Iceland is a stable democracy with the high standard of living
and until recently
extremely low unemployment and government debt
We had the complete infrastructure of a modern society:
clean energy, food production,
fisheries with a quota system to manage them
Good healthcare and good education,
clean air, not much crime,
It's good place for families to life
We had almost “end of history” status
But in 2000 Iceland government began a broad policy of deregulation
that would have disastrous consequences
first for the environment and then for the economy
They started by allowing
multinational corporations like Alcova
to build giant aluminum smelting plants
and exploit Iceland’s natural geothermal
and hydroelectric energy sources
Many of the most beautiful areas in the highlands
with the most spectacular colors are geothermal
So nothing comes without consequences.
At the same time the government privatized
Iceland’s three largest banks
The result was one of the purest experiments in financial deregulation
ever conducted
Finance took over and uh,
more or less wrecked the place
In a 5 year period this three tiny banks
which have never operated outside of Island
borrowed $120 billion
ten time the size of Iceland’s economy
The bankers showered money on themselves
each other and their friends
There was a massive bubble
Stock prices went up by a factor of nine,
house prices more than doubled
Iceland bubble gave rise to people
like Jon Asgeir Johannesson
He borrowed billions from the banks
to buy up high-end retail businesses in London
He also bought a pinstriped private jet,
a $40 million yacht
and a Manhattan penthouse
Newspapers always had headlines:
this millionaire bought this company
in UK or in Finland or in France or wherever
Instead of saying
this millionaire took a billion dollars loan
to buy this company
and it took it from your local bank
The banks set up money market funds
and the banks advised deposit-holders to
withdraw money and put them in a money market funds
The Ponzi scheme needed everything it could, huh?
American accounted firms like KPMG
audit the Iceland’s banks and investment firms
and found nothing wrong
And American credit rating agencies
said Iceland was wonderful
In February 2007
the rating agencies decided
to upgrade the banks
to a highest possible rate – AAA
It went so far as the government here
traveling with the bankers as a PR show
When Iceland’s banks collapsed at the end of 2008
unemployment tripled in 6 months
There is nobody unaffected in Iceland
- So a lot of people here lost their savings - Yes that’s the case
The government regulators
who should’ve been protecting the citizens of Iceland
had done nothing
You have two lawyers
from regulator company who're coming to a bank
to talk about some issues
When they approach the bank
they would see nineteen SUVs outside the bank
so you went to the bank and you have
nineteen lawyers sitting in front of you
that very well prepared,
ready to kill any argument you make
and then if you do very well
they offer you job
One third of Iceland’s financial regulators
went to work for the banks
But this is universal problem,
in New York you have the same problem, right?
What do you think of Wall Street incomes this days?
Excessive
I've been told that it's extremly difficult
for the IMF to critisize United States
I wouldn't say that
We deeply regret our breaches of US law
They’re amazed at
how much cocain these Wall Streeters can use
and get up and go to work the next day
I didn't know what credit default swaps are
I'm little bit old fashioned
Has Larry Summers ever expressed remorse?
I don't hear confessiones
The government just writing checks
that's plan A, that's plan B and that's plan C
Would you support legal controls on executive pay?
I would not
Are you comfortable with
law of compensation in financial service industry?
If they waranted, then yes, I am
- Do you think they waranted? - I think they waranted.
And so you help this people blow the world up?
You could say that
They were having massive private gains at public loss
When you start thinking
you can create something all of nothing
it's very difficult to resist
I'm concerned that a lot of people
want go back to the old way
the way they were operating prior to the crisis
I was getting a lot of anonymus e-mails from bankers
saying "You can't quote me,
but I'm really concerned"
Why do you think there isn't
a more systematic investigation being undertaking?
Because then you will find the culprits
Do you think that Columbia Business School
has any significant conflict of interest problem?
Don't see that we do
The regulators didn't do their job
they had the power to do
every case that I made when I was state attorney general
they just didn't want it
Over the weekend, Lehman Brothers one of the most venerable
and biggest investment banks, was forced to declare itself bankrupt
another, Merrill Lynch, was forced to sell itself today
Crisis talks are underway... World financial markets are way down today
dramatic developments for two Wall Street giants....
In september 2008
the bankruptcy of US investment bank Lehman Brothers
and the collapse of the world
largest insurance company AIG
triggered the global financial crisis
...fears gripped markets overnight
with Asian stocks slammed by...
Stocks fell off a cliff
the largest single point drop in history
Share prices continued to tumble in
the aftermath of the Lehman collapse
The result was the global recession
which costs the world tens of trillions of dollars
rendered 30 millions people unemployed
and doubled the national debt of the US
If you looked at the costs of it:
the structure of equity welth, of housing wealth
then the structure of income, of jobs,
15 million people globally
could end up below the poverty line again
This is just a hugely, hugely expensive crisis
This crisis was not an accident
It was caused by an out of control industry
Since the 1980s the rise of US financial sector
has led to a series
of increasingly severe financial crises
Each crisis has caused more damage
while the industry has made more and more money
Part I. How we got here
After the Great Depression United States
have 40 years of economic growth
without a single financial crisis
the financial industry was tightly regulated
most regular banks were local businesses
and they were prohibited from speculating
with depositors savings
Investment banks
which handle stock and bond tradings
were small private partnerships
In the traditional investment banking
partnership model
the partners put the money up
and obviously the partners
watch that money very carefully
They wanted to live well
but they didn't want to
bet the ranch on anything
Paul Volcker served on the treasury department
and was chairman of the Federal Reserve
from 1979 - 1987
Before going into government,
he was a financial economist
at Chase Manhattan Bank
When I left Chase to go in Treasury in 1969
I think my income was in the neighbour
of $45000 per year
Morgan Stanley in 1972
had approximately 110 total personnel
One office and capital of $12 000 000
Now Morgan Stanley has 50 000 workers
and has capital of several billion
and has offices all over the world
In the 1980s the financial industry exploded
The investment banks went public
given them huge amount of stock holding money
People on Wall Street started getting rich
I had a friend who was a bond trader
at Merilyn Lynch in 1970s
He had a job as a train conducter at night
Because he had 3 kids
and couldn't support them
on what a bond trader made
By 1986 he was making millions of dollars
and thought it was because he was smart
The highest order of business before the nation
is to restore our economic prosperity
In 1981 president Ronald Reagan
choses Treasury Secretary
the CEO of investment bank Merrill Lynch
- Donald Regan
Wall Street and the President do see eye to eye
I've talked to many leaders of Wall Street
they also will be behind the President on 100%
The Reagan administration
supported by economists and financial lobbyist
started the 30 years period of financial deregulations
In 1982 the Reagan administration
deregulated savings and loan companies
allowing them to make risky investments
with their depositors' money
By the end of the decade
hundreds of saving and loan compnies had failed
This crises cost tax payers $124 billion
and cost many people their live savings
It may be the biggest bank heist in our history
Thousands of saving and loan executives
went to jail for looting their companies
One of the most extreme cases
was Charles Keating
In 1985 when federal regulators
began investigating him
Keating haired an economist
named Alan Greenspan
In this latter to regulators
Greenspan praised Keating's
sound business plan and expertise
and said he saw no risk in allowing
Keating to invest his customers money
Keating reportedly paid Greenspan $40 000
Charles Keating went to prison shortly afterwords
As for Alan Greenspan
President Reagan appointed him
chairman of America's central bank
- The Federal Reserve
Greenspan was reappointed
by presidents Clinton and George W. Bush
During the Clinton administration
deregulation continued under Greenspan
And Treasury Secretary Robert Rubin,
the former CEO of the investment bank
Goldman Sachs
and Larry Summers - Harvard economics professor
The financial sector of Wall Street being powerfull,
having lobbyist, having lots of money
step by step captured the political system
both on the Democratic and the Republican side.
