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Inside Job (2010 Full Documentary Movie) — Transcript

by Aditya Shukla · 12,974 words · 1,678 segments · language en · Watch on YouTube

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1:08Iceland is a stable democracy
1:10with a high standard of living,
1:12and, until recently,
1:14extremely low unemployment and government debt.
1:19We had the complete infrastructure of a modern society.
1:23Clean energy, food production.
1:26Fisheries with a quota system to manage them.
1:28Good healthcare, education, clean air.
1:33Not much crime.
1:35It's a good place for families to live.
1:37We had almost end-of-history status.
1:42But in 2000, Iceland's government began a broad policy of deregulation
1:47that would have disastrous consequences,
1:50first for the environment and then for the economy.
1:54They started by allowing multinational corporations like Alcoa
1:58to build giant aluminum-smelting plants
2:00and exploit Iceland's geothermal and hydroelectric energy sources.
2:06Many of the most beautiful areas in the highlands
2:09with the most spectacular colors are geothermal.
2:14So nothing comes without consequence.
2:55At the same time,
2:56the government privatized Iceland's three largest banks.
3:00The result was one of the purest experiments
3:03in financial deregulation ever conducted.
3:11We have had enough. How could all of this happen?
3:15Finance took over and more or less wrecked the place.
3:21In a five-year period, these three tiny banks,
3:24which had never operated outside of Iceland,
3:27borrowed 120 billion dollars,
3:3010 times the size of Iceland's economy.
3:33The bankers showered money on themselves,
3:35each other, and their friends.
3:37There was a massive bubble.
3:39Stock prices went up by a factor of nine.
3:43House prices more than doubled.
3:52He borrowed billions to buy up high-end retail businesses in London.
3:56He also bought a pinstriped private jet,
3:59a 40-million-dollar yacht
4:01and a Manhattan penthouse.
4:03Newspapers always had the headline:
4:05This millionaire bought this company
4:08in the U.K. Or in Finland or in France or wherever,
4:14instead of saying:
4:15"This millionaire took a billion-dollar loan
4:19to buy this company, and he took it from your local bank."
4:24The banks set up money market funds,
4:26and the banks advised deposit-holders to withdraw money
4:29and put them in the money market funds.
4:31The Ponzi scheme needed everything it could.
4:34American accounting firms like KPMG
4:37audited the Icelandic banks and investment firms
4:40and found nothing wrong.
4:42And American credit-rating agencies said Iceland was wonderful.
4:46In February 2007,
4:48the rating agency upgraded the banks to the highest possible rate, triple-A.
4:55It went so far as the government here traveling with the bankers
5:00as a PR show.
5:05When Iceland's banks collapsed at the end of 2008,
5:08unemployment tripled in six months.
5:15There is nobody unaffected in Iceland.
5:24A lot of people lost their savings.
5:26Yes, that's the case.
5:28Government regulators who should've been protecting the citizens
5:32had done nothing.
5:35You have two lawyers from the regulator going down to a bank
5:39to talk about some issue.
5:41When they approach the bank,
5:43they would see 19 SUVs outside the bank.
5:48You enter the bank,
5:49and you have the 19 lawyers sitting in front of you, right,
5:54very well prepared, ready to kill any argument you make.
5:59And then, if you do really well, they'll offer you a job.
6:03One-third of Iceland's financial regulators
6:06went to work for the banks.
6:10But this is a universal problem, huh?
6:12In New York, you have the same problem, right?
6:46What do you think of Wall Street incomes these days?
6:49Excessive.
6:53I've been told it's extremely difficult for the IMF
6:56to criticize the United States.
6:58I wouldn't say that.
7:06We deeply regret our breaches of U.S. Law.
7:14They're amazed at how much cocaine these Wall Streeters can use
7:18and get up and go to work the next day.
7:23I didn't know what credit default swaps are.
7:27I'm a little bit old-fashioned.
7:34Has Larry Summers ever expressed remorse?
7:37I don't hear confessions.
7:53The government's just writing checks.
7:55That's plan A, that's plan B and that's plan C.
7:59Would you support legal controls on executive pay?
8:03I would not.
8:08Are you comfortable with the
8:10level of compensation in financial services?
8:12If they've earned it, yes, I am.
8:14Do you think they've earned it? I think so.
8:19And so you've helped these people blow the world up?
8:22You could say that.
8:33They were having massive private gains at public loss.
8:45When you think you can create something out of nothing
8:48it's difficult to resist.
9:05I'm concerned people want to go back to the old way,
9:08the way they were operating prior to the crisis.
9:21I was getting a lot of anonymous e-mails from bankers saying:
9:25"You can't quote me, but I'm really concerned."
9:34Why do you think there isn't
9:36a more systematic investigation being undertaken?
9:38Because then you'll find the culprits.
9:44You think Columbia Business.
9:46School has any conflict-of-interest problem?
9:49I don't see that we do.
10:00The regulators didn't do their job.
10:02They had the power to do every case that I made. They just didn't want to.
10:25Lehman Brothers, one of the most venerable
10:27and biggest investment banks, was forced to declare itself bankrupt.
10:30Another, Merrill Lynch, was forced to sell itself today.
10:34World financial markets are way down, following dramatic developments.
10:47In September 2008,
10:48the bankruptcy of the U.S. Investment bank Lehman Brothers
10:52and the collapse of the world's largest insurance company, AIG,
10:56triggered a global crisis.
10:58Fears gripped markets overnight.
11:00Stocks fell off a cliff.
11:02The largest single point drop in history.
11:05Share prices continued to tumble
11:07in the aftermath of the Lehman collapse.
11:12The result was a global recession,
11:14which cost the world tens of trillions of dollars,
11:17rendered 30 million people unemployed
11:20and doubled the national debt of the United States.
11:23With the destruction of equity and housing wealth,
11:29the destruction of income, of jobs,
11:3150 million people globally could end up below the poverty line again.
11:38This is just a hugely, hugely expensive crisis.
11:42This crisis was not an accident.
11:45It was caused by an out-of-control industry.
11:48Since the 1980s,
11:50the rise of the U.S. Financial sector has led to a series
11:53of increasingly severe financial crises.
11:56Each crisis has caused more damage,
11:59while the industry has made more and more money.
12:11After the Great Depression
12:13the United States had 40 years of economic growth
12:16without a single financial crisis.
12:19The financial industry was tightly regulated.
12:22Most regular banks were local businesses
12:24prohibited from speculating
12:27with depositors' savings.
12:29Investment banks, which handled stock and bond trading,
12:32were small, private partnerships.
12:35In the traditional investment banking model,
12:39the partners put the money up,
12:41and they watch that money very carefully.
12:45They wanted to live well,
12:46but they didn't want to bet the ranch on anything.
12:49Paul Volcker served in the Treasury Department
12:52and was chairman of the Federal Reserve from 1979 to 1987.
12:57Before going into government,
12:59he was a financial economist at Chase Manhattan Bank.
13:03When I left Chase to go in the Treasury in 1969,
13:08my income was in the neighborhood of $45,000 a year.
13:11Forty-five thousand dollars a year.
13:13Morgan Stanley, in 1972,
13:17had approximately 110 total personnel,
13:22one office, and capital of 12 million dollars.
13:26Now Morgan Stanley has 50,000 workers
13:31and has capital of several billion
13:35and has offices all over the world.
13:38In the 1980s, the financial industry exploded.
13:41The investment banks went public,
13:43giving them huge amounts of stockholder money.
13:47People on Wall Street started getting rich.
13:51I had a friend who was a bond trader
13:54at Merrill Lynch in the 1970s.
13:58He had a job as a train conductor at night
14:02because he had three kids and couldn't support them
14:06on what a trader made.
14:07By 1986, he was making millions of dollars
14:11and thought it was because he was smart.
14:15The highest order of business before the nation
14:17is to restore our economic prosperity.
14:20In 1981, President Ronald Reagan chose as Treasury secretary
14:25the CEO of the investment bank Merrill Lynch, Donald Regan.
14:28Wall Street and the president see eye to eye.
14:32I've talked to leaders of Wall Street.
14:34They say, "We're behind the president 100 percent."
14:37The Reagan administration,
14:39supported by economists and financial lobbyists,
14:42started a 30-year period of financial deregulation.
14:47In 1982, the Reagan administration
14:50deregulated savings-and-loan companies,
14:53allowing them to make risky investments with depositors' money.
14:56By the end of the decade,
14:58hundreds of savings-and-loan companies had failed.
15:01This crisis cost taxpayers $ 124 billion
15:06and cost many people their life savings.
15:08It may be the biggest bank heist in our history.
15:12Thousands of executives went to jail for looting their companies.
15:16One of the most extreme cases was Charles Keating.
15:19Mr. Keating, got a word?
15:21In 1985, when federal regulators began investigating him,
15:25Keating hired an economist named Alan Greenspan.
15:29In this letter to regulators,
15:31Greenspan praised Keating's sound business plans and expertise
15:34and said he saw no risk in allowing Keating to invest customers' money.
15:40Keating reportedly paid Greenspan $40,000.
15:46Keating went to prison shortly afterwards.
15:49As for Alan Greenspan,
15:51Reagan appointed him chairman of America's central bank,
15:55the Federal Reserve.
15:57Greenspan was reappointed
15:58by presidents Clinton and George W. Bush.
16:03During the Clinton administration,
16:05deregulation continued under Greenspan
16:07and Treasury secretaries Robert Rubin,
16:10the former CEO of the investment bank Goldman Sachs,
16:14and Larry Summers, a Harvard economics Professor.
16:17The financial sector, Wall Street being powerful,
16:20having lobbies, lots of money,
16:23step by step, captured the political system.
16:26Both on the Democratic and the Republican side.
16:30By the late 1990s, the financial sector had consolidated
16:34into a few gigantic firms, each of them so large
16:37that their failure could threaten the whole system.
16:41And the Clinton administration helped them grow even larger.
16:45In 1998, Citicorp and Travelers merged
16:48to form Citigroup,
16:50the largest financial services company in the world.
16:53The merger violated the Glass-Steagall Act,
16:56a law passed after the Great Depression,
16:58preventing banks with consumer deposits
17:01from engaging in risky investment-banking activities.
