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Iceland is a stable democracy
with a high standard of living
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and until recently
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extremely low unemployment and government debt
4
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We had the complete infrastructure
of a modern society:
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clean energy, food production,
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fisheries with a quota system to manage them
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Good healthcare and good education,
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clean air, not much crime,
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It's good place for families to life
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We had almost end of history status
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But in 2000 Iceland government
began a broad policy of deregulation
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that would have disastrous consequences
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00:01:49,401 -- 00:01:54,000
first for the environment and then for the economy
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They started by allowing
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multinational corporations like Alcova
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to build giant aluminum smelting plants
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and exploit Iceland s natural geothermal
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and hydroelectric energy sources
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Many of the most beautiful areas in the highlands
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with the most spectacular colors are geothermal
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So nothing comes without consequences.
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At the same time the government privatized
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Iceland s three largest banks
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The result was one of the purest
experiments in financial deregulation
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ever conducted
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Finance took over and uh,
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more or less wrecked the place
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In a 5 year period these three tiny banks
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which had never operated outside of Iceland
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borrowed $120 billion
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ten times the size of Iceland s economy
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The bankers showered money on themselves
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each other and their friends
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00:03:38,001 -- 00:03:39,000
There was a massive bubble
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Stock prices went up by a factor of nine,
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house prices more than doubled
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00:03:47,500 -- 00:03:49,500
Iceland bubble gave rise to people
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like Jon Asgeir Johannesson
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He borrowed billions from the banks
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00:03:53,501 -- 00:03:56,300
to buy up high-end retail businesses in London
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00:03:56,301 -- 00:03:59,500
He also bought a pinstriped private jet,
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00:03:59,501 -- 00:04:01,300
a $40 million yacht
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00:04:01,301 -- 00:04:04,000
and a Manhattan penthouse
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00:04:04,001 -- 00:04:05,500
Newspapers always had headlines:
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00:04:05,501 -- 00:04:07,500
this millionaire bought this company
46
00:04:07,501 -- 00:04:13,000
in the UK or in Finland or in France or wherever
47
00:04:13,001 -- 00:04:15,500
Instead of saying
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this millionaire took a billion dollar loan
49
00:04:19,001 -- 00:04:21,400
to buy this company
50
00:04:21,401 -- 00:04:24,000
and he took it from your local bank
51
00:04:24,001 -- 00:04:26,000
The banks set up money market funds
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00:04:26,001 -- 00:04:28,600
and the banks advised deposit-holders to
53
00:04:28,601 -- 00:04:32,000
withdraw money
and put them in a money market funds
54
00:04:32,001 -- 00:04:34,000
The Ponzi scheme needed everything it could, huh?
55
00:04:34,001 -- 00:04:37,500
American accounting firms like KPMG
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00:04:37,501 -- 00:04:40,500
audited the Iceland s banks and investment firms
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and found nothing wrong
58
00:04:42,001 -- 00:04:44,500
And American credit rating agencies
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00:04:44,501 -- 00:04:46,000
said Iceland was wonderful
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00:04:46,001 -- 00:04:49,000
In February 2007
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00:04:49,001 -- 00:04:50,200
the rating agencies decided
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00:04:50,201 -- 00:04:52,001
to upgrade the banks
63
00:04:52,001 -- 00:04:55,000
to a highest possible rate AAA
64
00:04:55,001 -- 00:04:57,500
It went so far as the government here
65
00:04:57,501 -- 00:05:03,000
traveling with the bankers as a PR show
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00:05:05,000 -- 00:05:08,500
When Iceland s banks collapsed at the end of 2008
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unemployment tripled in 6 months
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00:05:14,000 -- 00:05:19,000
There is nobody unaffected in Iceland
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00:05:24,000 -- 00:05:28,500
- So a lot of people here lost their savings
- Yes that s the case
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00:05:28,501 -- 00:05:30,200
The government regulators
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00:05:30,201 -- 00:05:32,300
who should ve been protecting the citizens of Iceland
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00:05:32,301 -- 00:05:35,000
had done nothing
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00:05:35,001 -- 00:05:37,000
You have two lawyers
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00:05:37,001 -- 00:05:39,000
from the regulator company who're coming to a bank
75
00:05:39,001 -- 00:05:41,000
to talk about some issues
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00:05:41,001 -- 00:05:43,000
When they approach the bank
77
00:05:43,001 -- 00:05:49,000
they would see nineteen SUVs outside the bank
78
00:05:49,001 -- 00:05:50,000
so you enter the bank and you have
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00:05:50,001 -- 00:05:54,000
nineteen lawyers sitting in front of you
80
00:05:54,001 -- 00:05:56,500
that very well prepared,
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00:05:56,501 -- 00:05:59,700
ready to kill any argument you make
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00:05:59,701 -- 00:06:01,400
and then if you do very well
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00:06:01,401 -- 00:06:03,000
they offer you job
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00:06:03,001 -- 00:06:06,100
One third of Iceland s financial regulators
85
00:06:06,101 -- 00:06:09,000
went to work for the banks
86
00:06:09,001 -- 00:06:12,300
But this is a universal problem,
87
00:06:12,301 -- 00:06:16,500
in New York you have the same problem, right?
88
00:06:46,001 -- 00:06:49,000
What do you think of Wall Street incomes these days?
89
00:06:49,001 -- 00:06:50,500
Excessive
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00:06:53,000 -- 00:06:55,000
I've been told that it's extremely difficult
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00:06:55,001 -- 00:06:58,000
for the IMF to criticize United States
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00:06:58,001 -- 00:07:00,500
I wouldn't say that
93
00:07:06,000 -- 00:07:10,500
We deeply regret our breaches of US law
94
00:07:13,000 -- 00:07:15,000
They re amazed at
95
00:07:15,001 -- 00:07:18,000
how much cocaine these Wall Streeters can use
96
00:07:18,001 -- 00:07:21,000
and get up and go to work the next day
97
00:07:23,000 -- 00:07:27,000
I didn't know what credit default swaps are
98
00:07:27,001 -- 00:07:29,500
I'm little bit old fashioned
99
00:07:34,000 -- 00:07:37,000
Has Larry Summers ever expressed remorse?
100
00:07:37,001 -- 00:07:40,000
I don't hear confessions
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00:07:54,000 -- 00:07:55,700
The government just writing checks
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00:07:55,701 -- 00:07:59,000
that's plan A, that's plan B and that's plan C
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00:07:59,001 -- 00:08:02,000
Would you support legal controls on executive pay?
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00:08:02,001 -- 00:08:05,000
I would not
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00:08:08,001 -- 00:08:10,000
Are you comfortable with
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00:08:10,001 -- 00:08:12,500
level of compensation in financial service industry?
107
00:08:12,501 -- 00:08:14,500
If they ve earned it, then yes, I am
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00:08:14,501 -- 00:08:17,000
- Do you think they ve earned it?
- I think they ve earned it.
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00:08:19,000 -- 00:08:22,000
And so you help these people blow the world up?
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00:08:22,001 -- 00:08:24,000
You could say that
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00:08:33,000 -- 00:08:37,000
They were having massive private gains at public loss
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00:08:45,000 -- 00:08:46,700
When you start thinking
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00:08:46,701 -- 00:08:48,700
you can create something out of nothing
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00:08:48,701 -- 00:08:51,000
it's very difficult to resist
115
00:09:04,000 -- 00:09:06,500
I'm concerned that a lot of people
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00:09:06,501 -- 00:09:08,000
want go back to the old way
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00:09:08,001 -- 00:09:11,500
the way they were operating prior to the crisis
118
00:09:21,000 -- 00:09:24,400
I was getting a lot of anonymous e-mails from bankers
119
00:09:24,401 -- 00:09:26,400
saying "You can't quote me,
120
00:09:26,401 -- 00:09:28,400
but I'm really concerned"
121
00:09:33,500 -- 00:09:35,000
Why do you think there isn't
122
00:09:35,001 -- 00:09:38,500
a more systematic investigation being undertaken?
123
00:09:38,501 -- 00:09:41,000
Because then you will find the culprits
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00:09:44,001 -- 00:09:45,500
Do you think that Columbia Business School
125
00:09:45,501 -- 00:09:49,000
has any significant conflict of interest problem?
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00:09:49,000 -- 00:09:51,000
Don't see that we do
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00:10:00,000 -- 00:10:02,000
The regulators didn't do their job
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00:10:02,001 -- 00:10:04,200
they had the power to do
129
00:10:04,201 -- 00:10:06,000
every case that I made
when I was state attorney general
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00:10:06,001 -- 00:10:08,000
they just didn't want it
131
00:10:25,500 -- 00:10:27,800
Over the weekend, Lehman Brothers
one of the most venerable
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00:10:27,801 -- 00:10:30,800
and biggest investment banks,
was forced to declare itself bankrupt
133
00:10:30,801 -- 00:10:33,500
another, Merrill Lynch,
was forced to sell itself today
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00:10:33,501 -- 00:10:37,000
Crisis talks are underway...
World financial markets are way down today
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00:10:37,001 -- 00:10:41,000
dramatic developments
for two Wall Street giants....
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00:10:46,000 -- 00:10:48,800
In September 2008
137
00:10:48,801 -- 00:10:52,000
the bankruptcy of US investment bank
Lehman Brothers
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00:10:52,001 -- 00:10:53,500
and the collapse of the world's
139
00:10:53,501 -- 00:10:56,000
largest insurance company AIG
140
00:10:56,001 -- 00:10:58,500
triggered a global financial crisis
141
00:10:58,501 -- 00:10:59,700
...fears gripped markets overnight
142
00:10:59,701 -- 00:11:01,300
with Asian stocks slammed by...
143
00:11:01,301 -- 00:11:02,600
Stocks fell off a cliff
144
00:11:02,601 -- 00:11:05,400
the largest single point drop in history
145
00:11:05,401 -- 00:11:07,600
Share prices continued to tumble in
146
00:11:07,601 -- 00:11:11,000
the aftermath of the Lehman collapse
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00:11:12,000 -- 00:11:14,500
The result was a global recession
148
00:11:14,501 -- 00:11:17,500
which costs the world tens of trillions of dollars
149
00:11:17,501 -- 00:11:20,000
rendered 30 million people unemployed
150
00:11:20,001 -- 00:11:23,500
and doubled the national debt of the US
151
00:11:23,501 -- 00:11:25,500
If you looked at the costs of it:
152
00:11:25,501 -- 00:11:28,500
Destruction of equity wealth, of housing wealth
153
00:11:28,501 -- 00:11:31,000
Destruction of income, of jobs.
154
00:11:31,001 -- 00:11:33,500
15 million people globally
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00:11:33,501 -- 00:11:37,999
could end up below the poverty line again
156
00:11:38,000 -- 00:11:42,000
This is just a hugely, hugely expensive crisis
157
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This crisis was not an accident
158
00:11:45,001 -- 00:11:48,500
It was caused by an out of control industry
159
00:11:48,501 -- 00:11:52,000
Since the 1980s the rise of US financial sector
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00:11:52,001 -- 00:11:53,500
has led to a series
161
00:11:53,501 -- 00:11:57,000
of increasingly severe financial crisis
162
00:11:57,001 -- 00:12:00,000
Each crisis has caused more damage
163
00:12:00,001 -- 00:12:04,000
while the industry has made more and more money
164
00:12:05,000 -- 00:12:09,000
165
00:12:11,001 -- 00:12:14,200
After the Great Depression, the United States
166
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have 40 years of economic growth
167
00:12:16,501 -- 00:12:19,002
without a single financial crisis
168
00:12:19,003 -- 00:12:22,000
the financial industry was tightly regulated
169
00:12:22,004 -- 00:12:24,400
most regular banks were local businesses
170
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and they were prohibited from speculating
171
00:12:26,501 -- 00:12:29,000
with depositors savings
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00:12:29,001 -- 00:12:30,000
Investment banks
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00:12:30,001 -- 00:12:32,400
which handle stock and bond trading
174
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were small private partnerships
175
00:12:35,501 -- 00:12:37,400
In the traditional investment banking
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partnership model
177
00:12:39,301 -- 00:12:41,001
the partners put the money up
178
00:12:41,002 -- 00:12:43,000
and obviously the partners
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watch that money very carefully
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00:12:45,001 -- 00:12:46,700
They wanted to live well
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00:12:46,701 -- 00:12:48,000
but they didn't want to
182
00:12:48,001 -- 00:12:49,500
bet the ranch on anything
183
00:12:49,501 -- 00:12:53,000
Paul Volcker served on the treasury department
184
00:12:53,001 -- 00:12:54,300
and was chairman of the Federal Reserve
185
00:12:54,301 -- 00:12:57,800
from 1979 - 1987
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00:12:57,801 -- 00:12:59,500
Before going into government,
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he was a financial economist
188
00:13:01,301 -- 00:13:03,000
at Chase Manhattan Bank
189
00:13:03,001 -- 00:13:08,001
When I left Chase to go in Treasury in 1969
190
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I think my income was in the neighbourhood
191
00:13:10,301 -- 00:13:13,400
of $45000 per year
192
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Morgan Stanley in 1972
193
00:13:16,501 -- 00:13:21,500
had approximately 110 total personnel
194
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One office and capital of $12 000 000
195
00:13:26,014 -- 00:13:31,000
Now Morgan Stanley has 50 000 workers
196
00:13:31,001 -- 00:13:36,000
and has capital of several billion
197
00:13:36,001 -- 00:13:38,000
and has offices all over the world
198
00:13:38,001 -- 00:13:41,015
In the 1980s the financial industry exploded
199
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The investment banks went public
200
00:13:43,501 -- 00:13:47,000
giving them huge amount of stock holding money
201
00:13:47,001 -- 00:13:51,500
People on Wall Street started getting rich
202
00:13:51,501 -- 00:13:54,500
I had a friend who was a bond trader
203
00:13:54,501 -- 00:13:59,000
at Merill Lynch in 1970s
204
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He had a job as a train conductor at night
205
00:14:03,001 -- 00:14:04,000
Because he had 3 kids
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00:14:04,001 -- 00:14:06,500
and couldn't support them
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00:14:06,501 -- 00:14:08,000
on what a bond trader made
208
00:14:08,001 -- 00:14:11,400
By 1986 he was making millions of dollars
209
00:14:11,401 -- 00:14:15,000
and thought it was because he was smart
210
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The highest order of business before the nation
211
00:14:17,601 -- 00:14:20,600
is to restore our economic prosperity
212
00:14:20,601 -- 00:14:23,300
In 1981 president Ronald Reagan
213
00:14:23,301 -- 00:14:25,000
choose as his Treasury Secretary
214
00:14:25,001 -- 00:14:27,500
the CEO of investment bank Merrill Lynch
215
00:14:27,501 -- 00:14:29,000
- Donald Regan
216
00:14:29,001 -- 00:14:32,701
Wall Street and the President do see eye to eye
217
00:14:32,702 -- 00:14:34,700
I've talked to many leaders of Wall Street
218
00:14:34,701 -- 00:14:38,200
they all say, we'll be behind the President on 100%
219
00:14:38,201 -- 00:14:39,500
The Reagan administration
220
00:14:39,501 -- 00:14:42,000
supported by economists and financial lobbyist
221
00:14:42,001 -- 00:14:47,000
started a 30 year period
of financial deregulations
222
00:14:47,500 -- 00:14:50,200
In 1982 the Reagan administration
223
00:14:50,201 -- 00:14:53,000
deregulated savings and loan companies
224
00:14:53,001 -- 00:14:54,500
allowing them to make risky investments
225
00:14:54,501 -- 00:14:57,000
with their depositors' money
226
00:14:57,000 -- 00:14:58,600
By the end of the decade
227
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hundreds of saving and loan companies had failed
228
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This crises cost tax payers $124 billion
229
00:15:06,001 -- 00:15:09,000
and cost many people their life savings
230
00:15:09,001 -- 00:15:12,003
It may be the biggest bank heist in our history
231
00:15:12,004 -- 00:15:14,000
Thousands of saving and loan executives
232
00:15:14,001 -- 00:15:16,900
went to jail for looting their companies
233
00:15:16,901 -- 00:15:18,500
One of the most extreme cases
234
00:15:18,501 -- 00:15:20,500
was Charles Keating
235
00:15:20,501 -- 00:15:23,500
In 1985 when federal regulators
236
00:15:23,501 -- 00:15:25,500
began investigating him
237
00:15:25,501 -- 00:15:27,000
Keating haired an economist
238
00:15:27,001 -- 00:15:29,500
named Alan Greenspan
239
00:15:29,501 -- 00:15:30,800
In this letter to regulators
240
00:15:30,801 -- 00:15:32,500
Greenspan praised Keating's
241
00:15:32,501 -- 00:15:35,000
sound business plan and expertise
242
00:15:35,001 -- 00:15:36,500
and said he saw no risk in allowing
243
00:15:36,501 -- 00:15:40,000
Keating to invest his customers money
244
00:15:40,001 -- 00:15:43,010
Keating reportedly paid Greenspan $40 000
245
00:15:46,500 -- 00:15:49,011
Charles Keating went
to prison shortly afterwards
246
00:15:49,012 -- 00:15:51,500
As for Alan Greenspan
247
00:15:51,501 -- 00:15:53,000
President Reagan appointed him
248
00:15:53,001 -- 00:15:55,000
chairman of America's central bank
249
00:15:55,001 -- 00:15:56,999
- The Federal Reserve
250
00:15:57,015 -- 00:15:58,500
Greenspan was reappointed
251
00:15:58,501 -- 00:16:03,000
by presidents Clinton and George W. Bush
252
00:16:03,001 -- 00:16:05,000
During the Clinton administration
253
00:16:05,001 -- 00:16:07,800
deregulation continued under Greenspan
254
00:16:07,801 -- 00:16:10,200
And Treasury Secretary Robert Rubin,
255
00:16:10,201 -- 00:16:12,000
the former CEO of the investment bank
256
00:16:12,001 -- 00:16:13,800
Goldman Sachs
257
00:16:13,801 -- 00:16:17,000
and Larry Summers - a Harvard economics professor
258
00:16:17,001 -- 00:16:21,000
The financial sector of Wall Street being powerful,
259
00:16:21,001 -- 00:16:24,000
having lobbyists, having lots of money
260
00:16:24,002 -- 00:16:26,502
step by step captured the political system
261
00:16:26,503 -- 00:16:29,503
both on the Democratic and the Republican side.