By the late 1990s
the financial sector had consolidated
into few gigantic firms
Each of them so large
that their failure can threaten whole system
And the Clinton administration
helped them grow even larger
In 1999 Citicorp and Travelers
merged to form Citigroup
- the largest financial services company
in the world
The merger violated the Glass-Steagal act
- a law passed after Great Depression
which prevented banks with costumer deposits
from engaging in risky investment banking activities
It was illegal to acquire Travelers
Greenspan said nothing
The Federal Reserve gave him exemption
for a year and then they got the law passed
In 1999 at the urging of Summers and Rubin
Congress passed the "Glemm-Leach-Bliley Act"
Known to some as the Citigroup Relive Act
It overturned "Glass-Steagal"
and clear the way for future mergers
Why do you have big banks
- because banks like monopoly power
because banks like lobbying power,
because banks know that when you too big
they will be bailed
Markets are inherently ustable
or at least potentially unstable
and appropriate metaphor is the old tankers
they very big and therefore
you have to put in compartments
to prevent the sloshing around of oil
from capsizing the boat
the design of the boat has to take it into account
and after the Depression
the regulation actually introduced
this very watertight compartments
and deregulation has led to
the end of compartmentalisation
The next crisis came at the end of the 90s
The investment banks fuel the mass of the bubble in internet stocks
Which were followed by a crash in 2001
that caused $5 trillion dollars in investment losses
The Securities and Exchange Commission
- the federal agency which had been created
during the depression to regulate investment banking
had done nothing
In the absence of meaning for federal action
and there has been none
and given the clear failure of self regulation
It is become necessary for others to step in
and adopt the protections needed
Eliot Spitzers investigations revealed that
the investments banks had promoted
internet companies they knew would fail
Stock analysts were being paid
based on how much business they brought in
and what they sad publicly
was quite different from what they sad privately
Infospace given the highest possible rating
dismissed by the analysts as the "piece of junk"
Excite - also highly rated
called "such a piece of crap"
The defence that was proffered
by many of the investment banks
was not, you're wrong, it was...
Everybodies doing it and everybodies knew what's going on
and therefore nobody should rely on this analysts anyway
In december 2002 ten investment banks
settle the case for a total of $1.4 billion
and promised to change their ways
Scott Talbott is the chief lobbyist
for the Financial Services Roundtable
one of the most powerfull groups in Washington
which represents nearly all of
the world largest financial companies
Are you comfortable with the fact
that several of your member companies
have engaged in large scale criminal activity?
- You'll have to be specific - Ok...
And first of all criminal activity
shouldn't be accepted, period
Since deregulation began
the world's biggest financial firms
have been caught laundering money,
defrauding customers and cooking thier books
again, and again, and again
Credit Suisse helped funnel money
for Iran's nuclear program
and for the Aerospace Industries Organization of Iran
which built ballistic missiles
Any information that would identify it
as Iranian would be removed
The bank was fined $536 million
Citi bank helped funnel $1.5 million
of drug money out of Mexico
Did you comment that she should
"loose any documents connected with the account"
I said that in a kidding maner
it was at the early stages of this
I did not mean it seriously
Between 1998 and 2003
Fannie Mae overstated its earnings
by more than $10 billion
This accounted standarts are highly complex
And required determinations
over which experts often disagree
CEO Franklin Raines
who used to be President Clinton's budget director
recieved over $22 million and bonuses
When UBS was caught
helping wealthy americans evade taxes
they refused to cooperate with US goverment
Would you be willing to supply the names?
- If there is a treaty framework...
-No treaty framework,
you've agreed you participated in a fraud
hm...
But while the company is faced an unprecedented fines
the investment firms do not
have to admit any wrong doing
When you this large and you are dealing
with this many products and this many customers
mistakes happen
The financial services industry
seems to have level of criminality that is,
you know, somewhat distinctive.
When were the last time when
CISCO or Intel or Google or Apple or IBM you know...
I'm totaly agree with you
about hightech versus financial services
but hightech is fundamentally creative business
where value generation and income derives
when you actually create something new and different
Begining at 1990s
deregulations and advances in technology
led to an explosion of complex financial products
called derivatives
Economists and bankers
claimed they made market safer
But instead they made it unstable
Since the end of Cold War
a lot of former physicist and mathematicians
decided to apply their skills
not on Cold War technology
but on financial markets
And together with investment bankers and hedge funds...
- Create a different weapons? - Absolutely
As Warren Buffett said:
"Weapons of mass destruction"
Regulators, politicians and business people
did not take seriously
the threat of financial innovation
on the stability of the financial system.
Using derivatives bankers
could gamble on virtually anything
They could bet on rise or fall of oil prises
the bankruptcy of the company, even the whether
By the late 1990s derivatives
were a $15 trillion unregulated market
In 1998 someone tried to regulate them
Brooksley Born graduated first in her class in Stanford Law School
and was the first woman
to edit the major law review
After running derivatives practice at Arnold & Porter
Born was appointed by president Clinton
to chair the Commodity Futures Trading Commission
which oversaw the derivatives' market
Brooksley Born ask me if
I would come work with her
We decided that this was a serious,
potentially destabilizing market
In may of 1998 the CFTC
issued a proposal to regulate derivatives
Clinton Treasury department had an immediate response
I happened to go into Brooksley's office
and she was just putting down a reciever of her telephone
And the blood had drained from her face
And she looked at me and said:
"That was Larry Summers. He had 13 bankers in his office"
He conveyed it in a very bullying fashion
Sort of directing her to stop.
The banks were now heavily reliant
for earnings on this types of activities
and that led to titanic battle
to prevent this set of instruments from been regulated
Shortly after the phone call from Summers
Greenspan, Rubin and SEC chairman Arthur Levitt
issued a joint statement condemning Born
and recomended legislation
to keep derivatives unregulated
Regulations of derivatives transactions
that are privately negotiated by professionals
is unnecessary
She was overruled, unfortunately
first by the Clinton administration
and then by the Congress
in 2000 Senator Phil Gramm took a major role
and getting a bill passed
that pretty much exempted derivatives from regulation
They are unifying markets they are reducing regulatory burden
I believe that we need to do it
After leaving the Senate, Phill Gramm became Vice-Chairman of UBS.
Since 1993, his wife Wendy had served on the board of Enron.
But its our very great hope
that it would be possible to move this year on legislation in a suitable way
goes to create legal certainty for OTC derivatives
Larry Summers later made $20 million as a consultant to a hedge fund that relied heavily on derivatives.
I wished to assosiate myself with all of
the remarks of secretary Summers
In december 2000 Congress passed
The Commodity Futures Modernization Act
Written with a help of financial industry lobbyists
it banned the regulation of derivatives
Once that's was done it was off to the races
And use of derivatives and financial innovation
exploded dramatically after 2000
-So help me God -So help me God
By the time G.W. Bush took office in 2001
The US financial sector was vastly more profitable,
concentrated and powerfull then ever before
Dominating this industry were 5 investment banks
Two financial conglomerates
Three securities insurance companies
and three rating agencies
And linking them all together
was a securitization food chain, a new system
which connected trillion of dollars, mortgages and other loans
with investors all over the world
30 years ago if you wanted get a loan for a home
the person lending you a money
expecting you to pay him or her back
you got a loan from a lender who wanted you to pay him back
we've since developed securitization thereby
people who made the loan
are no loger at risk of failure to repay
In old system when home owner
paid their mortgage every months
the money went to their local lender
And since mortgages took decades to repay
lenders were carefull
In a new system lenders sold the mortgages to investment banks
The investment banks combined thousands of mortgages and other loans
including car loans, student loans and credit card debt
to create complex derivatives
called collateralized debt obligation, or CDO
the investment banks then sold the CDOs to investors
Now when home owners paid their mortgages
the money went to investors all over the world
The investment banks paid rating agencies to evaluate the CDOs
and many of them were given a AAA rating
which is highest possible investment rate
This made CDOs popular with retirement funds
which can only purchase highly rated securities
This system was a ticking time bomb
Lenders didn't care anymore about whether a borrower can repay
So they started making riskier loans
The investment banks didn't care either
The more CDOs they sold the higher their profits
and the rating agencies which were paid by the investment banks
had no liability if their ratings of CDOs proved wrong
You were getting to be on the hook
and there weren't regulationly constraints
so there were a green light to just pump out more and more loans
Bentween 2000 and 2003
the number of mortgage loans made each year
nearly quadrupled
Everybody in this securitization food chain
from the very beggining until the end
didn't care about quality of the mortgage
they caring about maximazing their volume
and getting a fee out of it
In the early 2000s there was a huge increase
in the riskiest loans called subprime
but when thousands of subprime loans
were combined to create CDOs
Many of them still received AAA ratings
-Now it wouldn't have been possible to create derivative products
that don't have this risks
that carry the equivalent of deductibles
where there are limits on risks
that can be taken on and so forth
they didn't do that, did they
-They didn't do that and in retrospect they they should have done.
-So these guys knew they were doing something dangerous?
