As an outspoken critic of this year’s Oscars, I’m happy to note they got one thing right: Inside Job won the award for Best Documentary feature.
As of last week, this first-rate expose of the root causes behind the 2008 financial meltdown became available on DVD.
Rarely do I resort to exhortations like this, but here is a movie that every adult American should watch, digest, and discuss… then maybe watch again.
Its impact speaks to the unique power of film to relate a compelling story in under two hours, and have it hit you like a sledgehammer.
Like many others, to deal with my own bewilderment in the wake of this crisis, I had consumed Andrew Ross Sorkin’s much-praised book Too Big To Fail, and came away with a somewhat better understanding of what had gone down.
(I also felt oddly guilty that the book read like a thriller.)
Inside Job is not thrilling per se; A.O. Scott put it best when he described it as “infuriating”.
Most thoughtful people know by now the broad causes behind this mess: a steadily growing pattern of abuses in the wake of financial deregulation begun during the go-go ’80s.
Still- for context (and at the risk of over-simplification), I’ll try to encapsulate the gist of what went wrong:
Before deregulation, a bank only sold mortgages to customers who were good risks and could pay them back over
Tag: Inside Job
As an outspoken critic of this year’s Oscars, I’m happy to note they got one thing right: Inside Job won the award for Best Documentary feature.
Off to a good start with the hosts, James Franco and Anne Hathaway, inserted into scenes from several of the Oscar nominees, on an Inception theme. The writing is funny and their performances sparkle – but mostly, the writing is funny. Best gag: Morgan Freeman narrating Alec Baldwin’s dream. Then Franco and Hathaway opened up with a decent opening banter poking fun at themselves as tools to attract a young
Charles Ferguson’s mind goes where others dare not travel. In 2007, when movies like Lions for Lambs and Home of the Brave were proving Iraq toxic at the box office, Ferguson released No End in Sight, an engrossing examination of the Bush administration’s post-invasion blunders. That film earned Ferguson an Oscar nomination for Best Documentary.
The director has been nominated again this year for his second film, Inside Job, an infuriating look at the cronyism that triggered the 2008 financial meltdown, which destroyed millions of jobs and torched trillions of dollars in worldwide capital.
With this second film, Ferguson cements his position as an essential voice in the documentary world, a filmmaker who tackles the same subjects as Michael Moore without the goofy theatrics or
Good comedy is a precious commodity – and one you don’t find with much abundance at an event that takes itself as seriously as the Sundance Film Festival.
Yet three of the four films I saw at Sundance 2011 on Saturday not only fit the bill but acquitted themselves nicely. And the three came from a trio of different countries – the U.S., Ireland and Norway – offering a refreshing example of the various shapes and forms that comedy can take.
My favorite was the first of the day, The Guard, the kind of darkly comic crime tale that the Irish seem to have a patent on. The fact that first-time writer-director John Michael McDonagh has a cast that includes Brendan Gleeson, Don Cheadle, Mark Strong, Fionnula Flanagan and Liam Cunningham in his cast – well, talk about the luck of the Irish.
The title character is a rowdy and unorthodox police sergeant, Gerry Boyle, played by the wonderfully cocky and sarcastic Gleeson. He’s a small-town cop in Connemara who finds himself awash in big-city crime: a murder that turns out to be part of a cocaine-smuggling operation worth a half-billion dollars.
It’s so big that the bigger-city cops from Galway bring in an FBI agent, Wendell Everett (Cheadle), who is immediately rubbed the wrong way by Boyle’s wonderfully politically incorrect
Charles Ferguson could arguably be called one of the smartest men in film, but not in the traditional Hollywood sense. He didn’t greenlight the hit movie no one wanted to make, discover the next megastar, or crack the code for foolproof box office success. Ferguson, director of best documentary Oscar frontrunner Inside Job, is just smart — like, real smart.
After received a B.A. in mathematics from the University of California, Berkeley and a PhD in political science from MIT., Ferguson went on to study technology’s effects on globalization and government policy, even sharing his opinions with the Defense Department and White House staff as a consultant. He went on to consult with some of the world’s biggest tech companies, including Apple and Intel, before starting his own software company, which he sold to Microsoft two years later. With that money, Ferguson decided to make a documentary, the award-winning No End In Sight, considered by many to be the definitive film about America’s botched occupation of Iraq.
Quite an accomplishment for a first-time filmmaker. So for his next film, Ferguson decided to take on a topic of equal or greater complexity: the financial meltdown. That film, Inside Job, is being hailed as the definitive documentary on that topic, making many critics’ top ten lists of 2010 and sure to be a nominee for the best documentary Oscar. It turns out that book smarts come in handy when trying to sum up two of the biggest stories of the decade in two hours or less. See the trailer for Inside Job below.
I met with Ferguson in mid November at the opulent Beverly Wilshire Hotel in Los Angeles, the kind of place I’m sure the financial “wizards” who nearly wrecked the economy would feel at home.
Q: I’ve heard you say in interviews that when you spoke to many of the CEOs of financial firms and those who advocated for deregulation of the financial sector, that they were not accustomed to being challenged or questioned.
A: First of all, a lot of the people who were most responsible for the decisions that caused the crisis declined to be interviewed. Some did agree to be interviewed and some of their academic defenders agreed to be interviewed. Among the academics, I would say that I was rather shocked by kind of their obliviousness, and it was clear, I would say, that they were the group that was most shocked at being challenged and the most un-used to being challenged, particularly in regards to their financial arrangements and their conflicts of interest.
I filmed a lot of people outside the United States, and it became very clear in the course of those interviews that America’s days as kind of the automatic role model for the world were over. That had probably been eroding for a while as a result of many things, but the bubble and the crisis certainly put an end to that view of the United States as the place that you look to for economic theory, for guidance with regard to how to regulate your economy, how to run your affairs. That was one quite striking thing.
And another striking thing, perhaps related to that, is that if you look at the people who were the most articulate people to warn about the crisis in advance, they were in significant measure outsiders in one way or another, and a significant fraction of the ones who were inside the system were nonetheless foreign-born and foreign-raised. Who noticed this and spoke out about it? Nouriel Roubini (Professor of Economics at the Stern School of Business at New York University), a Turkish Jew raised in Italy. Raghuram Rajan (Chief Economist of the International Monetary Fund (IMF) from 2003-2007), an Indian who came to the United States as an adult. Simon Johnson (Chief Economist at the IMF from 2007-2008), British, also an immigrant, a United States citizen but came here as an adult, was raised outside the United States. George Soros (currency speculator, investor, philanthropist), Hungarian holocaust survivor. And I don’t think that’s totally a coincidence.
It’s not that everybody who warned about the crisis was foreign or an outsider. Alan Sloan (senior editor) of Fortune, completely raised in the United States. Charles Morris (author of The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash), completely raised in the United States. But even Charles Morris is in some ways an outsider — he wasn’t an academic, he didn’t have a tenured position at a major university, so he was independent in that sense. And George Soros, of course, has been a maverick in a lot of ways. So the reason I raise this is that, as the film points out, there has been a significant co-opting and corruption of the insiders, the most inside of the insiders in the United States financial community and in the parts of the academic community that studies finance and regulation. I think that’s dangerous and I think that it was interesting that a significant fraction of the people, a disproportionate fraction of the people that noticed this and warned about this in advance were outside the US system.