262
00:16:30,000 -- 00:16:32,400
By the late 1990s
263
00:16:32,401 -- 00:16:34,300
the financial sector had consolidated
264
00:16:34,301 -- 00:16:36,000
into few gigantic firms
265
00:16:36,001 -- 00:16:37,700
Each of them so large
266
00:16:37,701 -- 00:16:40,500
that their failure can threaten the whole system
267
00:16:40,501 -- 00:16:42,700
And the Clinton administration
268
00:16:42,701 -- 00:16:45,000
helped them grow even larger
269
00:16:45,001 -- 00:16:48,000
In 1999 Citicorp and Travelers
270
00:16:48,001 -- 00:16:50,300
merged to form Citigroup
271
00:16:50,301 -- 00:16:52,000
- the largest financial services company
272
00:16:52,001 -- 00:16:53,500
in the world
273
00:16:53,501 -- 00:16:56,000
The merger violated the Glass-Steagal act
274
00:16:56,001 -- 00:16:58,000
- a law passed after the Great Depression
275
00:16:58,001 -- 00:17:00,800
which prevented banks with consumer deposits
276
00:17:00,801 -- 00:17:04,000
from engaging in risky investment banking activities
277
00:17:04,001 -- 00:17:07,801
It was illegal to acquire Travelers
278
00:17:07,802 -- 00:17:09,000
Greenspan said nothing
279
00:17:09,001 -- 00:17:11,200
The Federal Reserve gave him an exemption
280
00:17:11,201 -- 00:17:15,000
for a year and then they got the law passed
281
00:17:15,001 -- 00:17:18,000
In 1999 at the urging of Summers and Rubin
282
00:17:18,001 -- 00:17:21,000
Congress passed the "Gramm-Leach-Bliley Act"
283
00:17:21,001 -- 00:17:24,700
Known to some as the Citigroup Relief Act
284
00:17:24,701 -- 00:17:27,000
It overturned "Glass-Steagal"
285
00:17:27,001 -- 00:17:30,000
and cleared the way for future mergers
286
00:17:37,901 -- 00:17:39,400
Why do you have big banks
287
00:17:39,401 -- 00:17:41,300
- because banks like monopoly power
288
00:17:41,301 -- 00:17:43,900
because banks like lobbying power,
289
00:17:43,901 -- 00:17:48,500
because banks know that when they're too big
290
00:17:48,501 -- 00:17:50,000
they will be bailed
291
00:17:50,000 -- 00:17:52,600
Markets are inherently unstable
292
00:17:52,601 -- 00:17:55,500
or at least potentially unstable
293
00:17:55,501 -- 00:17:59,000
and appropriate metaphor is the oil tankers
294
00:17:59,001 -- 00:18:02,000
they're very big and therefore
295
00:18:02,001 -- 00:18:04,000
you have to put in compartments
296
00:18:04,001 -- 00:18:07,500
to prevent the sloshing around of oil
297
00:18:07,501 -- 00:18:10,000
from capsizing the boat
298
00:18:10,001 -- 00:18:13,000
the design of the boat has to take that into account
299
00:18:13,001 -- 00:18:16,200
and after the Depression
300
00:18:16,201 -- 00:18:19,000
the regulation actually introduced
301
00:18:19,001 -- 00:18:22,000
these very watertight compartments
302
00:18:22,001 -- 00:18:25,000
and deregulation has led to
303
00:18:25,001 -- 00:18:29,000
the end of compartmentalization
304
00:18:29,000 -- 00:18:31,500
The next crisis came at the end of the 90s
305
00:18:31,501 -- 00:18:36,000
The investment banks fuel the
massive bubble in internet stocks
306
00:18:36,001 -- 00:18:38,500
Which was followed by a crash in 2001
307
00:18:38,501 -- 00:18:42,000
that caused $5 trillion dollars in investment losses
308
00:18:42,001 -- 00:18:44,500
The Securities and Exchange Commission
309
00:18:44,501 -- 00:18:46,000
- the federal agency which had been created
310
00:18:46,001 -- 00:18:49,000
during the depression to regulate investment banking
311
00:18:49,001 -- 00:18:51,000
had done nothing
312
00:18:51,001 -- 00:18:53,000
In the absence of meaningful federal action
313
00:18:53,001 -- 00:18:55,200
and there has been none
314
00:18:55,201 -- 00:18:57,500
and given the clear failure of self regulation
315
00:18:57,501 -- 00:19:00,000
It is become necessary for others to step in
316
00:19:00,001 -- 00:19:02,600
and adopt the protections needed
317
00:19:02,601 -- 00:19:04,700
Eliot Spitzers investigations revealed that
318
00:19:04,601 -- 00:19:06,200
the investments banks had promoted
319
00:19:06,201 -- 00:19:08,500
internet companies they knew would fail
320
00:19:08,501 -- 00:19:10,500
Stock analysts were being paid
321
00:19:10,501 -- 00:19:13,000
based on how much business they brought in
322
00:19:13,001 -- 00:19:14,700
and what they sad publicly
323
00:19:14,701 -- 00:19:17,700
was quite different from what they sad privately
324
00:19:17,701 -- 00:19:20,200
Infospace given the highest possible rating
325
00:19:20,201 -- 00:19:23,000
dismissed by the analysts as the "piece of junk"
326
00:19:23,001 -- 00:19:25,000
Excite - also highly rated
327
00:19:25,001 -- 00:19:27,000
called "such a piece of crap"
328
00:19:27,001 -- 00:19:30,300
The defense that was proffered
329
00:19:30,301 -- 00:19:34,000
by many of the investment banks
330
00:19:34,001 -- 00:19:37,500
was not, you're wrong, it was...
331
00:19:37,501 -- 00:19:40,000
Everybody s doing it and everybody s know it's going on
332
00:19:40,001 -- 00:19:43,001
and therefore nobody should rely on these analysts anyway
333
00:19:43,002 -- 00:19:46,500
In December 2002 ten investment banks
334
00:19:46,501 -- 00:19:49,500
settle the case for a total of $1.4 billion
335
00:19:49,501 -- 00:19:52,403
and promised to change their ways
336
00:19:52,600 -- 00:19:55,000
Scott Talbott is the chief lobbyist
337
00:19:55,001 -- 00:19:57,000
for the Financial Services Roundtable
338
00:19:57,001 -- 00:19:59,000
one of the most powerful groups in Washington
339
00:19:59,001 -- 00:20:01,000
which represents nearly all of
340
00:20:01,001 -- 00:20:03,000
the world largest financial companies
341
00:20:03,001 -- 00:20:05,700
Are you comfortable with the fact
342
00:20:05,701 -- 00:20:07,700
that several of your member companies
343
00:20:07,701 -- 00:20:11,000
have engaged in large scale criminal activity?
344
00:20:11,001 -- 00:20:13,000
- You'll have to be specific
- Ok...
345
00:20:13,001 -- 00:20:14,500
And first of all criminal activity
346
00:20:14,501 -- 00:20:18,000
shouldn't be accepted, period
347
00:20:25,500 -- 00:20:27,400
Since deregulation began
348
00:20:27,401 -- 00:20:28,800
the world's biggest financial firms
349
00:20:28,801 -- 00:20:30,500
have been caught laundering money,
350
00:20:30,501 -- 00:20:34,000
defrauding customers and cooking their books
351
00:20:34,001 -- 00:20:36,500
again, and again, and again
352
00:20:47,002 -- 00:20:48,700
Credit Suisse helped funnel money
353
00:20:48,701 -- 00:20:51,002
for Iran's nuclear program
354
00:20:51,003 -- 00:20:53,500
and for the Aerospace Industries Organization of Iran
355
00:20:53,501 -- 00:20:55,000
which built ballistic missiles
356
00:20:55,001 -- 00:20:57,000
Any information that would identify it
357
00:20:57,001 -- 00:21:00,000
as Iranian would be removed
358
00:21:00,001 -- 00:21:03,000
The bank was fined $536 million
359
00:21:03,001 -- 00:21:05,500
Citi bank helped funnel $100 million
360
00:21:05,501 -- 00:21:07,500
of drug money out of Mexico
361
00:21:07,501 -- 00:21:09,700
Did you comment that she should
362
00:21:09,701 -- 00:21:13,000
"loose any documents connected with the account"
363
00:21:13,001 -- 00:21:14,500
I said that in a kidding manner
364
00:21:14,501 -- 00:21:16,400
it was at the early stages of this
365
00:21:16,401 -- 00:21:18,999
I did not mean it seriously
366
00:21:20,003 -- 00:21:23,000
Between 1998 and 2003
367
00:21:23,001 -- 00:21:25,000
Fannie Mae overstated its earnings
368
00:21:25,001 -- 00:21:26,800
by more than $10 billion
369
00:21:26,801 -- 00:21:29,000
These accounting standards are highly complex
370
00:21:29,001 -- 00:21:30,500
And require determinations
371
00:21:30,501 -- 00:21:33,000
over which experts often disagree
372
00:21:33,001 -- 00:21:35,000
CEO Franklin Raines
373
00:21:35,001 -- 00:21:37,600
who used to be President Clinton's budget director
374
00:21:37,601 -- 00:21:41,500
received over $52 million in bonuses
375
00:21:44,800 -- 00:21:46,200
When UBS was caught
376
00:21:46,201 -- 00:21:49,000
helping wealthy Americans evade taxes
377
00:21:49,001 -- 00:21:52,000
they refused to cooperate with US government
378
00:21:52,001 -- 00:21:54,001
Would you be willing to supply the names?
379
00:21:54,002 -- 00:21:56,000
- If there is a treaty framework...
380
00:21:56,001 -- 00:21:57,500
-No treaty framework,
381
00:21:57,501 -- 00:22:00,000
you've agreed you participated in a fraud
382
00:22:00,001 -- 00:22:02,003
hm...
383
00:22:11,004 -- 00:22:14,004
But while the company is faced
unprecedented fines
384
00:22:14,005 -- 00:22:15,500
the investment firms do not
385
00:22:15,501 -- 00:22:17,600
have to admit any wrong doing
386
00:22:17,601 -- 00:22:19,000
When you this large and you are dealing
387
00:22:19,001 -- 00:22:21,000
with this many products and this many customers
388
00:22:21,001 -- 00:22:22,500
mistakes happen
389
00:22:22,501 -- 00:22:23,500
The financial services industry
390
00:22:23,501 -- 00:22:27,500
seems to have level of criminality that is,
391
00:22:27,501 -- 00:22:29,500
you know, somewhat distinctive.
392
00:22:29,501 -- 00:22:32,500
When were the last time when
393
00:22:32,501 -- 00:22:37,000
CISCO or Intel or Google or Apple or IBM you know...
394
00:22:37,001 -- 00:22:38,500
I totally agree with you
395
00:22:38,501 -- 00:22:40,000
about high-tech versus financial services
396
00:22:40,001 -- 00:22:44,000
but high-tech is fundamentally creative business
397
00:22:44,001 -- 00:22:47,000
where the value generation and the income derives
398
00:22:47,001 -- 00:22:49,999
from actually create something new and different
399
00:22:50,000 -- 00:22:52,000
Beginning at 1990s
400
00:22:52,001 -- 00:22:55,001
deregulations and advances in technology
401
00:22:55,002 -- 00:22:57,500
led to an explosion of complex financial products
402
00:22:57,501 -- 00:22:59,000
called derivatives
403
00:22:59,001 -- 00:23:01,000
Economists and bankers
404
00:23:01,001 -- 00:23:03,000
claimed they made market safer
405
00:23:03,001 -- 00:23:05,300
But instead they made them unstable
406
00:23:06,000 -- 00:23:08,700
Since the end of Cold War
407
00:23:08,701 -- 00:23:12,000
a lot of former physicist and mathematicians
408
00:23:12,002 -- 00:23:14,700
decided to apply their skills
409
00:23:14,701 -- 00:23:17,500
not on Cold War technology
410
00:23:17,501 -- 00:23:19,500
but on financial markets
411
00:23:19,501 -- 00:23:22,200
And together with investment
bankers and hedge funds...
412
00:23:22,201 -- 00:23:24,300
- Creating different weapons?
- Absolutely
413
00:23:24,301 -- 00:23:25,500
As Warren Buffett said:
414
00:23:25,501 -- 00:23:27,500
"Weapons of mass destruction"
415
00:23:27,501 -- 00:23:31,000
Regulators, politicians and business people
416
00:23:31,001 -- 00:23:32,500
did not take seriously
417
00:23:32,501 -- 00:23:35,000
the threat of financial innovation
418
00:23:35,001 -- 00:23:38,000
on the stability of the financial system.
419
00:23:38,001 -- 00:23:40,000
Using derivatives, bankers
420
00:23:40,001 -- 00:23:42,000
could gamble on virtually anything
421
00:23:42,001 -- 00:23:45,001
They could bet on rise or fall of oil prices
422
00:23:45,002 -- 00:23:48,500
the bankruptcy of a company, even the whether
423
00:23:49,000 -- 00:23:52,000
By the late 1990s derivatives
424
00:23:52,001 -- 00:23:56,000
were a $15 trillion unregulated market
425
00:23:56,001 -- 00:24:00,000
In 1998 someone tried to regulate them
426
00:24:00,001 -- 00:24:05,000
Brooksley Born graduated first in her
class at Stanford Law School
427
00:24:05,001 -- 00:24:06,300
and was the first woman
428
00:24:06,301 -- 00:24:09,000
to edit a major law review
429
00:24:09,001 -- 00:24:11,500
After running derivatives practice at Arnold & Porter
430
00:24:11,501 -- 00:24:14,000
Born was appointed by president Clinton
431
00:24:14,001 -- 00:24:16,800
to chair the Commodity Futures Trading Commission
432
00:24:16,801 -- 00:24:19,500
which oversaw the derivatives' market
433
00:24:19,501 -- 00:24:22,000
Brooksley Born ask me if
434
00:24:22,001 -- 00:24:24,000
I would come work with her
435
00:24:24,001 -- 00:24:27,500
We decided that this was a serious,
436
00:24:27,501 -- 00:24:31,000
potentially destabilizing market
437
00:24:31,001 -- 00:24:34,000
In May of 1998 the CFTC
438
00:24:34,001 -- 00:24:36,500
issued a proposal to regulate derivatives
439
00:24:36,501 -- 00:24:39,999
Clinton's Treasury department
had an immediate response
440
00:24:40,000 -- 00:24:45,000
I happened to go into Brooksley's office
441
00:24:45,001 -- 00:24:49,000
and she was just putting down the receiver of her telephone
442
00:24:49,001 -- 00:24:53,000
And the blood had drained from her face
443
00:24:53,001 -- 00:24:55,000
And she looked at me and said:
444
00:24:55,001 -- 00:25:00,000
"That was Larry Summers.
He had 13 bankers in his office"
445
00:25:00,001 -- 00:25:04,000
He conveyed it in a very bullying fashion
446
00:25:04,001 -- 00:25:07,800
Sort of directing her to stop.
447
00:25:07,800 -- 00:25:09,400
The banks were now heavily reliant
448
00:25:09,401 -- 00:25:11,000
for earnings on these types of activities
449
00:25:11,001 -- 00:25:14,000
and that led to a titanic battle
450
00:25:14,001 -- 00:25:18,000
to prevent these sets of instruments from being regulated
451
00:25:18,001 -- 00:25:20,001
Shortly after the phone call from Summers
452
00:25:20,002 -- 00:25:25,000
Greenspan, Rubin and SEC chairman Arthur Levitt
453
00:25:25,001 -- 00:25:27,500
issued a joint statement condemning Born
454
00:25:27,501 -- 00:25:29,000
and recommended legislation
455
00:25:29,001 -- 00:25:32,000
to keep derivatives unregulated
456
00:25:32,001 -- 00:25:35,200
Regulations of derivatives transactions
457
00:25:35,201 -- 00:25:39,000
that are privately negotiated by professionals
458
00:25:39,000 -- 00:25:41,000
is unnecessary
459
00:25:41,001 -- 00:25:43,000
She was overruled, unfortunately
460
00:25:43,001 -- 00:25:45,000
first by the Clinton administration
461
00:25:45,001 -- 00:25:47,000
and then by the Congress
462
00:25:47,001 -- 00:25:50,000
in 2000 Senator Phil Gramm took a major role
463
00:25:50,001 -- 00:25:51,800
in getting a bill passed
464
00:25:51,801 -- 00:25:55,000
that pretty much exempted derivatives from regulation
465
00:25:55,001 -- 00:25:58,000
They are unifying markets they are reducing regulatory burden
466
00:25:58,001 -- 00:26:01,000
I believe that we need to do it
467
00:26:01,001 -- 00:26:04,001
After leaving the Senate, Phil Gramm became Vice-Chairman of UBS.
468
00:26:04,002 -- 00:26:08,000
Since 1993, his wife Wendy had served on the board of Enron.
469
00:26:08,001 -- 00:26:11,000
But it s our very great hope
470
00:26:11,001 -- 00:26:17,000
that it would be possible to move this year on legislation in a suitable way
471
00:26:17,001 -- 00:26:24,000
goes to create legal certainty for OTC derivatives
472
00:26:24,001 -- 00:26:30,000
Larry Summers later made $20 million as a consultant
to a hedge fund that relied heavily on derivatives.
473
00:26:30,001 -- 00:26:34,000
I wished to associate myself with all of
474
00:26:34,001 -- 00:26:37,000
the remarks of secretary Summers
475
00:26:37,001 -- 00:26:39,500
In December 2000 Congress passed
476
00:26:39,501 -- 00:26:42,000
The Commodity Futures Modernization Act
477
00:26:42,001 -- 00:26:45,000
Written with a help of financial industry lobbyists
478
00:26:45,001 -- 00:26:49,700
it banned the regulation of derivatives
479
00:26:49,701 -- 00:26:52,000
Once that's was done it was off to the races
480
00:26:52,001 -- 00:26:56,000
And use of derivatives and financial innovation
481
00:26:56,001 -- 00:26:59,500
exploded dramatically after 2000
482
00:26:59,501 -- 00:27:02,000
-So help me God
-So help me God
483
00:27:02,001 -- 00:27:05,400
By the time G.W. Bush took office in 2001
484
00:27:05,401 -- 00:27:08,500
The US financial sector was vastly more profitable,
485
00:27:08,501 -- 00:27:13,000
concentrated and powerful than ever before
486
00:27:13,001 -- 00:27:16,500
Dominating this industry were 5 investment banks
487
00:27:16,501 -- 00:27:19,500
Two financial conglomerates
488
00:27:19,501 -- 00:27:22,500
Three securities insurance companies
489
00:27:22,501 -- 00:27:25,000
and three rating agencies
490
00:27:25,001 -- 00:27:26,500
And linking them all together
491
00:27:26,501 -- 00:27:30,000
was a securitization food chain, a new system
492
00:27:30,001 -- 00:27:33,500
which connected trillions of dollars,
mortgages and other loans
493
00:27:33,501 -- 00:27:35,501
with investors all over the world
494
00:27:36,000 -- 00:27:39,000
30 years ago if you wanted get a loan for a home
495
00:27:39,001 -- 00:27:40,700
the person lending you money
496
00:27:40,701 -- 00:27:43,000
expecting you to pay him or her back
497
00:27:43,001 -- 00:27:45,301
you got a loan from a lender
who wanted you to pay him back
498
00:27:45,302 -- 00:27:48,302
we've since developed securitization whereby
499
00:27:48,303 -- 00:27:50,000
people who made the loan
500
00:27:50,001 -- 00:27:53,000
are no longer at risk if there's a failure to repay
501
00:27:53,001 -- 00:27:55,400
In the old system when a home owner
502
00:27:55,401 -- 00:27:57,200
paid their mortgage every months
503
00:27:57,201 -- 00:28:00,000
the money went to their local lender
504
00:28:00,001 -- 00:28:02,200
And since mortgages took decades to repay
505
00:28:02,201 -- 00:28:04,201
lenders were careful
506
00:28:04,202 -- 00:28:09,202
In the new system, lenders sold
the mortgages to investment banks
507
00:28:09,203 -- 00:28:13,200
The investment banks combined
thousands of mortgages and other loans
508
00:28:13,201 -- 00:28:17,000
including car loans, student loans and credit card debt
509
00:28:17,001 -- 00:28:19,600
to create complex derivatives
510
00:28:19,601 -- 00:28:24,000
called collateralized debt obligation, or CDO
511
00:28:24,001 -- 00:28:29,000
the investment banks then sold the CDOs to investors
512
00:28:29,001 -- 00:28:31,000
Now when home owners paid their mortgages
513
00:28:31,001 -- 00:28:34,000
the money went to investors all over the world
514
00:28:34,001 -- 00:28:39,000
The investment banks paid rating agencies to evaluate the CDOs
515
00:28:39,001 -- 00:28:42,000
and many of them were given an AAA rating
516
00:28:42,001 -- 00:28:45,000
which is highest possible investment grade
517
00:28:45,001 -- 00:28:48,000
This made CDOs popular with retirement funds
518
00:28:48,001 -- 00:28:52,000
which can only purchase highly rated securities
519
00:28:52,800 -- 00:28:56,000
This system was a ticking time bomb
520
00:28:56,001 -- 00:29:00,000
Lenders didn't care anymore
about whether a borrower could repay
521
00:29:00,001 -- 00:29:01,000
So they started making riskier loans
522
00:29:01,001 -- 00:29:05,000
The investment banks didn't care either
523
00:29:05,001 -- 00:29:09,600
The more CDOs they sold the higher their profits
524
00:29:09,601 -- 00:29:13,000
and the rating agencies which were paid by the investment banks
525
00:29:13,001 -- 00:29:18,001
had no liability if their ratings of CDOs proved wrong
526
00:29:18,002 -- 00:29:20,500
You weren't going to be on the hook
527
00:29:20,501 -- 00:29:23,000
and there weren't regulatory constraints
528
00:29:23,001 -- 00:29:26,000
so it was a green light
to just pump out more and more loans
529
00:29:26,001 -- 00:29:30,000
Between 2000 and 2003
530
00:29:30,001 -- 00:29:32,300
the number of mortgage loans made each year
531
00:29:32,301 -- 00:29:35,000
nearly quadrupled
532
00:29:35,001 -- 00:29:38,000
Everybody in this securitization food chain
533
00:29:38,001 -- 00:29:40,000
from the very beginning until the end
534
00:29:40,001 -- 00:29:43,000
didn't care about the quality of the mortgage
535
00:29:43,001 -- 00:29:45,500
they cared about maximizing their volume
536
00:29:45,501 -- 00:29:48,000
and getting a fee out of it
537
00:29:48,001 -- 00:29:50,500
In the early 2000s there was a huge increase
538
00:29:50,501 -- 00:29:54,000
in the riskiest loans called subprime
539
00:29:54,001 -- 00:29:56,300
but when thousands of subprime loans
540
00:29:56,301 -- 00:29:59,000
were combined to create CDOs
541
00:29:59,001 -- 00:30:03,001
Many of them still received AAA ratings
542
00:30:04,000 -- 00:30:09,000
-Now it wouldn't have been possible
to create derivative products
543
00:30:09,001 -- 00:30:12,000
that don't have these risks
544
00:30:12,001 -- 00:30:14,000
that carry the equivalent of deductibles
545
00:30:14,001 -- 00:30:17,000
where there are limits on risks
546
00:30:17,001 -- 00:30:19,000
that can be taken on and so forth
547
00:30:19,001 -- 00:30:21,001
they didn't do that, did they?