- I think they did
All incentives that the financial institutions
offered to the mortgage brokers
were based on sawing the most profitable
products which were predatory loans
The bankers makes more money if they put you on subprime loan
That's what they gonna put you
Suddenly hundreds of billions of dollars a year
were flowing through securitization chain
Since anyone can get a mortgage
home purchases and house's prises skyrocketed
The result was the biggest financial bubble in history
Real estate is real, they can see their asset
their can live in their asset, they can rent out their asset
You had huge boom in housing that had no sense at all
financing appetites out of financial sector
droved what everyboby else did
Last time we had a housing bubble was in the late 80s
In that case the increasing home praises were relatively minor
That housing bubble led to relatively severe recession
From 1996 until 2006 real home praises effectively doubled
At $500 a ticket
they come to hear how buy
their very own piece of American dream
Goldman Sachs, Bear Stearns, Lehman Brothers, Merrill Lynch
were all in on this subprime lending alone
increase from $30 billion a year in funding
to over six hundred billion a year in ten years
they new what was happening
Countrywide Financial - the largest subprime lender
- issued $97 billion worth of loans
It made over %11 million dollars in profits as a result
On Wall Street annual cash bonuses spiked
traders and CEOs became enormously wealthy during the bubble
Lehman Brothers was the top uderwriter of subprime lending
And their CEO Richard Fuld took home $485 million
On Wall Street this housing and credit bubble
was leading to hundreds of billions of dollars of profits
By 2006 about 40% of all profits of S&P 500 firms
was coming from financial institutions
It wasn't real profits, it wasn't real income
It was just money that was been
created by the system and booked as income
to 3 years down the road this a default it's all wiped out
I think it was in fact, in retrospect, a great big national,
and not just national global ponzi scheme
Through the home ownership and equality protection act
the Federal Reserve Board had brought authority
to regulate mortgage industry
but Federal Chairman Alan Greenspan refuse to use it
Alan Greenspan said no that regulation: "I don't even believe in it"
For 20 years Robert Gnaizda was the head of Greenlining
a powerfull consumer advocacy group
He met with Greenspan on a regular basis
We gave him an example of Countrywide
150 different complex adjustable rate mortgages
He said if you'd had a doctorate in math
you wouldn't be able to understand them enough
to know which was good for you and which wasn't
So we thought he was gonna take action
but as the conversation continues
it was clear he was stuck with his ideology
We met again with Greenspan at '05
often we met with him 2 a year never less than 1 a year
and he wouldn't change his mind
Alan Greenspan declined to be interviewed for this film.
In this amazing world of instant global communications
The free and efficient movement of capital
is helping to create the greatest prosperity in human history
146 people were cut from the enforcement division of SEC
is that what you also testified to
Yeah, I think there has been a, a systematic
gutting, or whatever you want to call it,
of the agency and its capability,
through cutting back of staff.
The SEC office of risk managment
was reduce to stuff, did you say, of 1?
Year, when that gentelman would go home at night he could turn the lights out.
During the bubble the investment banks were borrowing heavily
to buy more loans and create more CDOs
The ratio between borrowed money and
bank's own money was called leverage
The more banks borrowed the higher their leverage
In 2004 Henry Paulson the CEO of Goldman Sachs
helped lobby the Securities and Exchange Commission
to relax limits on leverage
allowing the banks to sharply increase their borrowing
The SEC somehow decided to let
investment banks gamble a lot more
That was nuts I don't know why they did that but they did that
We've said these are the big guys and clearly that's true.
But that means if anything goes wrong, it's going to be an awfully big mess.
At this levels you're obviously dealing with the most highly sofisticated financial institutions
These are the firms that do most of the derivative activity in the United States.
We talked to some of them as to what their comfort level was.
The firms actually thought that the number was appropriate.
Do the commissioners vote to adopt the rule amendments and new rules as recommended by the staff?
We do indeed. Unanimous. And we are adjourned.
The degree of leverage in financial system
became absolutely frightening
investment banks leveraging up to the level 33 to 1
which means that tiny 3 procent decrease in a value of asset base
would leave them insolvent.
There was another ticking time bomb in the financial system
AIG - the worlds largest insurence company
was selling huge quantities of derivatives called credit default swaps
For investers who owned CDOs credit default swaps worked like an insurance policy
An investor who purchase credit default swap paid AIG a guatrerly premium
If CDO went bad AIG promised to pay to investor for their losses
But unlike regularly insurance speculators could also buy credit default swaps from AIG
in order to bet against CDOs they didn't own
In insurence you could only insure something you own
Let's say you and I own property and I own a house
I can only insure that house once
the derivatives universe essentially enables anybody to actually insure that house
So you could insure that somebody else could do that so 50 people could insure my house
So what happens is if my house burns down
the number of losses in the system becomes proportionally large
Since credit default swaps were unregulated
AIG didn't have put aside any money to cover potential losses
Instead AIG paid its employees huge cash bonuses
as soon as contract was signed
but if a CDOs later went bad AIG would be on the hook
People were essentially been rewarded for taking massive risks. In good times
they generate short-term revenues and profits and therefore bonuses
but that's gonna lead to the firm to be bankrupt over time
that's totally distorted system of compensation
AIG Financial Products division in Lonodon
issued $500 billion worth of credit default swaps during the bubble
Many of them for CDOs backed by subprime mortgages
The 400 made $3.5 million between 2000 and 2007
Joseph Cassano - the head of AIG FP - personally made $315 million
It's hard for us, without being flippant, to even
to even see a scenario within any kind of realm of reason
that would see us losing $1 in any of those transactions
In 2007 AIG auditors rised warnings
One of them Joseph St. Denis resigned in protest
After Cassano repeatedly blocked him from investigating AIG FP's accounting
Let me tell you one person
who didn't get a bonus when everybody else was getting bonuses
That was Sant Denis
Mr. St. Denis who tried to alert two of you
to the fact that you are running into big problems
he quit in frustration and he didn't get a bonus
In 2005 Raghuram Rajan then the Chief economist of the International Monetary Fund
delivered a paper at the Annual Jackson Hole symposium
the most elite banking conference in the world
- Who was in the audience? - It was I guess a central bankers of the world
ranging from Mr. Greenspan himself,
Ben Bernanke,
Larry Summers was there,
Tim Geithner was there
The title of the paper was essentially
Is Financial Development Making the World Riskier?
and the conclusion was it is
Rajan's paper focused on incentives structures that generated huge cash bonuses
based on short-term profits
but which imposed no penalties for later losses
Rajan argued that these incentives encouraged bankers to take risks
that might eventually destroy their own firms
or even the entire financial system
It's very easy to generate perfomance by taking on more risk
And so what you need to do is compensate for risk-adjusted performance
and that's where all the bodies are buried
Rajan hit the nail on the head
What he particularly said was:
"You guys have claimed you found a way to make more profit with less risk,
I say you found a way to make a more profit with more risk"
And that's a big difference
Summers was vocal
He basically thought that I was criticizing the change in the financial world
And was worried about regulation which reverse this whole change
So essentially he accused me of being a Luddite.
He wanted to make sure that we didn't bring a whole new set of regulations
to constrain the financial sector at that point
Larry Summers declined to be interviewed for this film.
You gonna make an extra $2 million dollars a year or $10 million dollars a year
For puting you financial institution at risk
Someone else pays the bill - you don't pay the bill
Would you make that bet?
Most people who worked on Wall Street said: "Sure, I make that bet"
The Hamptons 2 hours from New York City
That's never was enough
They never wanna home - one home
They wanna own five homes and they wanna have an expensive Penthouse on Park Avenue
And they want have they own private jet
You think this is an industry were high, very high compensation levels is just fine?
I think I would take caution, take heed, or take exception at your word very high,
I mean it's all relative
You have a $40 million oceanfront home in Florida, you have a summer vacation home in Sun Valley, Idaho
you and your wife have art collection filled with million dollar paintings
Richard Fuld never appeared on the trading floor
There was art advisors up there all the time.
You know, he had his own private elevator, he were out of his way to be disconnected
I mean, his elevator, the higher technicians to program it, you know,
so that his driver would call in in the morning, and
a security guard would hold it.
and there'a only like 2 or 3 seconds window when he actually he has to see people
and he hops in the elevator and he goes straight to 31
- Lehman owned a bunch of corporate jets, do you know about this? - Yes
How many were there?
Well, there were 6, including 767s
They also had a helicopter
I see. Isn't that kind a lot of planes to have?
We deal with type A personalities and type A personalities know everything in the world
Banking became a pissing contest, you know
mine is bigger than yours, that's kind of stuff
It was all men that ran it, incidentally.