Q: Talking about outsiders and conventional wisdom, something that I’ve always been curious to ask conservatives and republicans about is this idea that deregulated free markets are clearly the best way to go. Yet in the history of the world, has there ever been a country that had completely deregulated markets that was super awesome and was good for all its citizens? It seems like it’s such a purely theoretical, philosophical concept when most of the evidence that we see, whether it’s the US or Iceland now or what happened during the Great Depression, points to the opposite of that, that deregulation ends up being a terrible thing. So I was wondering if you have a sense of where that comes from, or if they feel that it’s as purely ideological and philosophical and theoretical as it seems to me when they seem to be treating it as an absolute concrete truth.
A: Well, I think there’s several things going on. First of all, as Soros says in the film, a lot of people say this because it’s in their financial self-interest to say it, and it’s not totally clear how much people really believe. There are some people who clearly do believe it and there are many people in the economics discipline who clearly do believe it. How come? I think that there’s something in the culture of economics that attracts people who hold that view, and now that economics has kind have been taken over by those people in significant measure, I think that there’s actually, in a subtle but important way, a kind of a free speech issue. I don’t think that people who hold contrary views are likely to do well in the economics discipline. They’re not going to get their papers published, they’re not going to get promoted, they’re not going to get hired, they’re not going to get grants. I think that that’s a real issue. But that still leaves the question of why people believe this. I’m not a social psychologist, but I do sense that there’s something in their individual personalities that is related to their intellectual and political ideologies.
Q: Something like that self-made man, go it alone, rugged individual idea?
A: Something like that. I made it, so can you if you try, etc. That’s too crude — it’s more complicated than that. But I do sense that, as a group, there are individual personality traits that are more prominent with this group.
Q: I’ve reviewed movies about the economic crisis like Capitalism: A Love Story and American Casino, and I’ve heard this argument that seems so strange to me, that the problem with the economic crisis and the housing crisis wasn’t capitalism but greed, as if greed is an aberration of capitalism, whereas I see it as the fuel. Have you heard anything like that? Does that argument make any sense to you?
A: I have heard that argument.
Q: It makes me think of something Jon Stewart said, that we have a system that benefits the pathologically greedy. And that’s sort of what capitalism is — to get as much as you can, even if you couldn’t possibly use it or need it. So what do you think of that argument?
A: There’s a difference between saying that the problem here is greed, and there’s another statement which is that the current rules of the system reward the pathologically greedy, which is a statement that I have more sympathy with and that I think does actually mean something. I agree with you that the crisis was caused by greed, but what sense does that make? It’s just kind of weird to think that somehow the American population became greedy starting in 2002 (laughs). So I don’t find that to be a coherent explanation. The times that I’ve heard that statement made, it’s been made in defense of the financial services industry as an accusation that there was this epidemic of greed in the general population which led people to buy houses they couldn’t afford and leverage themselves too much and take out home equity loans so they could buy cars and boats, and that’s the kind of argument I’ve heard which is not an argument that makes a lot of sense, I don’t think.
Q: In terms of arguments that don’t make sense, several people in the movie claim that people who work in the finance industry deserve all the money they got, they deserve their massive bonuses. But can someone rationally make the argument that someone who makes $30 million/year works 1,000 times harder than someone who makes $30,000/year? And you definitely can’t say that the person who makes $30 million/year took 1,000 times as much risk in their job in terms of risk/reward. What do you say to people who claim these huge salaries and bonuses are justified?
A: I think there are two different issues there. One is if it’s ever okay for people to make enormous amounts of money and become extremely wealthy. I personally have no problem with that as long as what they’re doing is real and legitimate and productive. I have no problem with the people who founded Intel getting really rich. If you invent random access memory (RAM) and you invent static memory and you invent microprocessors, it’s fine with me if you get rich from doing that. And they did take risks. I don’t know how you can quantify those, but they worked extremely hard for a long period of time and started the company with very little money and certainly no personal wealth. So I have no problem with that type of scenario.
The problem with what happened in the crisis is that these people made enormous amounts of money by behaving unethically and endangering the financial system and causing millions of people to lose their homes and their jobs, and that I have a big problem with, getting rewarded for that. And then actually I’d say there’s a third question which is just, even when people in finance are behaving legitimately, do financial services create the same kind of value as somebody who starts Intel or Google or Apple. And the evidence for that is, for the most part, they don’t. Finance is not an activity that creates great wealth. It’s a service industry, and there are some very productive and useful things in it, but I wouldn’t put it in the same category as these other activities. So I think what happened was crazy.
Q: How do we reform the financial system when it seems we mostly have to rely on politicians who are owned by Wall Street?
A: First of all, it’s not my department. I’m actually not really a political person. That might sound like a strange statement. I’m interested in policy questions. I’m interested in investigative journalism. I’m interested in making films and writing books. But I’ve never been involved in electoral politics. I’ve never been in government. I’m just not that kind of animal. But I’ve certainly thought about this, and many people have spoken with me about it since the film came out. Most people seem to think it’s going to be one of two things — that there’s going to be some change in the partisan political system, which might be an internal revolution inside one of the political parties or it might be a third political party. Or if it’s not going to be that, it’s going to be a nonpartisan social movement like the progressive movement or the environmental movement, something that starts from below and mobilizes a large number of people and that is independent from any political party but has a policy agenda it tries to force the political system to adopt. And I’m optimistic that something like that can still happen in the United States, but those kinds of things take a long time, and that’s frustrating and disappointing. But that’s where we’re at.
Q: Your first two movies have been No End In Sight and Inside Job. No End In Sight is considered the definitive movie about the Iraq occupation and Inside Job is considered the definitive movie about the economic crisis, two of the biggest things in the past several decades. What’s next?
A: Right now I have no idea, honestly.
Q: I come from a family of scientists and my brother and my dad are both professors. I’m wondering how your academic background influenced your filmmaking.
A: I think it had a big effect. Filmmaking is my third life, actually, and I think both of my previous lives had an effect. The other one being that I was a software entrepreneur. I think my training as an academic had a lot to do with my ability to put together these films. I was really put through the wringer in my education, in a very good way, by a lot of people at MIT and Harvard. My graduate work was at MIT and my thesis advisor to whom Inside Job is dedicated was an amazingly brilliant man and had no tolerance for bad thinking. So I learned how to think and how to structure things and make arguments, and I think that helped a lot in making these films.
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How was Peter Wallison able to assert that the majority of loans originated by Fannie Mae fit into high-risk categories? It was simple. He lied. One of the more vocal members of the Financial Crisis Inquiry Commission fabricated “evidence” to support his bogus narrative about the mortgage crisis.
More than two years ago, Wallison collaborated with another fraudster, Charles Calomiris of Columbia University, to produce a sham report, “The Last Trillion-Dollar Commitment: The Destruction of Fannie Mae and Freddie Mac.” It reveals all you need to know about Wallison’s deceitful agenda, which was expressed, in a more sanitized form, in the GOP version of the FCIC report.
