Did campaign contributions and lobbying by the financial sector contribute to the meltdown on Wall Street?
Yes
by A.W. Berry
The 2008 Wall street financial meltdown was caused in part by lobbying by the financial sector. The financial problems began in a nexus of lobby supported pro-banking legislation, lack of oversight, and developments within the mortgage industry and mortgage backed derivatives markets. These circumstances took place in the wake of the Savings and Loans crisis of the 1980's and in the midst of one of the most prosperous decades the United States has ever seen. During the 1990's the financial scenario(s) and economic picture didn't look so bleak for Wall Street, however new developments in the securities industry pointed heavily to economic thought that grouped banking deregulation with risk and wide-eyed political decision making.
In the years preceding the 2008 Wall street melt down, a flurry of lobbying activity by the Banking industry led to a loosening of mortgage lending practices according to Lisa Lerer of 'Politco' magazine. Specifically she states, " During those years, the mortgage industry pressed Congress to roll back strong state rules that sought to stem the rise of predatory tactics used by lenders and brokers to place homeowners in high-cost mortgages." This is further verified by opensecrets.org's lobbying totals from 1998-2008 in which the Finance, Insurance and Real Estate industries are recorded as being the largest lobbying group in terms of a dollar amount over $3.2 Billion.
The connection between financial lobbying and the Wall street crisis is also present in the case of Senator Phil Gramm of Texas who is stated by Lerer, as being a former banking lobbyist turned politician and co-author of the Financial Services Modernization Act of 1999. The relationship between the Financial Services Modernization Act and the Wall street meltdown of 2008 is in the lack of regulatory fail safes within the act. Moreover, to exacerbate things, little was done by congress to limit the massive risky mortgage derivative spending by large banks in regard to complex leveraged derivatives and as insured by mortgage default swaps. This was in part because of more lobbying.
In the book 'Infectious Greed' by Frank Partnoy, Partnoy illustrates the presence of the International Swaps and Derivatives Association (ISDA) in Washington D.C. politics. Moreover, Derivatives lobbyists successfully influenced key law makers to abort legislation against unregulated 'off balance sheet' derivatives assets. Eventually, the combination of loosely enacted banking deregulation laws, the mortgage lending lobby and the ISDA prevention of legislative oversight proved too potent a concoction for Wall street to bear when the housing bust, credit crisis and private investment bank failures arrived.
The mortgage giants Fannie Mae and Freddie Mac are not to be overlooked in the multi-tiered lobbying dynamic that led to the Wall street meltdown. In a July 2008 article by Tom Raum and Jim Drinkard of the Associated press, the two Government sponsored enterprises (GSE's) are reported as having contributed over $170 million dollars to members of congress to support their home buying cause. Specifically, they state "Over the past decade, both Fannie (FNM) and Freddie (FRE) made the list of Washington's top 20 lobbying spenders. They spent a combined $170 million to cultivate allies during that period, a bit less than the American Medical Association and a bit more than General Electric."
Campaign contributions since 2002 also indicate a strong influence of the financial industry on Congress according to Tom Hamburger and William Heisel of the L.A. Times. "The securities, banking and mortgage industries are among the biggest campaign contributors to both parties. Since 2002, the sector has contributed more than $1.1 billion to congressional candidates, with Republicans getting an edge during that period, according to federal lobbying records." How exactly these contributions affect political decision-making is a matter of connecting the dots as politicians receive their education on current events and industry developments in part by lobbyists. What's more, opensecrets.org illustrates the vast majority of campaign contributions go to political incumbents adding re-election incentive, and political relationship building to the mix.
The evidence indicates lobbying and campaign contributions from key groups within the financial industry led to a chain of events that caused the 2008 Wall street 'crisis'. The impact of the financial services industry was present all the way from banking deregulation in the 1990's to financially irresponsible neglect of derivatives asset reporting, and lax lending standards advocated by mortgage companies. The money trail of financial industry lobbyists and campaign contributors marks a clear multi-year trail that is well documented in U.S. Government lobbying public records and accounts from organizational and media watchdogs.