$15 billions deals weren't large enough so we do $100 billion deals
These people are risk-takers, they're impulsive
Jonathan Alpert is a therapist whose clients include high-level Wall Street executive
That's part of their behavior, part of their personality
and that manifests outside of work as well
It's quite typical for the guys to go out, to go strip bars,
to use drugs. I see a lot of cocain use, a lot of use of prostitution
Recently neuroscientists have done experiments where they've taken individuals
put them into MRI machine and
and they have them play game where the prize is money
And they notice that when the subjects earn money
the part of the brain that get stimulated is the same part that cocain stimulates
A lot of people feel they need to really participate in that behavior
to make it to get promoted, to get recognized
According to a Bloomberg article
business entertainment represents 5% of revenue
for New York derivatives brokers
and often includes strip clubs, prostitution, and drugs
A New York broker filed a lawsuit in 2007 against his firm
alleging he was required to retain prostitutes to entertain traders
There's just a blatant disregard
for the impact that their actions might have on,
on society, on family
They have no problem using a prostitute, uh, and going home to their wife
Kristin Davis ran an elite prostitution ring from her high-rise apartment.
It was located a few blocks from the new york stock exchange.
How many customers?
About 10,000 at that point in time
What fraction were from Wall Street?
Of the higher-end clients, probably – 40 to 50 percent
And were all the major Wall Street firms represented? Goldman Sachs.
Lehman Brothers, yeah, they’re all in there
Morgan Stanley was a little less of that
Uh, I think Goldman was, was pretty, pretty big with that
A lot of clients would call me, and say, can you get me a Lamborghini
for the night for the girl?
These guys were spending corporate money
I had many black cards from, you know, the various financial firms
What's happening is services are being charged to computer repair
Trading research, you know, consulting for market compliance.
I just usually gave them a piece of letterhead, and said, make your own invoice.
So this pattern of behavior, you think, extends to the senior management of the firm.
Absolutely does, yeah. I know for a fact that it does.
It extends to the very top.
A friend of mine, who, who's involved in a company that has a big financial presence,
said: Well, it's about time you learned about subprime mortgages.
So he set up a session with his trading desk and me
and, and a techie, who, who did all this – gets very excited
runs to his computer, pulls up, in about three seconds,
this Goldman Sachs issue of securities.
It was a complete disaster.
Borrowers had borrowed, on average, 99.3 percent of the price of the house.
Which means they have no money in the house.
If anything goes wrong, they're gonna walk away from the mortgage.
This is not a loan you'd really make, right?
You've gotta be crazy.
But somehow, you took 8,000 of these loans
and by the time the guys were done at Goldman Sachs and the rating agencies,
two-thirds of the loans were rated AAA,
which meant they were rated as safe as government securities.
It's, it's utterly mad.
Goldman Sachs sold at least 3.1 billion dollars' worth
of these toxic CDOs in the first half of 2006.
The CEO of Goldman Sachs at this time was Henry Paulson,
the highest-paid CEO on Wall Street.
Good morning, welcome to the White House.
I am pleased to announce that I will nominate Henry Paulson
to be the secretary of the Treasury.
He has a lifetime of business experience,
he has an intimate knowledge of financial markets
he has earned a reputation for candor and integrity
You might think it would be hard for Paulson
to adjust to a meager government salary.
But taking the job as Treasury secretary was the best financial decision of his life.
Paulson had to sell his 485 million dollars of Goldman stock
when he went to work for the government.
But because of a law passed by the first President Bush,
he didn't have to pay any taxes on it.
It saved him 50 million dollars
The article came out in October of 2007.
Already, a third of the mortgages defaulted.
Now, uh, most of them are goin'.
One group that had purchased these now-worthless securities
was the Public Employees Retirement System of Mississippi,
which provides monthly benefits to over 80,000 retirees.
They lost millions of dollars, and are now suing Goldman Sachs.
By late 2006, Goldman had taken things a step further.
It didn't just sell toxic CDOs
it started actively betting against them
at the same time it was telling customers
that they were high-quality investments.
By purchasing credit default swaps from AIG,
Goldman could bet against CDOs it didn't own,
and get paid when the CDOs failed.
I asked them if anybody called the customers,
and said, you know, we don't really like this kind of mortgage anymore,
and we thought you ought to know, you know.
They, they didn't really say anything
but, you know, you could just feel the laughter coming over the phone.
Goldman Sachs bought at least 22 billion dollars of credit default swaps from AIG.
It was so much that Goldman realized that AIG itself might go bankrupt
so they spent 150 million dollars
insuring themselves against AIG's potential collapse.
Then, in 2007, Goldman went even further.
They started selling CDOs specifically designed
so that the more money their customers lost,
the more money Goldman Sachs made.
Six hundred million dollars, Timberwolf Securities is what you sold.
Before you sold them,
this is what your sales team were tellin' to each other.
Boy, that Timberwolf was one shitty deal.
This was an e-mail to me in late June.
- Right. And you're callin' Timberwol - After the transaction.
- No no; you sold Timberwolf after as well.
W-, we did trades after that.
Yeah, okay.
The next e-mail, take a look, July 1, '07
tells the sales force, "the top priority is Timberwolf."
- Your top priority to sell is that shitty deal.
if you have an adverse interest to your client,
do you have the duty to disclose that to your client
to tell that client of your adverse interest? That's my question.
Mr. Chairman, just tryin' to understand
No, I think you understand it I don't think you want to answer it.
Do you believe that you have a duty to act
in the best interests of your clients?
Again, uh, uh, Senator, I,
I will repeat, you know, we have a, a duty to, to serve our clients
by showing prices on transaction where they ask us to show prices for.
What do you think about
selling securities which your own people think are – crap?
Does that bother you?
I think they would, again, as a hypothetical?
No. This is real
-Well then I don't - We heard it today.
- Well - We heard it today: this is a shitty deal, this is crap.
I, I, I heard nothing today that makes me think anything, um,
went wrong
Is there not a conflict when you sell something to somebody,
and then are determined to bet against that same security
and you don't disclose that to the person you're selling it
- In the... - Do you see a problem?
In the context of market-making, that is not a conflict
When you heard that your employees, in these e-mails, said,
"god, what a shitty deal, god, what a piece of crap"
do you feel anything?
I f..., I think that's very unfortunate to have on e-mail.
-Are you b...
- And, and, and very unfortunate... I don't, I don't...
On e-mail? How about feeling that way?
I think it's very unfortunate for anyone to have said that, in any form.
Is it your understanding that your competitors were engaged in similar activities?
Uh, yes. And, and to a greater extent than us, in most cases.
Hedge fund manager John Paulson
made 12 billion dollars betting against the mortgage market.
When John Paulson ran out of mortgage securities to bet against,
he worked with Goldman Sachs and Deutsche Bank to create more of them
Morgan Stanley was also selling mortgage securities that it was betting against,
and it's now being sued by the government employees retirement fund
of the Virgin Islands for fraud.
The lawsuit alleges that Morgan Stanley knew that the CDOs were junk.
Although they were rated AAA,
Morgan Stanley was betting they would fail.
A year later, Morgan Stanley had made hundreds of millions of dollars,
while the investors had lost almost all of their money.
You would have thought that pension funds would have said, "those are subprime
why am I buying them?"
And they had these guys at Moody's and Standard and Poor's who said, that's a AAA.
None of these securities got issued without the imprimatur, you know,
the Good Housekeeping Seal of Approval, of the rating agencies.
The three rating agencies — Moody's, S&P, and Fitch
made billions of dollars giving high ratings to risky securities.
Moody's, the largest rating agency, quadrupled its profits between 2000 and 2007.
Moody's and S&P get compensated based on putting out ratings reports.
And the more structured securities they gave a AAA rating to,
the higher their earnings were gonna be for the quarter.
Imagine if you went to the New York Times,
and you said, look, if you write a positive story, I'll pay you 500,000 dollars.
But if you don't, I'll give you nothing.
The rating agencies could have stopped the party, and said:
We're sorry – you know – we're gonna tighten our standards.
This is – a-, and, and immediately cut off a lot of the flow of funding to risky borrowers.
AAA-rated instruments mushroomed from just a handful to thousands and thousands.
Hundreds of billions of dollars, uh, were being rated. You know – and...
- Per year. - Per year; oh, yeah.
I’ve now testified before both houses of Congress on the credit rating agency issue.
And both times, they trot out very prominent First Amendment lawyers,
and argue that when we say something is rated AAA,
that is merely our opinion you shouldn't rely on it.
S&P's ratings express our opinion.
Our ratings are, uh, are our opinions. But they're opinions.
Opinions, and those are, they are just opinions.
I think we are emphasizing the fact that our ratings are, uh, uh,
are opinions.