Sponsored by the American Enterprise Institute, and released within days of the Federal takeover of the government-sponsored enterprises, “The Last Trillion-Dollar Commitment” has gone viral. It has been repeatedly cited as a bona fide source by FreedomWorks and by House Republicans, as well as by otherwise-reputable venues, such as About.com, Wikipedia and the St. Louis Federal Reserve. Wallison’s fraudulent accounting, which forms the core of his central thesis, could be debunked with a five-minute Internet search. Yet his lies have gone unchallenged for more than two years.
Lying About Fannie
The critical passages are as follows:
Anyone who took a glance at page 30 of the Fannie Mae 2008 Q2 10-Q Investor Summary
could see what Wallison was doing. Of Fannie’s total mortgage balance of almost $2.7 trillion, the high-risk categories represented very small percentages, as shown below. But how could those percentages be so low, if, as Wallison claimed, they represented the majority of originations during the three-year period of 2005 – 2007?
The answer is simple. Wallison lied. Let’s consider the $19.1 billion in NegAm loans on Fannie’s books as of June 30, 2008, which represent 0.7% of the total. Of that 0.7%, the majority, (62.2% of 0.7%, or 0.4%) were originated during 2005 through 2007. Yes, the prevalence of NegAm loans was higher during that critical three-year period; it spiked up to 0.9% of total originations. But Wallison wants you to believe that 62.2% of all loans originated by Fannie were NegAm. He wants to spread the myth that, “the percentage of mortgages with subprime characteristics purchased during this period consistently exceeded 49.8 percent.”
All of the other high risk categories also represented small slivers of Fannie’s overall book of business. As the note on page 30 makes clear, “Categories are not mutually exclusive; numbers are not additive across columns.” For instance, 45% of the Alt-A loans loans are also NegAm loans. But Wallison adds them up to arrive at his fraudulent total of $619 billion.
Do you think this was a mistake, something that Wallison, Calomiris, and research assistant Karen Dubas somehow overlooked? Or that they got confused? The problem with that fanciful notion is that these people aren’t stupid. Wallison is a Harvard Law grad and was once general counsel to the Department of Treasury. Calomiris teaches at Columbia Business School. Even worse, they pass themselves off as experts on Fannie and Freddie. The GSEs and their regulators publish all sorts of data about their mortgage originations. No one familiar with these entities could could make a plausible case for an honest oversight. And these falsehoods have gone uncorrected for more than two years.
Lying About Freddie
Once you glance at the disclosure by Freddie Mac, it becomes impossible to believe that they weren’t lying. They write:
Look at page 27 of Freddie Mac’s Second Quarter 2008 Financial Results, which lays out the exposures in the different high-risk categories in great detail. For each category, there is a column of percentages, referencing the year of origination, that adds up to 100%. So, to take one example, of the Alt-A loans on Freddie’s books, which represent 10% of the total, 17% or 1.7% of the total, were originated in 2005. Another 29%, or 2.9% of the total, were originated in 2006. Anyone who graduated from a good high school should be able to understand the table.
And anyone who compared the source document with Wallison’s Table 2 could see that he intended to deceive the reader. No one could mistakenly believe that anything like 90% of Freddie’s loans were interest-only, as he represents. Wallison’s calculation–that 40% of Freddie’s originations were “junk loans”–was fabricated out of thin air. The true numbers and percentages are summarized below.
The Data that Wallison Seeks to Conceal
Anyone who follows the GSEs knows that their loan originations, when segmented by FICO score or loan-to-value, have been remarkably stable. About 65% of their originations were extended to borrowers with FICO scores of 700 or higher, and about 6% were extended to borrowers with FICO scores below 620.
Source: Federal Housing Finance Agency
Mortgages with higher than 90% loan-to-value at closing averaged 9%, evenly distributed among different FICO buckets.
Source: Federal Housing Finance Agency
Here’s a critical distinction: These percentages apply to the mortgages that were directly purchased or guaranteed by the GSEs, and were vetted through their underwriting guidelines. The private label securitizations tailored by Wall Street bypassed the restraints against predatory lending, and those securitized mortgages have performed exponentially worse than comparable loans originated by the GSEs. The actual GSE data debunks Wallison’s agenda, which is to excuse the culpability of Wall Street and Bush-era regulators, who encouraged the GSEs to buy up many of these toxic private label securitizations.
Wallison’s FCIC whitewash offered a platform for another professional liar, John Boehner, to fabricate “evidence” out of thin air. Boehner claims:
This eye-opening report details how government mortgage companies played a pivotal role in the financial meltdown by handing out high-risk loans to families who couldn’t afford them.
But there were no details, eye-opening or otherwise, about the GSEs or anything else. Two absences were even more conspicuous. Nowhere is there any mention of the words “fraud” or “enforcement” in a work product drafted pursuant to The Fraud Enforcement and Recovery Act of 2009. The GOP document appears to validate the reporting of Shahien Nasiripour, who, confirmed from an on-the-record source, Brooksley Born, that, “all four Republicans voted in favor of banning the phrases ‘Wall Street’ and ‘shadow banking’ and the words ‘interconnection’ and ‘deregulation’ from the panel’s final report.”
Some final points:
Since Charles Calomiris teaches at a reputable university, you would think that he would publish a correction of his deceitful work product, and apologize to those who were misinformed. My bet is that he won’t because doing so would be an admission that he had no idea what he was talking about in the first place. If you want to see some damning footage of his professional colleagues at Columbia Business School, be sure to catch, Inside Job.
The foregoing is not intended to be a full accounting of the falsehoods in the 5,900-word article, “The Last Trillion-Dollar Commitment,” nor is it intended to suggest that the GSEs are not central to the mortgage crisis. It’s an attempt to prevent the discussion from being highjacked by liars who show contempt for facts.
An Open Letter To: Lee Bollinger, President, Columbia University
Dear President Bollinger,
Pleased as I am to be invited to speak at Columbia Business School in February, there’s something on my mind that we need to talk about before I show up, and that is Columbia Business School’s absence of an ethical disclosure policy.
What am I talking about?
Professors there advise private clients to the tune of hundreds of thousands of dollars in fees, advocating policies that serve the interests of those clients, and fail to disclose this to their students or the public – all while enjoying the prestige of a ‘neutral’ Ivy League perch.
This lack of disclosure came to my attention via the documentary, “Inside Job,” (shortlisted for the Oscar, by the way) in which director Charles Ferguson does an excellent job of explaining the origins of the financial crisis that overtook global banking in 2008 and 2009, and which was rooted in the deregulated culture of Wall Street.
Among the many revelations in this film is the corruption that has poisoned the departments of the nation’s top business schools and chief among them, Columbia’s.
Two Columbia professors come in for humiliation. Read the full post here…
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I and other consumer advocates have been arguing for an effort to head off the coming new wave of foreclosures, primarily by writing down the principal of mortgages that were based on unrealistic, bubble-inflated home values. But we keep running into an argument against such a program that many seem to find persuasive: the idea of “moral hazard.”
Back in November 2007, when the subprime mortgage crisis was starting to come into clear focus, National Public Radio summed up the “moral hazard” argument as “a concept any parent of a 5 year old can understand: Bail out someone who has engaged in risky behavior and you’re likely to encourage that behavior in the future.”
Back then, lots of experts warned that bailing out either lenders or homeowners would be a mistake for just that reason: If the lender reduced principal for struggling homeowners, it might encourage their neighbors — possibly still making their payments, but finding it burdensome — to walk away, or at least threaten to do so unless they get the same deal.
