Inside Job
Directed by:
Charles Ferguson
Written by:
Charles Ferguson, Chad Beck, and Adam Bolt
When I was
still a reporter, I remember trying to wrap my head around the machinations of the
global economic crisis that took place in 2008. I had covered some of the peripheral fallout such as the local construction sites that had been left abandoned, seemingly overnight, but never had the chance to get to the heart of the matter. However, I had a valuable resource -- childhood friend James Pressler -- an economist and
terrific writer. He took me behind the scenes, dispensed with the political
spin surrounding the events, and helped me grasp exactly what was going on. It
was a tragic turn of events for many, to say the least. But it sparked
something in me.
And then
this film came out, which furthered my interest in the subject.
Not only is
“Inside Job” one of the best documentaries of the 21st Century so
far, it is one of the best films of any genre, and certainly one of the most
important films I have seen. It echoed everything James had told me
earlier. But this wasn’t an isolated incident. Director Charles Ferguson traces
the history of this financial crisis and all the events that contributed to it. It was decades in the making.
In 2008, the
global economy went into a freefall, precipitated by a housing market crash.
People lost their homes, their jobs, and in some cases lost their pensions and life
savings. Unemployment skyrocketed. Very few people outside the financial
services industry or economics industry understood why.
The film
often reminds me of New York Times columnist and Nobel Prize-winning economist,
Paul Krugman. When Krugman writes, he writes for his overall audience, not financiers
or economists. His writing is accessible to those of us who aren’t in those
fields. He helps us understand without getting bogged down in arcane detail we
wouldn’t understand.
Director
Ferguson takes a similar approach. Each person he interviews speaks in
conceptual terms that audiences can understand. And the overall message is
rather clear: Regulation of the financial services is absolutely necessary and
the powerful in the financial services industry have been doing their best to
deregulate for decades.
We had been
through this before, specifically The Great Depression. Financiers held great
power then over unregulated finance. Following that period, Congress passed laws
to prevent another catastrophe, namely the Glass-Steagall Act. That law
essentially forced the separation of commercial and investment banking. So
investment banks couldn’t take deposits and commercial banks could not take
part in certain investment activities for their clients.
However,
ever since the Reagan presidency, administrations had been chipping away at
regulations bit by bit. Couple that with physicists and mathematicians, who
once worked for governments during the Cold War, had moved into finance and
applied their skills in the financial markets, according to Andrew Sheng, the
chief financial advisor to the China Banking Regulatory Commission.
As
regulation was being slowly rolled back, financial institutions continued to
develop what is called financial derivatives. Those were new financial products
that allowed financial institutions to make even more money. And those
derivatives became more and more risky over time.
But there
were two important pieces of legislation right at the turn of the 21st
Century that sent the derivatives market skyrocketing. The Gramm-Leach-Bliley
Act of 1999 essentially repealed the part of Glass-Steagall that prevented any
institution from acting as a commercial bank, financial bank and/or insurance
company. Then, in 2000, the Commodity Futures Modernization Act essentially
banned the regulation of derivatives.
What that
meant for the mortgage industry is such lending institutions were no longer on
the hook for the money lost if a borrower defaulted on a mortgage. That’s
because once lenders finalized mortgages, they would package them off as
mortgage-backed securities and sold them to investment banks, essentially
removing any risk to them. This type of derivative is called a collateralized
debt obligation (CDO), which the investment banks packaged with student loans
and car loans into investments for their clients.
This proved
to be quite lucrative for all financial institutions involved. Also, since
local lenders weren’t really on the hook for all the funds they loaned, they
turned to subprime mortgages – mortgages with higher interest rates extended to
those with low credit scores. The key was to sell these mortgages in high
volume for more immediate profit. Local lenders didn’t really care who they
were selling to or whether those clients were risky.
Most people, even those not in finance, understand the riskiness of investing in subprime mortgages. So investment
banks paid the three main credit ratings agencies – Standard & Poors, Fitch,
and Moody’s – to assign these investments with an AAA rating, the highest
possible.
And once
these derivatives were put into practice, the number of mortgages sold
increased dramatically. In ten years, the market for subprime loans increased
from $30 billion to $600 billion. And with that, housing prices increased
dramatically as well.
Another
derivative called a credit default swap, was offered by major insurance companies
like AIG for such investment in CDOs. Credit default swaps were essentially an
insurance policy companies could purchase on investments, according to Satyajit
Das, a derivatives consultant and author. The utterly bonkers concept behind
credit default swaps was that any company could purchase them, specifically as
a bet they would fail, even on investments they didn’t own. To put it in
perspective, it would be like any person purchasing a policy on my auto
insurance policy. So if I had an accident, not only would the insurance company
pay me, it would pay anyone else who bought a credit default swap on my
insurance policy.
The head of
AIG’s financial products division at the time was Joseph Cassano. Cassano
insisted, despite the warnings of his own company’s auditors, that such
derivatives were financially solid. Cassano made $315 million in AIG’s heyday.
As this
market boomed, investment banks needed more money to purchase the CDOs to keep
the gravy train moving. So they petitioned the Securities and Exchange
Commission to relax the rules for leveraging. Leveraging is the ratio of money owed
to the bank’s own money. The more banks borrowed, the higher the leverage. The
SEC relaxed such rules unanimously, and the agency having gutted its
enforcement division prior, there were few people to keep an eye on what was
happening.
The level of
leveraging was frightening, according to Daniel Alpert, managing director for
Westworld Capital. Investment banks’ leveraging ratios reached as high as 33 to
1. Alpert said that meant with a tiny 3 percent decrease in their asset bases,
banks could become insolvent. One of the chief lobbyists for relaxing these
leveraging rules was Henry Paulson, CEO of Goldman-Sachs. After the housing bubble
burst, Paulson was named Treasury Secretary by George W. Bush and tasked with
finding ways of fixing the mess it created. The irony is inescapable.
In 2007, Allan
Sloan, wrote an article for Fortune Magazine called “House of Junk,” about the
CDOs issued during Paulson’s last months as Goldman-Sachs’ CEO. As Sloan wrote
the article, one-third of the company’s CDOs had defaulted. By the time the
article came out, the majority had defaulted.
The fallout
was fast and furious. Mortgage defaults came in waves. People lost almost
everything. Since the investments were rated AAA, many investors put their
money into them, including those responsible for overseeing pension funds. And
more than a decade later, many are still trying to recover.
I watched
this film with a combination of awe, fascination and utter rage. Ferguson is
such a good filmmaker that he could take a subject that most people would
easily dismiss, and put them on the edge of their seats as though it were a
work of fiction.
Unfortunately for so many, it wasn’t fiction. And that is what is infuriating. So many people in positions of power and trust let us down. None of them were prosecuted. Certain individuals put their companies at risk for two reasons -- their own financial gain, and the notion that the federal government would bail them out (which it did).
Ferguson is precise and thorough. He talks with a host of industry experts who
saw how this could end. And though practically nobody in the industry that
promoted this kind of risky financial game playing agreed to be interviewed on
camera, they were compelled to testify in Congress. And Ferguson made sure he included
that video.
This film gives
such terrific perspective. So while many cling to the notion that it was a lack of personal
responsibility on behalf of the borrowers that caused the financial collapse, there is a reason why we have
regulations against predatory lending. And perhaps we need more.
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