How did the US banks manage to screw bailout money out of the US government? It's all about power, influence and having friends in the right places.
According to a new paper from the National Bureau of Economic Research, economists found that lenders who were lobbying more intensively on issues related to mortgage lending and securitization actually made riskier loans and expanded their mortgage business most rapidly during the housing boom. By 2008 when the market was in meltdown, the loans originated by those "politically active" (i.e friends in high places) lenders were more likely to be delinquent.
But here's the rub. They were 7 percent more likely to receive bailout funds, and they actually received more of the money. As a result, their share price went up. They had a 27 percent increase in their market capitalization in October 2008, the month the bailout program was announced. Because of their political connections, they were more valuable as companies regardless of how bad they were.
This study is important because it shows us how the banks were able to use political influence to get US taxpayers to subsidize delinquent and defaulting mortgages. Just another example of the corruption in the US financial system.
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