But we did bail out the financial industry to the tune of $700 billion, without much worry about moral hazard. And while no one much liked to do it, the government has now gotten most of that money back, with a net cost to taxpayers of only $25 billion. And the program did what it was supposed to do: stabilize the financial system and avert another Great Depression. All in all, not a bad deal.
And, as the film Inside Job lays out in disturbing detail, most of those whose reckless and self-serving actions helped tank the economy haven’t experienced any serious consequences. Some companies, like Lehman Brothers, are no more, but individuals who oversaw dubious activities often simply moved to the next step in their career paths, often getting huge bonuses to help them along.
If it’s okay to let these guys go merrily along, it’s hard to get worked up about the alleged moral hazard in giving relief to homeowners in danger of foreclosure. The far more serious hazard, it seems to me, is this: When a homeowner who could have reasonably paid their mortgage at current market value experiences foreclosure, that results in a loss of wealth that extends far beyond the homeowner. Property values plummet, unemployment is impacted, and the decrease in property taxes collected by the municipality impacts vital services. The homeowner isn’t the only one that loses when they lose their home, the whole community suffers. And given how many foreclosures are coming, that scenario will be repeated millions of times over.
Yes, the foreclosure crisis is messy, and yes, it’s impossible to resolve it in a way that’s neat and pretty. No one, including me, likes the situation we find ourselves in, but here we are. Get used to it. We need to bite the bullet and recognize that a failure to provide principal reduction will have far more disastrous consequences than if we act sensibly and compassionately — and soon.
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A new film on the financial debacle of 2008 has arrived to great acclaim. Inside Job, directed by Charles Ferguson, presents the corporate version of what went wrong. I spent two years coordinating research for Michael Moore’s documentary film, Capitalism: A Love Story, that investigated the systemic roots of the Great Recession. One of these two films presents a truncated analysis, limited by the filmmaker’s ideological preferences, and the other faces reality, painful as it is. If you want to believe that a few good men (and, maybe, a woman) can make everything all right, go see Inside Job and have your faith confirmed — with a healthy dash of righteous anger at the crooks and spoilers. If you dare to look in the eye of a repulsive, festering monster, one that must be put down before it consumes all of us, see Michael’s film.
Inside Job has been lauded by the New York Times as “meticulous and infuriating,” portraying “a betrayal of public trust and collective values,” and documenting “crime without punishment.” Another Times reviewer writing from Cannes, gushed that the film tells “a complex story exceedingly well and with a great deal of unalloyed anger…. [It] lays out its essential argument, cogently and convincingly, that the 2008 meltdown was avoidable.” Times columnist Frank Rich says, Inside Job, “has it right.”
Inside Job does not have it right. Yes, Ferguson presents some facts; yes, his anger and outrage are palpable; yes, he would like someone to do something about it. But Ferguson’s failing is critical. He doesn’t even name, much less discuss, our economic system. The result is his film diverts the viewers’ attention in the wrong direction.
Over the past 156 years for which the National Bureau of Economic Research provides numbers, the United States has suffered 33 official economic collapses, 22 since 1900, an average of one every 5 years. The economic euphemism for this is “the business cycle.” There can be no doubt that recurring cycles of boom and bust, inflation and recession, are built into our economic system. If they are avoidable, then why haven’t we avoided them? Ferguson’s film attempts to finesse the business cycle problem by stating at the beginning of “Part I — How We Got Here” that there was not a single “financial” crisis in the 40 years after the Great Depression. This sleight of hand allows Ferguson to focus on his theme that the financial industry simply got out of hand in the 1980s and needs to be reined in. We just time travel back to the 1930s, grab their financial regulations, and everything will be fine.
While there may have been no financial panics between 1938 and the savings and loan crisis of the mid-1980s, there were nine official economic collapses (recessions). Two of these collapses (1973-1975 and 1981-1982) were among the seven longest lasting recessions of the 20th century, with official annual unemployment rates reaching 8.5 percent and 9.7 percent. The only way to avoid this roller coaster of suffering is to build a new economic system, and this is the last thing Charles Ferguson would desire.
It is no secret why Ferguson might not want to examine the United States’ long and horrific pattern of economic crises. Simply take a look at the Inside Job film website where it proudly announces Charles Ferguson’s allegiance to the corporate economy that brings us “the business cycle.” He has served as a consultant to major corporations like Apple, Xerox, Motorola, Intel, and Texas Instruments. He founded his own software development company, Vermeer Technologies, which he sold to Microsoft in 1996. Ferguson has also devoted time “frequently consulting to U.S. government agencies including the White House staff, the Defense Department, and the U.S. Trade Representative.” Having devoted his life to the corporate states of America, Ferguson has every reason to overlook the capitalist forest in his “meticulous and infuriating” search for excessively greedy, corrupt, and incompetent individual players.
Ferguson’s film presents a now familiar litany of bad moves: financial deregulation, S&L crisis, Gramm-Leach-Bliley Act, Commodity Futures Modernization Act; and bad guys: Charles Keating, Alan Greenspan, Phil Gramm, Hank Paulson (Goldman Sachs), Dick Fuld (Lehman Bros.), Angelo Mozilo (Countrywide), Robert Rubin (Citigroup), and Larry Summers, to name just a few. Also, the economics profession as a whole comes in for severe criticism for selling out to the financial industry. The solution Ferguson offers is, next time, just listen to the good folks who warned us; people like regulator Brooksley Born, IMF chief economist Raghuram Rajan, Professor Nouriel Roubini, billionaire George Soros, former New York State Attorney General Elliot Spitzer, and author Charles Morris.
In spite of Ferguson’s deep connection to the corporate habitat, a reviewer from Examiner.com Detroit, praised his film for “leaving you at least with a sense that the filmmaker set out to paint a full picture of the crisis, and not some loon trying to make a radical political statement.” A Macleans reviewer called Ferguson “the best teacher you never had” in contrast to that “blue-collar class clown” Michael Moore. This is like calling a stump preacher the best teacher capable of presenting the full picture of the failings of fundamentalist Christianity.
Yet, in the same way that Inside Job never uses the word “capitalism,” most reviews of Ferguson’s movie never mention Capitalism: A Love Story. Moore’s 2009 film not only dissects the current crisis but reveals the endless round of human suffering caused by “the business cycle” and explains what Ferguson hides: the systemic origin of economic crises. Ferguson directs his viewers’ wrath at a few bad apples, not at removing the diseased tree that keeps putting bad apples out there, decade after decade. All we need to do, according to Ferguson, is prosecute the criminals and reenact reasonable financial regulations. But somehow Ferguson and nave movie reviewers all fail to consider not so much that we’ve been there and done that but what it means that we’ve been there and done that. No one asks the obvious question, how many more times do we have to go through this? Maybe, just maybe, you don’t save the hens by letting them run loose and locking up one or two foxes — then acting surprised when a few more foxes show up. You’ve got to build a new, fox-proof henhouse.