17:04It was illegal to acquire Travelers.
17:07Greenspan said nothing.
17:09The Federal Reserve gave them an exemption for a year,
17:12then they got the law passed.
17:14In 1999, at the urging of Summers and Rubin,
17:18Congress passed the Gramm-Leach-Bliley Act,
17:21known to some as the Citigroup Relief Act.
17:24It overturned Glass-Steagall
17:26and cleared the way for future mergers.
17:38Why do you have big banks?
17:39Because banks like monopoly power, lobbying power.
17:44Because banks know that when they're too big,
17:48they will be bailed.
17:50Markets are inherently unstable.
17:52Or at least potentially unstable.
17:55An appropriate metaphor is the oil tankers.
17:59They are very big,
18:01and therefore, you have to put in compartments
18:04to prevent the sloshing around of oil
18:07from capsizing the boat.
18:09The design of the boat has to take that into account.
18:13And after the Depression,
18:16the regulations actually introduced these very watertight compartments.
18:22And deregulation has led to the end of compartmentalization.
18:29The next crisis came at the end of the '90s.
18:32The investment banks fueled a massive bubble in Internet stocks,
18:36which was followed by a crash in 2001
18:38that caused $5 trillion in investment losses.
18:42The Securities and Exchange Commission, the federal agency
18:45created during the Depression to regulate investment banking,
18:49had done nothing.
18:51In the absence of meaningful federal action,
18:55and given the clear failure of self-regulation,
18:57it's become necessary for others to step in
19:00and adopt the protections needed.
19:02Eliot Spitzer's investigation revealed the investment banks
19:05promoted Internet companies they knew would fail.
19:09Analysts were being paid based on how much business they brought in.
19:13What they said publicly was quite different from what they said privately.
19:17Infospace, given the highest possible rating,
19:20dismissed by an analyst as a "piece of junk."
19:23Excite, also highly rated, called "such a piece of crap."
19:27The defense that was proffered by many of the investment banks
19:33was not "you're wrong,"
19:36it was, "Everybody's doing it, everybody knows it's going on."
19:40Nobody should rely on these analysts anyway."
19:42In December, 2002,
19:4510 investment banks settled the case for a total of $ 1.4 billion
19:49and promised to change their ways.
19:52Scott Talbott is the chief lobbyist for the Financial Services Roundtable,
19:57one of Washington's most powerful groups,
19:59which represents nearly all of the world's largest financial companies.
20:03Are you comfortable with the fact that several of your member companies
20:07have engaged in large-scale criminal activity?
20:10L... You'll have to be specific. Okay.
20:13And first of all, criminal activity shouldn't be accepted, period.
20:25Since deregulation began, the world's biggest financial firms
20:28have been caught laundering money, defrauding customers
20:32and cooking their books again and again and again.
20:47Credit Suisse helped funnel money for Iran's nuclear program
20:50and for Iran's Aerospace Industries Organization,
20:53which builds ballistic missiles.
20:55Any information that would identify it as Iranian would be removed.
20:59The bank was fined $536 million.
21:03Citibank helped funnel $ 100 million of drug money out of Mexico.
21:07Did you comment that she should, quote:
21:10"Lose any documents connected with the account"?
21:13I said that in a kidding manner. It was at the early stages of this.
21:16I did not mean it seriously.
21:20Between 1998 and 2003,
21:23Fannie Mae overstated it's earnings by more than $ 10 billion.
21:26These accounting standards are complex
21:29and require determinations over which experts often disagree.
21:33CEO Franklin Raines, who used to be President Clinton's budget director,
21:37received over $52 million in bonuses.
21:45When UBS was caught helping wealthy Americans evade taxes,
21:48they refused to cooperate with the government.
21:51Would you be willing to supply the names?
21:54If there's a treaty framework. No treaty framework.
21:57You've agreed you participated in a fraud.
21:59Hm.
22:11But while the companies face unprecedented fines,
22:13the investment firms do not have to admit any wrongdoing.
22:17When dealing with this many products, this many customers, mistakes happen.
22:22The financial services industry
22:24seems to have a level of criminality
22:27that is somewhat distinctive.
22:29You know, when was the last time that Cisco
22:33or Intel or Google or Apple or IBM, you know...?
22:37I agree about high-tech versus financial services...
22:40So how come? High-tech is a creative business
22:44where the value generation
22:46and income derives from actually creating something new.
22:50Beginning in the 1990s,
22:52deregulation and advances in technology
22:55led to an explosion of complex financial products called derivatives.
22:59Economists and bankers claimed they made markets safer.
23:03But instead, they made them unstable.
23:06Since the end of the Cold War,
23:09a lot of former physicists, mathematicians,
23:12decided to apply their skills,
23:14not on, you know, Cold War technology,
23:17but on financial markets.
23:19And together with investment bankers...
23:21Creating different weapons.
23:23Absolutely.
23:24You know, as Warren Buffett said, weapons of mass destruction.
23:27Regulators, politicians, business people
23:31did not take seriously the threat of innovation
23:34on the stability of the financial system.
23:38Using derivatives,
23:39bankers could gamble on virtually anything.
23:42They could bet on the rise or fall of oil prices,
23:45the bankruptcy of a company, even the weather.
23:49By the late 1990s,
23:50derivatives were a 50-trillion-dollar unregulated market.
23:56In 1998, someone tried to regulate them.
24:01Brooksley Born graduated first in her class at Stanford Law School
24:05and was the first woman to edit a major law review.
24:08After running the derivatives practice at Arnold & Porter,
24:11Born was appointed by Clinton
24:13to chair the Commodity Futures Trading Commission,
24:17which oversaw the derivatives market.
24:19Brooksley Born asked me if I would come work with her.
24:23We decided that this was a serious,
24:27potentially destabilizing market.
24:31In May of 1998, the CFTC issued a proposal to regulate derivatives.
24:36Clinton's Treasury Department had an immediate response.
24:40I happened to go into Brooksley's office,
24:45and she was just putting down the receiver on her telephone,
24:49and the blood had drained from her face.
24:53And she looked at me and said, "That was Larry Summers."
24:56He had 13 bankers in his office.
25:00He conveyed it in a very bullying fashion,
25:04sort of directing her to stop.
25:07Banks were now reliant for earnings on these activities.
25:11And that led to a Titanic battle to prevent this from being regulated.
25:18Shortly after the phone call from Summers,
25:20Greenspan, Rubin, and SEC chairman Arthur Levitt
25:25issued a joint statement condemning Born
25:27and recommending legislation to keep derivatives unregulated.
25:32Regulation of derivatives transactions
25:35that are privately negotiated by professionals is unnecessary.
25:40She was overruled, unfortunately. First by the Clinton administration
25:45and then by the Congress.
25:47In 2000, Senator Phil Gramm took a major role in getting a bill passed
25:51that pretty much exempted derivatives from regulation.
25:54They are unifying markets, reducing regulatory burden.
25:58I believe we need to do it.
26:07It is our very great hope
26:11that it will be possible to move this year
26:14on legislation that, in a suitable way
26:17goes to create legal certainty for OTC derivatives.
26:30I wish to associate myself
26:32with all the remarks of Secretary Summers.
26:36In December of 2000, Congress passed
26:39the Commodity Futures Modernization Act.
26:42Written with the help of financial-industry lobbyists,
26:45it banned the regulation of derivatives.
26:49After that, it was off to the races.
26:53Use of derivatives and financial innovation
26:56exploded dramatically after 2000.
26:59So help me God. So help me God.
27:01By the time George W. Bush took office in 2001,
27:05the U.S. Financial sector was vastly more profitable,
27:08concentrated and powerful than ever before.
27:12Dominating this industry were five investment banks,
27:16two financial conglomerates,
27:19three securities insurance companies
27:22and three rating agencies.
27:25And linking them all together was the securitization food chain.
27:28A new system which connected trillions of dollars
27:31in mortgages and other loans with investors all over the world.
27:36Thirty years ago, if you went to get a loan for a home,
27:39the person lending you the money expected you to pay him or her back.
27:43You got a loan from a lender who wanted to be paid back.
27:46We've since developed securitization, whereby people who make the loan
27:50are no longer at risk if they fail to repay.
27:53In the old system, when a homeowner paid their mortgage every month,
27:57the money went to their local lender.
27:59And since mortgages took decades to repay, lenders were careful.
28:05In the new system, lenders sold mortgages to investment banks.
28:09The banks combined thousands of mortgages and loans,
28:13including car loans, student loans, and credit card debt,
28:17to create complex derivatives called collateralized debt obligations,
28:22or CDOs.
28:23The investment banks then sold the CDOs to investors.
28:28Now when homeowners paid their mortgages,
28:31the money went to investors all over the world.
28:34The investment banks paid rating agencies
28:37to evaluate the CDOs,
28:39and many of them were given a triple-A rating,
28:42which is the highest possible investment grade.
28:44This made CDOs popular with retirement funds,
28:48which could only purchase highly rated securities.
28:53This system was a ticking time bomb.
28:56Lenders didn't care anymore about whether a borrower could repay,
29:00so they started making riskier loans.
29:03The investment banks didn't care either.
29:05The more CDOs they sold, the higher their profits.
29:09And the rating agencies, which were paid by the investment banks,
29:13had no liability if their ratings of CDOs proved wrong.
29:18You weren't gonna be on the hook, there weren't regulatory constraints.
29:23So it was a green light to just pump out more and more loans.
29:26Between 2000 and 2003,
29:29the number of mortgage loans made each year nearly quadrupled.
29:34Everybody in this securitization food chain,
29:38from the very beginning until the end,
29:40didn't care about the quality of the mortgage.
29:43They were caring about maximizing their volume
29:45and getting a fee out of it.
29:47In the early 2000s,
29:49there was a huge increase in the riskiest loans, called subprime.
29:54When thousands of subprime loans were combined to create CDOs,
29:59many of them still received triple-A ratings.
30:04Now, it would have been possible to create derivative products
30:09that don't have these risks,
30:12that carry the equivalent of deductibles,
30:14where there are limits on the risks that can be taken on, and so forth.
30:19They didn't do that, did they? They didn't.
30:22In retrospect, they should've done.
30:24So did these guys know they were doing something dangerous?
