History shows that lobbying is extremely counterproductive but it does not appear that banks have learned their lesson.
Lobbying is a permanent feature of the US political and regulatory scene. All industries participate and engage in it but some more than others. The question is, are these industries better off as a result of the often aggressive lobbying of the Congress and regulators? Does lobbying add value to an organization or industry?
The omens are not good.
During the 2000s a very curious thing happened. Three of the biggest industry lobbying groups experienced outcomes that would have been completely at odds with their business objectives. They were the oil industry, the auto industry and the banks.
An article in The Independent of the May 7, 2010 showed the extent to which BPs downfall was due at least in part to its lobbying activities.
US oil regulator ‘gave in to BP’ over rig safety,
..But an investigation by the Associated Press and other media outlets seemed to show that, after lobbying by BP, the Minerals Management Service (MMS) within the Interior Department relaxed the rules so that the company could dodge filing a proper blow-out contingency plan.
The auto industry on the other hand lobbied the Bush Administration in order to keep US mileage and emission standards low. The fact that they managed to do so at a time when global warming was a hot topic was indeed remarkable.
Alas, there was a spike in oil prices which was then followed by the financial crisis and the entire US auto industry, heavily dependent as it was on gas-guzzling SUVS, had a near-death experience. Had the auto industry not lobbied so hard against improved mileage standards they would have been in a better position to withstand the downturn in the economy when people turned to more fuel-efficient vehicles.
The US auto industry was only saved because the government decided to do a bailout.
The story of the banking industry is not much different. Included in their lobbying was an effort to get the SEC to relax the net capital requirements for broker-dealers, thus effectively reducing the amount that had to be held in reserve for each dollar at risk. This happened in 2004, just about the time that the subprime mortgage market was to go into overdrive—and there is little doubt that this change in regulation helped to grease the wheels.
That was not all however. Much of the lending in the subprime market was made through entities that were not part of the federal regulatory framework and banks lobbied to ensure that they stayed that way.
We all know what happened next. Overextended and overleveraged banks found themselves in a dire financial situation as the subprime mortgage crisis unfolded. Many banks failed, some were forced into shotgun marriages, while others had to be bailed out by the government.
One of my all-time favorite quotes is one by Ralph Waldo Emerson; “be careful what you set your heart on, for it will surely be yours”. While there is a clear necessity to engage with government and regulators over issues of genuine concern, banks as well as other organizations and industries, should take careful note and reconsider their approach to lobbying. If they don’t, their shareholders should encourage them to think and act otherwise.
Jonathan Ledwidge is the author of the book Clearing The Bull: The Financial Crisis and Why Banks Need a Human Transformation. Use this link to give your opinion on the performance of banks post the financial crisis.