The United States government has had 156 years to get the regulations just right and put an end to the cycle of economic breakdown, and nearly 75 years since John Maynard Keynes definitively showed how to do it, yet recessions continue to occur — and they are getting worse. Show trials of a few corporate criminals do nothing to stop an economic system that breeds corporate crime. At the conclusion of his film, Ferguson mentions that it seems like the huge financial corporations have taken over the government. We should fight back, he says, and then the movie just ends. But what are we fighting against and what are we fighting for? All you can deduce from Ferguson’s movie is we need to get back to our 1930s regulatory framework. Let’s say, somehow, we accomplish that feat. Based on the past record, we can be sure that forty years later we will have experienced eight or nine additional, and increasingly severe, economic collapses, not to mention at least one new and improved version of financial panic.
As Americans, our lives now depend upon the understanding that our “collective values” were not betrayed by Wall Street. The values that the rulers of the corporate states of America share are what got us into this mess: free markets, maximum profits, economic inequality, individual wealth over social/environmental costs, endless consumerism, and bigger is better. Anyone who dares criticize those values is quickly termed a “loon” or “clown.” If real change is to happen, it’s not enough to be “mad as hell”; the anger must be directed at the root of the problem and only Capitalism: A Love Story shows what that is.
A review of Inside Job, produced, written, and directed by Charles Ferguson, produced by Audry Marrs, 108 minutes, narrated by Matt Damon.
By Michael Shermer
In this disturbing and often infuriating look at the financial meltdown, the Academy Award-nominated (No End in Sight) documentary filmmaker Charles Ferguson promises viewers an inside look into the “inside job” (use intended to convey criminality) that he believes explains the financial meltdown and subsequent recession. Inside Job is a well produced, artfully edited, and dramatic reconstruction of the rise and fall (and rise) of the Wall Street financial industry. Most of us are painfully aware of what happened to the economy, so this film packs into less than two hours what took two years to unfold, and so the emotional impact is commensurate with the eye-blurring number of events tightly repackaged in cinematic gravitas.
With Inside Job I expected a Michael Moore-like liberal attack on all things free market, but that is not the case here. Instead, there is what is said and what is not said. In other words, there were no lies of commission, but there were some lies of omission. What is said in Inside Job (that I found to be accurate although Ferguson does not phrase it this way) is that, in fact, we do not practice free market capitalism because the government (both Bush and Obama administrations are indicted in the film) are in bed with Wall Street tycoons, reducing risk taking through the moral hazard of promised bailouts. The whole point of capitalism is to make a profit by taking risks. Low risk taking typically results in slow and steady growth, whereas high risk taking historically produces both high profits and steep losses. By entering the business of risk protection, the government is sending a clear signal to the market: don’t worry about taking big risks with your own and investors’ money; we’ll bail you out. In profits we’re capitalists, in losses we’re socialists. This is what Ralph Nader would call corporate welfare, and in the case of the financial meltdown and subsequent bailout he would be right.
What infuriates in particular in the film is just how much of an old-boys club Wall Street is (and what little chance any of us little guys have in competing fairly), and how much of the club roster includes prominent politicians and members of the Federal Reserve. It reminded me of my research on doping in sports, in which it has become abundantly clear that nearly everyone seems to turn a blind eye to the problem and former athletes are now running the sanctioning bodies and doping agencies are in the pay of said sanctioning bodies. When Ferguson reminds us that Obama left in place all the major players in the game–Bernanke, Geithner, Paulson, Sumners, et al.–it made me think of what would happen if Major League Baseball put Barry Bonds in charge of ending steroid use, or Marion Jones was the executive director of the World Anti-Doping Agency.
The greed of Wall Street bankers and financiers is the leitmotif throughout Inside Job, and there is certainly no shortage of it on Wall Street. As one trader noted, there is no point of going anywhere near that part of Manhattan if your primary goal is not to make a pile of money. But Wall Street greed is only half the story; the other half is Main Street greed. Those greedy bankers were giving questionable loans to greedy buyers, and everyone was hoping to cash in through escalating risk taking in financial and real estate markets.
Now, behavioral economists have demonstrated that humans are normally very risk averse. Specifically, the research shows that losses hurt twice as much as gains feel good. That is, in order to get someone to invest their hard-earned money you have to convince them that the potential gains are twice as much as the possible losses. So why weren’t all these Wall Street bankers and Main Street buyers risk averse? Two reasons: short term thinking and reduced risk signals. First, potential home buyers and investors mistakenly assumed that the increasing trend line in housing prices would continue unabated indefinitely. Two, loan officers and their financial institutions intentionally and deceptively reduced the normal risk signals sent to potential customers in hopes that the artificial bubble would not burst. It did, and here we are.
Since corporations and financial institutions are run by people, they should show the same risk aversion that individuals do when investing money and granting loans. Normally they do, but over the past decade something happened to remove or delay the risk. That something was a combination of government intervention into the financial marketplace and private repackaging and selling of loans to organizations too distant from the risk to feel averse to the potential loss. For example, in the spring of 1999 a pilot program was launched by Fannie Mae and Freddie Mac. Recall that Fannie and Freddie are government-run organizations that do not make loans directly to customers–they buy loans from banks, which make those loans directly. So, here already the risk was removed a step from the brains of the risk assessors, but risk aversion was further attenuated by government interference with the pricing mechanism that normally adjusts for risk.
In that pilot program the nation’s largest underwriter of home mortgages came under pressure from the Clinton administration in its desire to achieve an “ownership society,” along with insistence from the Department of Housing and Urban Development (HUD) that Fannie and Freddie increase their portfolio of loans made to lower and moderate-income borrowers from 44 percent to 50 percent by 2001. That meant granting loans to higher risk customers.
There’s nothing wrong with corporations and institutions taking higher risks, as long as they adjust for it by charging more. The higher price acts as a risk signal to both buyers and sellers, thereby dialing up their emotion of risk aversion. This is what Fannie Mae was already doing by only purchasing loans that banks made charging three to four percentage points higher than conventional loans. But under the new program implemented in 1999, higher-risk people with lower incomes, negligible savings, and poorer credit ratings could now qualify for a mortgage that was only one point above a conventional 30-year fixed rate mortgage (and that added point was dropped after two years of steady payments).
In other words, the normal risk signal sent to high risk customers–you can have the loan but it’s going to cost you a lot more–was removed. Lower the risk signal and you lower risk aversion.
None of this is part of Inside Job, and that’s a shame because it misses an opportunity for a deeper look into the well of human nature that can lead any of us down a greedy path of blind profit seeking through rent seeking–the term used by economists to describe actions of individuals or firms to seek profits through political manipulation instead of economic competition. The problem is not greed per se, since that is part of our nature that when channeled properly through clearly defined and strictly enforced rules can result in much human progress. The problem is the attenuation or elimination of risk signals that keep greed in check.
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Over the past couple months, I’ve been asked to participate in a few panel discussions about Waiting for “Superman”. The film presents a stark, moving portrayal of the denial of educational opportunities in low-income communities of color. But while the movie includes statements such as ‘we know what’s wrong’ and ‘we know how to fix it’, viewers of the movie are hard-pressed to identify those causes and solutions — other than to boo and hiss at teachers unions and to cheer at the heroic charter school educators.
So in the panel discussions we try to make sense of that simplistic black-hat/white-hat story. We argue about whether the movie offers a fair and complete picture (it doesn’t even come close, unfortunately). But we never get to deeper issues about what’s wrong and how to fix it.