They do not speak to the market value of a security,
the volatility of its price, or its suitability as an investment.
We have so many economists coming on our air, and saying,
oh, this is a bubble, and it's going to burst,
and this is going to be a real issue for the economy.
Some say it could even cause a recession at some point.
What is the worst-case scenario, if in fact we were to see
prices come down substantially across the country?
Well, I, I guess I don't buy your premise. It's a pretty unlikely possibility.
We've never had a decline in house prices on a nationra-, ba-, a nationwide basis.
Ben Bernanke became chairman of the Federal Reserve Board in February 2006,
the top year for subprime lending.
But despite numerous warnings, Bernanke and the Federal Reserve Board did nothing.
Robert Gnaizda met with Ben Bernanke and the Federal Reserve Board
three times after Bernanke became chairman.
Only at the last meeting
did he suggest that there was a problem,
and that the government ought to look into it.
When? When was that? What year?
It's 2009; March 11th, in D.C.
- This year. - This year we met, yes.
- And so for the two previous years you met him; even in 2008? - Yes
One of the six Federal Reserve Board governors serving under Bernanke
was Frederic Mishkin, who was appointed by President Bush in 2006.
Did you participate in the semiannual meetings that, uh,
Robert Gnaizda and, and, uh, Greenlining
had with the Federal Reserve Board?
Yes I did. I was actually on the committee that, uh,
that was involved, involved with that the Consumer Community Affairs Committee.
He warned, in an extremely explicit manner, about what was going on
and he came to the Federal Reserve Board
with loan documentation of the kind of loans that were
frequently being made.
And he was listened to politely, and nothing was done.
Yeah. So, uh, again, I, I don't know the details, in terms of, of, uh, of, um – uh,
in fact, I, I just don't – I, I – eh, eh,
whatever information he provide, I'm not sure exactly, I, eh, uh
it's, it's actually, to be honest with you, I can't remember the, the, this kind of discussion
But certainly, uh, there, there were issues that were, uh, uh, coming up.
But then the question is, how pervasive are they?
Why didn't you try looking?
I think that people did.
We had people looking at, a whole group of people looking at this,
for whatever reason - Excuse me, you can't be serious.
If you would have looked, you would have found things.
Uh, you know, that's very, very easy to always say that you can always find it.
As early as 2004,
the FBI was already warning about an epidemic of mortgage fraud.
They reported inflated appraisals,
doctored loan documentation,
and other fraudulent activity.
In 2005, the IMF's chief economist, Raghuram Rajan,
warned that dangerous incentives could lead to a crisis.
Then came Nouriel Roubini's warnings in 2006
Allan Sloan's articles in Fortune magazine and the Washington Post in 2007
and repeated warnings from the IMF
I said it, and on behalf of the institution:
ah, the crisis which is in front of us is a huge crisis
Who did you talk to?
The government, Treasury, s-, Fed, everybody
In May of 2007, hedge fund manager Bill Ackman
circulated a presentation called "Who's Holding the Bag?",
which described how the bubble would unravel.
And in early 2008, Charles Morris published his book about the impending crisis.
Easy Money, High Rollers, and the Great Credit Crash
You're just not sure, what do you do?
And you, you might have some suspicions that underwriting standards are being weakened
but then the question is, should you do anything about it?
By 2008, home foreclosures were skyrocketing,
and the securitization food chain imploded.
Lenders could no longer sell their loans to the investment banks
and as the loans went bad, dozens of lenders failed
Chuck Prince, of Citibank, famously said that, uh, uh,
we have to dance until the music stops.
Actually, the music had stopped already when he said that.
The market for CDOs collapsed,
leaving the investment banks holding hundreds of billions of dollars in loans,
CDOs, and real estate they couldn't sell.
When the crisis started both the Bush administration
and the Federal Reserve were totally behind the curve.
They did not understand the extent of it.
At what point do you remember thinking, for the first time,
this is dangerous, this is bad?
I remember very well, uh, one
I think it was a G7 meeting, of February 2008.
And I remember discussing the issue with, with Hank Paulson.
And I clearly remember telling Hank:
we are watching this tsunami coming.
And you just – proposing
that we ask which swimming costume we are going to put on.
What was his response, what was his feeling?
Things are pretty much under control. Yes, we are looking at,
this situation carefully, and uh
yeah, it's under control.
We're gonna keep growing, okay? And obviously, I'll say it:
if you're growing, you're not in recession, right? I mean,
we all know that.
In March of 2008, the investment bank Bear Stearns ran out of cash,
and was acquired for two dollars a share by JP Morgan Chase.
The deal was backed by 30 billion dollars in emergency guarantees
from the Federal Reserve.
That was the time when the administration could have come in,
and put in place various kinds of measures
that would have reduced system risk.
The information that I'm receiving from some entities
is the end is not here, that there are other shoes to fall.
I've seen those investment banks working with
the Fed and the SEC to strengthen their liquidity,
to strengthen their the, their capital positions.
I get reports all the time. Our regulators are, are very vigilant.
On September 7th, 2008
Henry Paulson announced the federal takeover
of Fannie Mae and Freddie Mac,
two giant mortgage lenders on the brink of collapse.
Nothing about our actions today
in any way reflects a changed view
of the housing correction or the strength
of other U.S. financial institutions.
Two days later, Lehman Brothers announced record losses
of 3.2 billion dollars, and its stock collapsed.
The effects of Lehman and AIG in September
still came as a surprise.
I mean, this is even after July, and Fannie and Freddie. So...
clearly, there was stuff that as of September — major stuff —
that nobody knew about.
I think that's, I think that's fair.
Bear Stearns was rated AAA, like, a month before it went bankrupt?
- Uh, more likely A2. - A2.
- Yeah. - Okay.
- A2 is still not bankrupt. - No no no. No.
That's, that's a high investment grade, solid investment-grade rating
Lehman Brothers; A2, within days of failing.
Um, AIG, AA, within days of being bailed out.
Fannie Mae and Freddie Mac were AAA when they were rescued.
Um, Citigroup, Merrill; all, all of 'em had investment-grade ratings.
How can that be?
Well, that's a good question. That's a great question
At no point did the administration ever go to all the major institutions, and say,
you know: this is serious, tell us what your positions are, you know,
uh, no bullshit, where are you?
Well, first, that's what the regulators, that's their job, right?
Their job is to understand the exposure
across these different institutions, and they have a very refined, uh,
understanding that I think became more respon, more refined
as the crisis, um, proceeded. So...
Forgive me, but that's clearly not true. I m
What do you mean, it's not true?
In August of 2008, were you aware of the,
the credit ratings held then by Lehman Brothers, Merrill Lynch, AIG
and did you think that they were accurate?
Well, uh, e-, uh, certainly by that time, it was clear
that that earlier credit ratings were inaccurate,
because they had been downgraded substantially.
No they hadn't.
Uh, there's still, there was still some downgrading, in terms of the,
the industry, concerns of the ind-, certainly the stock prices
Not some, all those firms were rated at least A2
until a couple of days before they, uh, were rescued.
Well then, you know, then the answer is, I just don't, don't know enough to
really answer your question on this particular issue.
Governor Fred Mishkin is resigning, effective August 31.
He says he plans to return to his teaching post at Columbia's Graduate School of Business.
Why did you leave the Federal Reserve in August of 2008?
I mean, in, in the middle of the worst financial crisis
So, so, uh, that, uh, I had to, to revise a textbook.
His departure leaves the Fed board with three of its seven seats vacant
just when the economy needs it most.
Well, I'm sure your textbook is important and widely read.
But in August of 2008, you know, some,
somewhat more important things were going on in the world, don't you think?
By Friday, September 12th,
Lehman Brothers had run out of cash,
and the entire investment banking industry was sinking fast.
The stability of the global financial system was in jeopardy.
That weekend, Henry Paulson and Timothy Geithner,
president of the New York Federal Reserve
called an emergency meeting with the CEOs of the major banks
in an effort to rescue Lehman.
But Lehman wasn't alone.
Merrill Lynch, another major investment bank,
was also on the brink of failure.
And that Sunday, it was acquired by Bank of America.
The only bank interested in buying Lehman was the British firm Barclay's.
But British regulators demanded a financial guarantee from the U.S. government.
Paulson refused.
We all jumped into a yellow cab
and went down to the Federal Reserve Bank.
They wanted the bankruptcy case commenced before midnight
of September 14.
We kept pressing that this would be a, uh, terrible event.
And at some point, I used the word "Armageddon."
Had they fully considered the consequences of what they were proposing?
The effect on the market would be extraordinary.
- You said this? - Yes.