548
00:30:21,002 -- 00:30:24,000
-They didn't do that and in retrospect
they should have done.
549
00:30:24,001 -- 00:30:27,000
-So did these guys knew they were doing something dangerous?
550
00:30:27,001 -- 00:30:29,000
- I think they did
551
00:30:46,001 -- 00:30:49,000
All the incentives that the financial institutions
552
00:30:49,001 -- 00:30:51,000
offered to the mortgage brokers
553
00:30:51,001 -- 00:30:54,300
were based on selling the most profitable
554
00:30:54,301 -- 00:30:57,000
products which were predatory loans
555
00:30:57,001 -- 00:30:59,000
The bankers make more money
if they put you on subprime loan
556
00:30:59,001 -- 00:31:01,000
That's where they are going to put you
557
00:31:07,000 -- 00:31:10,000
Suddenly hundreds of billions of dollars a year
558
00:31:10,001 -- 00:31:13,000
were flowing through the securitization chain
559
00:31:13,001 -- 00:31:15,000
Since anyone could get a mortgage
560
00:31:15,001 -- 00:31:18,500
home purchases and housing prices skyrocketed
561
00:31:18,501 -- 00:31:22,400
The result was the biggest financial bubble in history
562
00:31:22,401 -- 00:31:26,000
Real estate is real, they can see their asset
563
00:31:26,001 -- 00:31:29,001
they can live in their asset, they can rent out their asset
564
00:31:29,001 -- 00:31:33,000
You had huge boom in housing that made no sense at all
565
00:31:33,001 -- 00:31:39,000
financing appetites of the financial sector
566
00:31:39,001 -- 00:31:42,000
drove what everybody else did
567
00:31:42,001 -- 00:31:46,000
Last time we had a housing bubble was in the late 80s
568
00:31:46,001 -- 00:31:52,000
In that case the increasing
home prices were relatively minor
569
00:31:52,001 -- 00:31:57,000
That housing bubble led to relatively severe recession
570
00:31:57,001 -- 00:32:04,000
From 1996 until 2006 real home prices effectively doubled
571
00:32:09,000 -- 00:32:10,500
At $500 a ticket
572
00:32:10,501 -- 00:32:12,000
they come to hear how buy
573
00:32:12,001 -- 00:32:16,000
their very own piece of American dream
574
00:32:16,001 -- 00:32:21,000
Goldman Sachs, Bear Stearns,
Lehman Brothers, Merrill Lynch
575
00:32:21,001 -- 00:32:26,000
were all in on this subprime lending alone
576
00:32:26,001 -- 00:32:29,000
increase from $30 billion a year in funding
577
00:32:29,001 -- 00:32:33,500
to over six hundred billion a year in ten years
578
00:32:33,501 -- 00:32:35,000
they knew what was happening
579
00:32:35,001 -- 00:32:38,500
Countrywide Financial - the largest subprime lender
580
00:32:38,501 -- 00:32:43,000
- issued $97 billion worth of loans
581
00:32:43,001 -- 00:32:47,000
It made over $11 billion dollars in profits as a result
582
00:32:47,001 -- 00:32:52,000
On Wall Street annual cash bonuses spiked
583
00:32:52,001 -- 00:32:56,000
traders and CEOs became enormously
wealthy during the bubble
584
00:32:56,001 -- 00:33:00,000
Lehman Brothers was the top underwriter of subprime lending
585
00:33:00,001 -- 00:33:07,000
And their CEO Richard Fuld took home $485 million
586
00:33:07,001 -- 00:33:10,000
On Wall Street this housing and credit bubble
587
00:33:10,001 -- 00:33:13,000
was leading to hundreds of billions of dollars of profits
588
00:33:13,001 -- 00:33:19,000
By 2006 about 40% of all profits of S&P 500 firms
589
00:33:19,001 -- 00:33:21,800
was coming from financial institutions
590
00:33:21,801 -- 00:33:24,000
It wasn't real profits, it wasn't real income
591
00:33:24,001 -- 00:33:26,000
It was just money that was being
592
00:33:26,001 -- 00:33:29,000
created by the system and booked as income
593
00:33:29,001 -- 00:33:33,000
Two, three years down the road,
there's a default, it's all wiped out
594
00:33:33,001 -- 00:33:37,000
I think it was in fact, in retrospect, a great big national,
595
00:33:37,001 -- 00:33:40,000
and not just national, global Ponzi scheme
596
00:33:40,001 -- 00:33:43,000
Through the home ownership and equality protection act
597
00:33:43,001 -- 00:33:46,000
the Federal Reserve Board had broad authority
598
00:33:46,001 -- 00:33:49,000
to regulate the mortgage industry
599
00:33:49,001 -- 00:33:52,500
but Federal Chairman Alan Greenspan refused to use it
600
00:33:52,501 -- 00:33:55,500
Alan Greenspan said no that regulation:
"I don't even believe in it"
601
00:33:57,001 -- 00:34:00,000
For 20 years Robert Gnaizda was the head of Greenlining
602
00:34:00,001 -- 00:34:03,300
a powerful consumer advocacy group
603
00:34:03,301 -- 00:34:06,000
He met with Greenspan on a regular basis
604
00:34:06,001 -- 00:34:08,500
We gave him an example of Countrywide
605
00:34:08,501 -- 00:34:14,000
150 different complex adjustable rate mortgages
606
00:34:14,001 -- 00:34:17,000
He said if you'd had a doctorate in math
607
00:34:17,001 -- 00:34:19,500
you wouldn't be able to understand them enough
608
00:34:19,501 -- 00:34:23,000
to know which was good for you and which wasn't
609
00:34:23,001 -- 00:34:26,000
So we thought he was going to take action
610
00:34:26,001 -- 00:34:29,000
but as the conversation continues
611
00:34:29,001 -- 00:34:31,800
it was clear he was stuck with his ideology
612
00:34:31,801 -- 00:34:34,300
We met again with Greenspan at '05
613
00:34:34,301 -- 00:34:39,000
often we met with him twice a year never less than once a year
614
00:34:39,001 -- 00:34:41,000
and he wouldn't change his mind
615
00:34:41,001 -- 00:34:46,000
Alan Greenspan declined to be interviewed for this film.
616
00:34:46,001 -- 00:34:50,000
In this amazing world of instant global communications
617
00:34:50,001 -- 00:34:52,000
The free and efficient movement of capital
618
00:34:52,001 -- 00:34:57,000
is helping to create the greatest prosperity in human history
619
00:35:02,500 -- 00:35:06,000
146 people were cut from the enforcement division of SEC
620
00:35:06,001 -- 00:35:10,000
is that what you also testified to
621
00:35:10,001 -- 00:35:15,000
Yeah, I think there has been a, a systematic
622
00:35:15,001 -- 00:35:17,200
gutting, or whatever you want to call it,
623
00:35:17,201 -- 00:35:20,000
of the agency and its capability,
624
00:35:20,001 -- 00:35:22,000
through cutting back of staff.
625
00:35:22,001 -- 00:35:24,500
The SEC office of risk management
626
00:35:24,501 -- 00:35:29,000
was reduced to a staff, did you say, of one?
627
00:35:29,001 -- 00:35:34,500
Yeah, when that gentleman would go home at night
he could turn the lights out.
628
00:35:35,000 -- 00:35:38,000
During the bubble the investment
banks were borrowing heavily
629
00:35:38,001 -- 00:35:42,000
to buy more loans and create more CDOs
630
00:35:42,001 -- 00:35:45,000
The ratio between borrowed money and
631
00:35:45,001 -- 00:35:48,000
banks own money was called leverage
632
00:35:48,001 -- 00:35:52,000
The more banks borrowed the higher their leverage
633
00:35:53,000 -- 00:35:58,000
In 2004 Henry Paulson the CEO of Goldman Sachs
634
00:35:58,001 -- 00:36:01,000
helped lobby the Securities and Exchange Commission
635
00:36:01,001 -- 00:36:03,000
to relax limits on leverage
636
00:36:03,001 -- 00:36:07,000
allowing the banks to sharply increase their borrowing
637
00:36:07,001 -- 00:36:10,000
The SEC somehow decided to let
638
00:36:10,001 -- 00:36:13,200
investment banks gamble a lot more
639
00:36:13,201 -- 00:36:17,000
That was nuts. I don't know why they did that, but they did that
640
00:36:23,001 -- 00:36:26,200
We've said these are the big guys and clearly that's true.
641
00:36:26,201 -- 00:36:33,000
But that means if anything goes wrong,
it's going to be an awfully big mess.
642
00:36:33,001 -- 00:36:39,400
At these levels you're obviously dealing with
the most highly sophisticated financial institutions
643
00:36:39,401 -- 00:36:43,300
These are the firms that do most of the
derivative activity in the United States.
644
00:36:43,301 -- 00:36:46,300
We talked to some of them as to what their comfort level was.
645
00:36:46,301 -- 00:36:52,000
The firms actually thought that the number was appropriate.
646
00:36:52,001 -- 00:36:57,000
Do the commissioners vote to adopt the rule
amendments and new rules as recommended by the staff?
647
00:36:57,001 -- 00:37:01,001
We do indeed. Unanimous.
And we are adjourned.
648
00:37:04,500 -- 00:37:08,000
The degree of leverage in financial system
649
00:37:08,001 -- 00:37:10,300
became absolutely frightening
650
00:37:10,301 -- 00:37:15,000
investment banks leveraging up to the level 33 to 1
651
00:37:15,001 -- 00:37:19,500
which means that tiny 3 percent decrease in a value of asset base
652
00:37:19,501 -- 00:37:22,000
would leave them insolvent.
653
00:37:24,000 -- 00:37:27,000
There was another ticking time bomb in the financial system
654
00:37:27,001 -- 00:37:31,000
AIG - the world s largest insurance company
655
00:37:31,001 -- 00:37:36,000
was selling huge quantities of derivatives called credit default swaps
656
00:37:37,000 -- 00:37:43,500
For investors who owned CDOs
credit default swaps worked like an insurance policy
657
00:37:43,501 -- 00:37:48,800
An investor who purchase credit default swap paid AIG a quarterly premium
658
00:37:48,801 -- 00:37:56,000
If CDO went bad AIG promised to pay the investor for their losses
659
00:37:56,001 -- 00:38:02,000
But unlike regularly insurance speculators could also buy credit default swaps from AIG
660
00:38:02,001 -- 00:38:06,000
in order to bet against CDOs they didn't own
661
00:38:06,001 -- 00:38:09,700
In insurance you could only insure something you own
662
00:38:09,701 -- 00:38:12,500
Let's say you and I own property and I own a house
663
00:38:12,501 -- 00:38:15,000
I can only insure that house once
664
00:38:15,001 -- 00:38:21,000
the derivatives universe essentially enables anybody to actually insure that house
665
00:38:21,001 -- 00:38:25,000
So you could insure that somebody else could do that. So 50 people could insure my house
666
00:38:25,001 -- 00:38:29,000
So what happens is if my house burns down
667
00:38:29,001 -- 00:38:32,000
the number of losses in the system becomes proportionally large
668
00:38:32,001 -- 00:38:35,600
Since credit default swaps were unregulated
669
00:38:35,601 -- 00:38:40,000
AIG didn't have put aside any money to cover potential losses
670
00:38:40,001 -- 00:38:44,500
Instead AIG paid its employees huge cash bonuses
671
00:38:44,501 -- 00:38:47,000
as soon as contracts were signed
672
00:38:47,001 -- 00:38:52,500
but if the CDOs later went bad AIG would be on the hook
673
00:38:52,501 -- 00:38:57,500
People were essentially been rewarded for taking massive risks. In good times
674
00:38:57,501 -- 00:39:02,000
they generate short-term revenues and profits and therefore bonuses
675
00:39:02,001 -- 00:39:05,500
but that's going to lead to the firm to be bankrupt over time
676
00:39:05,501 -- 00:39:09,000
that's totally distorted system of compensation
677
00:39:09,001 -- 00:39:12,500
AIG Financial Products division in London
678
00:39:12,501 -- 00:39:17,000
issued $500 billion worth of credit default swaps during the bubble
679
00:39:17,001 -- 00:39:23,000
Many of them for CDOs backed by subprime mortgages
680
00:39:23,001 -- 00:39:29,000
The 400 made $3.5 million between 2000 and 2007
681
00:39:29,001 -- 00:39:35,500
Joseph Cassano - the head of AIG FP - personally made $315 million
682
00:39:35,501 -- 00:39:39,900
It's hard for us, without being flippant, to even
683
00:39:39,901 -- 00:39:45,000
to even see a scenario within any kind of realm of reason
684
00:39:45,001 -- 00:39:49,501
that would see us losing $1 in any of those transactions
685
00:39:49,501 -- 00:39:54,000
In 2007 AIG auditors raised warnings
686
00:39:54,001 -- 00:39:58,200
One of them Joseph St. Denis resigned in protest
687
00:39:58,201 -- 00:40:03,000
After Cassano repeatedly blocked
him from investigating AIG FP's accounting
688
00:40:03,001 -- 00:40:04,000
Let me tell you one person
689
00:40:04,001 -- 00:40:07,500
who didn't get a bonus when everybody else was getting bonuses
690
00:40:07,501 -- 00:40:08,700
That was St. Denis
691
00:40:08,701 -- 00:40:11,500
Mr. St. Denis who tried to alert two of you
692
00:40:11,501 -- 00:40:14,500
to the fact that you are running into big problems
693
00:40:14,501 -- 00:40:18,500
he quit in frustration and he didn't get a bonus
694
00:40:18,501 -- 00:40:24,500
In 2005 Raghuram Rajan then the Chief economist of the International Monetary Fund
695
00:40:24,501 -- 00:40:27,500
delivered a paper at the Annual Jackson Hole symposium
696
00:40:27,501 -- 00:40:30,500
the most elite banking conference in the world
697
00:40:30,501 -- 00:40:36,000
- Who was in the audience?
- It was I guess the central bankers of the world
698
00:40:36,001 -- 00:40:40,000
ranging from Mr. Greenspan himself,
699
00:40:40,001 -- 00:40:42,000
Ben Bernanke,
700
00:40:42,001 -- 00:40:43,500
Larry Summers was there,
701
00:40:43,501 -- 00:40:45,500
Tim Geithner was there
702
00:40:45,501 -- 00:40:48,000
The title of the paper was essentially
703
00:40:48,001 -- 00:40:52,000
Is Financial Development Making the World Riskier?
704
00:40:52,001 -- 00:40:56,600
and the conclusion was it is
705
00:40:56,601 -- 00:41:02,000
Rajan's paper focused on incentives structures that generated huge cash bonuses
706
00:41:02,001 -- 00:41:04,000
based on short-term profits
707
00:41:04,001 -- 00:41:07,500
but which imposed no penalties for later losses
708
00:41:07,501 -- 00:41:11,700
Rajan argued that these incentives encouraged bankers to take risks
709
00:41:11,701 -- 00:41:14,500
that might eventually destroy their own firms
710
00:41:14,501 -- 00:41:18,500
or even the entire financial system
711
00:41:20,000 -- 00:41:25,000
It's very easy to generate performance by taking on more risk
712
00:41:25,001 -- 00:41:29,000
And so what you need to do is compensate for risk-adjusted performance
713
00:41:29,001 -- 00:41:32,000
and that's where all the bodies are buried
714
00:41:32,001 -- 00:41:35,400
Rajan hit the nail on the head
715
00:41:35,401 -- 00:41:37,400
What he particularly said was:
716
00:41:37,401 -- 00:41:43,000
"You guys have claimed you found a way to make more profit with less risk,
717
00:41:43,001 -- 00:41:46,000
I say you found a way to make a more profit with more risk"
718
00:41:46,001 -- 00:41:48,000
And that's a big difference
719
00:41:48,001 -- 00:41:50,200
Summers was vocal
720
00:41:50,201 -- 00:41:58,000
He basically thought that I was criticizing the change in the financial world
721
00:41:58,001 -- 00:42:04,000
And was worried about regulation which reverse this whole change
722
00:42:04,001 -- 00:42:08,000
So essentially he accused me of being a Luddite.
723
00:42:08,001 -- 00:42:13,000
He wanted to make sure that we didn't bring a whole new set of regulations
724
00:42:13,001 -- 00:42:15,800
to constrain the financial sector at that point
725
00:42:15,801 -- 00:42:20,000
Larry Summers declined to be interviewed for this film.
726
00:42:20,001 -- 00:42:24,000
You going to make an extra $2 million dollars a year or $10 million dollars a year
727
00:42:24,001 -- 00:42:26,600
For putting you financial institution at risk
728
00:42:26,601 -- 00:42:29,000
Someone else pays the bill - you don't pay the bill
729
00:42:29,001 -- 00:42:31,000
Would you make that bet?
730
00:42:31,001 -- 00:42:34,000
Most people who worked on Wall Street said: "Sure, I make that bet"
731
00:43:00,000 -- 00:43:04,000
The Hamptons
2 hours from New York City
732
00:43:17,000 -- 00:43:19,000
There never was enough
733
00:43:19,001 -- 00:43:21,000
They don't want to own one home
734
00:43:21,001 -- 00:43:28,000
They want to own five homes and they want to have an expensive Penthouse on Park Avenue
735
00:43:28,001 -- 00:43:31,000
And they want have they own private jet
736
00:43:31,001 -- 00:43:36,500
You think this is an industry were high,
very high compensation levels are justified?
737
00:43:36,501 -- 00:43:41,300
I think I would take caution, take heed,
or take exception at your word very high,
738
00:43:41,301 -- 00:43:42,500
I mean it's all relative
739
00:43:42,501 -- 00:43:48,300
You have a $40 million oceanfront home in Florida,
you have a summer vacation home in Sun Valley, Idaho
740
00:43:48,301 -- 00:43:49,301
you and your wife have art collection
filled with million dollar paintings
741
00:43:52,401 -- 00:43:55,000
Richard Fuld never appeared on the trading floor
742
00:43:55,001 -- 00:43:57,000
There were art advisors up there all the time.
743
00:43:57,001 -- 00:44:01,500
You know, he had his own private elevator,
he were out of his way to be disconnected
744
00:44:01,501 -- 00:44:05,000
I mean, his elevator, the higher technicians to program it, you know,
745
00:44:05,001 -- 00:44:07,500
so that his driver would call in the morning, and
746
00:44:07,501 -- 00:44:09,600
a security guard would hold it.
747
00:44:09,601 -- 00:44:15,000
and there s only like 2 or 3 seconds window
when he actually he has to see people
748
00:44:15,001 -- 00:44:18,500
and he hops in the elevator and he goes straight to 31
749
00:44:18,501 -- 00:44:22,700
- Lehman owned a bunch of corporate jets, do you know about this?
- Yes
750
00:44:22,701 -- 00:44:24,000
How many were there?