I thought about that when leaving a showing of the other prominent documentary currently showing, called Inside Job. It offers an explanation of how the current economic crisis came about, describing the securitization of mortgages; the extraordinary leveraging of assets; the regulatory capture by Wall Street leading to minimal enforcement of federal regulations — a deregulation intended to spur innovation; and the fraud, greed, hubris and general belief among hedge fund titans and others in the financial services world that they are infallible. The film also points out the growing and now extreme inequality of wealth distribution in the United States “The top 1 percent of American earners took in 23.5 percent of the nation’s pretax income in 2007 — up from less than 9 percent in 1976.”
Consider those final three items: (1) the advocacy of deregulation in order to free up innovation, (2) hubris and general belief among hedge fund titans that they are infallible, and (3) increased wealth inequality. If Superman had explored these issues instead of bashing unions and promoting charters, moviegoers might have walked away understanding a great deal about why the families it profiled and so many similar families across America face a bleak educational future.
The movie certainly showed scenes of poverty, but its implications and the structural inequalities underlying that poverty were largely ignored. Devastating urban poverty was just there — as if that were somehow the natural order of things but if we could only ‘fix’ schools it would disappear. Rick Hanushek is put forth, saying that if we fire the bottom 5 to 10 percent of the lowest-performing teachers every year, our national test scores would soon approach Finland at the top of international rankings in mathematics and science. But no mention is made of the telling fact that Finland had, in 2005, a child poverty rate of 2.8 percent while the United States had a rate of 21.9 percent. That gap has likely gotten even bigger over the intervening five years.
Rather than addressing these poverty issues, Superman serves up innovation through privatization and deregulation. We’re shown charter schools that give hope to these families. But what we’re not told is that the extra resources and opportunities found in these charters are funded in large part with donations from Wall Street hedge fund millionaires and billionaires. Problems of structural inequality and intergenerational poverty and pushed aside in favor of a ‘solution’ grounded in the belief that deregulation will prompt innovation, all the while guided by the infallible judgment of Wall Street tycoons. It’s no wonder that Inside Job better explained the school crisis than did Waiting for “Superman”.
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by Kevin G. Welner
Every single American and every person thinking of going to business school (and especially those in Business School) needs to see the documentary, Inside Job. This film is one of the most powerful, well-made and brave documentaries I have ever seen, and I have seen a heck of a lot of docs having been a programmer and documentary producer/director for the last two decades. I do not understand why this film is not being distributed widely, as it deserves a massive budget to promote it and the message it communicates so well. It needs to be shown to all high school students as a warning and should be required for all undergraduates who decide to study Economics, Business, Marketing, Women’s Studies, Education… basically everyone should see it.
Because not understanding what has happened is already leading us to repeat our mistakes. Don’t be fooled, those who created this depression, and we must call it what it is, are still in positions of power, and are still being paid huge sums of money to influence the economy, and worst of all, young people who are the future generations who will one day be running the businesses, economy, governments of the world.
The film is better than most thrillers and the bad guys and good guys (or in this case, an amazing woman) are so well defined and fascinating that you cannot stop watching for even a moment. The woman who should be a hero for all Americans, Brooksley Born, was the head of the Commodities Futures Trading Commission, and one of the few people who stood up to those who took down our economy, namely Larry Summers, Alan Greenspan and Robert Rubin. Ms. Born told the truth when no one else would. She was undermined by both dangerous ideologies which stole her power to regulate derivatives, and the greed of Wall Street with its powerful lobbyists and supporters.
Another woman featured in the documentary is the French Finance Minister, Christine Lagarde, who also has been outspoken about the dysfunctional nature of what was going on in the so-called hallowed halls and wood paneled executive offices of the banks. If we had women such as these two, along with trustworthy people such as Elizabeth Warren, running the show, I would wager we would not be in the economic mess we are today.
But the most disturbing part of the film for me was that not only have most of the criminals who stole from the American people not gone to prison, they have been rewarded, but that their approach to business and profit-making is being taught in what are considered to be the best Business Schools in the United States.
I felt ashamed for our top Business Schools in America when I heard the professors from Harvard, Columbia, Chicago, Northwestern, etc. demonstrate their complete ignorance as to how their teachings and philosophies (if you can call them that) helped lead to this disaster; they simply sounded arrogant and frankly stupid. They came across as out of touch and without a hint of understanding of their role in leading generations of students to buy into what is so obviously an immoral approach to participating in and running a world economy. In other words, not one of them seemed to think that perhaps they were wrong. Not one of them apologized, and in fact, they attempted to hide their ties to large corporations on whose boards they served, who financed their research and who paid them to write, publish and repeat precisely the things that supported the corruption and fraud which is ruining us.
This must stop and the people who are promoting this unsustainable, even criminal, way of running economies, corporations and people’s lives should not be teaching future generations about how to do things when they have undermined and are destroying our country and destabilizing many countries around the world. Their greed, added to the lack of moral hazard, is leading to increases in poverty and hardship for billions of human beings.
We talk about war in Iraq and Afghanistan, but what is happening within our borders and being replicated in financial centers across the globe is highly toxic, and doing more damage than any war being conducted with missiles, bombs and soldiers. And for generations, students from around the world have wanted to come to the US to study at our Business Schools, yet now our very way of functioning is being questioned. How can we expect others to respect our academic institutions when they are bought and paid for by an unhealthy system?
I would argue this economic warfare has been going on for longer than most of us realize, but the soldiers at JPMorgan, Goldman Sachs, the late Lehman Brothers, etc., have been fighting a dirty war they helped create. Some of them have fallen and now the even more concentrated power and wealth, which resulted as the number of their competitors dwindled, is continuing to spread and replicate a way of doing things which we already know will bring more hardship for the majority of the planet. The few rays of hope are in the Sustainable Business degrees and courses being taught in a few schools, but mostly the hope resides in those students who are questioning the status quo and demanding a more moral and just approach to Business and Economics.
Perhaps the goal was to centralize the power into fewer economic players so that they could more readily compete with the huge emerging market banks in China and elsewhere, and to go up against the oligarchs in Russia and India, but the fallout is that Democracy is at stake and our US banks are now playing by rules which have nothing to do with what America stands for, and, in fact, is destroying our foreign policy as other countries no longer trust us to do the right thing.
Just yesterday I was at a conference in Europe where the Future of Strategic Partnerships was being discussed, and the US was not being considered in the same way as it had in the past. This is primarily because of the way Wall Street hurt both the US economy and Europe, selling their own people, and other countries and their banks, pension funds, governments our bad loans. They are pretty angry at us for basically destabilizing even those economies which had been responsible, had savings, and whose people pay higher taxes in the US. In other words, the US contagion spread, and it has destroyed in some cases, our reputation so badly, that diplomatic, economic and even military partnerships are being affected.
I hope that some responsible business leader or a group of them will get together and make sure that the film Inside Job is shown near and on campuses across the country and around the world. The signs of hope really lie with these future generations questioning those who came before them. The problem is, most business students are in it for the money, not all, but many of them. But business can also be a noble endeavor. It can also be approached as a way to create a better world. I hope and pray that those in the film who are speaking up and do hold positions of power, will be able to help change things. But we need to take a hard look at what we are teaching our children.
What good is a Harvard MBA if one does not lead a life of integrity? We should teach our children to leave this planet better than it was when they arrived. And sadly, they are going to have a lot of hard work ahead of them to clean up our mess.