They just said they had considered all of the comments that we had made
and they were still of the belief
that in order to calm the markets and move forward
it was necessary for Lehman to go into bankruptcy.
- Calm the markets? - Yes.
When were you first told that Lehman in fact was going to go bankrupt?
Ah, after the fact.
After the fact?
Wow. Okay.
and – what was your reaction when you learned of it?
Holy cow.
Paulson and Bernanke had not consulted with other governments
and didn't understand the consequences of foreign bankruptcy laws.
Under British law, Lehman's London office had to be closed immediately.
All transactions came to a halt.
And there are thousands and thousands and thousands of transactions.
The hedge funds who had had assets with Lehman in London
discovered overnight, to their complete horror,
that they couldn't get those assets back.
One of the points of the hub failed.
And that had huge knock-on effects around the system.
The oldest money market fund in the nation
wrote off roughly three quarters of a billion dollars in bad debt
issued by the now-bankrupt Lehman Brothers.
Lehman's failure also caused a collapse in the commercial paper market,
which many companies depend on
to pay for operating expenses, such as payroll.
That means maybe they have to lay off employees
they can't buy parts. It stops business in its tracks.
Suddenly, people stood, and said:
Listen; what can we believe in? There's nothing we can trust anymore.
That same week, AIG owed 13 billion dollars
to holders of credit default swaps
and it didn't have the money.
AIG was another hub.
If AIG had stopped, you know,
all planes may have to be, you know, stop flying.
On September 17th, AIG is taken over by the government
And one day later, Paulson and Bernanke
ask Congress for 700 billion dollars to bail out the banks.
They warn that the alternative would be a catastrophic financial collapse.
It was scary. You know, the entire system froze up
every part of the financial system, every part of the credit system.
Nobody could borrow money.
It was like a cardiac arrest of the global financial system.
am playing the hand that was dealt me.
a lot of what I am dealing with, you know,
I'm dealing with the consequences of things that were done,
often, many years ago.
Secretary Paulson spoke throughout the fall.
And all the potential root causes of this
and there are plenty - he called 'em.
- so I, I'm not sure... - You're not being serious about that, are you?
I am being serious. What, what would you have expected?
I'm, what are, what were you looking for that you didn't see?
He was the senior advocate
for prohibiting the regulation of credit default swaps
and also lifting the leverage limits on the investment banks.
- So a-, again, what - He mentioned those things?
I never heard him mention those things.
C-, can we turn this off for a second?
When AIG was bailed out, the owners of its credit default swaps
the most prominent of which was Goldman Sachs
were paid 61 billion dollars the next day.
Paulson, Bernanke, and Tim Geithner forced AIG
to pay 100 cents on the dollar, rather than negotiate lower prices
Eventually, the AIG bailout cost taxpayers over 150 billion dollars.
A hundred and sixty billion dollars went through AIG
14 billion went to Goldman Sachs.
At the same time, Paulson and Geithner forced AIG
to surrender its right to sue Goldman and the other banks for fraud
Isn't there a problem when the person in charge of dealing with this crisis
is the former CEO of Goldman Sachs
someone who had a major role in causing it?
Well, I think it's fair to say that the financial markets today
are incredibly complicated.
...supply urgently needed money...
On October 4th, 2008, President Bush
signs a 700-billion-dollar bailout bill.
But world stock markets continue to fall,
amid fears that a global recession is now underway
The bailout legislation does nothing
to stem the tide of layoffs and foreclosures.
Unemployment in the United States and Europe quickly rises to 10 percent.
The recession accelerates, and spreads globally.
I began to get really scared,
'cause I hadn't foreseen
the whole world going down at the same rate at the same time.
December of 2008, General Motors and Chrysler
are facing bankruptcy.
And as U.S. consumers cut back on spending,
Chinese manufacturers see sales plummet.
Over 10 million migrant workers in China lose their jobs.
the end of the day, the poorest, as always, pay the most.
Here you can earn a lot of money, like, uh,
70, 80, uh, U.S. dollars per month.
As a farmer in the countryside, you cannot earn as much money.
The workers just wire their salaries to their hometown.
To give to their families.
The crisis started in America.
We all know it will be coming to China
Some of the factories try to cut off some workers.
Some people will get poor because they’ll lose their jobs.
Life gets harder.
[SINGAPORE]
We were growing at about 20 percent.
It was a super year.
And then we suddenly went to minus nine this quarter.
Exports collapsed. And we're talking like 30 percent.
So we just took a hit, you know, fell off a cliff, boom!
Even as the crisis unfolded,
we didn't know how wide it was going to spread,
or how severe it was going to be.
And we were still hoping that there would be some
way for us to have a shelter
and be, uh, less battered by the storm.
But it is not possible
It's a very globalized world the economies are all linked together.
Every time a home goes into foreclosure,
it affects everyone who lives around that house.
'Cause when that property goes on the market,
it's gonna be sold at a lower price
maybe before it goes on the market, it won't be well maintained.
We estimate another 9 million homeowners will lose their homes.
We went out on a weekend to see what houses were for sale.
We saw one we liked.
The payment was going to be $3,200.
Everything was beautiful, the house was very pretty.
The payment low. Everything was...
We won the lottery.
But the reality was when the first payment arrived.
I felt very bad for my husband...
...because he works too much. And we have three children.
The vast majority I've seen lately, unfortunately,
are people who have just been hurt by the economy.
They were living, you know, day to day, paycheck to paycheck,
and unfortunately, that ran out
And unemployment isn't gonna pay a house mortgage
it's not gonna pay a car bill.
I was a log-truck driver.
And they shut down, they shut down
all the logging systems up there
shut down the sawmills and everything.
So I moved down here, I had a construction job.
And the construction jobs got shut down too so – things are so tough
there's a lot o' people out there, and pretty soon
you're gonna be seeing more camps like this around
because there's just no jobs right now.
When the company did well,
we did well
when the company did not do well, sir,
we did not do well.
The men who destroyed their own companies
and plunged the world into crisis
walked away from the wreckage with their fortunes intact.
The top five executives at Lehman Brothers
made over a billion dollars between 2000 and 2007
and when the firm went bankrupt
they got to keep all the money.
The system worked
It doesn't make any sense for us to make a loan that's gonna fail,
'cause we lose. They lose
the borrower loses, the community loses, and we lose.
Countrywide's CEO Angelo Mozilo
made 470 million dollars between 2003 and 2008.
One hundred forty million
came from dumping his Countrywide stock
in the 12 months before the company collapsed.
Ultimately, I hold the board accountable when a business fails
'Cause the board is responsible for hiring and firing the CEO
and overseeing big strategic decisions.
The problem with board composition in America
is the way boards are elected.
The boards are pretty much, in many cases,
picked by the CEO.
The board of directors and the compensation committees
are the two bodies best situated
to determine the pay packages, uh, for executives.
How do you think they’ve done over the past 10 years?
Well, I think that, if you look at those,
uh, in, I would give about a B. Because...
- A B? - Yes.
- Not an F. - Not an F, not an F.
Stan O'Neal, the CEO of Merrill Lynch
received 90 million dollars in 2006 and 2007 alone
After driving his firm into the ground
Merrill Lynch's board of directors allowed him to resign
and he collected 161 million dollars in severance.
Instead of being fired, Stan O'Neal is allowed to resign
and takes away 151 million dollars
That's a decision that that board of directors made at that point
And what grade do you give that decision?
Uh, that's a tougher one. I don't know
if I would give that one a B as well.
O'Neal's successor, John Thain,
was paid 87 million dollars in 2007
and in December of 2008,
two months after Merrill was bailed out by U.S. taxpayers
Thain and Merrill's board handed out billions in bonuses
In March of 2008
AIG's Financial Products Division lost 11 billion dollars
Instead of being fired, Joseph Cassano, the head of AIGFP
was kept on as a consultant
for a million dollars a month.
And you want to make sure that the key players
and the key, key employees, uh, within AIGFP
yeah, we retain that intellectual knowledge.
I attended a very interesting, uh, dinner,
organized by Hank Paulson a little more than one year ago
with some officials and a couple of,uh,
CEOs from the biggest, uh, banks in the U.S.
And uh, surprisingly enough, all these gentlemen
were arguing we were too greedy,
so we have part responsibility. Fine.
And then they were turning to the treasurer, to the secretary of the Treasury,
and say, you should regulate more because we are too greedy
we can't avoid it.
The only way to avoid this is to have more regulation.
I have spoken to many bankers about
this question, including very senior ones
And this is the first time that I've ever heard anybody say
that they actually wanted their compensation to be regulated
Yeah, because it was at the moment where they were afraid.