751
00:44:24,001 -- 00:44:27,000
Well, there were 6, including 767s
752
00:44:27,001 -- 00:44:29,000
They also had a helicopter
753
00:44:29,001 -- 00:44:32,200
I see. Isn't that kind a lot of planes to have?
754
00:44:34,000 -- 00:44:38,500
We deal with type A personalities and type A personalities know everything in the world
755
00:44:38,501 -- 00:44:41,000
Banking became a pissing contest, you know
756
00:44:41,001 -- 00:44:43,500
mine is bigger than yours, that's kind of stuff
757
00:44:43,501 -- 00:44:45,500
It was all men that ran it, incidentally.
758
00:44:45,501 -- 00:44:50,000
$15 billions deals weren't large enough so we do $100 billion deals
759
00:44:50,001 -- 00:44:53,500
These people are risk-takers, they're impulsive
760
00:44:53,501 -- 00:44:58,000
Jonathan Alpert is a therapist whose clients
include high-level Wall Street executive
761
00:44:58,001 -- 00:45:01,500
That's part of their behavior, part of their personality
762
00:45:01,501 -- 00:45:05,000
and that manifests outside of work as well
763
00:45:05,001 -- 00:45:09,000
It's quite typical for the guys to go out, to go strip bars,
764
00:45:09,001 -- 00:45:13,500
to use drugs. I see a lot of cocaine use, a lot of use of prostitution
765
00:45:19,501 -- 00:45:25,000
Recently neuroscientists have done experiments where they've taken individuals
766
00:45:25,001 -- 00:45:27,000
put them into MRI machine and
767
00:45:27,001 -- 00:45:32,000
and they have them play game where the prize is money
768
00:45:32,001 -- 00:45:35,500
And they notice that when the subjects earn money
769
00:45:35,501 -- 00:45:40,500
the part of the brain that get stimulated is the same part that cocaine stimulates
770
00:45:40,501 -- 00:45:44,000
A lot of people feel they need to really participate in that behavior
771
00:45:44,001 -- 00:45:46,900
to make it to get promoted, to get recognized
772
00:45:46,901 -- 00:45:48,800
According to a Bloomberg article
773
00:45:48,801 -- 00:45:51,700
business entertainment represents 5% of revenue
774
00:45:51,701 -- 00:45:53,550
for New York derivatives brokers
775
00:45:53,551 -- 00:45:58,000
and often includes strip clubs, prostitution, and drugs
776
00:45:58,001 -- 00:46:03,000
A New York broker filed a lawsuit in 2007 against his firm
777
00:46:03,001 -- 00:46:07,000
alleging he was required to retain prostitutes to entertain traders
778
00:46:07,001 -- 00:46:09,400
There's just a blatant disregard
779
00:46:09,401 -- 00:46:12,000
for the impact that their actions might have on,
780
00:46:12,000 -- 00:46:14,000
on society, on family
781
00:46:14,001 -- 00:46:20,000
They have no problem using a prostitute, uh, and going home to their wife
782
00:46:22,000 -- 00:46:25,000
Kristin Davis ran an elite prostitution ring from her high-rise apartment.
783
00:46:25,001 -- 00:46:28,000
It was located a few blocks from the New York stock exchange.
784
00:46:28,001 -- 00:46:30,000
How many customers?
785
00:46:30,001 -- 00:46:34,000
About 10,000 at that point in time
786
00:46:38,000 -- 00:46:40,000
What fraction were from Wall Street?
787
00:46:40,001 -- 00:46:44,500
Of the higher-end clients, probably 40 to 50 percent
788
00:46:44,501 -- 00:46:48,500
And were all the major Wall Street firms represented? Goldman Sachs.
789
00:46:45,502 -- 00:46:51,500
Lehman Brothers, yeah, they re all in there
790
00:46:51,501 -- 00:46:55,000
Morgan Stanley was a little less of that
791
00:46:55,001 -- 00:46:59,000
Uh, I think Goldman was, was pretty, pretty big with that
792
00:46:59,001 -- 00:47:01,000
A lot of clients would call me, and say, can you get me a Lamborghini
793
00:47:01,001 -- 00:47:03,000
for the night for the girl?
794
00:47:03,001 -- 00:47:05,500
These guys were spending corporate money
795
00:47:05,501 -- 00:47:10,500
I had many black cards from, you know, the various financial firms
796
00:47:10,501 -- 00:47:16,000
What's happening is services are being charged to computer repair
797
00:47:16,001 -- 00:47:20,500
Trading research, you know, consulting for market compliance.
798
00:47:20,501 -- 00:47:23,800
I just usually gave them a piece of letterhead, and said, make your own invoice.
799
00:47:23,801 -- 00:47:27,000
So this pattern of behavior, you think, extends to the senior management of the firm.
800
00:47:27,001 -- 00:47:31,000
Absolutely does, yeah. I know for a fact that it does.
801
00:47:31,001 -- 00:47:34,000
It extends to the very top.
802
00:47:38,000 -- 00:47:41,500
A friend of mine, who, who's involved in a company that has a big financial presence,
803
00:47:41,501 -- 00:47:46,000
said: Well, it's about time you learned about subprime mortgages.
804
00:47:46,001 -- 00:47:50,000
So he set up a session with his trading desk and me
805
00:47:50,001 -- 00:47:54,000
and, and a techie, who, who did all this gets very excited
806
00:47:54,001 -- 00:47:57,700
runs to his computer, pulls up, in about three seconds,
807
00:47:57,701 -- 00:48:00,600
this Goldman Sachs issue of securities.
808
00:48:00,601 -- 00:48:02,800
It was a complete disaster.
809
00:48:02,801 -- 00:48:08,000
Borrowers had borrowed, on average, 99.3 percent of the price of the house.
810
00:48:08,001 -- 00:48:11,000
Which means they have no money in the house.
811
00:48:11,001 -- 00:48:13,600
If anything goes wrong, they're going to walk away from the mortgage.
812
00:48:13,601 -- 00:48:16,300
This is not a loan you'd really make, right?
813
00:48:16,301 -- 00:48:18,200
You've got to be crazy.
814
00:48:18,201 -- 00:48:21,500
But somehow, you took 8,000 of these loans
815
00:48:21,501 -- 00:48:26,500
and by the time the guys were done at Goldman Sachs and the rating agencies,
816
00:48:26,501 -- 00:48:29,000
two-thirds of the loans were rated AAA,
817
00:48:29,001 -- 00:48:32,200
which meant they were rated as safe as government securities.
818
00:48:32,201 -- 00:48:34,000
It's, it's utterly mad.
819
00:48:35,000 -- 00:48:38,500
Goldman Sachs sold at least 3.1 billion dollars' worth
820
00:48:38,501 -- 00:48:43,000
of these toxic CDOs in the first half of 2006.
821
00:48:42,801 -- 00:48:47,000
The CEO of Goldman Sachs at this time was Henry Paulson,
822
00:48:47,001 -- 00:48:49,500
the highest-paid CEO on Wall Street.
823
00:48:49,501 -- 00:48:53,500
Good morning, welcome to the White House.
824
00:48:53,501 -- 00:48:56,000
I am pleased to announce that I will nominate Henry Paulson
825
00:48:56,001 -- 00:48:58,000
to be the secretary of the Treasury.
826
00:48:58,001 -- 00:49:00,000
He has a lifetime of business experience,
827
00:49:00,001 -- 00:49:03,000
he has an intimate knowledge of financial markets
828
00:49:03,001 -- 00:49:06,000
he has earned a reputation for candor and integrity
829
00:49:06,001 -- 00:49:08,200
You might think it would be hard for Paulson
830
00:49:08,201 -- 00:49:11,000
to adjust to a meager government salary.
831
00:49:11,001 -- 00:49:17,000
But taking the job as Treasury secretary was the best financial decision of his life.
832
00:49:17,001 -- 00:49:21,000
Paulson had to sell his 485 million dollars of Goldman stock
833
00:49:21,001 -- 00:49:23,000
when he went to work for the government.
834
00:49:23,001 -- 00:49:26,200
But because of a law passed by the first President Bush,
835
00:49:26,201 -- 00:49:29,000
he didn't have to pay any taxes on it.
836
00:49:29,001 -- 00:49:32,000
It saved him 50 million dollars
837
00:49:39,001 -- 00:49:42,000
The article came out in October of 2007.
838
00:49:42,001 -- 00:49:46,000
Already, a third of the mortgages defaulted.
839
00:49:46,001 -- 00:49:50,000
Now, uh, most of them are going'.
840
00:49:51,500 -- 00:49:54,000
One group that had purchased these now-worthless securities
841
00:49:54,001 -- 00:49:58,200
was the Public Employees Retirement System of Mississippi,
842
00:49:58,201 -- 00:50:02,800
which provides monthly benefits to over 80,000 retirees.
843
00:50:02,801 -- 00:50:08,000
They lost millions of dollars, and are now suing Goldman Sachs.
844
00:50:21,001 -- 00:50:26,000
By late 2006, Goldman had taken things a step further.
845
00:50:26,001 -- 00:50:28,600
It didn't just sell toxic CDOs
846
00:50:28,601 -- 00:50:31,000
it started actively betting against them
847
00:50:31,001 -- 00:50:32,600
at the same time it was telling customers
848
00:50:32,601 -- 00:50:35,500
that they were high-quality investments.
849
00:50:36,500 -- 00:50:40,000
By purchasing credit default swaps from AIG,
850
00:50:40,001 -- 00:50:43,000
Goldman could bet against CDOs it didn't own,
851
00:50:43,001 -- 00:50:46,000
and get paid when the CDOs failed.
852
00:50:47,000 -- 00:50:51,000
I asked them if anybody called the customers,
853
00:50:51,001 -- 00:50:54,300
and said, you know, we don't really like this kind of mortgage anymore,
854
00:50:54,301 -- 00:50:57,000
and we thought you ought to know, you know.
855
00:50:57,001 -- 00:50:59,000
They, they didn't really say anything
856
00:50:59,001 -- 00:51:02,500
but, you know, you could just feel the laughter coming over the phone.
857
00:51:03,000 -- 00:51:08,500
Goldman Sachs bought at least 22 billion dollars of credit default swaps from AIG.
858
00:51:08,501 -- 00:51:13,500
It was so much that Goldman realized that AIG itself might go bankrupt
859
00:51:13,501 -- 00:51:15,500
so they spent 150 million dollars
860
00:51:15,501 -- 00:51:20,000
insuring themselves against AIG's potential collapse.
861
00:51:20,001 -- 00:51:23,500
Then, in 2007, Goldman went even further.
862
00:51:23,501 -- 00:51:26,000
They started selling CDOs specifically designed
863
00:51:26,001 -- 00:51:28,600
so that the more money their customers lost,
864
00:51:28,601 -- 00:51:31,500
the more money Goldman Sachs made.
865
00:51:38,001 -- 00:51:43,000
Six hundred million dollars, Timberwolf Securities is what you sold.
866
00:51:43,001 -- 00:51:46,000
Before you sold them,
867
00:51:46,001 -- 00:51:50,100
this is what your sales team were telling' to each other.
868
00:51:50,101 -- 00:51:54,000
Boy, that Timberwolf was one shitty deal.
869
00:51:54,001 -- 00:51:57,000
This was an e-mail to me in late June.
870
00:51:57,001 -- 00:51:59,500
- Right. And you're calling' Timberwolf
- After the transaction.
871
00:51:59,501 -- 00:52:03,000
- No no; you sold Timberwolf after as well.
872
00:52:03,001 -- 00:52:04,200
W-, we did trades after that.
873
00:52:04,201 -- 00:52:05,300
Yeah, okay.
874
00:52:05,301 -- 00:52:09,000
The next e-mail, take a look, July 1, '07
875
00:52:08,801 -- 00:52:12,000
tells the sales force, "the top priority is Timberwolf."
876
00:52:12,001 -- 00:52:15,400
- Your top priority to sell is that shitty deal.
877
00:52:15,401 -- 00:52:17,500
if you have an adverse interest to your client,
878
00:52:17,501 -- 00:52:20,000
do you have the duty to disclose that to your client
879
00:52:20,001 -- 00:52:23,000
to tell that client of your adverse interest? That's my question.
880
00:52:23,001 -- 00:52:25,500
Mr. Chairman, just trying' to understand
881
00:52:25,501 -- 00:52:28,000
No, I think you understand it
I don't think you want to answer it.
882
00:52:28,001 -- 00:52:31,000
Do you believe that you have a duty to act
883
00:52:31,001 -- 00:52:34,550
in the best interests of your clients?
884
00:52:35,500 -- 00:52:37,000
Again, uh, uh, Senator, I,
885
00:52:37,001 -- 00:52:40,400
I will repeat, you know, we have a, a duty to, to serve our clients
886
00:52:40,401 -- 00:52:45,000
by showing prices on transaction where they ask us to show prices for.
887
00:52:45,001 -- 00:52:47,000
What do you think about
888
00:52:47,401 -- 00:52:51,800
selling securities which your own people think are crap?
889
00:52:51,801 -- 00:52:53,500
Does that bother you?
890
00:52:53,501 -- 00:52:57,500
I think they would, again, as a hypothetical?
891
00:52:57,501 -- 00:52:58,500
No. This is real
892
00:52:58,501 -- 00:53:00,500
-Well then I don't
- We heard it today.
893
00:53:00,501 -- 00:53:04,000
- Well
- We heard it today: this is a shitty deal, this is crap.
894
00:53:04,001 -- 00:53:09,000
I, I, I heard nothing today that makes me think anything, um,
895
00:53:09,001 -- 00:53:10,500
went wrong
896
00:53:10,501 -- 00:53:14,700
Is there not a conflict when you sell something to somebody,
897
00:53:14,701 -- 00:53:20,500
and then are determined to bet against that same security
898
00:53:20,501 -- 00:53:24,000
and you don't disclose that to the person you're selling it
899
00:53:24,001 -- 00:53:25,200
- In the...
- Do you see a problem?
900
00:53:25,201 -- 00:53:28,700
In the context of market-making, that is not a conflict
901
00:53:28,701 -- 00:53:32,000
When you heard that your employees, in these e-mails, said,
902
00:53:32,001 -- 00:53:35,200
"god, what a shitty deal, god, what a piece of crap"
903
00:53:35,201 -- 00:53:36,500
do you feel anything?
904
00:53:36,501 -- 00:53:39,600
I f..., I think that's very unfortunate to have on e-mail.
905
00:53:39,601 -- 00:53:41,200
-Are you b...
906
00:53:41,201 -- 00:53:44,500
- And, and, and very unfortunate... I don't, I don't...
907
00:53:44,501 -- 00:53:47,500
On e-mail? How about feeling that way?
908
00:53:47,501 -- 00:53:50,500
I think it's very unfortunate for anyone to have said that, in any form.
909
00:53:50,501 -- 00:53:55,100
Is it your understanding that your competitors were engaged in similar activities?
910
00:53:55,101 -- 00:54:00,000
Uh, yes. And, and to a greater extent than us, in most cases.
911
00:54:00,001 -- 00:54:02,000
Hedge fund manager John Paulson
912
00:54:02,001 -- 00:54:06,000
made 12 billion dollars betting against the mortgage market.
913
00:54:06,001 -- 00:54:09,100
When John Paulson ran out of mortgage securities to bet against,
914
00:54:09,101 -- 00:54:14,000
he worked with Goldman Sachs and Deutsche Bank to create more of them
915
00:54:14,001 -- 00:54:18,700
Morgan Stanley was also selling mortgage securities that it was betting against,
916
00:54:18,701 -- 00:54:21,800
and it's now being sued by the government employees retirement fund
917
00:54:21,801 -- 00:54:25,000
of the Virgin Islands for fraud.
918
00:54:25,001 -- 00:54:29,300
The lawsuit alleges that Morgan Stanley knew that the CDOs were junk.
919
00:54:29,301 -- 00:54:32,000
Although they were rated AAA,
920
00:54:32,001 -- 00:54:34,100
Morgan Stanley was betting they would fail.
921
00:54:34,101 -- 00:54:38,600
A year later, Morgan Stanley had made hundreds of millions of dollars,
922
00:54:38,601 -- 00:54:42,900
while the investors had lost almost all of their money.
923
00:54:58,001 -- 00:55:03,000
You would have thought that pension funds would have said, "those are subprime
924
00:55:03,001 -- 00:55:05,500
why am I buying them?"
925
00:55:05,501 -- 00:55:10,700
And they had these guys at Moody's and Standard and Poor's who said, that's an AAA.
926
00:55:10,701 -- 00:55:14,500
None of these securities got issued without the imprimatur, you know,
927
00:55:14,501 -- 00:55:17,100
the Good Housekeeping Seal of Approval, of the rating agencies.
928
00:55:17,101 -- 00:55:22,000
The three rating agencies Moody's, S&P, and Fitch
929
00:55:22,001 -- 00:55:26,500
made billions of dollars giving high ratings to risky securities.
930
00:55:26,501 -- 00:55:34,000
Moody's, the largest rating agency, quadrupled its profits between 2000 and 2007.
931
00:55:34,001 -- 00:55:37,500
Moody's and S&P get compensated based on putting out ratings reports.
932
00:55:37,501 -- 00:55:41,500
And the more structured securities they gave an AAA rating to,
933
00:55:41,501 -- 00:55:43,500
the higher their earnings were going to be for the quarter.
934
00:55:43,501 -- 00:55:44,500
Imagine if you went to the New York Times,
935
00:55:44,501 -- 00:55:47,500
and you said, look, if you write a positive story, I'll pay you 500,000 dollars.
936
00:55:47,501 -- 00:55:50,500
But if you don't, I'll give you nothing.
937
00:55:50,501 -- 00:55:52,000
The rating agencies could have stopped the party, and said:
938
00:55:52,001 -- 00:55:55,000
We're sorry you know we're going to tighten our standards.
939
00:55:55,001 -- 00:56:01,000
This is a-, and, and immediately cut off a lot of the flow of funding to risky borrowers.
940
00:56:01,001 -- 00:56:11,000
AAA-rated instruments mushroomed from just a handful to thousands and thousands.
941
00:56:11,001 -- 00:56:16,000
Hundreds of billions of dollars, uh, were being rated. You know and...
942
00:56:16,001 -- 00:56:18,000
- Per year.
- Per year; oh, yeah.
943
00:56:18,001 -- 00:56:23,700
I ve now testified before both houses of Congress on the credit rating agency issue.
944
00:56:23,701 -- 00:56:29,300
And both times, they trot out very prominent First Amendment lawyers,
945
00:56:29,301 -- 00:56:33,600
and argue that when we say something is rated AAA,
946
00:56:33,601 -- 00:56:37,000
that is merely our opinion you shouldn't rely on it.
947
00:56:37,001 -- 00:56:39,600
S&P's ratings express our opinion.
948
00:56:39,601 -- 00:56:40,601
Our ratings are, uh, are our opinions. But they're opinions.
949
00:56:40,602 -- 00:56:45,700
Opinions, and those are, they are just opinions.
950
00:56:45,701 -- 00:56:49,500
I think we are emphasizing the fact that our ratings are, uh, uh,
951
00:56:49,501 -- 00:56:51,000
are opinions.
952
00:56:56,001 -- 00:56:59,300
They do not speak to the market value of a security,
953
00:56:59,301 -- 00:57:04,000
the volatility of its price, or its suitability as an investment.
954
00:57:22,000 -- 00:57:25,000
We have so many economists coming on our air, and saying,
955
00:57:25,001 -- 00:57:27,000
oh, this is a bubble, and it's going to burst,
956
00:57:27,001 -- 00:57:30,000
and this is going to be a real issue for the economy.
957
00:57:30,001 -- 00:57:33,300
Some say it could even cause a recession at some point.
958
00:57:33,301 -- 00:57:36,600
What is the worst-case scenario, if in fact we were to see
959
00:57:36,601 -- 00:57:40,000
prices come down substantially across the country?
960
00:57:40,001 -- 00:57:43,000
Well, I, I guess I don't buy your premise. It's a pretty unlikely possibility.
961
00:57:43,001 -- 00:57:47,600
We've never had a decline in house prices on a nationwide basis.
962
00:57:47,601 -- 00:57:52,700
Ben Bernanke became chairman of the Federal Reserve Board in February 2006,
963
00:57:52,701 -- 00:57:56,300
the top year for subprime lending.