30:27I think they did.
30:46All the incentives financial institutions offered to their mortgage brokers
30:51were based on selling the most profitable products,
30:55which were predatory loans.
30:57If they make more money, that's where they'll put you.
31:07Suddenly, hundreds of billions of dollars a year
31:10were flowing through the securitization chain.
31:13Since anyone could get a mortgage,
31:15home purchases and housing prices skyrocketed.
31:18The result was the biggest financial bubble in history.
31:23Real estate is real. They can see their asset.
31:25They can live in their asset. They can rent out their asset.
31:29You had a huge boom in housing that made no sense at all.
31:32The financing appetites of the financial sector
31:39drove what everybody else did.
31:42Last time we had a housing bubble was in the late '80s.
31:47In that case, the increase in home price had been relatively minor.
31:51That housing bubble led to a relatively severe recession.
31:56From 1996 until 2006,
32:01real home prices effectively doubled.
32:08At $500 a ticket, they've come to hear how to buy their very own piece
32:13of the American dream.
32:15Goldman Sachs, Bear Stearns, Lehman Brothers,
32:20Merrill Lynch were all in on this.
32:23The subprime lending alone increased from 30 billion a year in funding
32:29to over 600 billion a year in 10 years.
32:33They knew what was happening.
32:35Countrywide Financial, the largest subprime lender,
32:38issued $97 billion worth of loans.
32:43It made over $ 11 billion in profits as a result.
32:48On Wall Street, annual cash bonuses spiked.
32:51Traders and CEOs
32:53became enormously wealthy during the bubble.
32:56Lehman Brothers was a top underwriter of subprime lending,
33:00and their CEO, Richard Fuld,
33:03took home $485 million.
33:06On Wall Street, this housing and credit bubble
33:10was leading to hundreds of billions of dollars of profits.
33:14You know, by 2006 about 40 percent of all profits
33:17of S&P 500 firms was coming from financial institutions.
33:21It wasn't real profits or income.
33:24It was money created by the system and booked as income.
33:29Two, three years down the road there's a default, it's all wiped out.
33:33I think it was, in fact, in retrospect, a great big national...
33:37And not just national, global Ponzi scheme.
33:40Through the Home Ownership and Equity Protection Act,
33:43the Federal Reserve board had broad authority
33:46to regulate the mortgage industry.
33:48But Fed chairman Alan Greenspan refused to use it.
33:52Alan Greenspan said, "No, that's regulation.
33:55I don't believe in it."
33:56For 20 years, Robert Gnaizda was the head of Greenlining,
34:00a powerful consumer advocacy group.
34:03He met with Greenspan on a regular basis.
34:06We gave him an example of Countrywide
34:08and 150 different complex adjustable-rate mortgages.
34:14He said, "If you had a doctorate in math"
34:17you wouldn't be able to understand them enough
34:19"to know which was good for you and which wasn't."
34:23So we thought he was gonna take action.
34:26But as the conversation continued,
34:29it was clear he was stuck with his ideology.
34:32We met again with Greenspan in '05.
34:35Often we met with him twice a year, and never less than once a year.
34:39And he wouldn't change his mind.
34:46In this world of global communications,
34:50the efficient movement of capital
34:52is helping to create the greatest prosperity in human history.
35:02A hundred and forty-six people were cut from the SEC Enforcement Division?
35:06Is that what you also testified to?
35:08Yes.
35:10Yeah, I think there has been a systematic gutting,
35:15or whatever you wanna call it, of the agency
35:18and it's capability through cutting back of staff.
35:22The SEC Office of Risk Management
35:24was reduced to a staff, did you say, of one?
35:29Yeah. When that gentleman would go home, he could turn the lights out.
35:35During the bubble, investment banks were borrowing heavily
35:38to buy more loans and create more CDOs.
35:43The ratio between borrowed money and the banks' own money
35:46was called leverage.
35:48The more the banks borrowed, the higher their leverage.
35:53In 2004, Henry Paulson, the CEO of Goldman Sachs,
35:58helped lobby the SEC to relax limits on leverage,
36:03allowing the banks to sharply increase their borrowing.
36:07The SEC somehow decided
36:09to let investment banks gamble a lot more.
36:13That was nuts. I don't know why they did that, but they did.
36:23We've said these are the big guys, and clearly that's true.
36:26But that means if anything goes wrong, it's going to be an awfully big mess.
36:33You are dealing with the most
36:36highly sophisticated financial institutions.
36:39These are the firms that do most of the derivative activity.
36:43We talked to some as to what their comfort level was.
36:46The firms actually thought that the number was appropriate.
36:52The commissioners vote to adopt the new rules as recommended.
36:56- Yes. - Yes.
36:58We do indeed. It's unanimous. And we are adjourned.
37:04The degree of leverage in the financial system
37:08became absolutely frightening.
37:10Investment banks leveraging up to the level of 33-to-1.
37:15Which means that a tiny 3-percent decrease
37:18in the value of their asset base would leave them insolvent.
37:23There was another ticking time bomb in the financial system.
37:27AIG, the world's largest insurance company,
37:30was selling huge quantities of derivatives
37:33called credit default swaps.
37:37For investors who owned CDOs,
37:39credit default swaps worked like an insurance policy.
37:43An investor who purchased a credit default swap
37:46paid AIG a quarterly premium.
37:49If the CDO went bad,
37:51AIG promised to pay the investor for their losses.
37:56But unlike regular insurance,
37:58speculators could also buy credit default swaps from AIG
38:02in order to bet against CDOs they didn't own.
38:06In insurance, you can only insure something you own.
38:09Let's say you and I own property. I own a house.
38:12I can only insure that house once.
38:15The derivatives universe essentially enables anybody
38:18to actually insure that house.
38:20You could insure that, somebody else could.
38:23So 50 people might insure my house.
38:25So what happens is, if my house burns down,
38:28the number of losses in the system becomes proportionately larger.
38:32Since credit default swaps were unregulated,
38:35AIG didn't have to put aside any money to cover potential losses.
38:40Instead, AIG paid it's employees huge cash bonuses
38:44as soon as contracts were signed.
38:46But if the CDOs later went bad,
38:49AIG would be on the hook.
38:52People were essentially being rewarded for taking massive risks.
38:56In good times, they generate short-term revenues and profits
39:00and, therefore, bonuses.
39:02But that's gonna lead to the firm to be bankrupt over time.
39:05That's a distorted system of compensation.
39:09AIG's Financial Products division in London
39:12issued $500 billion worth of credit default swaps during the bubble,
39:17many of them for CDOs backed by subprime mortgages.
39:21The 400 employees at AIGFP
39:24made $3.5 billion between 2000 and 2007.
39:29Joseph Cassano, the head of AIGFP,
39:32personally made $315 million.
39:35It's hard for us,
39:37and without being flippant, to even see a scenario
39:42within any kind of realm of reason
39:44that would see us losing one dollar in any of those transactions.
39:49In 2007, AIG's auditors raised warnings.
39:54One of them, Joseph St. Denis,
39:56resigned in protest after Cassano repeatedly blocked him
40:00from investigating AIGFP's accounting.
40:03Let me tell you one person that didn't get a
40:05bonus while everybody else was getting bonuses.
40:07That was St. Denis. Mr. St. Denis tried to alert the two of you
40:11to the fact you were running into big problems.
40:14He quit in frustration, and he didn't get a bonus.
40:18In 2005, Raghuram Rajan,
40:21then the chief economist of the International Monetary Fund,
40:25delivered a paper at the Jackson Hole symposium,
40:27the most elite banking conference in the world.
40:30Who was in the audience?
40:32It was the central bankers of the world,
40:37ranging from Mr. Greenspan himself,
40:40Ben Bernanke
40:42Larry Summers.
40:43Tim Geithner was there.
40:45The title of the paper was essentially:
40:47"Is Financial Development Making the World Riskier?"
40:51And the conclusion was, it is.
40:57Rajan's paper focused on incentive structures
41:00that generated huge cash bonuses based on short-term profits,
41:04but which imposed no penalties for later losses.
41:07Rajan argued that these incentives encouraged bankers
41:10to take risks that might eventually destroy their own firms
41:14or even the entire financial system.
41:20It's very easy to generate performance by taking on more risk.
41:24So what you need to do is compensate for risk-adjusted performance.
41:29And that's where all the bodies are buried.
41:32Rajan, you know, hit the nail on the head.
41:35What he particularly said was:
41:37"You guys have claimed you've found a way"
41:40to make more profits with less risk.
41:42I say you've found a way to make more profits with more risk.
41:46"There's a big difference."
41:47Summers was vocal.
41:50He basically thought
41:52that I was criticizing the change in the financial world
41:58and was worried about, you know, regulation,
42:01which would reverse this change.
42:04Essentially he accused me of being a Luddite.
42:07He wanted to make sure that we didn't bring in
42:11a whole new set of regulations
42:13to constrain the financial sector.
42:19You're gonna make an extra $2 million a year, or $ 10 million a year,
42:24for putting your financial institution at risk.
42:26Someone else pays the bill, you don't.
42:29Would you make that bet?
42:30Most people on Wall Street said, "Sure, I'd make that bet."
43:17It never was enough.
43:19They don't wanna own one home, they wanna own five homes.
43:22And they wanna have an expensive penthouse
43:25on Park Avenue.
43:28And they wanna have their own private jet.
43:31You think this is an industry where high...?
43:34Very high compensation levels are justified?
43:36I think I would take caution, or take heed,
43:39or take exception to your word "very high." It's relative.
43:42You have a 14-million-dollar home in Florida.
43:45You have a summer home in Sun Valley, Idaho.
43:48An art collection filled with million-dollar paintings.
43:52Richard Fuld never appeared on the trading floor.
43:54There were art advisors there all the time.
43:57He had a private elevator.
43:59He wanted to be disconnected.
44:01His elevator, they hired technicians to program it
44:04so that his driver would call in in the morning
44:07and a security guard would hold it.
44:10There's only a three-second window where he actually has to see people.
44:14And he hops into this elevator and it goes straight to 31.
44:17Lehman owned corporate jets.
44:20You know about this? Yes.
44:22How many were there?
44:23Well, there were six, including the 767 s.
44:26They also had a helicopter.
