … they've just done things in a quieter way," said Ethan Siegel, an analyst at financial consultancy The Washington Exchange, who monitors Congress for big investors. "They haven't pulled back on their lobbying just because they've become piñata [punchbags] in the press."

Wall Street lobbyists argue that scaling back the size of banks misdiagnoses the cause of the financial crisis, jeopardises jobs, damages America's competitiveness and could inhibit growth.

The Financial Services Forum, which represents 18 top banks including Goldman Sachs, JP Morgan and Citigroup, says the problem of institutions becoming "too big to fail" ought to be tackled through more effective supervision, and by creating an authority able to wind down failing firms, rather than by forcing them to shrink. Spokeswoman Erica Hurtt said: "This was not a trading crisis and these proposals miss the mark. They won't get to the causes of the crisis."

Banks' persuasiveness has already had significant impact on the Obama administration. Plans for the creation of a consumer financial protection agency are meeting staunch Senate opposition and may be watered down to get the 60-40 support needed to override objections.

One widely used strategy by the financial industry has been to deploy representatives of smaller high-street banks to make the case to lawmakers. Organisations such as the Independent Community Bankers of America tend to get a sympathetic hearing because they can point to members in towns and cities in almost every Congressional district, rather than purely in lower Manhattan.

Douglas Elliott, a non-partisan expert in financial services at the Brookings Institution, said JP Morgan and a few other firms were likely to be particularly alarmed at the prospect of a tightening of the existing cap preventing a bank from holding more than 10% of America's insured deposits: "They may already be over any limit under consideration. If they are, they'll probably be allowed to stay unchanged but it will mean they have to eschew acquisitions."

He added that banks will not succeed in defeating restrictions entirely: "Everybody hates banks now and my intuition is that bank lobbyists overplayed their hand last year. It would have been better for them to work out some compromises rather than trying to destroy reform bills entirely."

Full article published here http://www.guardian.co.uk/business/2010/jan/24/wall-street-lobbyists-banks-obama

Lobbying by US banks linked to risky lending

Published by The Guardian
5 January 2010


Powerful American banks spending lavishly on lobbying are more likely to engage in high-risk lending and their shares have performed less well than others, a groundbreaking study by the International Monetary Fund has found.

The in-depth research will prompt calls for a wholesale clean-up of Capitol Hill by the Obama administration. Lobbying by the finance, insurance and real estate (Fire) sector outstrips any other in the US economy.

The study, entitled A Fistful of Dollars: Lobbying and the Financial Crisis, published by the IMF, reveals a stark correlation between lobbying by lenders and high loan-to-income loans.

The paper, written by a trio of high-profile IMF economists, established that firms who spend more on buying access to politicians are more likely to engage in risky securitisation of their loan books, have faster-growing mortgage loan portfolios as well as poorer share performance and larger loan defaults.

The landmark paper will increase pressure on US politicians to regulate the mortgage industry, which Washington insiders say has so far been immune from meaningful financial reform in the aftermath of the bank crisis.

Highlighting 33 pieces of federal legislation that would have tamed predatory lending or introduced more responsible banking but were the target of intense lobbying, the IMF found that the efforts by banks to resist the legislation overwhelmingly succeeded.

"Our analysis suggests that the political influence of the financial industry can be a source of systemic risk," Deniz Igan, Prachi Mishra and Thierry Tressel wrote in their conclusion. "Therefore, it provides some support to the view that the prevention of future crises might require weakening political influence of the financial industry or closer monitoring of lobbying activities to understand better the incentives behind it."

The study also established that US business spends $4.2bn (£2.6bn) over the four-year election cycle on "targeted political activity", with Fire firms accounting for 15% of that total – equivalent to $479,500 a firm in 2006. The "lobbying intensity" of the Fire sector also "increased at a much faster pace relative to the average lobbying intensity over 1999-2006".

The IMF claims such a study is the first of its kind. It uses complicated algebraic equations to assess the effect of lobbying on policy makers, loan defaults and the overall financial performance of banks.

Jack Blum, one of the world's most respected investigators who uncovered the BCCI scandal and has 40 years experience tracking down mortgage fraud, said: "In my entire career investigating financial fraud, fraud was always explained away as perpetrated by a few bad apples. This is plainly untrue. There has been a systematic refusal to look hard at how this has happened. I'm delighted the IMF are using mathematical formula to look at something that has been obvious to so many for so long. There's nothing new and surprisinmg about this. The question is where was the IMF when this happened?"

Raymond Baker, director at the Washington DC-based thinktank, Global Financial Integrity, said: "The financial community has no hesitation when it comes to fighting against anything that they deemed would limit their freedom to carry out business in any way they saw fit. We have seen this vividly when it came to the prospect of anti-money laundering legislation and we have seen this with Capitol Hill moves to limit predatory lending and introduce responsible banking measures."

Many of the responsible banking bills targeted by Wall Street would have required them to evaluate consumers' ability to repay loans before cash is forwarded, stipulated that creditors must report consumers' payment histories to credit rating agencies and that loans should not exceed more than 50% of an individual's income.

An unfettered, liberalised mortgage market provided the backdrop for sub-prime mortgage market failure. The IMF will now be under pressure to formulate policy in response to its research. The IMF has not commented on the study.

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