964
00:57:56,301 -- 00:58:01,700
But despite numerous warnings, Bernanke and the Federal Reserve Board did nothing.
965
00:58:06,001 -- 00:58:09,800
Robert Gnaizda met with Ben Bernanke and the Federal Reserve Board
966
00:58:09,801 -- 00:58:12,500
three times after Bernanke became chairman.
967
00:58:12,501 -- 00:58:15,100
Only at the last meeting
968
00:58:15,101 -- 00:58:18,000
did he suggest that there was a problem,
969
00:58:18,001 -- 00:58:20,700
and that the government ought to look into it.
970
00:58:20,701 -- 00:58:22,800
When? When was that? What year?
971
00:58:22,801 -- 00:58:26,000
It's 2009; March 11th, in D.C.
972
00:58:26,001 -- 00:58:27,900
- This year.
- This year we met, yes.
973
00:58:27,901 -- 00:58:33,400
- And so for the two previous years you met him; even in 2008?
- Yes
974
00:58:33,401 -- 00:58:37,300
One of the six Federal Reserve Board governors serving under Bernanke
975
00:58:37,301 -- 00:58:42,000
was Frederic Mishkin, who was appointed by President Bush in 2006.
976
00:58:42,001 -- 00:58:45,500
Did you participate in the semiannual meetings that, uh,
977
00:58:45,501 -- 00:58:48,000
Robert Gnaizda and, and, uh, Greenlining
978
00:58:48,001 -- 00:58:49,500
had with the Federal Reserve Board?
979
00:58:49,501 -- 00:58:52,000
Yes I did. I was actually on the committee that, uh,
980
00:58:52,001 -- 00:58:55,700
that was involved, involved with that
the Consumer Community Affairs Committee.
981
00:58:55,701 -- 00:58:59,700
He warned, in an extremely explicit manner, about what was going on
982
00:58:59,701 -- 00:59:01,500
and he came to the Federal Reserve Board
983
00:59:01,501 -- 00:59:04,000
with loan documentation of the kind of loans that were
984
00:59:04,001 -- 00:59:05,001
frequently being made.
985
00:59:05,001 -- 00:59:09,000
And he was listened to politely, and nothing was done.
986
00:59:09,001 -- 00:59:15,000
Yeah. So, uh, again, I, I don't know the details, in terms of, of, uh, of, um uh,
987
00:59:15,001 -- 00:59:18,000
in fact, I, I just don't I, I eh, eh,
988
00:59:18,001 -- 00:59:22,000
whatever information he provide, I'm not sure exactly, I, eh, uh
989
00:59:22,501 -- 00:59:26,300
it's, it's actually, to be honest with you,
I can't remember the, the, this kind of discussion
990
00:59:23,502 -- 00:59:30,000
But certainly, uh, there, there were issues that were, uh, uh, coming up.
991
00:59:30,001 -- 00:59:33,000
But then the question is, how pervasive are they?
992
00:59:33,001 -- 00:59:34,601
Why didn't you try looking?
993
00:59:34,602 -- 00:59:35,800
I think that people did.
994
00:59:35,501 -- 00:59:38,000
We had people looking at, a whole group of people looking at this,
995
00:59:38,001 -- 00:59:39,500
for whatever reason
- Excuse me, you can't be serious.
996
00:59:39,501 -- 00:59:41,700
If you would have looked, you would have found things.
997
00:59:41,701 -- 00:59:45,700
Uh, you know, that's very, very easy
to always say that you can always find it.
998
00:59:45,701 -- 00:59:48,000
As early as 2004,
999
00:59:48,001 -- 00:59:52,500
the FBI was already warning about an epidemic of mortgage fraud.
1000
00:59:52,501 -- 00:59:55,000
They reported inflated appraisals,
1001
00:59:55,001 -- 00:59:57,000
doctored loan documentation,
1002
00:59:57,001 -- 00:59:59,300
and other fraudulent activity.
1003
00:59:59,301 -- 01:00:04,000
In 2005, the IMF's chief economist, Raghuram Rajan,
1004
01:00:04,001 -- 01:00:08,000
warned that dangerous incentives could lead to a crisis.
1005
01:00:08,001 -- 01:00:12,000
Then came Nouriel Roubini's warnings in 2006
1006
01:00:12,001 -- 01:00:17,300
Allan Sloan's articles in Fortune magazine
and the Washington Post in 2007
1007
01:00:17,301 -- 01:00:19,000
and repeated warnings from the IMF
1008
01:00:19,001 -- 01:00:22,500
I said it, and on behalf of the institution:
1009
01:00:22,501 -- 01:00:25,500
ah, the crisis which is in front of us is a huge crisis
1010
01:00:25,501 -- 01:00:27,000
Who did you talk to?
1011
01:00:27,001 -- 01:00:29,000
The government, Treasury, s-, Fed, everybody
1012
01:00:29,001 -- 01:00:33,100
In May of 2007, hedge fund manager Bill Ackman
1013
01:00:33,101 -- 01:00:36,800
circulated a presentation called "Who's Holding the Bag?",
1014
01:00:36,801 -- 01:00:40,000
which described how the bubble would unravel.
1015
01:00:40,001 -- 01:00:46,500
And in early 2008, Charles Morris published his book about the impending crisis.
1016
01:00:46,501 -- 01:00:49,000
Easy Money, High Rollers, and the Great Credit Crash
1017
01:00:49,001 -- 01:00:51,000
You're just not sure, what do you do?
1018
01:00:51,001 -- 01:00:54,800
And you, you might have some suspicions
that underwriting standards are being weakened
1019
01:00:54,801 -- 01:00:58,500
but then the question is, should you do anything about it?
1020
01:01:00,000 -- 01:01:04,000
By 2008, home foreclosures were skyrocketing,
1021
01:01:04,001 -- 01:01:07,000
and the securitization food chain imploded.
1022
01:01:07,001 -- 01:01:11,000
Lenders could no longer sell their loans to the investment banks
1023
01:01:11,001 -- 01:01:15,000
and as the loans went bad, dozens of lenders failed
1024
01:01:15,001 -- 01:01:21,500
Chuck Prince, of Citibank, famously said that, uh, uh,
1025
01:01:21,501 -- 01:01:24,700
we have to dance until the music stops.
1026
01:01:24,701 -- 01:01:28,300
Actually, the music had stopped already when he said that.
1027
01:01:28,301 -- 01:01:30,800
The market for CDOs collapsed,
1028
01:01:30,801 -- 01:01:34,700
leaving the investment banks
holding hundreds of billions of dollars in loans,
1029
01:01:34,701 -- 01:01:38,500
CDOs, and real estate they couldn't sell.
1030
01:01:38,501 -- 01:01:43,500
When the crisis started both the Bush administration
1031
01:01:43,501 -- 01:01:47,000
and the Federal Reserve were totally behind the curve.
1032
01:01:47,001 -- 01:01:49,600
They did not understand the extent of it.
1033
01:01:49,601 -- 01:01:53,500
At what point do you remember thinking, for the first time,
1034
01:01:53,501 -- 01:01:56,000
this is dangerous, this is bad?
1035
01:01:56,001 -- 01:01:59,000
I remember very well, uh, one
1036
01:01:59,001 -- 01:02:02,600
I think it was a G7 meeting, of February 2008.
1037
01:02:02,601 -- 01:02:06,700
And I remember discussing the issue with, with Hank Paulson.
1038
01:02:06,701 -- 01:02:10,000
And I clearly remember telling Hank:
1039
01:02:10,001 -- 01:02:13,000
we are watching this tsunami coming.
1040
01:02:13,001 -- 01:02:16,600
And you just proposing
1041
01:02:16,001 -- 01:02:20,000
that we ask which swimming costume we are going to put on.
1042
01:02:20,001 -- 01:02:22,400
What was his response, what was his feeling?
1043
01:02:22,401 -- 01:02:26,500
Things are pretty much under control. Yes, we are looking at,
1044
01:02:26,501 -- 01:02:29,400
this situation carefully, and uh
1045
01:02:29,401 -- 01:02:32,000
yeah, it's under control.
1046
01:02:32,001 -- 01:02:36,000
We're going to keep growing, okay? And obviously, I'll say it:
1047
01:02:36,001 -- 01:02:40,000
if you're growing, you're not in recession, right? I mean,
1048
01:02:40,001 -- 01:02:42,000
we all know that.
1049
01:02:49,000 -- 01:02:54,000
In March of 2008, the investment bank Bear Stearns ran out of cash,
1050
01:02:54,001 -- 01:02:57,500
and was acquired for two dollars a share by JP Morgan Chase.
1051
01:02:57,501 -- 01:03:02,000
The deal was backed by 30 billion dollars in emergency guarantees
1052
01:03:02,001 -- 01:03:04,300
from the Federal Reserve.
1053
01:03:04,301 -- 01:03:07,700
That was the time when the administration could have come in,
1054
01:03:07,701 -- 01:03:11,800
and put in place various kinds of measures
1055
01:03:11,801 -- 01:03:13,500
that would have reduced system risk.
1056
01:03:13,501 -- 01:03:16,500
The information that I'm receiving from some entities
1057
01:03:16,501 -- 01:03:21,000
is the end is not here, that there are other shoes to fall.
1058
01:03:21,001 -- 01:03:25,700
I've seen those investment banks working with
1059
01:03:25,701 -- 01:03:30,600
the Fed and the SEC to strengthen their liquidity,
1060
01:03:30,601 -- 01:03:33,800
to strengthen their capital positions.
1061
01:03:33,801 -- 01:03:38,500
I get reports all the time. Our regulators are, are very vigilant.
1062
01:03:38,501 -- 01:03:40,800
On September 7th, 2008
1063
01:03:40,801 -- 01:03:42,800
Henry Paulson announced the federal takeover
1064
01:03:42,801 -- 01:03:45,000
of Fannie Mae and Freddie Mac,
1065
01:03:45,001 -- 01:03:48,000
two giant mortgage lenders on the brink of collapse.
1066
01:03:48,001 -- 01:03:50,000
Nothing about our actions today
1067
01:03:50,001 -- 01:03:52,800
in any way reflects a changed view
1068
01:03:52,801 -- 01:03:55,000
of the housing correction or the strength
1069
01:03:55,001 -- 01:03:57,500
of other U.S. financial institutions.
1070
01:03:57,501 -- 01:04:00,000
Two days later, Lehman Brothers announced record losses
1071
01:04:00,001 -- 01:04:04,500
of 3.2 billion dollars, and its stock collapsed.
1072
01:04:05,501 -- 01:04:08,500
The effects of Lehman and AIG in September
1073
01:04:08,501 -- 01:04:10,000
still came as a surprise.
1074
01:04:10,001 -- 01:04:13,800
I mean, this is even after July, and Fannie and Freddie. So...
1075
01:04:13,801 -- 01:04:20,500
clearly, there was stuff that as of September major stuff 
1076
01:04:20,501 -- 01:04:23,000
that nobody knew about.
1077
01:04:23,001 -- 01:04:25,500
I think that's, I think that's fair.
1078
01:04:25,501 -- 01:04:29,600
Bear Stearns was rated AAA, like, a month before it went bankrupt?
1079
01:04:29,601 -- 01:04:32,000
- Uh, more likely A2.
- A2.
1080
01:04:32,001 -- 01:04:33,001
- Yeah.
- Okay.
1081
01:04:33,002 -- 01:04:36,500
- A2 is still not bankrupt.
- No no no. No.
1082
01:04:36,501 -- 01:04:39,000
That's, that's a high investment grade, solid investment-grade rating
1083
01:04:39,001 -- 01:04:42,500
Lehman Brothers; A2, within days of failing.
1084
01:04:42,501 -- 01:04:47,500
Um, AIG, AA, within days of being bailed out.
1085
01:04:47,501 -- 01:04:52,000
Fannie Mae and Freddie Mac were AAA when they were rescued.
1086
01:04:52,001 -- 01:04:56,000
Um, Citigroup, Merrill; all, all of them had investment-grade ratings.
1087
01:04:56,001 -- 01:04:57,500
How can that be?
1088
01:04:57,501 -- 01:05:02,000
Well, that's a good question. That's a great question
1089
01:05:02,001 -- 01:05:06,000
At no point did the administration ever go
to all the major institutions, and say,
1090
01:05:06,001 -- 01:05:10,600
you know: this is serious, tell us what your positions are, you know,
1091
01:05:10,601 -- 01:05:15,000
uh, no bullshit, where are you?
1092
01:05:15,001 -- 01:05:18,500
Well, first, that's what the regulators, that's their job, right?
1093
01:05:18,501 -- 01:05:21,000
Their job is to understand the exposure
1094
01:05:21,001 -- 01:05:25,500
across these different institutions, and they have a very refined, uh,
1095
01:05:25,501 -- 01:05:28,500
understanding that I think became more refined
1096
01:05:28,501 -- 01:05:30,500
as the crisis, um, proceeded. So...
1097
01:05:30,501 -- 01:05:34,000
Forgive me, but that's clearly not true. I m
1098
01:05:34,001 -- 01:05:35,500
What do you mean, it's not true?
1099
01:05:35,501 -- 01:05:38,800
In August of 2008, were you aware of the,
1100
01:05:38,801 -- 01:05:44,500
the credit ratings held then by Lehman Brothers, Merrill Lynch, AIG
1101
01:05:44,501 -- 01:05:46,400
and did you think that they were accurate?
1102
01:05:46,401 -- 01:05:51,000
Well, uh, e-, uh, certainly by that time, it was clear
1103
01:05:51,001 -- 01:05:53,000
that that earlier credit ratings were inaccurate,
1104
01:05:53,001 -- 01:05:55,000
because they had been downgraded substantially.
1105
01:05:55,001 -- 01:05:56,400
No they hadn't.
1106
01:05:56,401 -- 01:05:59,000
Uh, there's still, there was still some downgrading, in terms of the,
1107
01:05:59,001 -- 01:06:01,700
the industry, concerns of the ind-, certainly the stock prices
1108
01:06:01,701 -- 01:06:03,000
Not some, all those firms were rated at least A2
1109
01:06:03,001 -- 01:06:06,000
until a couple of days before they, uh, were rescued.
1110
01:06:06,001 -- 01:06:08,500
Well then, you know, then the answer is,
I just don't, don't know enough to
1111
01:06:08,501 -- 01:06:10,500
really answer your question on this particular issue.
1112
01:06:10,501 -- 01:06:14,000
Governor Fred Mishkin is resigning, effective August 31.
1113
01:06:14,001 -- 01:06:18,500
He says he plans to return to his teaching
post at Columbia's Graduate School of Business.
1114
01:06:18,501 -- 01:06:21,200
Why did you leave the Federal Reserve in August of 2008?
1115
01:06:21,201 -- 01:06:25,000
I mean, in, in the middle of the worst financial crisis
1116
01:06:25,001 -- 01:06:28,600
So, so, uh, that, uh, I had to, to revise a textbook.
1117
01:06:28,601 -- 01:06:32,500
His departure leaves the Fed board with three of its seven seats vacant
1118
01:06:32,501 -- 01:06:34,600
just when the economy needs it most.
1119
01:06:34,601 -- 01:06:36,800
Well, I'm sure your textbook is important and widely read.
1120
01:06:36,801 -- 01:06:40,000
But in August of 2008, you know, some,
1121
01:06:40,001 -- 01:06:44,000
somewhat more important things
were going on in the world, don't you think?
1122
01:06:44,001 -- 01:06:46,000
By Friday, September 12th,
1123
01:06:46,001 -- 01:06:48,000
Lehman Brothers had run out of cash,
1124
01:06:48,001 -- 01:06:52,000
and the entire investment banking industry was sinking fast.
1125
01:06:52,001 -- 01:06:56,500
The stability of the global financial system was in jeopardy.
1126
01:06:56,501 -- 01:07:00,000
That weekend, Henry Paulson and Timothy Geithner,
1127
01:07:00,001 -- 01:07:02,400
president of the New York Federal Reserve
1128
01:07:02,401 -- 01:07:06,000
called an emergency meeting with the CEOs of the major banks
1129
01:07:06,001 -- 01:07:08,000
in an effort to rescue Lehman.
1130
01:07:08,001 -- 01:07:11,000
But Lehman wasn't alone.
1131
01:07:11,001 -- 01:07:13,300
Merrill Lynch, another major investment bank,
1132
01:07:13,301 -- 01:07:15,500
was also on the brink of failure.
1133
01:07:15,501 -- 01:07:19,000
And that Sunday, it was acquired by Bank of America.
1134
01:07:19,001 -- 01:07:24,000
The only bank interested in buying
Lehman was the British firm Barclay's.
1135
01:07:24,001 -- 01:07:29,000
But British regulators demanded
a financial guarantee from the U.S. government.
1136
01:07:29,001 -- 01:07:31,000
Paulson refused.
1137
01:07:35,001 -- 01:07:39,000
We all jumped into a yellow cab
1138
01:07:39,001 -- 01:07:42,500
and went down to the Federal Reserve Bank.
1139
01:07:42,501 -- 01:07:46,000
They wanted the bankruptcy case commenced before midnight
1140
01:07:46,001 -- 01:07:48,000
of September 14.
1141
01:07:48,001 -- 01:07:54,700
We kept pressing that this would be a, uh, terrible event.
1142
01:07:54,701 -- 01:07:57,200
And at some point, I used the word "Armageddon."
1143
01:07:57,201 -- 01:08:02,200
Had they fully considered the
consequences of what they were proposing?
1144
01:08:02,201 -- 01:08:05,000
The effect on the market would be extraordinary.
1145
01:08:05,001 -- 01:08:07,000
- You said this?
- Yes.
1146
01:08:07,001 -- 01:08:12,400
They just said they had considered
all of the comments that we had made
1147
01:08:12,401 -- 01:08:14,000
and they were still of the belief
1148
01:08:14,001 -- 01:08:18,500
that in order to calm the markets and move forward
1149
01:08:18,501 -- 01:08:22,000
it was necessary for Lehman to go into bankruptcy.
1150
01:08:22,001 -- 01:08:23,300
- Calm the markets?
- Yes.
1151
01:08:23,301 -- 01:08:28,500
When were you first told that
Lehman in fact was going to go bankrupt?
1152
01:08:28,501 -- 01:08:30,000
Ah, after the fact.
1153
01:08:30,001 -- 01:08:33,000
After the fact?
1154
01:08:33,001 -- 01:08:36,500
Wow. Okay.
1155
01:08:36,501 -- 01:08:42,000
and what was your reaction when you learned of it?
1156
01:08:42,001 -- 01:08:44,000
Holy cow.
1157
01:08:44,001 -- 01:08:47,000
Paulson and Bernanke had
not consulted with other governments
1158
01:08:47,001 -- 01:08:52,000
and didn't understand the
consequences of foreign bankruptcy laws.
1159
01:08:52,001 -- 01:08:58,000
Under British law, Lehman's
London office had to be closed immediately.
1160
01:08:58,001 -- 01:08:59,900
All transactions came to a halt.
1161
01:08:59,901 -- 01:09:03,000
And there are thousands and
thousands and thousands of transactions.
1162
01:09:03,001 -- 01:09:06,100
The hedge funds that had had assets with Lehman in London
1163
01:09:06,101 -- 01:09:09,000
discovered overnight, to their complete horror,
1164
01:09:09,001 -- 01:09:11,500
that they couldn't get those assets back.
1165
01:09:11,501 -- 01:09:14,400
One of the points of the hub failed.
1166
01:09:14,401 -- 01:09:17,400
And that had huge knock-on
effects around the system.
1167
01:09:17,401 -- 01:09:19,900
The oldest money market fund in the nation
1168
01:09:19,901 -- 01:09:24,000
wrote off roughly three quarters of
a billion dollars in bad debt
1169
01:09:24,001 -- 01:09:26,400
issued by the now-bankrupt Lehman Brothers.
1170
01:09:26,401 -- 01:09:30,000
Lehman's failure also caused
a collapse in the commercial paper market,
1171
01:09:30,001 -- 01:09:32,000
which many companies depend on
1172
01:09:32,001 -- 01:09:35,300
to pay for operating expenses, such as payroll.