44:28Isn't that kind of a lot of planes to have?
44:34We're dealing with type-A personalities.
44:36And type-A personalities know everything in the world.
44:38Banking became a pissing contest.
44:41"Mine's bigger than yours." That kind of stuff.
44:43It was all men that ran it, incidentally.
44:45Fifty-billion-dollar deals weren't large enough, so we'd do 100-billion deals.
44:50These people are risk-takers. They're impulsive.
44:58It's part of their behavior. It's part of their personality.
45:01And that manifests outside of work as well.
45:04It was quite typical for the guys to go out
45:07to go to strip bars, to use drugs.
45:09I see a lot of cocaine use, use of prostitution.
45:19Recently, neuroscientists have done experiments
45:22where they've taken individuals and put them into an MRI machine,
45:27and they have them play a game where the prize is money.
45:31And they noticed that when the subjects earn money,
45:35the part of the brain that gets stimulated
45:38is the same part that cocaine stimulates.
45:40A lot of people feel that they need to participate in that behavior
45:44to make it, to get promoted, get recognized.
45:47According to a Bloomberg article, business entertainment
45:50represents 5 percent of revenue for derivatives brokers
45:53and often includes strip clubs, prostitution and drugs.
45:58A New York broker filed a lawsuit in 2007 against his firm
46:02alleging he was required to retain prostitutes to entertain traders.
46:07There's just a blatant disregard
46:09for the impact that their actions might have on society, on family.
46:14They have no problem using a prostitute
46:17and going home to their wife.
46:29How many customers?
46:31About 10,000 at that point in time.
46:37What fraction were from Wall Street?
46:39Of the higher-end clients, probably 40 to 50 percent.
46:44Were all the major Wall Street firms represented?
46:47Goldman Sachs?
46:48Lehman Brothers. They're all in there.
46:51Morgan Stanley was a little less of that.
46:55I think Goldman was pretty, pretty big with that.
46:58Clients would call and say:
47:00"Can you get me a Lamborghini for the girl?"
47:03These guys were spending corporate money.
47:05I had many black cards from, you know, the various financial firms.
47:10What's happening is services are being charged
47:14to computer repair.
47:16Trading research, you know, consulting for market compliance.
47:20Just gave them letterhead and said, "Make your own invoice."
47:24This behavior extends to the senior management of the firm?
47:27Absolutely does. Yeah.
47:29I know for a fact that it does.
47:31It extends to the very top.
47:37A friend of mine in a company that has a big financial presence said:
47:42"It's about time you learned about subprime mortgages."
47:46So he set up a session with his trading desk and me.
47:50And the techie who did all this gets very excited,
47:54runs to his computer, pulls up in about three seconds
47:57this Goldman Sachs issue of securities.
48:01It was a complete disaster.
48:02Borrowers had borrowed, on average, 99.3 percent of the price of the house.
48:08They have no money in the house.
48:10If anything goes wrong, they walk away from the mortgage.
48:13This is not a loan you'd really make, right?
48:16You've gotta be crazy.
48:18But somehow, you took 8000 of these loans,
48:21and by the time the guys were done
48:24at Goldman Sachs and the rating agencies,
48:27two-thirds of the loans were rated triple-A.
48:29They were rated as safe as government securities.
48:32It's utterly mad.
48:35Goldman Sachs sold at least $3. 1 billion worth
48:38of these toxic CDOs in the first half of 2006.
48:42The CEO of Goldman Sachs at this time was Henry Paulson,
48:47the highest paid CEO on Wall Street.
48:52Good morning. I'm pleased to announce
48:54that I will nominate Henry Paulson to be the Secretary of the Treasury.
48:58He has a lifetime of experience.
49:00He has knowledge of financial markets.
49:02He's earned a reputation for candor and integrity.
49:06You might think it would be hard
49:08to adjust to a meager government salary.
49:11But taking the job as Treasury secretary
49:13was the best financial decision of his life.
49:16Paulson had to sell his $485 million of Goldman stock
49:21when he went to work for the government.
49:23But because of a law passed by the first President Bush,
49:26he didn't have to pay any taxes on it.
49:29It saved him $50 million.
49:38The article came out in October of 2007.
49:42Already, a third of the mortgages defaulted.
49:46Now most of them are going.
49:51One group that had purchased these now worthless securities
49:54was the Public Employees' Retirement System of Mississippi,
49:58which provides monthly benefits to over 80,000 retirees.
50:02They lost millions of dollars and are now suing Goldman Sachs.
50:21By late 2006, Goldman had taken things a step further.
50:26It didn't just sell toxic CDOs,
50:28it started betting against them at the same time it was telling customers
50:33that they were high-quality investments.
50:36By purchasing credit default swaps from AIG,
50:40Goldman could bet against CDOs it didn't own
50:43and get paid when the CDOs failed.
50:47I asked if anybody called the customers and said:
50:51"We don't really like this kind of mortgage anymore,
50:54and we thought you ought to know."
50:57They didn't say anything, but you could feel the laughter over the phone.
51:02Goldman Sachs bought at least $22 billion
51:05of credit default swaps from AIG.
51:08It was so much that Goldman realized that AIG itself might go bankrupt.
51:13So they spent $ 150 million insuring themselves
51:16against AIG's potential collapse.
51:19Then in 2007, Goldman went even further.
51:23They started selling CDOs specifically designed
51:26so that the more money their customers lost,
51:29the more money Goldman Sachs made.
51:38Six hundred million dollars of Timberwolf securities is what you sold.
51:43Before you sold them,
51:46this is what your sales team were telling to each other:
51:50"Boy, that Timberwolf was one shitty deal."
51:54This was an e-mail to me in late June, after the transaction.
51:59No, no. You sold Timberwolf after as well.
52:02We did trades after that. Yeah. Okay.
52:05The next e-mail... Take a look. July 1, '07.
52:08Tells the sales force, "The top priority is Timberwolf."
52:12Your top priority to sell is that shitty deal.
52:15If you have an adverse interest to your client,
52:18do you have the duty to disclose it?
52:20To tell that client of your adverse interest?
52:22That's my question. I'm trying to understand...
52:25I think you understand. You don't wanna answer.
52:27Do you believe you have a duty
52:30to act in your clients' best interest?
52:35I repeat, we have a duty to serve our clients
52:40by showing prices on transactions that they ask us to show prices for.
52:45What do you think about selling securities
52:48which your own people think are crap?
52:51Does that bother you?
52:53I think they would.
52:55- As a hypothetical? - No, this is real.
52:58- Well, then I don't know... - We heard it today.
53:01We heard it today. "This is a shitty deal." "This is crap."
53:04I heard nothing today
53:06that makes me think anything went wrong.
53:10Is there not a conflict when you sell something to somebody
53:14and then are determined to bet against that same security,
53:20and you don't disclose that to the person you're selling it to?
53:24You see a problem?
53:25In the context of market making, that is not a conflict.
53:28When you heard your employees in e-mails said,
53:32"What a shitty deal," "What a piece of crap,"
53:35did you feel anything?
53:37That's very unfortunate to have on e-mail.
53:39Are you embar...?
53:42And very unfortunate... I don't... I don't...
53:44"On e-mail"? How about feeling that way?
53:47It's very unfortunate for anyone to have said that in any form.
53:50Are your competitors engaged in similar activities?
53:55Yes, and to a greater extent than us in most cases.
54:00Hedge fund manager John Paulson made $ 12 billion
54:03betting against the mortgage market.
54:06When Paulson ran out of mortgage securities to bet against,
54:09he worked with Goldman Sachs and Deutsche Bank to create more.
54:14Morgan Stanley was also selling
54:16mortgage securities it was betting against, and it's now being sued by
54:19the Government Employees' Retirement Fund of the Virgin Islands
54:23for fraud.
54:25The lawsuit alleges that Morgan Stanley knew
54:27that the CDOs were junk.
54:29Although they were rated triple-A,
54:31Morgan Stanley was betting they would fail.
54:34A year later, Morgan Stanley had made hundreds of millions of dollars,
54:38while the investors had lost almost all of their money.
54:58You would have thought pension funds would have said:
55:01"Those are subprime. Why am I buying them?"
55:05They had these guys at Moody's and Standard & Poor's
55:09who said, "That's a triple-A."
55:10No securities got issued without the seal of approval of the rating agencies.
55:17The three rating agencies, Moody's, S&P and Fitch,
55:22made billions of dollars giving high ratings to risky securities.
55:26Moody's, the largest rating agency, quadrupled it's profits
55:30between 2000 and 2007.
55:34Moody's and S&P get compensated based on putting out ratings reports.
55:37And the more structured securities they gave a triple-A rating to,
55:41the higher their earnings were.
55:43Imagine going to The Times saying:
55:45"Write a positive story, I'll pay you $500,000.
55:48If you don't, I'll give you nothing."
55:50Rating agencies could have stopped the party and said:
55:52"Sorry. We're gonna tighten our standards,"
55:56and immediately cut off the funding to risky borrowers.
56:01Triple-A-rated instruments
56:04mushroomed from just a handful to thousands and thousands.
56:11Hundreds of billions of dollars were being rated, you know, and...
56:15Per year? Per year. Oh, yeah.
56:17I've now testified before both houses of Congress
56:21on the credit rating agency issue,
56:24and both times they trot out very prominent First Amendment lawyers
56:29and argue that, "When we say something is rated triple-A",
56:33that is merely our 'opinion.' You shouldn't rely on it."
56:37S&P's ratings express our opinion.
56:39Our ratings are our opinions. They're opinions.
56:43Opinions. And they are just opinions.
56:45I think we are emphasizing the fact that our ratings are opinions.
56:56They do not speak to the market value of a security,
56:59the volatility of it's price, or it's suitability as an investment.
57:22We have many economists saying:
57:25"Oh. This is a bubble, it's going to burst.
57:27This is going to be an issue for the economy."
57:30Some say it could even 'cause a recession at some point.
57:33What is the worst-case scenario if, in fact, we were to see prices
57:37come down substantially across the country?
57:40I don't buy your premise. It's an unlikely possibility.
57:43We've never had a decline in house prices on a nationwide basis.
57:48Ben Bernanke became chairman of the Federal Reserve
57:50in February 2006,
57:52the top year for subprime lending.