And after, when solution to the crisis began to appear
then probably they, they changed their mind.
In the U.S., the banks are now bigger, more powerful,
and more concentrated than ever before.
There are fewer competitors, and a lot of smaller banks
have been taken over by big ones.
JP Morgan today is even bigger than it was before.
JP Morgan took over first Bear Stearns and then WAMU
Bank of America took over Countrywide and Merrill Lynch
Wells Fargo took over Wachovia.
After the crisis, the financial industry
including the Financial Services Roundtable
worked harder than ever to fight reform.
he financial sector employs 3,000 lobbyists
more than five for each member of Congress.
Do you think the financial services industry
has excessive political influence in the United States?
No. I think that every person in, in the w-,
in the country is represented here in Washington.
And you think that all segments of American society
have equal and fair access to the system?
The, you can walk into any hearing room, uh,
that you would like. Yes, I do.
Um, one could walk into any hearing room
one can not necessarily write the kind of lobbying checks
that your industry writes
or engage in the level of political contributions
that your industry engages in.
Between 1998 and 2008
the financial industry spent over 5 billion dollars
on lobbying and campaign contributions.
And since the crisis, they're spending even more money.
The financial industry also exerts its influence
in a more subtle way
one that most Americans don't know about
It has corrupted the study of economics itself.
Deregulation had tremendous financial and intellectual support.
Because, uh, uh, people argued it for their own benefit.
economics profession was the main source of that illusion.
Since the 1980s, academic economists
have been major advocates of deregulation,
and played powerful roles in shaping U.S. government policy.
Very few of these economic experts warned about the crisis.
And even after the crisis,
many of them opposed reform.
The guys who taught these things
tended to get paid a lot of money being consultants.
Business school professors don't live on a faculty salary.
They do very, very well.
Over the last decade, the financial services industry
has made about 5 billion dollars' worth of
political contributions in the United States.
that's kind of a lot of money.
That doesn't bother you?
No.
Martin Feldstein is a professor at Harvard,
and one of the world's most prominent economists.
s President Reagan's chief economic advisor,
he was a major architect of deregulation.
And from 1988 until 2009,
he was on the board of directors of both AIG and AIG Financial Products,
which paid him millions of dollars.
You have any regrets about having been on AIG's board?
I have no comments. No, I have no regrets
about being on AIG's board.
- None. - That I can s-, absolutely none. Absolutely none.
Okay. Um,
You have any regrets about, uh, AIG's decisions?
I cannot say anything more about AIG.
I've taught at Northwestern and Chicago, Harvard and Columbia.
Glenn Hubbard is the dean of Columbia Business School
and was the chairman of the Council of Economic Advisers
under George W. Bush.
Do you think the financial services industry
has too much, uh, political power in the United States?
I don't think so, no. You certainly,
you certainly wouldn't get that impression
by the drubbing that they regularly get, uh, in Washington.
Many prominent academics quietly make fortunes
while helping the financial industry shape public debate
and government policy.
The Analysis Group,
Charles River Associates,
Compass Lexecon,
and the Law and Economics Consulting Group
manage a multi-billion-dollar industry
that provides academic experts for hire.
Two bankers who used these services were Ralph Ciofi
and Matthew Tannin,
Bear Stearns hedge fund managers prosecuted for securities fraud.
After hiring The Analysis Group,
both were acquitted.
Glenn Hubbard was paid 100,000 dollars
to testify in their defense.
Do you think that the economics discipline has, uh,
a conflict of interest problem?
I'm not sure I know what you mean.
Do you think that a significant fraction of the economics discipline,
a number of economists, have financial conflicts of interests
that in some way might call into question or color
Oh, I see what you're saying. I doubt it.
You know, most academic economists, uh, you know,
aren't wealthy business people.
Hubbard makes 250,000 dollars a year
as a board member of Met Life
and was formerly on the board of Capmark,
a major commercial mortgage lender during the bubble,
which went bankrupt in 2009.
He has also advised Nomura Securities,
KKR Financial Corporation,
and many other financial firms.
Laura Tyson, who declined to be interviewed for this film,
is a professor at the University of California, Berkeley.
She was the chair of the Council of Economic Advisers,
and then director of the National Economic Council
in the Clinton administration.
Shortly after leaving government,
she joined the board of Morgan Stanley
which pays her 350,000 dollars a year.
Ruth Simmons, the president of Brown University,
makes over 300,000 dollars a year
on the board of Goldman Sachs.
Larry Summers, who as Treasury secretary
played a critical role in the deregulation of derivatives
became president of Harvard in 2001
While at Harvard, he made millions consulting to hedge funds
and millions more in speaking fees,
much of it from investment banks.
According to his federal disclosure report,
Summers's net worth is between 16.5 million and 39.5 million dollars.
Frederic Mishkin, who returned to Columbia Business School
after leaving the Federal Reserve,
reported on his federal disclosure report
that his net worth was between 6 million and 17 million dollars.
-In 2006, you coauthored a study of Iceland's financial system. - Right, right.
Iceland is also an advanced country with excellent institutions,
low corruption, rule of law.
The economy has already adjusted to financial liberalization
while prudential regulation and supervision is generally quite strong.
Yeah. And that was the mistake. That it turns out that, uh,
that the prudential regulation and supervision was not strong in Iceland.
- And particularly during this period... - So what led you to think that it was?
I think that, uh, you're going with the information you have at
and generally, uh, the view was that, that, uh,
hat Iceland had very good institutions. It was a very advanced country
Who told you that? Who did, what kind of research did you do?
you, you talk to people, you have faith in, in, uh the Central Bank
which actually did fall down on the job.
Uh, that, uh, clearly, it, this, uh
Why do you have "faith" in a central bank?
Well, that faith, you, ya, d-, because you ha-,
go with the information you have.
Um, how much were you paid to write it?
I was paid, uh, I think the number was, uh,
it's public information
Uh, on your CV, the title of this report has been
changed from "Financial Stability in Iceland" to "Financial Instability in Iceland."
Oh. Well, I don't know, if, itch-, whatever it is, is, the, uh
thing – if it's a typo, there's a typo.
I think what should be publicly available is
whenever anybody does research on a topic
they disclose if they have any financial conflict with that research.
But if I recall, there is no policy to that effect.
I can't imagine anybody not doing that
in terms of putting it in a paper.
You would, there would be significant professional sanction for failure to do that.
I didn't see any place in the study where
you indicated that you had been paid, uh,
by the Icelandic Chamber of Commerce to produce it.
- No, I - Okay.
Richard Portes, the most famous economist in Britain
and a professor at London Business School
was also commissioned by the Icelandic Chamber of Commerce in 2007
to write a report which praised the Icelandic financial sector
The banks themselves are highly liquid.
They've actually made money on the fall of the Icelandic krona.
These are strong banks, their funding,
their market funding is assured for the coming year.
These are well-run banks.
Richard, thank you so much.
Like Mishkin, Portes's report
didn't disclose his payment from the Icelandic Chamber of Commerce.
Does Harvard require disclosures
of financial conflict of interest in publications?
Um, not to my knowledge.
Do you require people to report the compensation
they’ve received from outside activities? - No
Don't you think that's a problem?
I don't see why.
Martin Feldstein being on the board of AIG
Laura Tyson going on the board of Morgan Stanley
Larry Summers making 10 million dollars a year consulting to financial services firms
irrelevant
well – yeah; basically irrelevant.
You've written a very large number of articles
about a very wide array of subjects.
You never saw fit to investigate the risks
of unregulated credit default swaps?
I never did.
Same question with regard to executive compensation
the regulation of corporate governance
- the effect of political contributions... - What, uh, what, uh, w-,
I don't know that I would have anything
to add to those discussions.
I'm looking at your resume now.
It looks to me as if the majority
of your outside activities are, uh
onsulting and directorship arrangements with
the financial services industry.
Is that, would you not agree with that characterization?
No, to my knowledge,
I don't think my consulting clients are even on my CV, so
Uh, who are your consulting clients?
I don't believe I have to discuss that with you.
Okay.
Look, you have a few more minutes, and the interview is over
Do you consult for any financial services firms?
Uh, the answer is, I do.
- And... - And, but I d-, I do not want to go into details about that.
Do they include other financial services firms?
Possibly.
You don't remember?
This isn't a deposition, sir.
I was polite enough to give you time, foolishly, I now see.
But you have three more minutes.
Give it your best shot.