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Last week I urged readers to go see the film Inside Job, which lays out the web of deregulation, deceit and delusion that led to the subprime meltdown and crashed the U.S. economy. It’s no slight against the film to say that there is a lot of ground it didn’t cover.
Consider, for instance, the Henriquez family of California’s Central Valley, one of 25 Latino families interviewed in detail by researchers from the University of North Carolina Center for Community Capital and the National Council of La Raza for a report examining the impact of foreclosures on families. Mrs. Henriquez described how a real estate agent steered the family into an expensive loan:
But the family’s trust in the real estate agent was misplaced:
But the family put their trust in what they believed were knowledgeable professionals. The combination of the dubious mortgage and the loss of one income when their youngest son was diagnosed with autism and Mrs. Henriquez had to stop working and stay home led to foreclosure and financial ruin. A once financially stable family now has nearly $60,000 in debt even after the foreclosure. The emotional toil has strained their marriage and disrupted their children’s performance in school.
The Henriquez’s story is not unique; it’s been repeated many thousands of times in the last few years. In our work with grassroots organizations trying to assist these families, we’ve heard disturbing numbers of stories of borrowers who were pushed to falsely state a higher income than they really earned or were subject to other questionable tactics, including being sold a loan in their native language and then being forced to sign a contract in another language, with different terms than they had been sold orally.
Such foreclosures are numbers on a balance sheet to officials and economists, but they represent human beings with real lives. The UNC/ National Council of La Raza study found that family finances were devastated, with an average loss of nearly $90,000 — including money and hard work these families had put into repairs or upgrades to their homes. With their financial safety net obliterated, families had to make devastating choices, from doing without needed medical care to giving up on plans to help pay for their children’s education.
Sadly, the human misery we’ve seen from the foreclosure crisis thus far may be only the opening act. It could get worse — much, much worse — if the federal government and lending institutions stay on their present course.
According to figures compiled by the Center for Responsible Lending, a total of 2.5 million homes went into foreclosure in 2007, 2008 and 2009 combined. An additional 5.7 million borrowers are at “imminent risk” of foreclosure, meaning they are two or more payments behind. Analysts predict that there will be between 10 and 13 million foreclosures altogether before the present crisis ends.
For the most hard-hit neighborhoods, this will be the equivalent of a financial nuclear blast. The worst devastation will be among Latino and African American homeowners, over one in five of whom are at imminent risk of foreclosure.
Think of the wreckage we’ve seen already being inflicted on three to four times more families than have already gone through it. And think of the ripple effects on neighborhoods and communities – the businesses that will go under, the new waves of jobs that will be lost, and so on.
This isn’t some far-fetched, worst-case scenario. It’s what will happen if we stay on our present course. But there is still time to stop it – if we choose to.
NEXT WEEK: How to stop the coming tidal wave of foreclosures.
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Anyone who has seen The Corporation (a brilliant 2003 Canadian documentary) knows that business executives will go to any length (no matter the human cost) to extend their profit margins. In an age when corporations are claiming the same right to freedom of speech as that guaranteed by the United States Constitution to citizens who vote, it’s interesting to see how The Corporation likens corporate behavior to the clinical definition of a psychopath.
Poster Art for The Corporation
This year, we saw devastating evidence of corporate negligence by Halliburton and British Petroleum following the Deepwater Horizon oil spill in the Gulf of Mexico.
Joe Berlinger’s 2009 documentary, Crude, examines the toxic impact Chevron has had on the indigenous people of Ecuador and their environment.
Charles H. Ferguson’s documentary, Inside Job, examines the the financial crisis of 2007-2010.
Analysts have recently shown how money spent by the United States Chamber of Commerce to influence elections has come from overseas corporations hoping to acquire lucrative outsourcing contracts.
While some Americans are shocked that corporations would lay waste to the environment or take jobs away from Americans, to imagine for one second that patriotism plays a role in corporate decisions is utterly naive. It’s all about the bottom line and how corporate incentives are used to squeeze larger profits from current and future operations.
Following the Supreme Court’s ruling in the Citizens United v. Federal Election Commission case on January 21, 2010, corporations were given a green light to spend as much money as they wish to influence American elections. According to the Campaign Media Analysis Group, since January 1, 2010 more than $65 million has been spent on 161,203 ads attacking Speaker Nancy Pelosi (and that’s just the tip of the iceberg).
The giant egos of Wall Street CEOs who thought of themselves as “Masters of the Universe” are put brazenly on display throughout Client 9: The Rise and Fall of Eliot Spitzer. That filmmaker Alex Gibney was able to get some of these people to talk in front of a camera is testament not only to his skills as a documentarian, but to their sense of omnipotence and entitlement as well.
Gibney initially approached journalist Peter Elkind to see if they might work together on the story (Elkind had known Spitzer while they were enrolled at Princeton and had interviewed him several times for Fortune) magazine. Elkind (who had collaborated with Gibney on Enron: The Smartest Guys In The Room) sensed that the story had acquired a new set of legs. As the filmmaker explains:
Ironically, a documentary about how the man who looked certain to become the first Jewish President of the United States saw his political career go up in smoke (after it was revealed that he had been seeing a prostitute) is hitting theatres at the same time that former President George W. Bush is out pushing his recently published autobiography.
No doubt, you’re wondering what the connection is (this is easier than playing Six Degrees of Kevin Bacon). Eliot Spitzer just became a pundit on CNN. Karl Rove (the man known as “Bush’s brain”) is now a pundit on Fox News.
Although you never hear any mention of Rove’s name during Gibney’s thoroughly researched documentary about Eliot Spitzer, that’s because Rove has a long history of engineering dirty political tricks that can’t be traced back to him. But if you look closely at how Spitzer was taken down, the first thing you’ll notice is that the man who was known as the Sheriff of Wall Street had pissed off some top-level Republican donors.
The kind of people who use their money and power like the Mafia.
The kind of people who know who to call when they want someone out of the way.
The kind of people who consider themselves above the law.
The kind of people who know Karl Rove.
Anyone familiar with Rove’s history of dirty tricks can sense his influence in the way Spitzer was taken down. Among the Wall Street thugs who contributed to his downfall are:
Kenneth Langone, co-founder of The Home Depot and a former Director of the New York Stock Exchange who had been singled out by Spitzer for approving a staggeringly high pay package for Dick Grasso, the former head of the New York Stock Exchange.
Maurice R. “Hank” Greenberg, the former Chairman and CEO of AIG . In 2005, the board of AIG asked Greenberg to resign from his post as CEO not long after Attorney General Spitzer had begun an investigation into fraudulent business activities at AIG and a subsidiary of Warren Buffet’s Gen Re.
Joseph Bruno, the long-standing Majority Leader of the New York State Senate when Spitzer became Governor. Bruno later served as Lieutenant Governor of New York but, in 2009, was convicted on federal corruption charges.
Roger Stone, one of the most famous lobbyists on the American political scene and a renowned Republican strategist who has referred to himself as a GOP “hitman.” A consultant to Joseph Bruno in 2007, he was forced to resign after allegations that he had threatened Spitzer’s father in an obscene and angry voice-mail traced by private detectives to his home. Although Stone has always denied he made the phone call, he admits to writing a letter to the FBI that might have alerted them to Spitzer’s use of prostitutes.
