I watched Charles Ferguson’s excellent documentary “Inside Job” for the second time yesterday. It’s a masterful polemic exploring the series of bad decisions, deregulation and ideological economics that led to the financial crisis. Covering the rise of derivatives, moral hazard, revolving doors, questionable ratings, dodgy academic conflicts of interest, subprime mortgages, the severity of the crash, and bonuses, it’s all there, and explained in laymans terms by some of the worlds foremost experts and those who were right at the heart of it. From Nouriel Roubini, the now famous economist credited with predicting the crisis with startling accuracy, to the madame who catered to the vices of Wall Street’s top bankers.
Larry Summers, Tim Geithner, Bob Rubin, Hank Paulson, Alan Greenspan and Ben Bernanke failed to appear in the film, all of them declining to be interviewed, perhaps a wise decision on their parts in retrospect, after seeing the grilling Ferguson gave Glenn Hubbard, the Columbia University Dean, regarding the numerous conflicts of interest in being paid large sums of money for writing and supporting regulation (or abolishment of) that contributed to the crisis.
Part I of the film, “How we got here”, covers the deregulation of financial markets, for example how the Glass Steagall act was violated during the Citigroup merger, with the newly formed company given a year’s reprieve from the legislation while it was conveniently changed to accomodate the merger under the Gramm-Leach-Bliley Act. George Soros uses a very good metaphor to explain the logic behind regulation and the ringfencing of funds. Soros describes the financial system as being like an oil tanker, with the money representing the oil in different compartments being separated into separate tanks through regulation. When deregulation happened the walls between the tanks are removed, and the oil begins to slosh around across the ship, destabilising it. In the instance of the financial markets this led to bubbles occurring in the dot-com era and recently in subprime mortgages. Of course, the nature of the financial system, that an endless supply of money can be focused into bubbles, without any real savings or money representing real value to back it up, is enormously problematic, and is not covered here.
Part II goes into the nature of the subprime bubble. Covering the AAA rating given to collections of mortgages held in Collateralised Debt Obligations which in many cases the borrowers entered into with less than 1% ownership of the home. AAA ratings are normally given to save investments like government bonds, and the remuneration of the ratings agencies was often higher when a higher rating was given, a clear case of moral hazard. The rise of securitisation meant that for all intents and purposes limits on the level of money that could be created by banks were meaningless. Money was created to issue a loan, and then the loan was often sold on to another financial institution or a wealthy investor who were often leveraged with created money themselves, freeing up capital for the issuing banks to make even more loans. This is how eventually people with no income, no jobs, and no assets were allowed to borrow 99% of the value of their homes, at massively inflated prices. Securitisation is but a symptom of the wider problem, a clever way that was devised to bypass regulation to limit the amount of money that can be created by banks. Securitisation is not the problem, it is the process that it was used to compound at fault.
Part III covers the crisis and the irresponsible actions of those pulling the strings at the time. Ben Bernanke and the US regulators failed to inform the French and British governments that Lehman Brothers was about to become bankrupt as the wave of defaults started to come through. The film accuses the investment banks of deliberate actions to cause the crash, with Morgan Stanley and Goldman Sachs betting against CDO’s that internal memo’s referred to as “shitty deals”, and justifying it in the context of “market making”. The CEO of Countrywise, the biggest subprime mortgage lender in the USA managed to walk away with nearly half a billion dollars in the year preceding its downfall. The FBI referred to an “epidemic” of mortgage fraud with dodgy loan documentation, now biting the banks back as many homeowners fight their evictions with this evidence.
Part IV and V cover “accountability”, and “where we are now”, detailing the extent of the damage and the fact that no criminal prosecutions have been made, none of the extensive remuneration in the boom years has been recovered, and the academic are all still working in the same jobs, while the financial institutions continue to consolidate and the bonuses continue to get bigger and bigger, with no new regulation coming into force as of yet, and no real change from the industry beginning to appear. Harvard and Columbia professors are given highly accusatory interviews for their involvement in being paid large sums of money to oversee and recommend deregulation in the USA and vouch for the stability of Iceland’s astronomically leveraged banking sector.
I would highly reccomend this film to anybody interested in the subject. While it does not cover the real, deep systemic causes of the crisis, the fact that our monetary system is based on credit or debt, and that without constantly continuing issuance of debt, the whole thing falls apart, it is certainly a very useful narrative for the financial crisis, and the knock on effects that deregulation, mega-bonuses, moral hazard, and the failure of the duty of care had on the public and the global economy.