In 2004, at the height of the bubble,
Glenn Hubbard coauthored a widely read paper with William C. Dudley
the chief economist of Goldman Sachs.
In the paper, Hubbard praised credit derivatives
and the securitization chain
stating that they had improved allocation of capital,
and were enhancing financial stability.
He cited reduced volatility in the economy
and stated that recessions
had become less frequent and milder.
Credit derivatives were protecting banks against losses
and helping to distribute risk.
A medical researcher writes an article, saying:
to treat this disease, you should prescribe this drug.
It turns out Doctor makes 80 percent of
personal income from manufacturer of this drug.
Does not bother you.
I think, uh, it's certainly important to disclose
the, um – the, um
Well, I think that's also a little different from cases
that we are talking about here. Because, um – um
So, uh, what do you think this says about the economics discipline?
Well, heh heh, it has no relevance to anything, really
And indeed, I think, um, it's a part of the, it's a
important part of the problem
PART V: WHERE WE ARE NOW
The rising power of the U.S. financial sector
was part of a wider change in America.
Since the 1980s, the United States has become
a more unequal society,
and its economic dominance has declined.
Companies like General Motors, Chrysler, and U.S. Steel
formerly the core of the U.S. economy — were poorly managed
and falling behind their foreign competitors.
And as countries like China opened their economies,
American companies sent jobs overseas to save money.
For many, many years,
the 660 million people in the developed world
were effectively sheltered
from all of this additional labor
that existed on the planet
Suddenly, the Bamboo Curtain and the Iron Curtain are lifted
and you have 2.5 billion additional people
American factory workers
were laid off by the tens of thousands
Our manufacturing base was destroyed,
literally over the course of a few years.
As manufacturing declined, other industries rose.
The United States leads the world in information technology,
where high-paying jobs are easy to find.
But those jobs require an education.
And for average Americans,
college is increasingly out of reach.
While top private universities like Harvard
have billions of dollars in their endowments
funding for public universities is shrinking,
and tuition is rising.
Tuition for California's public universities
rose from 650 dollars in the 1970s
to over 10,000 dollars in 2010.
Increasingly, the most important determinant
of whether Americans go to college
is whether they can find the money to pay for it.
Meanwhile, American tax policy shifted
to favor the wealthy
When I first came to office,
I thought taxes were too high, and they were.
The most dramatic change was a series of tax cuts
designed by Glenn Hubbard
who at the time was serving
as President Bush's chief economic advisor
The Bush administration sharply reduced taxes on investment gains,
stock dividends,
and eliminated the estate tax.
We had a comprehensive plan
that, when acted has left nearly $1.1 trillion
in the hands of American workers families, investors,
and small business owners.
Most of the benefits of these tax cuts
went to the wealthiest 1 percent of Americans.
And by the way, it was really the cornerstone,
in many ways, of our economic recovery policy.
Inequality of wealth in the United States
is now higher than in any other developed country.
American families responded to these changes in two ways:
by working longer hours, and by going into debt.
As the middle class falls further and further behind,
there is a political urge to respond
by making it easier to get credit.
You don't have to have a lousy home.
The low-income home buyer
can have just as nice a house as anybody else.
American families borrowed to finance their homes
their cars, their healthcare,
and their children's educations.
People in the bottom 90 percent
lost ground between 1980 and 2007
It all went to the top 1 percent
For the first time in history,
average Americans have less education
and are less prosperous than their parents
The era of greed and irresponsibility on Wall Street
and in Washington
has led us to a financial crisis as serious as
any that we have faced since the Great Depression.
When the financial crisis struck
just before the 2008 election
Barack Obama pointed to Wall Street greed
and regulatory failures
as examples of the need for change in America.
A lack of oversight in Washington
and on Wall Street is exactly
what got us into this mess.
After taking office, President Obama
spoke of the need to reform the financial industry.
We want a systemic-risk regulator,
increased capital requirements
We need a consumer financial protection agency
we need to change Wall Street's culture.
But when finally enacted in mid-2010
the administration's financial reforms were weak
and in some critical areas, including the rating agencies
lobbying, and compensation
nothing significant was even proposed
Addressing Obama and, quote, regulatory reform:
my response, if it was one word, would be: Ha!
There’s very little reform
How come?
It's a Wall Street government
Obama chose Timothy Geithner as Treasury secretary
Geithner was the president of the New York Federal Reserve
during the crisis
and one of the key players
in the decision to pay Goldman Sachs
100 cents on the dollar
for its bets against mortgages.
When Tim Geithner was testifying
to be confirmed as Treasury secretary
he said: "I have never been a regulator"
Now that said to me, he did not understand his job
as president of the New York Fed.
The new president of the New York Fed is William C. Dudley,
the former chief economist of Goldman Sachs
whose paper with Glenn Hubbard praised derivatives.
Geithner's chief of staff is Mark Paterson
a former lobbyist for Goldman
and one of the senior advisors is Lewis Sachs
who oversaw Tricadia
a company heavily involved in betting against
the mortgage securities it was selling.
To head the Commodity Futures Trading Commission
Obama picked Gary Gensler - a former Goldman Sachs executive
who had helped ban the regulation of derivatives
To run the Securities and Exchange Commission
Obama picked Mary Shapiro
the former CEO of FINRA
the investment-banking industry's self-regulation body
Obama's chief of staff, Rahm Emanuel
made 320,000 dollars
serving on the board of Freddie Mac
Both Martin Feldstein and Laura Tyson
are members of Obama's Economic Recovery Advisory Board.
And Obama's chief economic advisor is Larry Summers
The most senior economic advisors
are the very people who were there, who built the structure.
When it was clear that Summers and Geithner
were going to play major roles as advisors
I knew this was going to be status quo.
The Obama administration resisted regulation of bank compensation
even as foreign leaders took action.
I think the financial industry is a service industry
it should serve others before it serves itself.
In September of 2009,
Christine Lagarde and the finance ministers of Sweden,
the Netherlands, Luxembourg, Italy, Spain, and Germany
called for the G20 nations, including the United States
to impose strict regulations on bank compensation
And in July of 2010, the European Parliament
enacted those very regulations
The Obama administration had no response
Their view is, this is a temporary blip
and things will go back to normal
And that is why I am reappointing him
to another term as chairman of the Federal Reserve
Thank you so much, Ben.
In 2009, Barack Obama reappointed Ben Bernanke
Thank you, Mr. President
As of mid-2010, not a single senior financial executive
had been criminally prosecuted,
or even arrested
no special prosecutor had been appointed
not a single financial firm
had been prosecuted criminally
for securities fraud or accounting fraud
The Obama administration has made no attempt
to recover any of the compensation
given to financial executives during the bubble
I certainly would think of criminal action
against some of Countrywide's top leaders
like Mozilo
I'd certainly look at Bear Stearns, Goldman Sachs
and Lehman Brothers, and Merrill Lynch
- For criminal prosecutions. - Yes. Yes.
They'd be very hard to, to win
But I think they could do it
if they got enough underlings to tell the truth
In an industry in which drug use, prostitution,
and fraudulent billing of prostitutes as a business expense
occur on an industrial scale
it wouldn't be hard to make people talk,
if you really wanted to
They gave me a plea bargain, and I took it.
Um, they were not interested in any of my records
they weren't interested in anything
They were not interested in your records?
That's correct. That's correct.
There is a sensibility that you don't use people's
personal vices in the context of Wall Street cases
necessarily, to get them to flip
I think maybe it's,
after the cataclysms that we've been through
maybe people will reevaluate that
I'm not the one to pass judgment on that right now.
You come to us today, telling us:
we're sorry, we didn't mean it
we won't do it again, trust us.
Well, I have some people in my constituency
that actually robbed some of your banks
And they say the same thing!
They're sorry, they didn't mean it
they won't do it again
In 2009, as unemployment hit its highest level in 17 years
Morgan Stanley paid its employees over 14 billion dollars
and Goldman Sachs paid out over 16 billion
In 2010, bonuses were even higher
Why should a financial engineer be paid four, four times
to a hundred times more than the, a real engineer?
A real engineer build bridges
a financial engineer build, build dreams
And when those dream turn out to be nightmares,
other people pay for it.
For decades, the American financial system was stable and safe.
But then something changed
The financial industry turned its back on society
corrupted our political system,
and plunged the world economy into crisis
At enormous cost, we’ve avoided disaster, and are recovering.
But the men and institutions that caused the crisis are still in power
and that needs to change.
They will tell us that we need them
and that what they do is too complicated for us to understand
They will tell us it won't happen again
They will spend billions fighting reform
It won't be easy
But some things are worth fighting for