57:56But despite numerous warnings,
57:58Bernanke and the Federal Reserve Board did nothing.
58:06Robert Gnaizda met with Bernanke and the Federal Reserve Board
58:09three times after Bernanke became chairman.
58:12Only at the last meeting did he suggest that there was a problem
58:18and that the government ought to look into it.
58:20When? When was that? What year?
58:22It's 2009, March 11 th, in D.C.
58:25This year? This year we met, yes.
58:27And so for the two previous years you met him.
58:30Even in 2008? Yes.
58:33One of the six Federal Reserve Board governors serving under Bernanke
58:37was Frederic Mishkin,
58:38who was appointed by President Bush in 2006.
58:42Did you participate in the meetings Robert Gnaizda
58:46and Greenlining had with the Federal Reserve Board?
58:49Yes, I did. I was on the committee that was involved
58:52with the Consumer Community Affairs Committee.
58:55He warned, in an extremely explicit manner, about what was going on.
58:59He came to the Federal Reserve Board with loan documentation
59:03of the kind of loans that were frequently being made.
59:06And he was listened to politely, and nothing was done.
59:09So again, I don't know the details in terms of, um...
59:15In fact, I just don't... l...
59:17Whatever information he provided, I'm not sure exactly.
59:22To be honest with you, I can't remember this kind of discussion,
59:25but certainly there were issues that were coming up.
59:30The question is, how pervasive are they?
59:33Why didn't you try looking?
59:34I think that people did.
59:36We had people looking at...
59:38Excuse me. You can't be serious. You would have found things.
59:41That's very easy to always say that you can always find it.
59:46As early as 2004,
59:48the FBI was already warning about an epidemic of mortgage fraud.
59:52They reported inflated appraisals,
59:54doctored loan documentation and other fraudulent activity.
59:59In 2005, the IMF's chief economist, Raghuram Rajan,
1:00:04warned that dangerous incentives could lead to a crisis.
1:00:08Then came Nouriel Roubini's warnings in 2006,
1:00:12Allan Sloan's articles in Fortune magazine
1:00:14and The Washington Post in 2007,
1:00:17and repeated warnings from the IMF.
1:00:19I said, and on behalf of the institution,
1:00:22the crisis in front of us is a huge crisis.
1:00:25Who did you talk to?
1:00:27The government, Treasury, Fed, everybody.
1:00:29In May of 2007, hedge fund manager Bill Ackman circulated a presentation,
1:00:35"Who is Holding the Bag?"
1:00:37Which described how the bubble would unravel.
1:00:40And in early 2008, Charles Morris published his book
1:00:44about the impending crisis.
1:00:48You're not sure. What do you do?
1:00:50You might have some suspicions that underwriting standards are weakened.
1:00:55But then the question is, should you do anything about it?
1:01:00By 2008, home foreclosures were skyrocketing
1:01:03and the securitization food chain imploded.
1:01:07Lenders could no longer sell their loans to the investment banks.
1:01:10And as the loans went bad, dozens of lenders failed.
1:01:15Chuck Prince of Citibank famously said
1:01:21that we have to dance until the music stops.
1:01:24Actually, the music had stopped already when he said that.
1:01:28The market for CDOs collapsed,
1:01:30leaving investment banks holding hundreds of billions of dollars
1:01:34in loans, CDOs, and real estate they couldn't sell.
1:01:38When the crisis started, both the Bush administration
1:01:42and the Federal Reserve were totally behind the curve.
1:01:46They did not understand the extent of it.
1:01:49At what point do you remember thinking for the first time:
1:01:53"This is dangerous, this is bad"?
1:01:56I remember very well one... I think it was a G 7 meeting
1:02:00of February, 2008.
1:02:02And I remember discussing the issue with Hank Paulson.
1:02:06And I clearly remember telling Hank:
1:02:09"We are watching this Tsunami coming,"
1:02:13and you're just proposing that we ask
1:02:17"which swimming costume we're going to put on."
1:02:19What was his response? What was his feeling?
1:02:22"Things are under control."
1:02:23Yes, we are looking at this situation carefully,
1:02:28"and, yeah, it's under control."
1:02:32We're gonna keep growing. Okay? And, obviously, I'll say it:
1:02:36If you're growing, you're not in recession, right?
1:02:39I mean, we all know that.
1:02:46One of the pillars of Wall Street...
1:02:49In March 2008, the investment bank Bear Stearns ran out of cash
1:02:53and was acquired for $2 a share by JPMorgan Chase.
1:02:57The deal was backed by $30 billion in emergency guarantees
1:03:01from the Federal Reserve.
1:03:04That was when the administration could have come in
1:03:07and put in place various measures to reduce system risk.
1:03:13The information I'm receiving is the end is not here,
1:03:18that there are other shoes to fall.
1:03:20Well, I've seen those investment banks,
1:03:23working with the Fed and the SEC,
1:03:27strengthen their liquidity, strengthen their capital positions.
1:03:33I get reports all the time. Our regulators are very vigilant.
1:03:38On September 7 th, 2008,
1:03:40Henry Paulson announced the federal takeover
1:03:43of Fannie Mae and Freddie Mac, giant lenders on the brink of collapse.
1:03:48Nothing about our actions today reflects a changed view
1:03:52of the housing correction
1:03:54or the strength of other U.S. Financial institutions.
1:03:57Two days later,
1:03:58Lehman Brothers announced record losses of $3.2 billion,
1:04:02and it's stock collapsed.
1:04:05The effects of Lehman and AIG in September still came as a surprise.
1:04:10I mean, this is even after July and Fannie and Freddie.
1:04:13So clearly there was stuff that, as of September,
1:04:18major stuff, that nobody knew about.
1:04:22I think that's... I think that's fair.
1:04:25Bear Stearns was rated triple-A
1:04:27like a month before it went bankrupt?
1:04:29More likely A2. A2?
1:04:32Yeah. Okay.
1:04:33A2 is still not bankrupt.
1:04:35No, that's a high investment grade. Solid investment grade rating.
1:04:38Lehman Brothers, A2 within days of failing.
1:04:42AIG, double-A within days of being bailed out.
1:04:47Fannie Mae and Freddie Macwere triple-A when they were rescued.
1:04:51Citigroup, Merrill, all of them had investment-grade ratings.
1:04:56How can that be? Well, that's a good question.
1:05:00That's a great question.
1:05:02At no point did the administration
1:05:03ever go to all the major institutions and say:
1:05:07"This is serious. Tell us what your positions are.
1:05:10You know, no bullshit. Where are you?"
1:05:14Well, first, that's what the regulators... That's their job, right?
1:05:18Their job is to understand the exposure across these institutions.
1:05:22And they have a very refined understanding
1:05:25that I think became more respon... More refined as the crisis proceeded. So...
1:05:30Forgive me, but that's clearly not true.
1:05:33What do you mean, that's not true?
1:05:35In August of 2008,
1:05:36were you aware of the credit ratings held by Lehman Brothers,
1:05:42Merrill Lynch, AIG,
1:05:44and did you think that they were accurate?
1:05:47Well, certainly by that time,
1:05:50it was clear earlier credit ratings weren't accurate.
1:05:53- They had been downgraded. - No, they hadn't.
1:05:56There was downgrading in terms of the industry and concerns of the...
1:06:00All those firms were rated at least A2
1:06:02until a couple of days before they were rescued.
1:06:05The answer is I don't know enough to answer your question on this issue.
1:06:10Governor Fred Mishkin is resigning, effective August 31.
1:06:14He plans to return to Columbia's Graduate School of Business.
1:06:18Why did you leave the Federal Reserve in August of 2008
1:06:21in the middle of the worst financial crisis?
1:06:24So that... I had to revise a textbook.
1:06:28His departure leaves the board with three of it's seven seats vacant
1:06:32just when the economy needs it most.
1:06:35I'm sure your textbook is
1:06:36important and widely read, but in August 2008,
1:06:39some more important things were going on in the world, don't you think?
1:06:43By Friday, September 12th,
1:06:45Lehman Brothers had run out of cash
1:06:48and the entire investment-banking industry was sinking fast.
1:06:52The stability of the global financial system was in jeopardy.
1:06:56That weekend, Henry Paulson and Timothy Geithner
1:06:59president of the New York Federal Reserve,
1:07:02called an emergency meeting with the CEOs of the major banks
1:07:06in an effort to rescue Lehman.
1:07:08But Lehman wasn't alone.
1:07:10Merrill Lynch was also on the brink of failure.
1:07:15And that Sunday, it was acquired by Bank of America.
1:07:19The only bank interested in buying Lehman was the British firm Barclays.
1:07:24But British regulators demanded a financial guarantee from the U.S.
1:07:28Paulson refused.
1:07:35We got in a cab and went to the Federal Reserve Bank.
1:07:42They wanted the bankruptcy case commenced before midnight
1:07:46of September 14.
1:07:48We kept pressing that this would be a terrible event,
1:07:54and at some point I used the word Armageddon,
1:07:57and they consider the consequences of what they were proposing.
1:08:02The effect on the market would be extraordinary.
1:08:04You said this? Yes.
1:08:06They just said they had considered all of the comments we had made,
1:08:12and they were still of the belief that in order to calm the markets
1:08:17and move forward, it was necessary for Lehman to go into bankruptcy.
1:08:21"Calm the markets"? Yes.
1:08:23When were you first told that Lehman, in fact, was going to go bankrupt?
1:08:28After the fact. After the fact?
1:08:32Wow. Okay. Um...
1:08:36And what was your reaction when you learned of it?
1:08:41"Holy cow."
1:08:43Paulson and Bernanke had not consulted with other governments
1:08:47and didn't know the consequences of foreign bankruptcy laws.
1:08:50Lehman Brothers London continue to empty their desks.
1:08:53Under British law,
1:08:54Lehman's London office had to be closed immediately.
1:08:58All transactions came to a halt, and there are thousands of transactions.
1:09:02The hedge funds who had had assets with Lehman in London
1:09:06discovered overnight, to their complete horror,
1:09:09they couldn't get those assets back.
1:09:11One of the points of the hub failed.
1:09:14And that had huge knock-on effects around the system.