1173
01:09:35,301 -- 01:09:37,000
That means maybe they have to lay off employees
1174
01:09:37,001 -- 01:09:40,500
they can't buy parts. It stops business in its tracks.
1175
01:09:40,501 -- 01:09:42,300
Suddenly, people stood, and said:
1176
01:09:42,301 -- 01:09:45,500
Listen; what can we believe in?
There's nothing we can trust anymore.
1177
01:09:45,501 -- 01:09:49,000
That same week, AIG owed 13 billion dollars
1178
01:09:49,001 -- 01:09:51,400
to holders of credit default swaps
1179
01:09:51,401 -- 01:09:53,400
and it didn't have the money.
1180
01:09:53,401 -- 01:09:55,000
AIG was another hub.
1181
01:09:55,001 -- 01:09:57,000
If AIG had stopped, you know,
1182
01:09:57,001 -- 01:09:59,500
all planes may have to be, you know, stop flying.
1183
01:09:59,501 -- 01:10:03,500
On September 17th, AIG is taken over by the government
1184
01:10:03,501 -- 01:10:06,500
And one day later, Paulson and Bernanke
1185
01:10:06,501 -- 01:10:11,000
ask Congress for 700 billion dollars
to bail out the banks.
1186
01:10:11,001 -- 01:10:16,000
They warn that the alternative
would be a catastrophic financial collapse.
1187
01:10:16,001 -- 01:10:18,700
It was scary. You know, the entire system froze up
1188
01:10:18,701 -- 01:10:23,000
every part of the financial system,
every part of the credit system.
1189
01:10:23,001 -- 01:10:24,700
Nobody could borrow money.
1190
01:10:24,701 -- 01:10:27,900
It was like a cardiac arrest of
the global financial system.
1191
01:10:27,901 -- 01:10:30,300
am playing the hand that was dealt me.
1192
01:10:30,301 -- 01:10:32,100
a lot of what I am dealing with, you know,
1193
01:10:32,101 -- 01:10:35,200
I'm dealing with the consequences of
things that were done,
1194
01:10:35,201 -- 01:10:37,000
often, many years ago.
1195
01:10:37,001 -- 01:10:39,000
Secretary Paulson spoke throughout the fall.
1196
01:10:39,001 -- 01:10:41,200
And all the potential root causes of this
1197
01:10:41,201 -- 01:10:43,800
and there are plenty - he called 'em.
1198
01:10:43,801 -- 01:10:46,900
- so I, I'm not sure...
- You're not being serious about that, are you?
1199
01:10:46,901 -- 01:10:49,000
I am being serious. What, what would you have expected?
1200
01:10:49,001 -- 01:10:51,600
I'm, what are, what were you looking for that you didn't see?
1201
01:10:51,601 -- 01:10:54,900
He was the senior advocate
1202
01:10:54,901 -- 01:10:59,500
for prohibiting the regulation of
credit default swaps
1203
01:10:59,501 -- 01:11:03,000
and also lifting the leverage limits on the investment banks.
1204
01:11:03,001 -- 01:11:06,000
- So a-, again, what
- He mentioned those things?
1205
01:11:06,001 -- 01:11:08,000
I never heard him mention those things.
1206
01:11:08,001 -- 01:11:10,900
C-, can we turn this off for a second?
1207
01:11:15,001 -- 01:11:19,200
When AIG was bailed out, the owners of its credit default swaps
1208
01:11:19,201 -- 01:11:22,000
the most prominent of which was Goldman Sachs
1209
01:11:22,001 -- 01:11:25,900
were paid 61 billion dollars the next day.
1210
01:11:25,901 -- 01:11:29,300
Paulson, Bernanke, and Tim Geithner forced AIG
1211
01:11:29,301 -- 01:11:35,000
to pay 100 cents on the dollar, rather
than negotiate lower prices
1212
01:11:35,001 -- 01:11:40,800
Eventually, the AIG bailout cost taxpayers over 150 billion dollars.
1213
01:11:40,801 -- 01:11:44,000
A hundred and sixty billion dollars went through AIG
1214
01:11:44,001 -- 01:11:47,000
14 billion went to Goldman Sachs.
1215
01:11:47,001 -- 01:11:50,600
At the same time, Paulson and Geithner forced AIG
1216
01:11:50,601 -- 01:11:55,000
to surrender its right to sue
Goldman and the other banks for fraud
1217
01:11:55,001 -- 01:12:00,000
Isn't there a problem when the
person in charge of dealing with this crisis
1218
01:12:00,001 -- 01:12:02,500
is the former CEO of Goldman Sachs
1219
01:12:02,501 -- 01:12:06,500
someone who had a major role in causing it?
1220
01:12:06,501 -- 01:12:08,700
Well, I think it's fair to say
that the financial markets today
1221
01:12:08,701 -- 01:12:11,000
are incredibly complicated.
1222
01:12:11,001 -- 01:12:12,001
...supply urgently needed money...
1223
01:12:12,002 -- 01:12:16,400
On October 4th, 2008, President Bush
1224
01:12:16,401 -- 01:12:20,000
signs a 700-billion-dollar bailout bill.
1225
01:12:20,001 -- 01:12:22,000
But world stock markets continue to fall,
1226
01:12:22,001 -- 01:12:26,000
amid fears that a global recession is now underway
1227
01:12:30,000 -- 01:12:32,400
The bailout legislation does nothing
1228
01:12:32,401 -- 01:12:35,400
to stem the tide of layoffs and foreclosures.
1229
01:12:35,401 -- 01:12:41,000
Unemployment in the United States
and Europe quickly rises to 10 percent.
1230
01:12:41,001 -- 01:12:45,000
The recession accelerates, and spreads globally.
1231
01:12:48,000 -- 01:12:50,000
I began to get really scared,
1232
01:12:50,001 -- 01:12:53,600
'cause I hadn't foreseen
1233
01:12:53,601 -- 01:12:57,600
the whole world going down
at the same rate at the same time.
1234
01:12:57,601 -- 01:13:01,200
December of 2008, General Motors and Chrysler
1235
01:13:01,201 -- 01:13:04,000
are facing bankruptcy.
1236
01:13:04,001 -- 01:13:06,500
And as U.S. consumers cut back on spending,
1237
01:13:06,501 -- 01:13:11,200
Chinese manufacturers see sales plummet.
1238
01:13:11,201 -- 01:13:16,000
Over 10 million migrant workers in China lose their jobs.
1239
01:13:16,001 -- 01:13:21,500
the end of the day, the poorest,
as always, pay the most.
1240
01:13:25,001 -- 01:13:29,000
Here you can earn a lot of money, like, uh,
1241
01:13:29,001 -- 01:13:35,000
70, 80, uh, U.S. dollars per month.
1242
01:13:35,001 -- 01:13:40,300
As a farmer in the countryside, you cannot earn as much money.
1243
01:13:40,301 -- 01:13:44,500
The workers just wire their salaries to their hometown.
1244
01:13:44,501 -- 01:13:48,000
To give to their families.
1245
01:13:48,001 -- 01:13:50,700
The crisis started in America.
1246
01:13:50,701 -- 01:13:56,000
We all know it will be coming to China
1247
01:13:59,000 -- 01:14:03,700
Some of the factories try to cut off some workers.
1248
01:14:03,701 -- 01:14:07,300
Some people will get poor because they ll lose their jobs.
1249
01:14:07,301 -- 01:14:11,000
Life gets harder.
1250
01:14:14,000 -- 01:14:17,000
[SINGAPORE]
1251
01:14:18,000 -- 01:14:21,000
We were growing at about 20 percent.
1252
01:14:21,001 -- 01:14:24,000
It was a super year.
1253
01:14:24,001 -- 01:14:28,000
And then we suddenly went to minus nine this quarter.
1254
01:14:28,001 -- 01:14:33,500
Exports collapsed. And we're talking like 30 percent.
1255
01:14:33,501 -- 01:14:37,500
So we just took a hit, you know, fell off a cliff, boom!
1256
01:14:37,501 -- 01:14:39,200
Even as the crisis unfolded,
1257
01:14:39,201 -- 01:14:41,900
we didn't know how wide it was going to spread,
1258
01:14:41,901 -- 01:14:44,000
or how severe it was going to be.
1259
01:14:44,001 -- 01:14:47,000
And we were still hoping that there would be some
1260
01:14:47,001 -- 01:14:49,000
way for us to have a shelter
1261
01:14:49,001 -- 01:14:52,000
and be, uh, less battered by the storm.
1262
01:14:52,001 -- 01:14:53,500
But it is not possible
1263
01:14:53,501 -- 01:14:59,000
It's a very globalized world
the economies are all linked together.
1264
01:15:30,001 -- 01:15:32,500
Every time a home goes into foreclosure,
1265
01:15:32,501 -- 01:15:35,000
it affects everyone who
lives around that house.
1266
01:15:35,001 -- 01:15:36,400
'Cause when that property goes on the market,
1267
01:15:36,401 -- 01:15:38,600
it's going to be sold at a lower price
1268
01:15:38,601 -- 01:15:42,000
maybe before it goes on the market,
it won't be well maintained.
1269
01:15:42,001 -- 01:15:46,000
We estimate another 9 million
homeowners will lose their homes.
1270
01:15:51,547 -- 01:15:56,100
We went out on a weekend to see
what houses were for sale.
1271
01:15:56,901 -- 01:15:57,711
We saw one we liked.
1272
01:15:58,470 -- 01:16:01,712
The payment
was going to be $3,200.
1273
01:16:13,318 -- 01:16:15,980
Everything was beautiful,
the house was very pretty.
1274
01:16:16,154 -- 01:16:18,190
The payment low. Everything was...
1275
01:16:18,365 -- 01:16:20,071
We won the lottery.
1276
01:16:20,242 -- 01:16:23,154
But the reality was when
the first payment arrived.
1277
01:16:28,134 -- 01:16:33,703
I felt very bad for my husband...
1278
01:16:33,880 -- 01:16:40,342
...because he works too much.
And we have three children.
1279
01:16:50,000 -- 01:16:51,900
The vast majority I've seen lately, unfortunately,
1280
01:16:51,901 -- 01:16:53,800
are people who have just
been hurt by the economy.
1281
01:16:53,801 -- 01:16:56,400
They were living, you know, day to day, paycheck to paycheck,
1282
01:16:56,401 -- 01:16:58,300
and unfortunately, that ran out
1283
01:16:58,301 -- 01:17:00,000
And unemployment isn't going to pay a house mortgage
1284
01:17:00,001 -- 01:17:02,000
it's not going to pay a car bill.
1285
01:17:02,001 -- 01:17:04,000
I was a log-truck driver.
1286
01:17:04,001 -- 01:17:06,000
And they shut down, they shut down
1287
01:17:06,001 -- 01:17:07,600
all the logging systems up there
1288
01:17:07,601 -- 01:17:09,000
shut down the sawmills and everything.
1289
01:17:09,001 -- 01:17:11,800
So I moved down
here, I had a construction job.
1290
01:17:11,801 -- 01:17:16,000
And the construction jobs got shut down
too so things are so tough
1291
01:17:16,001 -- 01:17:18,000
there's a lot o' people out there, and pretty soon
1292
01:17:18,001 -- 01:17:20,000
you're going to be seeing
more camps like this around
1293
01:17:20,001 -- 01:17:21,001
because there's just no jobs right now.
1294
01:17:28,001 -- 01:17:30,500
When the company did well,
1295
01:17:30,501 -- 01:17:33,300
we did well
1296
01:17:33,301 -- 01:17:35,600
when the company did not do well, sir,
1297
01:17:35,601 -- 01:17:37,000
we did not do well.
1298
01:17:37,001 -- 01:17:39,500
The men who destroyed their own companies
1299
01:17:39,501 -- 01:17:41,600
and plunged the world into crisis
1300
01:17:41,601 -- 01:17:45,000
walked away from the wreckage with their fortunes intact.
1301
01:17:45,001 -- 01:17:47,500
The top five executives at Lehman Brothers
1302
01:17:47,501 -- 01:17:52,000
made over a billion dollars between 2000 and 2007
1303
01:17:52,001 -- 01:17:53,800
and when the firm went bankrupt
1304
01:17:53,801 -- 01:17:55,500
they got to keep all the money.
1305
01:17:55,501 -- 01:17:57,500
The system worked
1306
01:17:57,501 -- 01:17:59,300
It doesn't make any sense for us
to make a loan that's going to fail,
1307
01:17:59,301 -- 01:18:01,500
'cause we lose. They lose
1308
01:18:01,501 -- 01:18:04,500
the borrower loses, the community loses, and we lose.
1309
01:18:04,501 -- 01:18:06,800
Countrywide's CEO Angelo Mozilo
1310
01:18:06,801 -- 01:18:12,000
made 470 million dollars between 2003 and 2008.
1311
01:18:12,001 -- 01:18:13,500
One hundred forty million
1312
01:18:13,501 -- 01:18:15,700
came from dumping his Countrywide stock
1313
01:18:15,701 -- 01:18:18,600
in the 12 months before the company collapsed.
1314
01:18:18,601 -- 01:18:21,600
Ultimately, I hold the board accountable when a business fails
1315
01:18:21,601 -- 01:18:24,000
'Cause the board is responsible for hiring and firing the CEO
1316
01:18:24,001 -- 01:18:26,500
and overseeing big strategic decisions.
1317
01:18:26,501 -- 01:18:28,300
The problem with board composition in America
1318
01:18:28,301 -- 01:18:30,000
is the way boards are elected.
1319
01:18:30,001 -- 01:18:31,600
The boards are pretty much, in many cases,
1320
01:18:31,601 -- 01:18:33,500
picked by the CEO.
1321
01:18:33,501 -- 01:18:36,000
The board of directors and the compensation committees
1322
01:18:36,001 -- 01:18:38,500
are the two bodies best situated
1323
01:18:38,501 -- 01:18:41,500
to determine the pay packages, uh, for executives.
1324
01:18:41,501 -- 01:18:44,100
How do you think they ve done over the past 10 years?
1325
01:18:44,101 -- 01:18:46,800
Well, I think that, if you look at those,
1326
01:18:46,801 -- 01:18:49,500
uh, in, I would give about a B. Because...
1327
01:18:49,501 -- 01:18:51,000
- A B?
- Yes.
1328
01:18:51,001 -- 01:18:53,000
- Not an F.
- Not an F, not an F.
1329
01:18:53,001 -- 01:18:55,700
Stan O'Neal, the CEO of Merrill Lynch
1330
01:18:55,701 -- 01:19:00,000
received 90 million dollars in 2006 and 2007 alone
1331
01:19:00,001 -- 01:19:02,600
After driving his firm into the ground
1332
01:19:02,601 -- 01:19:05,500
Merrill Lynch's board of directors
allowed him to resign
1333
01:19:05,501 -- 01:19:09,600
and he collected 161 million dollars in severance.
1334
01:19:09,601 -- 01:19:14,000
Instead of being fired, Stan O'Neal is allowed to resign
1335
01:19:14,001 -- 01:19:17,000
and takes away 151 million dollars
1336
01:19:17,001 -- 01:19:20,500
That's a decision that that
board of directors made at that point
1337
01:19:20,501 -- 01:19:22,000
And what grade do you give that decision?
1338
01:19:22,001 -- 01:19:23,300
Uh, that's a tougher one. I don't know
1339
01:19:23,301 -- 01:19:25,000
if I would give that one a B as well.
1340
01:19:25,001 -- 01:19:27,800
O'Neal's successor, John Thain,
1341
01:19:27,801 -- 01:19:31,300
was paid 87 million dollars in 2007
1342
01:19:31,301 -- 01:19:33,500
and in December of 2008,
1343
01:19:33,501 -- 01:19:37,200
two months after Merrill was bailed out by U.S. taxpayers
1344
01:19:37,201 -- 01:19:42,500
Thain and Merrill's board handed out billions in bonuses
1345
01:19:42,501 -- 01:19:44,000
In March of 2008
1346
01:19:44,001 -- 01:19:49,000
AIG's Financial Products Division
lost 11 billion dollars
1347
01:19:49,001 -- 01:19:53,200
Instead of being fired, Joseph Cassano, the head of AIGFP
1348
01:19:53,201 -- 01:19:55,500
was kept on as a consultant
1349
01:19:55,501 -- 01:19:57,300
for a million dollars a month.
1350
01:19:57,301 -- 01:19:59,700
And you want to make sure that the key players
1351
01:19:59,701 -- 01:20:03,500
and the key, key employees, uh, within AIGFP
1352
01:20:03,501 -- 01:20:05,500
yeah, we retain that intellectual knowledge.
1353
01:20:05,501 -- 01:20:07,600
I attended a very interesting, uh, dinner,
1354
01:20:07,601 -- 01:20:11,500
organized by Hank Paulson
a little more than one year ago
1355
01:20:11,501 -- 01:20:13,900
with some officials and a couple of, uh,
1356
01:20:13,901 -- 01:20:17,000
CEOs from the biggest, uh, banks in the U.S.
1357
01:20:17,001 -- 01:20:20,500
And uh, surprisingly enough, all these gentlemen
1358
01:20:20,501 -- 01:20:23,000
were arguing we were too greedy,
1359
01:20:23,001 -- 01:20:26,000
so we have part responsibility. Fine.
1360
01:20:26,001 -- 01:20:29,000
And then they were turning to the treasurer,
to the secretary of the Treasury,
1361
01:20:29,001 -- 01:20:32,000
and say, you should regulate more
because we are too greedy
1362
01:20:32,001 -- 01:20:33,500
we can't avoid it.
1363
01:20:33,501 -- 01:20:36,000
The only way
to avoid this is to have more regulation.
1364
01:20:36,001 -- 01:20:38,400
I have spoken to many bankers about
1365
01:20:38,401 -- 01:20:41,000
this question, including very senior ones
1366
01:20:41,001 -- 01:20:46,000
And this is the first time that I've ever heard anybody say
1367
01:20:46,001 -- 01:20:50,400
that they actually wanted their compensation
to be regulated
1368
01:20:50,401 -- 01:20:53,100
Yeah, because it was at the
moment where they were afraid.
1369
01:20:53,101 -- 01:20:57,000
And after, when solution to the crisis began to appear
1370
01:20:57,001 -- 01:21:00,000
then probably they,
they changed their mind.
1371
01:21:02,000 -- 01:21:05,700
In the U.S., the banks are now bigger, more powerful,
1372
01:21:05,701 -- 01:21:09,000
and more concentrated than ever before.
1373
01:21:09,001 -- 01:21:12,500
There are fewer competitors, and a lot of smaller banks
1374
01:21:12,501 -- 01:21:14,700
have been taken over by big ones.
1375
01:21:14,701 -- 01:21:17,800
JP Morgan today is even bigger than it was before.
1376
01:21:17,801 -- 01:21:21,800
JP Morgan took over first Bear Stearns and then WAMU
1377
01:21:21,801 -- 01:21:25,800
Bank of America took over Countrywide and Merrill Lynch
1378
01:21:25,801 -- 01:21:28,500
Wells Fargo took over Wachovia.
1379
01:21:28,501 -- 01:21:31,000
After the crisis, the financial industry
1380
01:21:31,001 -- 01:21:33,800
including the Financial Services Roundtable
1381
01:21:33,801 -- 01:21:36,800
worked harder than ever to fight reform.
1382
01:21:36,801 -- 01:21:40,000
he financial sector employs 3,000 lobbyists
1383
01:21:40,001 -- 01:21:43,000
more than five for each member of Congress.
1384
01:21:43,001 -- 01:21:46,200
Do you think the financial services industry
1385
01:21:46,201 -- 01:21:48,800
has excessive political influence in the United States?
1386
01:21:48,801 -- 01:21:52,900
No. I think that every person in, in the w-,
1387
01:21:52,901 -- 01:21:55,500
in the country is represented here in Washington.
1388
01:21:55,501 -- 01:21:59,000
And you think that all segments of American society
1389
01:21:59,001 -- 01:22:03,000
have equal and fair access to the system?
1390
01:22:03,001 -- 01:22:05,400
The, you can walk into any hearing room, uh,
1391
01:22:05,401 -- 01:22:08,000
that you would like.
Yes, I do.
