Politics of subprime datapoint of the day

By Felix Salmon
June 21, 2010
new paper:


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Atif Mian, Amir Sufi, and Francesco Trebbi report, in a new paper:

We begin with an examination of the pattern of campaign contributions toward representatives from districts with a high fraction of subprime borrowers. From 1994 to 2000, mortgage industry campaign contributions toward these representatives are relative steady. However, beginning in the 107th Congress (2001-2002), there is a sharp relative rise in mortgage industry campaign contributions toward representatives from high subprime share districts. The relative increase accelerates through 2006. The magnitude is economically significant: a one standard deviation increase in the fraction of subprime borrowers in a given district leads to an 80 percentage point increase in the growth of mortgage campaign contributions from 2002 to 2006. In contrast, we see no effect for non-mortgage financial industry campaign contributions.

Of course there’s a pretty chart to go with:

subprime.tiff

The authors conclude, based on this and other evidence, that both subprime lenders and subprime borrowers were responsible for successfully pressuring politicians of both parties to deregulate the mortgage industry.

This isn’t regulatory capture, so much as it is regulatory emasculation via Congress. And there’s really nothing that can be done, in terms of building a new regulatory architecture, to stop the same thing from happening again in future — especially with the rise of tea-party rhetoric. All we can hope for is that memories of the financial crisis will be long enough to prevent Congress from embarking on another fight against regulatory red tape and artificial restraints. I’m not hopeful.

(Via Guan)

Comments
2 comments so far

I love the chart, but I come to a very different conclusion.

There was very little deregulation of the mortgage industry. This spending was to encourage Congress to continue to encourage Fannie Mae and Freddie Mac to make dangerous loans.

The problems developed because the investment bankers fast-talked the ratings agencies into believing that 80% of repackaged/tranched sub-prime debt should be rated Aaa. They argued that mortgage defaults were independent events (ridiculous in any but boom times), and that because the worst tranche (mezzanine) would take the first 20% of mortgage defaults, the rest would get paid. The ratings agencies bought that argument and the Fed and regulators signed off on it.

Converting sub-prime debt to Aaa debt was like spinning gold from straw for the investment bankers. Their demand was limitless, once the ratings agencies signed on.

Posted by chartguy | Report as abusive

Pretty sure “80% of repackaged subprime debt” wasn’t rated triple A. Don’t think a single person argued there was zero correlation between the mortgages and in boom times the correlation is no more likely to be zero than in a crash – both times the correlation is likely to be high and you are confusing mezzanine with equity tranches.

The demand was from investors who wanted the ***appearance*** of low risk with a higher yield. Anyone who ACTUALLY thought they were taking on no risk should have “I am a moron” tattooed on their forehead and be forever banned from every having an asset except cash.

Posted by Danny_Black | Report as abusive
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