1:09:17The oldest money market fund in the nation
1:09:19wrote off three-quarters of a billion dollars in bad debt
1:09:24issued by now-bankrupt Lehman Brothers.
1:09:26Lehman's failure caused a collapse in the commercial paper market,
1:09:30which many companies depend on to pay for expenses
1:09:33such as payroll.
1:09:35That means they have to lay off employees, they can't buy parts.
1:09:38It stops business in it's tracks.
1:09:40People stood and said, "Listen, what can we believe in?
1:09:43There's nothing we can trust anymore."
1:09:45That same week, AIG owed $ 13 billion
1:09:49to holders of credit default swaps, and it didn't have the money.
1:09:53AIG was another hub.
1:09:55If AIG had stopped, you know, all planes may have to stop flying.
1:09:59On September 17 th, AIG is taken over by the government.
1:10:03One day later, Paulson and Bernanke ask Congress
1:10:07for $700 billion to bail out the banks.
1:10:09We're coming together.
1:10:11They warned that the alternative would be a catastrophic collapse.
1:10:15It was scary. You know, the entire system froze up.
1:10:18Every part of the financial system, every part of the credit system.
1:10:22Nobody could borrow money.
1:10:24It was like a cardiac arrest of the global financial system.
1:10:27I'm playing the hand dealt me.
1:10:30A lot of what I'm dealing with...
1:10:32I'm dealing with the consequences of things that were done years ago.
1:10:37Secretary Paulson spoke through the fall.
1:10:39All the potential root causes of this, and there are plenty,
1:10:42he called them. I'm not sure...
1:10:44You're not being serious about that.
1:10:46I am being serious. What would you have expected?
1:10:49What were you looking for that you didn't see?
1:10:51He was the senior advocate
1:10:54for prohibiting the regulation of credit default swaps
1:10:59and also lifting the leverage limits on the investment banks.
1:11:03So again, what...?
1:11:04He mentioned those things? I never heard him mention those things.
1:11:07Could we turn this off for a second?
1:11:15When AIG was bailed out,
1:11:17the owners of it's credit default swaps,
1:11:19the most prominent of which was Goldman Sachs,
1:11:22were paid $61 billion the next day.
1:11:25Paulson, Bernanke and Tim Geithner
1:11:28forced AIG to pay 100 cents on the dollar
1:11:31rather than negotiate lower prices.
1:11:34Eventually, the AIG bailout cost taxpayers over $ 150 billion.
1:11:40A hundred and sixty billion dollars went through AIG.
1:11:44Fourteen billion went to Goldman Sachs.
1:11:47At the same time, Paulson and Geithner forced AIG
1:11:50to surrender it's right to sue Goldman and the other banks for fraud.
1:11:54Isn't there a problem when the
1:11:57person in charge of dealing with this crisis
1:12:00is the former CEO of Goldman Sachs?
1:12:02Someone who had a major role in causing it.
1:12:06It's fair to say that the financial markets today
1:12:09are incredibly complicated.
1:12:11And supply urgently needed money.
1:12:12On October 4th, 2008,
1:12:15President Bush signs a 700-billion-dollar bailout bill.
1:12:19But world stock markets continue to fall
1:12:22amid fears that a global recession is now underway.
1:12:30The bailout legislation does nothing to stem the tide of layoffs
1:12:33and foreclosures.
1:12:35Unemployment in the United States and Europe rises to 10 percent.
1:12:40The recession accelerates and spreads globally.
1:12:48I began to get really scared because I hadn't foreseen
1:12:52the whole world going down at the same rate at the same time.
1:12:57By December of 2008,
1:12:59General Motors and Chrysler are facing bankruptcy.
1:13:03And as U.S. Consumers cut back on spending,
1:13:06Chinese manufacturers see sales plummet.
1:13:11Over 10 million migrant workers in China lose their jobs.
1:13:16At the end of the day, the poorest, as always, pay the most.
1:13:26Here, you can earn a lot of money.
1:13:28Like 70, 80 U.S. Dollars per month.
1:13:35As a farmer in the countryside, you cannot earn as much money.
1:13:40The workers, they just wire their salary to their hometown
1:13:44to give to their families.
1:13:47The crisis started in America.
1:13:50We all know it will be coming to China.
1:13:59Some of the factories try to cut off some workers.
1:14:03And some people will get poor because they'll lose their jobs.
1:14:08Life gets harder.
1:14:18We were growing at about 20 percent.
1:14:21It was a super year.
1:14:24Then we suddenly went to minus-nine this quarter.
1:14:28Exports collapsed, and we're talking like 30 percent.
1:14:33So we just took a hit, you know. Fell off a cliff. Boomp.
1:14:37Even as the crisis unfolded, we didn't know how wide it was going to spread
1:14:41or how severe it was going to be.
1:14:43We were still hoping that there would be some way
1:14:46for us to have a shelter and be less battered by the storm.
1:14:51But it's not possible.
1:14:53It's a very globalized world.
1:14:55The economies are all linked together.
1:15:29Every time a home goes into foreclosure,
1:15:32it affects everyone who lives around that house.
1:15:34When that house goes on the market, it'll be sold at a lower price.
1:15:38Maybe before it goes on the market, it won't be well-maintained.
1:15:41We estimate another 9 million homeowners will lose their homes.
1:15:51We went out on a weekend to see what houses were for sale.
1:15:56We saw one we liked.
1:15:58The payment was going to be $3200.
1:16:13Everything was beautiful, the house was very pretty.
1:16:16The payment low. Everything was...
1:16:18We won the lottery.
1:16:20But the reality was when the first payment arrived.
1:16:28I felt very bad for my husband
1:16:33because he works too much. And we have three children.
1:16:49The majority I've seen are people hurt by the economy.
1:16:53They were living day to day, paycheck to paycheck,
1:16:56and that ran out.
1:16:58Unemployment won't pay a mortgage. It won't pay a car bill.
1:17:02I was a log truck driver.
1:17:04They shut down the logging systems, shut down the sawmills.
1:17:09So I moved down here on a construction job.
1:17:11And the construction jobs got shut down too, so...
1:17:14Things are so tough. There's a lot of people out there.
1:17:17Soon you're gonna be seeing more camps like this
1:17:20because there's just no jobs right now.
1:17:28When the company did well, we did well.
1:17:33When the company did not do well, sir, we did not do well.
1:17:37The men who destroyed their own companies
1:17:39and plunged the world into crisis
1:17:41walked away from the wreckage with their fortunes intact.
1:17:45The top five executives at Lehman Brothers made over a billion dollars
1:17:48between 2000 and 2007.
1:17:51And when the firm went bankrupt, they got to keep all the money.
1:17:55The system worked.
1:17:57It doesn't make sense to make a failing loan because we lose.
1:18:00The borrower loses, the community loses and we lose.
1:18:04Countrywide's CEO, Angelo Mozilo,
1:18:07made $470 million between 2003 and 2008.
1:18:11One hundred forty million came from dumping his Countrywide stock
1:18:15in the 12 months before the company collapsed.
1:18:18I hold the board accountable when a business fails.
1:18:21They're responsible for hiring and firing the CEO
1:18:24and overseeing big strategic decisions.
1:18:26The problem with boards in America is the way boards are elected.
1:18:29You know, the boards are pretty much, in many cases, picked by the CEO.
1:18:33The board of directors and compensation committees
1:18:36are the two bodies best situated to determine pay for executives.
1:18:41How do you think they've done over the past 10 years?
1:18:44Well, I think that if you look at those... I would give about a B, because...
1:18:49A B? A B, yes.
1:18:50Not an F? Not an F, not an F.
1:18:52Stan O'neal, the CEO of Merrill Lynch,
1:18:55received $90 million in 2006 and 2007 alone.
1:19:00After driving his firm into the ground,
1:19:02the board of directors allowed him to resign,
1:19:05and he collected $ 161 million in severance.
1:19:09Instead of being fired, Stan O'neal is allowed to resign
1:19:14and takes away $ 151 million.
1:19:17That's a decision that that board of directors made.
1:19:20What grade do you give that decision?
1:19:22That's a tougher one. I don't know if I'd give it a B as well.
1:19:25O'neal's successor, John Thain, was paid $87 million in 2007.
1:19:31And in December of 2008,
1:19:33two months after Merrill was bailed out by U.S. Taxpayers,
1:19:37Thain and Merrill's board handed out billions in bonuses.
1:19:42In March of 2008, AIG's Financial Products division
1:19:46lost $ 11 billion.
1:19:48Instead of being fired, Joseph Cassano, head of AIGFP,
1:19:53was kept on as a consultant for a million dollars a month.
1:19:57You wanna make sure key players and key employees within AIGFP,
1:20:03we retain that intellectual knowledge.
1:20:05I attended a very interesting dinner
1:20:07organized by Hank Paulson a little more than one year ago
1:20:11with some officials and a couple of CEOs
1:20:14from the biggest banks in the U.S.
1:20:16And surprisingly enough, all these gentlemen were arguing:
1:20:21"We were too greedy, so we have part of the responsibility." Fine.
1:20:25Then they were turning to the treasurer,
1:20:27Secretary of the Treasury, and saying:
1:20:29"You should regulate more. We're too greedy, we can't avoid it.
1:20:32The only way to avoid this is to have more regulation."
1:20:35I have spoken to many bankers about this question,
1:20:39including very senior ones.
1:20:41And this is the first time that I've ever heard anybody say
1:20:46they wanted their compensation to be regulated in any way.
1:20:49Yeah, because it was at the moment where they were afraid.
1:20:52And after, when solution to the crisis began to appear,
1:20:57then probably they changed their mind.
1:21:01In the U.S., the banks are now bigger, more powerful
1:21:05and more concentrated than ever before.
1:21:09There are fewer competitors.
1:21:11A lot of smaller banks have been taken over by big ones.
1:21:15J.P. Morgan is even bigger than it was before.
1:21:17J.P. Morgan took over first Bear Stearns and then WaMu.
1:21:21Bank of America took over Countrywide and Merrill Lynch.
1:21:25Wells Fargo took over Wachovia.
1:21:28After the crisis, the financial industry,
1:21:31including the Financial Services Roundtable,
1:21:34worked harder than ever to fight reform.