1392
01:22:08,001 -- 01:22:09,900
Um, one could walk into any hearing room
1393
01:22:09,901 -- 01:22:12,900
one can not necessarily write the kind of lobbying checks
1394
01:22:12,901 -- 01:22:14,000
that your industry writes
1395
01:22:14,001 -- 01:22:17,000
or engage in the level of political contributions
1396
01:22:17,001 -- 01:22:18,501
that your industry engages in.
1397
01:22:18,502 -- 01:22:21,500
Between 1998 and 2008
1398
01:22:21,501 -- 01:22:24,600
the financial industry spent over 5 billion dollars
1399
01:22:24,601 -- 01:22:27,300
on lobbying and campaign contributions.
1400
01:22:27,301 -- 01:22:31,500
And since the crisis, they're spending even more money.
1401
01:22:32,000 -- 01:22:34,400
The financial industry also exerts its influence
1402
01:22:34,401 -- 01:22:36,300
in a more subtle way
1403
01:22:36,301 -- 01:22:39,000
one that most Americans don't know about
1404
01:22:40,000 -- 01:22:43,100
It has corrupted the study of economics itself.
1405
01:22:43,101 -- 01:22:50,300
Deregulation had tremendous financial and intellectual support.
1406
01:22:50,301 -- 01:22:55,000
Because, uh, uh, people argued it for their own benefit.
1407
01:22:55,001 -- 01:23:00,000
economics profession was
the main source of that illusion.
1408
01:23:00,001 -- 01:23:04,000
Since the 1980s, academic economists
1409
01:23:04,001 -- 01:23:05,800
have been major advocates of deregulation,
1410
01:23:05,801 -- 01:23:09,800
and played powerful roles in shaping U.S. government policy.
1411
01:23:09,801 -- 01:23:13,800
Very few of these economic experts warned about the crisis.
1412
01:23:13,801 -- 01:23:15,500
And even after the crisis,
1413
01:23:15,501 -- 01:23:18,000
many of them opposed reform.
1414
01:23:18,001 -- 01:23:20,500
The guys who taught these things
1415
01:23:20,501 -- 01:23:24,900
tended to get paid a lot of
money being consultants.
1416
01:23:24,901 -- 01:23:30,000
Business school professors don't live on a faculty salary.
1417
01:23:30,001 -- 01:23:33,000
They do very, very well.
1418
01:23:33,001 -- 01:23:36,000
Over the last decade, the financial services industry
1419
01:23:36,001 -- 01:23:39,100
has made about 5 billion dollars' worth of
1420
01:23:39,101 -- 01:23:43,000
political contributions in the United States.
1421
01:23:43,001 -- 01:23:45,000
that's kind of a lot of money.
1422
01:23:45,001 -- 01:23:48,600
That doesn't bother you?
1423
01:23:48,601 -- 01:23:50,000
No.
1424
01:23:50,001 -- 01:23:52,200
Martin Feldstein is a professor at Harvard,
1425
01:23:52,201 -- 01:23:55,000
and one of the world's most prominent economists.
1426
01:23:55,001 -- 01:23:57,700
s President Reagan's chief economic advisor,
1427
01:23:57,701 -- 01:24:00,600
he was a major architect of deregulation.
1428
01:24:00,601 -- 01:24:04,000
And from 1988 until 2009,
1429
01:24:04,001 -- 01:24:09,500
he was on the board of directors
of both AIG and AIG Financial Products,
1430
01:24:09,501 -- 01:24:11,600
which paid him millions of dollars.
1431
01:24:11,601 -- 01:24:15,500
You have any regrets about having been on AIG's board?
1432
01:24:15,501 -- 01:24:17,100
I have no comments. No, I have no regrets
1433
01:24:17,101 -- 01:24:18,600
about being on AIG's board.
1434
01:24:18,601 -- 01:24:22,000
- None.
- That I can s-, absolutely none. Absolutely none.
1435
01:24:22,001 -- 01:24:26,000
Okay. Um,
1436
01:24:26,001 -- 01:24:31,000
You have any regrets about, uh, AIG's decisions?
1437
01:24:31,001 -- 01:24:33,800
I cannot say anything more about AIG.
1438
01:24:33,801 -- 01:24:38,800
I've taught at Northwestern and Chicago, Harvard and Columbia.
1439
01:24:38,801 -- 01:24:41,600
Glenn Hubbard is the dean of Columbia Business School
1440
01:24:41,601 -- 01:24:44,200
and was the chairman of the Council of Economic Advisers
1441
01:24:44,201 -- 01:24:46,300
under George W. Bush.
1442
01:24:46,301 -- 01:24:48,000
Do you think the financial services industry
1443
01:24:48,001 -- 01:24:52,000
has too much, uh, political power in the United States?
1444
01:24:53,500 -- 01:24:55,000
I don't think so, no. You certainly,
1445
01:24:55,001 -- 01:24:57,000
you certainly wouldn't get that impression
1446
01:24:57,001 -- 01:25:01,000
by the drubbing that they regularly get, uh, in Washington.
1447
01:25:01,001 -- 01:25:03,800
Many prominent academics quietly make fortunes
1448
01:25:03,801 -- 01:25:06,700
while helping the financial industry shape public debate
1449
01:25:06,701 -- 01:25:08,500
and government policy.
1450
01:25:08,501 -- 01:25:10,200
The Analysis Group,
1451
01:25:10,201 -- 01:25:12,000
Charles River Associates,
1452
01:25:12,001 -- 01:25:14,400
Compass Lexecon,
1453
01:25:14,401 -- 01:25:16,000
and the Law and Economics Consulting Group
1454
01:25:16,001 -- 01:25:18,400
manage a multi-billion-dollar industry
1455
01:25:18,401 -- 01:25:21,900
that provides academic experts for hire.
1456
01:25:21,901 -- 01:25:25,000
Two bankers who used these services were Ralph Ciofi
1457
01:25:25,001 -- 01:25:27,200
and Matthew Tannin,
1458
01:25:27,201 -- 01:25:31,500
Bear Stearns hedge fund managers
prosecuted for securities fraud.
1459
01:25:31,501 -- 01:25:33,500
After hiring The Analysis Group,
1460
01:25:33,501 -- 01:25:35,000
both were acquitted.
1461
01:25:35,001 -- 01:25:37,500
Glenn Hubbard was paid 100,000 dollars
1462
01:25:37,501 -- 01:25:40,000
to testify in their defense.
1463
01:25:40,700 -- 01:25:44,700
Do you think that the economics discipline has, uh,
1464
01:25:44,701 -- 01:25:47,000
a conflict of interest problem?
1465
01:25:47,500 -- 01:25:49,100
I'm not sure I know what you mean.
1466
01:25:49,101 -- 01:25:52,700
Do you think that a significant fraction of the economics discipline,
1467
01:25:52,701 -- 01:25:56,100
a number of economists, have financial conflicts of interests
1468
01:25:56,101 -- 01:25:59,600
that in some way might call into question or color
1469
01:25:59,601 -- 01:26:01,000
Oh, I see what you're saying. I doubt it.
1470
01:26:01,001 -- 01:26:04,000
You know, most academic economists, uh, you know,
1471
01:26:04,001 -- 01:26:07,000
aren't wealthy business people.
1472
01:26:07,001 -- 01:26:09,500
Hubbard makes 250,000 dollars a year
1473
01:26:09,501 -- 01:26:11,300
as a board member of Met Life
1474
01:26:11,301 -- 01:26:13,700
and was formerly on the board of Capmark,
1475
01:26:13,701 -- 01:26:16,300
a major commercial mortgage lender during the bubble,
1476
01:26:16,301 -- 01:26:19,000
which went bankrupt in 2009.
1477
01:26:19,001 -- 01:26:21,500
He has also advised Nomura Securities,
1478
01:26:21,501 -- 01:26:23,500
KKR Financial Corporation,
1479
01:26:23,501 -- 01:26:26,500
and many other financial firms.
1480
01:26:27,300 -- 01:26:30,400
Laura Tyson, who declined to be interviewed for this film,
1481
01:26:30,401 -- 01:26:34,300
is a professor at the University of California, Berkeley.
1482
01:26:34,301 -- 01:26:37,200
She was the chair of the Council of Economic Advisers,
1483
01:26:37,201 -- 01:26:39,500
and then director of the National Economic Council
1484
01:26:39,501 -- 01:26:41,600
in the Clinton administration.
1485
01:26:41,601 -- 01:26:43,600
Shortly after leaving government,
1486
01:26:43,601 -- 01:26:45,600
she joined the board of Morgan Stanley
1487
01:26:45,601 -- 01:26:49,000
which pays her 350,000 dollars a year.
1488
01:26:49,001 -- 01:26:52,000
Ruth Simmons, the president of Brown University,
1489
01:26:52,001 -- 01:26:54,500
makes over 300,000 dollars a year
1490
01:26:54,501 -- 01:26:56,800
on the board of Goldman Sachs.
1491
01:26:56,801 -- 01:26:59,500
Larry Summers, who as Treasury secretary
1492
01:26:59,501 -- 01:27:02,500
played a critical role in the deregulation of derivatives
1493
01:27:02,501 -- 01:27:06,000
became president of Harvard in 2001
1494
01:27:06,001 -- 01:27:09,300
While at Harvard, he made millions consulting to hedge funds
1495
01:27:09,301 -- 01:27:11,800
and millions more in speaking fees,
1496
01:27:11,801 -- 01:27:15,000
much of it from investment banks.
1497
01:27:17,000 -- 01:27:19,000
According to his federal disclosure report,
1498
01:27:19,001 -- 01:27:26,000
Summers's net worth is between
16.5 million and 39.5 million dollars.
1499
01:27:26,001 -- 01:27:28,700
Frederic Mishkin, who returned to Columbia Business School
1500
01:27:28,701 -- 01:27:30,700
after leaving the Federal Reserve,
1501
01:27:30,701 -- 01:27:33,400
reported on his federal disclosure report
1502
01:27:33,401 -- 01:27:38,000
that his net worth was
between 6 million and 17 million dollars.
1503
01:27:38,001 -- 01:27:42,900
-In 2006, you coauthored a study of Iceland's financial system.
- Right, right.
1504
01:27:42,901 -- 01:27:46,200
Iceland is also an advanced country with excellent institutions,
1505
01:27:46,201 -- 01:27:48,400
low corruption, rule of law.
1506
01:27:48,401 -- 01:27:51,400
The economy has already adjusted to financial liberalization
1507
01:27:51,401 -- 01:27:55,500
while prudential regulation and supervision is generally quite strong.
1508
01:27:55,501 -- 01:27:59,000
Yeah. And that was the mistake. That it turns out that, uh,
1509
01:27:59,001 -- 01:28:02,300
that the prudential regulation and
supervision was not strong in Iceland.
1510
01:28:02,301 -- 01:28:05,300
- And particularly during this period...
- So what led you to think that it was?
1511
01:28:05,301 -- 01:28:07,800
I think that, uh, you're going with the information you have at
1512
01:28:07,801 -- 01:28:11,700
and generally, uh, the view was that, that, uh,
1513
01:28:11,701 -- 01:28:15,200
hat Iceland had very good institutions.
It was a very advanced country
1514
01:28:15,201 -- 01:28:18,000
Who told you that? Who did, what kind of research did you do?
1515
01:28:18,001 -- 01:28:21,000
you, you talk to people, you have faith
in, in, uh the Central Bank
1516
01:28:21,001 -- 01:28:22,800
which actually did fall down on the job.
1517
01:28:22,801 -- 01:28:26,000
Uh, that, uh, clearly, it, this, uh
1518
01:28:26,001 -- 01:28:28,000
Why do you have "faith" in a central bank?
1519
01:28:28,001 -- 01:28:31,000
Well, that faith, you, ya, d-, because you ha-,
1520
01:28:31,001 -- 01:28:32,000
go with the information you have.
1521
01:28:32,001 -- 01:28:33,700
Um, how much were you paid to write it?
1522
01:28:33,701 -- 01:28:36,300
I was paid, uh, I think the number was, uh,
1523
01:28:36,301 -- 01:28:37,500
it's public information
1524
01:28:45,001 -- 01:28:48,000
Uh, on your CV, the title of this report has been
1525
01:28:48,001 -- 01:28:52,500
changed from
"Financial Stability in Iceland" to "Financial Instability in Iceland."
1526
01:28:52,501 -- 01:28:54,800
Oh. Well, I don't know, if, itch-, whatever it is, is, the, uh
1527
01:28:54,801 -- 01:28:57,400
thing if it's a typo, there's a typo.
1528
01:28:57,401 -- 01:28:59,000
I think what should be publicly available is
1529
01:28:59,001 -- 01:29:02,000
whenever anybody does research on a topic
1530
01:29:02,001 -- 01:29:06,800
they disclose if they have any
financial conflict with that research.
1531
01:29:06,801 -- 01:29:11,000
But if I recall, there is no policy to that effect.
1532
01:29:11,001 -- 01:29:14,700
I can't imagine anybody not doing that
1533
01:29:14,701 -- 01:29:17,000
in terms of putting it in a paper.
1534
01:29:17,001 -- 01:29:20,500
You would, there would be significant
professional sanction for failure to do that.
1535
01:29:20,501 -- 01:29:22,800
I didn't see any place in the study where
1536
01:29:22,801 -- 01:29:26,000
you indicated that you had been paid, uh,
1537
01:29:26,001 -- 01:29:28,400
by the Icelandic Chamber of Commerce to produce it.
1538
01:29:28,401 -- 01:29:31,500
- No, I
- Okay.
1539
01:29:31,501 -- 01:29:35,300
Richard Portes, the most famous economist in Britain
1540
01:29:35,301 -- 01:29:37,700
and a professor at London Business School
1541
01:29:37,701 -- 01:29:42,000
was also commissioned by
the Icelandic Chamber of Commerce in 2007
1542
01:29:42,001 -- 01:29:46,000
to write a report which praised the Icelandic financial sector
1543
01:29:46,001 -- 01:29:48,700
The banks themselves are highly liquid.
1544
01:29:48,701 -- 01:29:51,600
They've actually made
money on the fall of the Icelandic krona.
1545
01:29:51,601 -- 01:29:53,500
These are strong banks, their funding,
1546
01:29:53,501 -- 01:29:56,200
their market funding is assured for the coming year.
1547
01:29:56,201 -- 01:29:57,700
These are well-run banks.
1548
01:29:57,701 -- 01:29:58,701
Richard, thank you so much.
1549
01:29:58,702 -- 01:30:00,800
Like Mishkin, Portes's report
1550
01:30:00,801 -- 01:30:04,700
didn't disclose his payment from
the Icelandic Chamber of Commerce.
1551
01:30:04,701 -- 01:30:06,500
Does Harvard require disclosures
1552
01:30:06,501 -- 01:30:09,200
of financial conflict of interest in publications?
1553
01:30:09,201 -- 01:30:12,000
Um, not to my knowledge.
1554
01:30:12,001 -- 01:30:15,000
Do you require people to report the compensation
1555
01:30:15,001 -- 01:30:18,000
they ve received from outside activities?
- No
1556
01:30:18,001 -- 01:30:20,001
Don't you think that's a problem?
1557
01:30:20,002 -- 01:30:21,500
I don't see why.
1558
01:30:21,600 -- 01:30:24,200
Martin Feldstein being on the board of AIG
1559
01:30:24,201 -- 01:30:26,000
Laura Tyson going on the board of Morgan Stanley
1560
01:30:26,001 -- 01:30:31,000
Larry Summers making 10 million dollars a year
consulting to financial services firms
1561
01:30:31,001 -- 01:30:32,001
irrelevant
1562
01:30:33,500 -- 01:30:36,000
well yeah; basically irrelevant.
1563
01:30:36,001 -- 01:30:38,400
You've written a very large number of articles
1564
01:30:38,401 -- 01:30:40,800
about a very wide array of subjects.
1565
01:30:40,801 -- 01:30:44,500
You never saw fit to investigate the risks
1566
01:30:44,501 -- 01:30:47,200
of unregulated credit default swaps?
1567
01:30:47,201 -- 01:30:49,600
I never did.
1568
01:30:49,601 -- 01:30:53,000
Same question with regard to executive compensation
1569
01:30:53,001 -- 01:30:55,400
the regulation of corporate governance
1570
01:30:55,401 -- 01:30:58,500
- the effect of political contributions...
- What, uh, what, uh, w-,
1571
01:30:58,501 -- 01:31:00,000
I don't know that I would have anything
1572
01:31:00,001 -- 01:31:02,600
to add to those discussions.
1573
01:31:02,601 -- 01:31:05,000
I'm looking at your resume now.
1574
01:31:05,001 -- 01:31:07,000
It looks to me as if the majority
1575
01:31:07,001 -- 01:31:11,000
of your outside activities are, uh
1576
01:31:11,001 -- 01:31:12,001
consulting and directorship arrangements with
1577
01:31:12,002 -- 01:31:15,000
the financial services industry.
1578
01:31:15,001 -- 01:31:17,000
Is that, would you not agree with that characterization?
1579
01:31:17,001 -- 01:31:18,001
No, to my knowledge,
1580
01:31:18,002 -- 01:31:21,600
I don't think my consulting clients are even
on my CV, so
1581
01:31:21,601 -- 01:31:24,000
Uh, who are your consulting clients?
1582
01:31:24,001 -- 01:31:26,000
I don't believe I have to discuss that with you.
1583
01:31:26,001 -- 01:31:28,000
Okay.
1584
01:31:28,001 -- 01:31:32,000
Look, you have a few more minutes, and the interview is over
1585
01:31:32,001 -- 01:31:34,500
Do you consult for any financial services firms?
1586
01:31:34,501 -- 01:31:37,000
Uh, the answer is, I do.
1587
01:31:37,001 -- 01:31:41,000
- And...
- And, but I d-, I do not want to go into details about that.
1588
01:31:41,001 -- 01:31:42,001
Do they include other financial services firms?
1589
01:31:42,002 -- 01:31:45,500
Possibly.
1590
01:31:45,501 -- 01:31:47,000
You don't remember?
1591
01:31:47,001 -- 01:31:48,700
This isn't a deposition, sir.
1592
01:31:48,701 -- 01:31:52,000
I was polite enough to give you time,
foolishly, I now see.
1593
01:31:52,001 -- 01:31:54,300
But you have three more minutes.
1594
01:31:54,301 -- 01:31:56,000
Give it your best shot.
1595
01:31:56,001 -- 01:31:59,200
In 2004, at the height of the bubble,
1596
01:31:59,201 -- 01:32:03,000
Glenn Hubbard coauthored a widely
read paper with William C. Dudley
1597
01:32:03,001 -- 01:32:06,000
the chief economist of Goldman Sachs.
1598
01:32:06,001 -- 01:32:09,000
In the paper, Hubbard praised credit derivatives
1599
01:32:09,001 -- 01:32:11,000
and the securitization chain
1600
01:32:11,001 -- 01:32:13,400
stating that they had improved allocation of capital,
1601
01:32:13,401 -- 01:32:16,200
and were enhancing financial stability.
1602
01:32:16,201 -- 01:32:18,600
He cited reduced volatility in the economy
1603
01:32:18,601 -- 01:32:20,600
and stated that recessions
1604
01:32:20,601 -- 01:32:23,900
had become less frequent and milder.
1605
01:32:23,901 -- 01:32:26,800
Credit derivatives were protecting banks against losses
1606
01:32:26,801 -- 01:32:30,000
and helping to distribute risk.
1607
01:32:30,500 -- 01:32:34,300
A medical researcher writes an article, saying:
1608
01:32:34,301 -- 01:32:39,000
to treat this disease, you should prescribe this drug.
1609
01:32:39,001 -- 01:32:41,001
It turns out Doctor makes 80 percent of
1610
01:32:41,002 -- 01:32:44,300
personal income from manufacturer of this drug.
1611
01:32:44,301 -- 01:32:46,000
Does not bother you.
1612
01:32:46,001 -- 01:32:49,000
I think, uh, it's certainly important to disclose
1613
01:32:49,001 -- 01:32:56,000
the, um the, um
1614
01:32:56,001 -- 01:32:58,700
Well, I think that's also a little different from cases
1615
01:32:58,701 -- 01:33:06,000
that we are talking about here. Because, um um
1616
01:33:17,001 -- 01:33:21,700
So, uh, what do you think this says
about the economics discipline?