1:21:36The financial sector employs 3000 lobbyists,
1:21:39more than five for each member of Congress.
1:21:43You think the financial services industry
1:21:46has excessive political influence in the United States?
1:21:48No. I think that every person in the country
1:21:53is represented here in Washington.
1:21:55And you think that all segments of American society
1:21:59have equal and fair access to the system?
1:22:02That you can walk into any hearing room that you would like. Yes, I do.
1:22:08One can walk into any hearing room. One cannot necessarily
1:22:11write the lobbying checks that your industry writes
1:22:14or engage in the level of political contributions your industry engages in.
1:22:18Between 1998 and 2008,
1:22:21the financial industry spent over $5 billion
1:22:24on lobbying and campaign contributions.
1:22:27And since the crisis, they're spending even more money.
1:22:31The financial industry also exerts it's influence
1:22:34in a more subtle way, one that most Americans don't know about.
1:22:40It has corrupted the study of economics itself.
1:22:44Deregulation had tremendous financial and intellectual support
1:22:50because people argued it for their own benefit.
1:22:54The economics profession was the main source of that illusion.
1:22:59Since the 1980s, academic economists
1:23:03have been major advocates of deregulation
1:23:05and played powerful roles in shaping U.S. Government policy.
1:23:09Very few of these economic experts warned about the crisis.
1:23:13And even after the crisis, many of them opposed reform.
1:23:18The guys who taught these things tended to get paid a lot of money
1:23:22being consultants.
1:23:24Business school professors don't live on a faculty salary.
1:23:30They do very, very well.
1:23:33Over the last decade, the financial services industries
1:23:36made about $5 billion worth of political contributions in the U.S.
1:23:43That's kind of a lot of money.
1:23:46That doesn't bother you? No.
1:23:49Martin Feldstein is a Professor at Harvard
1:23:52and one of the world's most prominent economists.
1:23:55As President Reagan's chief economic advisor,
1:23:57he was a major architect of deregulation.
1:24:00And from 1988 until 2009,
1:24:03he was on the board of directors of both AIG
1:24:07and AIG Financial Products,
1:24:09which paid him millions of dollars.
1:24:11You have any regrets about having been on AIG's board?
1:24:14I have no comments. No, I have no regrets about being on AIG's board.
1:24:18None? That I can say. Absolutely none.
1:24:22Okay.
1:24:26You have any regrets about AIG's decisions?
1:24:31I cannot say anything more about AIG.
1:24:33I've taught at Northwestern in Chicago, Harvard and Columbia.
1:24:38Glenn Hubbard is the Dean of Columbia Business School
1:24:41and was chairman of the Council of Economic Advisers
1:24:44under George W. Bush.
1:24:46Do you think the financial services industry
1:24:48has too much political power in the United States?
1:24:52I don't think so. No. You certainly wouldn't get that impression
1:24:56by the drubbing that they regularly get in Washington.
1:25:00Many prominent academics quietly make fortunes
1:25:03helping the financial industry shape public debate and government policy.
1:25:08The Analysis Group, Charles River Associates,
1:25:12Compass Lexecon
1:25:13and the Law and Economics Consulting Group
1:25:16manage a multibillion-dollar industry
1:25:18that provides academic experts for hire.
1:25:22Two bankers who used these services
1:25:24were Ralph Cioffi and Matthew Tannin,
1:25:27Bear Stearns hedge fund managers prosecuted for securities fraud.
1:25:31After hiring the Analysis Group, both were acquitted.
1:25:35Glenn Hubbard was paid $ 100,000 to testify in their defense.
1:25:40Do you think the economics
1:25:43discipline has a conflict-of-interest problem?
1:25:47I'm not sure I know what you mean.
1:25:49Do you think a significant fraction of the economics discipline, economists,
1:25:53have financial conflicts of interest that might call into question or color...?
1:25:59I see what you're saying. I doubt it.
1:26:01Most academic economists aren't wealthy business people.
1:26:06Hubbard makes $250,000 a year as a board member of MetLife
1:26:11and was formerly on the board of Capmark,
1:26:13a major commercial mortgage lender during the bubble,
1:26:16which went bankrupt in 2009.
1:26:19He has also advised Nomura Securities,
1:26:21KKR Financial Corporation and many other financial firms.
1:26:27Laura Tyson, who declined to be interviewed for this film,
1:26:30is a Professor at the University of California, Berkeley.
1:26:34She was the chair of the Council of Economic Advisers,
1:26:38then director of the National Economic Council under Clinton.
1:26:41After leaving government, she joined the board of Morgan Stanley,
1:26:45which pays her $350,000 a year.
1:26:49Ruth Simmons, president of Brown University,
1:26:51makes over $300,000 a year on the board of Goldman Sachs.
1:26:57Larry Summers, who, as Treasury secretary, played a role
1:27:00in the deregulation of derivatives, became president of Harvard in 2001.
1:27:06While at Harvard, he made millions consulting to hedge funds
1:27:09and millions more in speaking fees, much of it from investment banks.
1:27:16According to his federal disclosure report, Summers' net worth
1:27:20is between $ 16.5 million and $39.5 million.
1:27:26Frederic Mishkin, who returned to Columbia Business School
1:27:29after leaving the Federal Reserve, reported on his disclosure report
1:27:33that his net worth was between $6 million and $ 17 million.
1:27:38In 2006, you coauthored a study of Iceland's financial system.
1:27:42"Iceland is an advanced country"
1:27:44with excellent institutions, low corruption, rule of law.
1:27:48The economy has adjusted to financial liberalization
1:27:51"while prudential regulation and supervision is generally quite strong."
1:27:55And that was the mistake, that it turns out
1:27:58prudential regulation and supervision was not strong in Iceland
1:28:02during this period... What led you to think it was?
1:28:05You're going with the information you had
1:28:07and generally, the view was that Iceland had very good institutions.
1:28:13It was an advanced country... Who told you that?
1:28:16What research did you do? You talk to people.
1:28:18You have faith in the central bank, which actually did fall down on the job.
1:28:23That clearly it... This...
1:28:26Why have faith in a central bank? Well, that faith... You try...
1:28:29Because you go with the information you have.
1:28:32How much were you paid to write it? I was paid...
1:28:34I think the number... It's public information.
1:28:44On your CV, the title of this report has been changed
1:28:48from "Financial Stability in Iceland" to "Financial Instability in Iceland."
1:28:52Well, I don't know. Whatever it is... If there's a typo, there's a typo.
1:28:57What should be publicly available
1:28:59is whenever anybody does research on a topic
1:29:01that they disclose if they have any financial conflict with that research.
1:29:06But if I recall, there is no policy to that effect.
1:29:11I can't imagine anybody not doing that in terms of putting it in a paper. You...
1:29:16There would be significant professional sanction for failure to do that.
1:29:20I didn't see any place in the study where you indicated you'd been paid
1:29:25by the Icelandic Chamber of Commerce to produce it.
1:29:28No, I don't... You know. Okay.
1:29:32Richard Portes, the most famous economist in Britain
1:29:35and a Professor at London Business School,
1:29:37was also commissioned by the Icelandic Chamber of Commerce
1:29:41to write a report which praised the Icelandic financial sector.
1:29:46The banks themselves are highly liquid.
1:29:48They've made money on the fall of the Icelandic krona.
1:29:51These are strong banks.
1:29:53Their market funding is assured for the coming year.
1:29:56- These are well-run banks. - Thank you.
1:29:58Like Mishkin, Portes' report didn't disclose his payment
1:30:02from the Icelandic Chamber of Commerce.
1:30:04Does Harvard require disclosures
1:30:07of financial conflict of interest?
1:30:10Not to my knowledge.
1:30:12Do you require people to report the compensation
1:30:15received from outside activities? No.
1:30:18Don't you think that's a problem?
1:30:20I don't see why.
1:30:21Martin Feldstein being on the board of AIG,
1:30:24Laura Tyson at Morgan Stanley,
1:30:26Larry Summers making $ 10 million consulting to financial services firms.
1:30:31Irrelevant?
1:30:32Hm. Yeah.
1:30:34Yeah. Basically irrelevant.
1:30:36You've written many articles about a wide array of subjects.
1:30:41You never saw fit to investigate the risks
1:30:44of unregulated credit default swaps?
1:30:47I never did.
1:30:49Same question with regard to executive compensation?
1:30:53The regulation of corporate governance?
1:30:55The effect of political contributions?
1:30:58I don't know that I would have anything to add to those discussions.
1:31:02I'm looking at your resume now.
1:31:04It looks to me as if the majority of your outside activities
1:31:09are consulting and directorship arrangements
1:31:12with the financial services industry.
1:31:15Would you not agree with that characterization?
1:31:17To my knowledge, I don't think my consulting clients are on my CV.
1:31:20So I wouldn't know. Who are your consulting clients?
1:31:23I don't believe I have to discuss that with you.
1:31:25Okay.
1:31:27In fact, you have a few more minutes and the interview's over.
1:31:32Do you consult for any financial services firms?
1:31:34The answer is I do. And?
1:31:37And... But I do not wanna go into details about that.
1:31:40Do they include other financial services firms?
1:31:43Possibly.
1:31:45You don't remember?
1:31:47This isn't a deposition, sir. I was polite enough to give you time.
1:31:50Foolishly, I now see. But you have three more minutes.
1:31:54Give it your best shot.
1:31:56In 2004, at the height of the bubble,
1:31:59Glenn Hubbard coauthored a widely read paper with William C. Dudley,
1:32:03the chief economist of Goldman Sachs.
1:32:06In the paper, Hubbard praised credit derivatives
1:32:08and the securitization chain,
1:32:10stating they had improved allocation of capital
1:32:13and were enhancing financial stability.
1:32:16He cited reduced volatility in the economy
1:32:18and stated that recessions had become less frequent and milder.
1:32:23Credit derivatives were protecting banks against losses
1:32:26and helping to distribute risk.
1:32:31A medical researcher writes an article, saying:
1:32:34"To treat this disease, you should prescribe this drug."
1:32:39Turns out doctor makes 80 percent of personal income
1:32:42from manufacture of this drug. Does not bother you?
1:32:45I think it's certainly important to disclose the, um...
1:32:50The, um...
1:32:55Well, I think that's also a little different
1:32:57from cases that we're talking about here because, um...
1:33:17So, what do you think this says about the economics discipline?
1:33:21Well, I mean, it has no relevance to anything, really.
1:33:25And, indeed, I think it's a part of the...
1:33:29It's an important part of the problem.
1:33:48The rising power of the U.S. Financial sector
1:33:51was part of a wider change in America.
1:33:55Since the 1980s, the United States has become a more unequal society,
1:34:00and it's economic dominance has declined.
1:34:03Companies like General Motors, Chrysler and U.S. Steel,
1:34:08formerly the core of the U.S. Economy,
1:34:11were poorly managed and falling behind their foreign competitors.
1:34:16And as countries like China opened their economies,
1:34:19American companies sent jobs overseas to save money.
1:34:26For many, many years, the 660 million people
1:34:29in the developed world were sheltered
1:34:32from all of this additional labor that existed on the planet.
1:34:36Suddenly the Bamboo Curtain and the Iron Curtain are lifted
1:34:39and you have 2.5 billion additional people.
1:34:42American factory workers were laid off by the tens of thousands.
1:34:47Our manufacturing base was destroyed, literally,
1:34:49over a few years.
1:34:51As manufacturing declined, other industries rose.
1:34:55The United States leads the world in information technology,
1:34:59where high-paying jobs are easy to find.
1:35:02But those jobs require an education.
1:35:05And for average Americans, college is increasingly out of reach.
1:35:10While universities like Harvard have billions of dollars in endowments,
1:35:15funding for public universities is shrinking and tuition is rising.
1:35:20Tuition for California's public universities
1:35:23rose from $650 in the 1970s to over $ 10,000 in 2010.
1:35:30The most important determinant of whether Americans go to college
1:35:35is whether they can find the money to pay for it.
1:35:38Meanwhile, American tax policy shifted to favor the wealthy.
1:35:43When I first came to office, I thought taxes were too high, and they were.
1:35:49The most dramatic change was a series of tax cuts
1:35:51designed by Glenn Hubbard, who was serving
1:35:54as President Bush's chief economic advisor.
1:35:58The Bush administration sharply reduced taxes on investment gains,
1:36:02stock dividends, and eliminated the estate tax.
1:36:05We had a comprehensive plan that when acted
1:36:09has left nearly $ 1.1 trillion in the hands of American workers,
1:36:13families, investors and small-business owners.
1:36:15Most benefits of these cuts went to the wealthiest 1 percent of Americans.
1:36:22And by the way, it was the cornerstone
1:36:24in many ways, of our economic recovery policy.
1:36:27Inequality of wealth in the United States
1:36:30is now higher than in any other developed country.
1:36:34American families responded to these changes in two ways:
1:36:38By working longer hours and by going into debt.
1:36:43As the middle class falls further and further behind,
1:36:46there is a political urge to respond
1:36:50by making it easier to get credit.
1:36:54You don't have to have a lousy home.
1:36:57The low-income home buyer can have just as nice a house as anybody else.
1:37:03American families borrowed to finance their homes, their cars,
1:37:07their healthcare, and their children's educations.
1:37:11People in the bottom 90 percent
1:37:15lost ground between 1980 and 2007.
1:37:19It all went to the top 1 percent.
1:37:26For the first time in history, average Americans
1:37:29have less education and are less prosperous than their parents.
1:37:36The era of greed and irresponsibility
1:37:39on Wall Street and in Washington
1:37:43has led us to a financial crisis
1:37:45as serious as any that we've faced since the Great Depression.
1:37:49When the financial crisis struck before the 2008 election,
1:37:53Barack Obama pointed to Wall Street greed
1:37:55and regulatory failures as examples of the need for change in America.
1:38:00A lack of oversight in Washington and on Wall Street
1:38:02is exactly what got us into this mess.
1:38:06After taking office, Obama spoke of the need to reform the industry.
1:38:11We want a risk regulator, increased capital requirements.
1:38:14We need a consumer financial protection agency.
1:38:17We need to change Wall Street's culture.
1:38:19But when finally enacted in mid-2010,
1:38:22the administration's financial reforms were weak.
1:38:25And in some critical areas, including the rating agencies,
1:38:29lobbying and compensation,
1:38:31nothing significant was even proposed.
1:38:34Addressing Obama and, quote, "regulatory reform,"
1:38:38my response, if it was one word, would be "ha."
1:38:43There's very little reform.
1:38:46How come?
1:38:48It's a Wall Street government.
1:38:53Obama chose Timothy Geithner as Treasury secretary.
1:38:57Geithner was president of the New York Federal Reserve
1:39:00during the crisis, and a key player in the decision
1:39:03to pay Goldman Sachs 100 cents on the dollar
1:39:06for it's bets against mortgages.
1:39:08When Tim Geithner was testifying
1:39:11to be confirmed as Treasury secretary
1:39:13he said, "I have never been a regulator."
1:39:16That said to me he did not understand his job
1:39:19as President of the New York Fed.
1:39:25The new President of the New York Fed is William C. Dudley,
1:39:29the former chief economist of Goldman Sachs
1:39:31whose paper with Glenn Hubbard praised derivatives.
1:39:35Geithner's chief of staff is Mark Patterson,
1:39:37a former lobbyist for Goldman.
1:39:39And one of the senior advisors is Lewis Sachs,
1:39:42who oversaw Tricadia, a company heavily involved
1:39:45in betting against the mortgage securities it was selling.
1:39:49To head the Commodity Futures Trading Commission,
1:39:52Obama picked Gary Gensler, a former Goldman Sachs executive
1:39:56who had helped ban the regulation of derivatives.
1:39:59To run the Securities and Exchange Commission,
1:40:02Obama picked Mary Schapiro, the former CEO of FINRA,
1:40:06the investment banking industry's self-regulation body.
1:40:10Obama's chief of staff, Rahm Emanuel,
1:40:12made $320,000 serving on the board of Freddie Mac.
1:40:17Both Martin Feldstein and Laura Tyson are members
1:40:20of Obama's Economic Recovery Advisory Board.
1:40:24And Obama's chief economic advisor is Larry Summers.
1:40:29The most senior economic advisors
1:40:31are the ones who were there, who built the structure.
1:40:34When it was clear that Summers and Geithner
1:40:37were going to play major roles as advisors,
1:40:41I knew this was going to be status quo.
1:40:44The Obama administration resisted regulation of bank compensation
1:40:48even as foreign leaders took action.
1:40:51The financial industry is a service industry.
1:40:53It should serve others before it serves itself.
1:40:57In September of 2009, Christine Lagarde
1:41:00and the finance ministers of Sweden, the Netherlands,
1:41:03Luxembourg, Italy, Spain and Germany
1:41:07called for the G20 nations, including the United States,
1:41:10to impose strict regulations on bank compensation.
1:41:14And in July of 2010,
1:41:16the European Parliament enacted those very regulations.
1:41:21The Obama administration had no response.
1:41:24Their view is it's a temporary blip and things will go back to normal.
1:41:28That is why I am reappointing him
1:41:32as chairman of the Federal Reserve. Thank you, Ben.
1:41:35In 2009, Barack Obama reappointed Ben Bernanke.
1:41:39Thank you, Mr. President.
1:41:42As of mid-2010, not a single senior financial executive
1:41:46had been criminally prosecuted, or even arrested.
1:41:49No special prosecutor had been appointed.
1:41:52Not a single firm had been prosecuted criminally
1:41:55for securities fraud or accounting fraud.
1:41:58The Obama administration has made no attempt
1:42:00to recover any compensation
1:42:02given to financial executives during the bubble.
1:42:07I certainly would think of criminal action
1:42:10against some of Countrywide's top leaders, like Mozilo.
1:42:14I'd certainly look at Bear Stearns, Goldman Sachs
1:42:17and Lehman Brothers and Merrill Lynch.
1:42:20For criminal prosecutions?
1:42:21Yes.
1:42:22In regard to... Yes. They'd be very hard to win,
1:42:26but I think they could do it if they got enough underlings to tell the truth.
1:42:32In an industry in which drug use, prostitution
1:42:35and billing of prostitutes as a business expense
1:42:38occur on an industrial scale,
1:42:40it wouldn't be hard to make people talk if you really wanted to.
1:42:45They gave me a plea bargain and I took it.
1:42:48They were not interested in my records.
1:42:50They weren't interested in anything.
1:42:52Not interested in your records?
1:42:54That's correct. Correct.
1:42:56There's a sensibility that you don't use people's personal vices
1:43:02in the context of Wall Street cases, necessarily, to get them to flip.
1:43:06Maybe after the cataclysms that we've been through, people will reevaluate.
1:43:11I'm not the one to pass judgment on that right now.
1:43:29You come to us today telling us, "We're sorry, we didn't mean it."
1:43:34We won't do it again. Trust us."
1:43:38Well, I have some people in my constituency
1:43:41that actually robbed some of your banks.
1:43:44And they say the same thing.
1:43:46They're sorry. They didn't mean it. They won't do it again.
1:43:49In 2009, as unemployment hit it's highest level in 17 years,
1:43:54Morgan Stanley paid it's employees over $ 14 billion,
1:43:58and Goldman Sachs paid out over $ 16 billion.
1:44:01In 2010, bonuses were even higher.
1:44:05Why should a financial engineer be paid
1:44:09four times to 100 times more than a real engineer?
1:44:15A real engineer build Bridges.
1:44:17A financial engineer build dreams.
1:44:21And, you know, when those dreams turn out to be nightmares,
1:44:25other people pay for it.
1:44:29For decades,
1:44:30the American financial system was stable and safe.
1:44:34But then something changed.
1:44:36The financial industry turned it's back on society,
1:44:40corrupted our political system
1:44:43and plunged the world economy into crisis.
1:44:48At enormous cost, we've avoided disaster
1:44:51and are recovering.
1:44:53But the men and institutions that caused the crisis are still in power,
1:44:57and that needs to change.
1:45:00They will tell us that we need them,
1:45:03and that what they do is too complicated for us to understand.
1:45:08They will tell us it won't happen again.
1:45:10They will spend billions fighting reform.
1:45:14It won't be easy.
1:45:17But some things are worth fighting for.

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