1617
01:33:21,701 -- 01:33:26,000
Well, heh heh, it has no relevance to anything, really
1618
01:33:26,001 -- 01:33:31,000
And indeed, I think, um, it's a part of the, it's a
1619
01:33:31,001 -- 01:33:34,000
important part of the problem
1620
01:33:34,001 -- 01:33:38,700
PART V: WHERE WE ARE NOW
1621
01:33:49,000 -- 01:33:51,300
The rising power of the U.S. financial sector
1622
01:33:51,301 -- 01:33:55,000
was part of a wider change in America.
1623
01:33:55,001 -- 01:33:58,000
Since the 1980s, the United States has become
1624
01:33:58,001 -- 01:34:00,600
a more unequal society,
1625
01:34:00,601 -- 01:34:04,000
and its economic dominance has declined.
1626
01:34:04,001 -- 01:34:08,500
Companies like General Motors, Chrysler, and U.S. Steel
1627
01:34:08,501 -- 01:34:12,700
formerly the core of the U.S. economy were poorly managed
1628
01:34:12,701 -- 01:34:16,000
and falling behind their foreign competitors.
1629
01:34:16,001 -- 01:34:19,900
And as countries like China opened their economies,
1630
01:34:19,901 -- 01:34:25,000
American companies sent jobs overseas to save money.
1631
01:34:26,000 -- 01:34:27,600
For many, many years,
1632
01:34:27,601 -- 01:34:30,300
the 660 million people in the developed world
1633
01:34:30,301 -- 01:34:31,900
were effectively sheltered
1634
01:34:31,901 -- 01:34:34,100
from all of this additional labor
1635
01:34:34,101 -- 01:34:35,600
that existed on the planet
1636
01:34:35,601 -- 01:34:39,000
Suddenly, the Bamboo Curtain and the Iron Curtain are lifted
1637
01:34:39,001 -- 01:34:43,000
and you have 2.5 billion additional people
1638
01:34:43,001 -- 01:34:44,200
American factory workers
1639
01:34:44,201 -- 01:34:47,000
were laid off by the tens of thousands
1640
01:34:47,001 -- 01:34:49,600
Our manufacturing base was destroyed,
1641
01:34:49,601 -- 01:34:51,500
literally over the course of a few years.
1642
01:34:51,501 -- 01:34:55,400
As manufacturing declined, other industries rose.
1643
01:34:55,401 -- 01:34:58,800
The United States leads
the world in information technology,
1644
01:34:58,801 -- 01:35:02,000
where high-paying jobs are easy to find.
1645
01:35:02,001 -- 01:35:04,700
But those jobs require an education.
1646
01:35:04,701 -- 01:35:06,500
And for average Americans,
1647
01:35:06,501 -- 01:35:09,500
college is increasingly out of reach.
1648
01:35:09,501 -- 01:35:12,800
While top private universities like Harvard
1649
01:35:12,801 -- 01:35:15,300
have billions of dollars in their endowments
1650
01:35:15,301 -- 01:35:18,400
funding for public universities is shrinking,
1651
01:35:18,401 -- 01:35:20,200
and tuition is rising.
1652
01:35:20,201 -- 01:35:23,100
Tuition for California's public universities
1653
01:35:23,101 -- 01:35:26,500
rose from 650 dollars in the 1970s
1654
01:35:26,501 -- 01:35:30,500
to over 10,000 dollars in 2010.
1655
01:35:30,700 -- 01:35:33,200
Increasingly, the most important determinant
1656
01:35:33,201 -- 01:35:35,000
of whether Americans go to college
1657
01:35:35,001 -- 01:35:38,500
is whether they can find the money to pay for it.
1658
01:35:38,501 -- 01:35:41,700
Meanwhile, American tax policy shifted
1659
01:35:41,701 -- 01:35:43,000
to favor the wealthy
1660
01:35:43,001 -- 01:35:45,800
When I first came to office,
1661
01:35:45,801 -- 01:35:49,000
I thought taxes were too high, and they were.
1662
01:35:49,001 -- 01:35:52,000
The most dramatic change was a series of tax cuts
1663
01:35:52,001 -- 01:35:53,900
designed by Glenn Hubbard
1664
01:35:53,901 -- 01:35:55,000
who at the time was serving
1665
01:35:55,001 -- 01:35:58,500
as President Bush's chief economic advisor
1666
01:35:58,501 -- 01:36:02,600
The Bush administration sharply
reduced taxes on investment gains,
1667
01:36:02,601 -- 01:36:03,800
stock dividends,
1668
01:36:03,801 -- 01:36:05,700
and eliminated the estate tax.
1669
01:36:05,701 -- 01:36:08,500
We had a comprehensive plan
1670
01:36:08,501 -- 01:36:11,200
that, when acted has left nearly $1.1 trillion
1671
01:36:11,201 -- 01:36:13,900
in the hands of American workers families, investors,
1672
01:36:13,901 -- 01:36:15,500
and small business owners.
1673
01:36:15,501 -- 01:36:18,000
Most of the benefits of these tax cuts
1674
01:36:18,001 -- 01:36:22,000
went to the wealthiest 1 percent of Americans.
1675
01:36:22,001 -- 01:36:24,500
And by the way, it was really the cornerstone,
1676
01:36:24,501 -- 01:36:27,300
in many ways, of our
economic recovery policy.
1677
01:36:27,301 -- 01:36:30,000
Inequality of wealth in the United States
1678
01:36:30,001 -- 01:36:34,000
is now higher than in any other
developed country.
1679
01:36:34,001 -- 01:36:38,200
American families responded to these changes in two ways:
1680
01:36:38,201 -- 01:36:43,000
by working longer hours, and by going into debt.
1681
01:36:43,001 -- 01:36:46,300
As the middle class falls further and further behind,
1682
01:36:46,301 -- 01:36:51,000
there is a political urge to respond
1683
01:36:51,001 -- 01:36:54,000
by making it easier to get credit.
1684
01:36:54,001 -- 01:36:56,800
You don't have to have a lousy home.
1685
01:36:56,801 -- 01:36:58,600
The low-income home buyer
1686
01:36:58,601 -- 01:37:03,000
can have just as nice a house as anybody else.
1687
01:37:03,001 -- 01:37:06,600
American families borrowed to finance their homes
1688
01:37:06,601 -- 01:37:08,600
their cars, their healthcare,
1689
01:37:08,601 -- 01:37:11,800
and their children's educations.
1690
01:37:11,801 -- 01:37:15,000
People in the bottom 90 percent
1691
01:37:15,001 -- 01:37:20,000
lost ground between 1980 and 2007
1692
01:37:20,001 -- 01:37:25,500
It all went to the top 1 percent
1693
01:37:26,000 -- 01:37:28,500
For the first time in history,
1694
01:37:28,501 -- 01:37:31,000
average Americans have less education
1695
01:37:31,001 -- 01:37:35,000
and are less prosperous than their parents
1696
01:37:36,500 -- 01:37:41,500
The era of greed and irresponsibility on Wall Street
1697
01:37:41,501 -- 01:37:43,400
and in Washington
1698
01:37:43,401 -- 01:37:44,401
has led us to a financial crisis as serious as
1699
01:37:44,402 -- 01:37:49,700
any that we have faced since the Great Depression.
1700
01:37:49,701 -- 01:37:50,800
When the financial crisis struck
1701
01:37:50,801 -- 01:37:53,400
just before the 2008 election
1702
01:37:53,401 -- 01:37:55,500
Barack Obama pointed to Wall Street greed
1703
01:37:55,501 -- 01:37:57,200
and regulatory failures
1704
01:37:57,201 -- 01:37:59,800
as examples of the need for change in America.
1705
01:37:59,801 -- 01:38:01,800
A lack of oversight in Washington
1706
01:38:01,801 -- 01:38:03,600
and on Wall Street is exactly
1707
01:38:03,601 -- 01:38:06,000
what got us into this mess.
1708
01:38:06,001 -- 01:38:08,800
After taking office, President Obama
1709
01:38:08,801 -- 01:38:11,000
spoke of the need to reform the financial industry.
1710
01:38:11,001 -- 01:38:13,000
We want a systemic-risk regulator,
1711
01:38:13,001 -- 01:38:14,500
increased capital requirements
1712
01:38:14,501 -- 01:38:17,300
We need a consumer financial protection agency
1713
01:38:17,301 -- 01:38:19,500
we need to change Wall Street's culture.
1714
01:38:19,501 -- 01:38:23,000
But when finally enacted in mid-2010
1715
01:38:23,001 -- 01:38:25,800
the administration's financial reforms were weak
1716
01:38:25,801 -- 01:38:29,200
and in some critical areas, including the rating agencies
1717
01:38:29,201 -- 01:38:30,201
lobbying, and compensation
1718
01:38:30,202 -- 01:38:34,500
nothing significant was even proposed
1719
01:38:34,501 -- 01:38:38,700
Addressing Obama and, quote, regulatory reform:
1720
01:38:38,701 -- 01:38:43,000
my response, if it was one word, would be: Ha!
1721
01:38:43,001 -- 01:38:46,000
There s very little reform
1722
01:38:46,001 -- 01:38:47,800
How come?
1723
01:38:47,801 -- 01:38:51,200
It's a Wall Street government
1724
01:38:54,000 -- 01:38:57,400
Obama chose Timothy Geithner as Treasury secretary
1725
01:38:57,401 -- 01:38:59,900
Geithner was the president of the New York Federal Reserve
1726
01:38:59,901 -- 01:39:01,300
during the crisis
1727
01:39:01,301 -- 01:39:02,600
and one of the key players
1728
01:39:02,601 -- 01:39:04,300
in the decision to pay Goldman Sachs
1729
01:39:04,301 -- 01:39:05,700
100 cents on the dollar
1730
01:39:05,701 -- 01:39:08,000
for its bets against mortgages.
1731
01:39:08,001 -- 01:39:11,300
When Tim Geithner was testifying
1732
01:39:11,301 -- 01:39:13,500
to be confirmed as Treasury secretary
1733
01:39:13,501 -- 01:39:16,700
he said: "I have never been a regulator"
1734
01:39:16,701 -- 01:39:19,500
Now that said to me, he did not understand his job
1735
01:39:19,501 -- 01:39:21,500
as president of the New York Fed.
1736
01:39:25,001 -- 01:39:29,000
The new president of
the New York Fed is William C. Dudley,
1737
01:39:29,001 -- 01:39:31,500
the former chief economist of Goldman Sachs
1738
01:39:31,501 -- 01:39:35,000
whose paper with Glenn Hubbard praised derivatives.
1739
01:39:35,001 -- 01:39:37,600
Geithner's chief of staff is Mark Paterson
1740
01:39:37,601 -- 01:39:40,000
a former lobbyist for Goldman
1741
01:39:40,001 -- 01:39:42,900
and one of the senior advisors is Lewis Sachs
1742
01:39:42,901 -- 01:39:44,700
who oversaw Tricadia
1743
01:39:44,701 -- 01:39:46,700
a company heavily involved in betting against
1744
01:39:46,701 -- 01:39:50,000
the mortgage securities it was selling.
1745
01:39:50,001 -- 01:39:52,500
To head the Commodity Futures Trading Commission
1746
01:39:52,501 -- 01:39:56,600
Obama picked Gary Gensler
- a former Goldman Sachs executive
1747
01:39:56,601 -- 01:39:59,700
who had helped ban the regulation of derivatives
1748
01:39:59,701 -- 01:40:02,000
To run the Securities and Exchange Commission
1749
01:40:02,001 -- 01:40:04,000
Obama picked Mary Shapiro
1750
01:40:04,001 -- 01:40:06,500
the former CEO of FINRA
1751
01:40:06,501 -- 01:40:10,000
the investment-banking industry's self-regulation body
1752
01:40:10,001 -- 01:40:12,700
Obama's chief of staff, Rahm Emanuel
1753
01:40:12,701 -- 01:40:14,700
made 320,000 dollars
1754
01:40:14,701 -- 01:40:17,500
serving on the board of Freddie Mac
1755
01:40:17,501 -- 01:40:20,000
Both Martin Feldstein and Laura Tyson
1756
01:40:20,001 -- 01:40:23,500
are members of Obama's
Economic Recovery Advisory Board.
1757
01:40:23,501 -- 01:40:29,000
And Obama's chief economic advisor is Larry Summers
1758
01:40:29,001 -- 01:40:31,300
The most senior economic advisors
1759
01:40:31,301 -- 01:40:34,400
are the very people who were
there, who built the structure.
1760
01:40:34,401 -- 01:40:37,000
When it was clear that Summers and Geithner
1761
01:40:37,001 -- 01:40:41,000
were going to play major roles as advisors
1762
01:40:41,001 -- 01:40:44,700
I knew this was going to be status quo.
1763
01:40:44,701 -- 01:40:48,500
The Obama administration resisted
regulation of bank compensation
1764
01:40:48,501 -- 01:40:51,000
even as foreign leaders took action.
1765
01:40:51,001 -- 01:40:53,700
I think the financial industry is a service industry
1766
01:40:53,701 -- 01:40:58,000
it should serve others before it serves itself.
1767
01:40:58,001 -- 01:40:59,800
In September of 2009,
1768
01:40:59,801 -- 01:41:02,600
Christine Lagarde and the finance ministers of Sweden,
1769
01:41:02,601 -- 01:41:07,300
the Netherlands, Luxembourg, Italy, Spain, and Germany
1770
01:41:07,301 -- 01:41:10,800
called for the G20 nations, including the United States
1771
01:41:10,801 -- 01:41:14,600
to impose strict regulations on bank compensation
1772
01:41:14,601 -- 01:41:18,200
And in July of 2010, the European Parliament
1773
01:41:18,201 -- 01:41:21,000
enacted those very regulations
1774
01:41:21,001 -- 01:41:24,500
The Obama administration had no response
1775
01:41:24,501 -- 01:41:27,300
Their view is, this is a temporary blip
1776
01:41:27,301 -- 01:41:28,500
and things will go back to normal
1777
01:41:28,501 -- 01:41:31,200
And that is why I am reappointing him
1778
01:41:31,201 -- 01:41:34,500
to another term as chairman of the Federal Reserve
1779
01:41:34,501 -- 01:41:35,800
Thank you so much, Ben.
1780
01:41:35,801 -- 01:41:39,500
In 2009, Barack Obama reappointed Ben Bernanke
1781
01:41:39,501 -- 01:41:40,301
Thank you, Mr. President
1782
01:41:40,302 -- 01:41:45,600
As of mid-2010, not a single senior financial executive
1783
01:41:45,601 -- 01:41:48,000
had been criminally prosecuted,
1784
01:41:48,001 -- 01:41:49,500
or even arrested
1785
01:41:49,501 -- 01:41:51,600
no special prosecutor had been appointed
1786
01:41:51,601 -- 01:41:53,500
not a single financial firm
1787
01:41:53,501 -- 01:41:55,000
had been prosecuted criminally
1788
01:41:55,001 -- 01:41:58,000
for securities fraud or accounting fraud
1789
01:41:58,001 -- 01:42:00,800
The Obama administration has made no attempt
1790
01:42:00,801 -- 01:42:02,500
to recover any of the compensation
1791
01:42:02,501 -- 01:42:07,000
given to financial executives during the bubble
1792
01:42:07,001 -- 01:42:10,500
I certainly would think of criminal action
1793
01:42:10,501 -- 01:42:13,000
against some of Countrywide's top leaders
1794
01:42:13,001 -- 01:42:14,500
like Mozilo
1795
01:42:14,501 -- 01:42:17,800
I'd certainly look at Bear Stearns, Goldman Sachs
1796
01:42:17,801 -- 01:42:20,500
and Lehman Brothers, and Merrill Lynch
1797
01:42:20,501 -- 01:42:24,000
- For criminal prosecutions.
- Yes. Yes.
1798
01:42:24,001 -- 01:42:26,800
They'd be very hard to, to win
1799
01:42:26,801 -- 01:42:28,200
But I think they could do it
1800
01:42:28,201 -- 01:42:33,000
if they got enough underlings to tell the truth
1801
01:42:33,001 -- 01:42:35,500
In an industry in which drug use, prostitution,
1802
01:42:35,501 -- 01:42:38,500
and fraudulent billing of prostitutes as a business expense
1803
01:42:38,501 -- 01:42:40,500
occur on an industrial scale
1804
01:42:40,501 -- 01:42:42,600
it wouldn't be hard to make people talk,
1805
01:42:42,601 -- 01:42:45,000
if you really wanted to
1806
01:42:45,001 -- 01:42:48,000
They gave me a plea bargain, and I took it.
1807
01:42:48,001 -- 01:42:50,900
Um, they were not interested in any of my records
1808
01:42:50,901 -- 01:42:53,000
they weren't interested in anything
1809
01:42:52,801 -- 01:42:54,300
They were not interested in your records?
1810
01:42:54,301 -- 01:42:56,200
That's correct. That's correct.
1811
01:42:56,201 -- 01:42:59,200
There is a sensibility that you don't use people's
1812
01:42:59,201 -- 01:43:04,000
personal vices in the context of Wall Street cases
1813
01:43:04,001 -- 01:43:06,500
necessarily, to get them to flip
1814
01:43:06,501 -- 01:43:08,000
I think maybe it's,
1815
01:43:08,001 -- 01:43:10,500
after the cataclysms that we've been through
1816
01:43:10,501 -- 01:43:12,000
maybe people will reevaluate that
1817
01:43:12,001 -- 01:43:16,000
I'm not the one to pass judgment on that right now.
1818
01:43:29,500 -- 01:43:32,000
You come to us today, telling us:
1819
01:43:32,001 -- 01:43:34,000
we're sorry, we didn't mean it
1820
01:43:34,001 -- 01:43:38,400
we won't do it again, trust us.
1821
01:43:38,401 -- 01:43:41,000
Well, I have some people in my constituency
1822
01:43:41,001 -- 01:43:44,000
that actually robbed some of your banks
1823
01:43:44,001 -- 01:43:46,500
And they say the same thing!
1824
01:43:46,501 -- 01:43:48,000
They're sorry, they didn't mean it
1825
01:43:48,001 -- 01:43:50,000
they won't do it again
1826
01:43:50,001 -- 01:43:55,000
In 2009, as unemployment hit its highest level in 17 years
1827
01:43:55,001 -- 01:43:58,500
Morgan Stanley paid its employees over 14 billion dollars
1828
01:43:58,501 -- 01:44:01,600
and Goldman Sachs paid out over 16 billion
1829
01:44:01,601 -- 01:44:05,500
In 2010, bonuses were even higher
1830
01:44:05,501 -- 01:44:11,100
Why should a financial engineer be paid four, four times
1831
01:44:11,101 -- 01:44:15,000
to a hundred times more than the, a real engineer?
1832
01:44:15,001 -- 01:44:18,000
A real engineer build bridges
1833
01:44:18,001 -- 01:44:21,400
a financial engineer build, build dreams
1834
01:44:21,401 -- 01:44:25,200
And when those dream turn out to be nightmares,
1835
01:44:25,201 -- 01:44:28,000
other people pay for it.
1836
01:44:28,001 -- 01:44:34,500
For decades, the American financial system was stable and safe.
1837
01:44:34,501 -- 01:44:37,000
But then something changed
1838
01:44:37,001 -- 01:44:40,300
The financial industry turned its back on society
1839
01:44:40,301 -- 01:44:42,200
corrupted our political system,
1840
01:44:42,201 -- 01:44:45,500
and plunged the world economy into crisis
1841
01:44:48,000 -- 01:44:53,000
At enormous cost, we ve avoided disaster, and are recovering.
1842
01:44:53,001 -- 01:44:57,000
But the men and institutions
that caused the crisis are still in power
1843
01:44:57,001 -- 01:44:59,500
and that needs to change.
1844
01:45:00,000 -- 01:45:03,000
They will tell us that we need them
1845
01:45:03,001 -- 01:45:07,500
and that what they do is
too complicated for us to understand
1846
01:45:07,501 -- 01:45:10,500
They will tell us it won't happen again
1847
01:45:10,501 -- 01:45:14,000
They will spend billions fighting reform
1848
01:45:14,001 -- 01:45:16,000
It won't be easy
1849
01:45:18,000 -- 01:45:23,000
But some things are worth fighting for