Poster art for Client 9: The Rise and Fall of Eliot Spitzer
In a sense, Client 9: The Rise and Fall of Eliot Spitzer could easily have been subtitled For Hedge Fund Managers Who Have Considered Bailout Money When Their Bonuses Weren’t Enuf. This is a story about greed, arrogance, vendetta, and sex. It’s a story about what happens at the higher echelons of politics and prostitution.
It’s also the story of a man with a tragic flaw that is almost Shakespearean in nature. With his obsessive attention to detail, Spitzer made sure that his actions could not be traced by use of a credit card or checking account. However, he forgot one thing: it’s the smallest, stupidest details that usually trip up the most brilliant, complex minds. Just remember that Spitzer did not get caught in an FBI wiretap without someone suggesting that he be followed. As Gibney recalls:
Filmmaker Alex Gibney
“As for the federal investigation, I found the manner and the timing to be very suspicious. While al-Qaeda was at large and the entire global economy was collapsing, the Department of Justice’s Southern District of New York (responsible for policing Wall Street and terrorism, among other things) was spending extraordinary man-hours and resources to track down a small-time escort service. Spitzer did technically break federal law but historically the Justice Department never goes after small-time prostitution rings and explicitly has a policy of not prosecuting ‘Johns’ under an antiquated statute called the Mann Act. So I do think the investigation was intended as a form of political assassination. The goal, I believe, wasn’t to charge him with a crime (there really wasn’t any federal crime to charge him with) but rather to leak salacious details that would embarrass him and bingo, he’d have to resign. And so Spitzer was brought down just as everything on Wall Street was going up in flames.”
There are many sad ironies in Client 9: The Rise and Fall of Eliot Spitzer, not the least of which is the near collapse of the U.S. economy soon after Spitzer stepped down from office. The odd thing is that, as you watch Gibney’s film, instead of silently thinking about news events or another documentary, you might find yourself referencing 2004′s Mean Girls.
There are times during Client 9: The Rise and Fall of Eliot Spitzer when you’ll laugh and snicker. At other moments, you might just groan in disgust and disbelief. Once the film ends, you may simply want to take a long, hot shower while mumbling Macbeth’s famous words: “Will all great Neptune’s ocean wash this blood clean from my hand? No; this my hand will rather the multitudinous seas incarnadine, making the green one red.” Here’s the trailer:
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“Inside Job”, the highly-touted documentary about the global financial crisis, opened last week in theaters, and director Charles Ferguson told the New York Times that he could have done a separate film just on Iceland, where the former Prime Minister was indicted in recent weeks for “gross neglect” of the economy. Ferguson was amazed by the havoc caused by an elite so small, “you could practically fit them into a restaurant.”
This week, Iceland is the focus of the second in an occasional series examining a trend in which networks of public-private players, purporting to serve the public interest, instead capture official information to serve their own interests. Robert Wade of the London School of Economics and Silla Sigurgeirsdottir of the University of Iceland show how the trend played out disastrously in Iceland. – Janine Wedel & Linda Keenan
What explains Iceland’s financial debacle? The bankers’ wild behaviour is a textbook case of accounting control fraud. In the end, however, the responsibility lies with the government led by former PM Geir Haarde and Haarde’s longtime ally/mentor David Oddsson, who led the Central Bank after serving as PM from 1991-2004. The parallels with US and UK politicians and central bankers are obvious: Iceland’s leaders remained in denial while their policies pumped up the bubbles, year after year. And their modus operandi shows that these leaders are part of a new breed of power broker who fuse state and private power to achieve their own ends. These players debuted with the end of the Cold War and amid the growth of privatization and of new information technologies, part of a new system of power and influence identified in Janine Wedel’s Shadow Elite. Iceland appears to be a stark example of the shadow elite in action, with operators multiplying their influence by coordinating their efforts as part of an exclusive and self-propelling team that Wedel calls a “flex net.”
Iceland’s flex net operated on the edge of and partly in opposition to a traditional elite, a bloc of some 14 families known popularly as the Octopus, which dominated Icelandic capitalism from the start. In the early 70′s, some university students took over a journal called The Locomotive to promote free-market ideas–and, not least, to open up career opportunities for themselves, rather than wait for Octopus patronage. The two future PM’s, Oddsson and Haarde, were members.
They were devoted to neoliberal policies, and privatized publicly-owned enterprises, to the benefit of their Locomotive cronies. In 1991 Oddsson began his reign–not too strong a word–as PM, explicitly invoking Reagan and Thatcher as models and drawing on the same ideas of “New Public Management,” which sanctioned large-scale outsourcing of government work to private actors. Then he set in motion the dramatic growth of Iceland’s financial sector, before installing himself as Central Bank Governor in 2005. Finance Minister Haarde took over as PM shortly after.
While manuevering themselves and their allies into key roles relevant to achieving their agenda, the leaders also locked up should-be public information in their own network –these tactics are both key flex net features. A glaring case of this can be seen when, as the collapse gathered speed, Oddsson, as Central Bank Governor, moved to peg the krona at close to the pre-crisis rate, a crazy move by all economic counts, but it might have allowed cronies in-the-know to spirit their krona into safer currencies in the few hours that the rate lasted. He consulted only his protg, Haarde. Even the Central Bank’s chief economist was kept in the dark.
With near-exclusive access to information, power brokers can also brand it for the media and public to suit their own purposes, with only a few able to counter them. The Oddsson and later Haarde government proved masterful at this. They relied primarily on the banks’ research departments for economic analysis. Iceland’s National Economic Institute had built a reputation for independent thinking and, at times, published unwelcome reports, warning that the economy’s management was going haywire. Oddsson abolished it in 2002. Statistics Iceland, the public data agency, was notably cowed into suppressing unfavourable information. And the University of Iceland bowed to pressures to make its Economic and Social Research centres self-funding–that is, to rely on finding buyers for commissioned research–with the convenient result that they no longer published big-picture reports with a critical edge.
In 2006, the Icelandic Chamber of Commerce commissioned an expensive report from
Columbia Business School economist Frederic Mishkin, which affirmed the banks’ stability with few qualifications. The following year the Chamber of Commerce commissioned another one from London Business School’s Richard Portes, which reached much the same conclusion. (After Iceland’s collapse, Mishkin’s report, called “Financial Stability in Iceland” was re-listed on his CV as “Financial Instability In Iceland”. Mishkin told Inside Job director Charles Ferguson that it was a typo.)
With independent information centres neutralized, the big financial players were better able to capture the key Ministries and Central Bank; indeed, in such a small pool, one could say that they all they captured each other. The line they fed themselves and the public was that, because the three main banks – Landsbanki, Kaupthing and Glitnir – paid much better than any government body, they must therefore attract the best talent. (Of course, this “talent” joined the Central Bank or the Financial Services Authority with the aim of learning enough to then land a private bank job and double their salary.) Therefore, it was only sensible for the government and the public to rely on information supplied by the best talent – the banks themselves.
The Chamber of Commerce, for its part, functioned almost literally as the bankers’ executive committee: it has been estimated that at least 90 per cent of its recommendations were translated into legislation. Almost everything the bankers wanted became government policy, and grateful bankers provided grateful politicians with generous rewards. The government’s decision to provide unlimited deposit guarantees after the crash – rather than the statutory amount — illustrates its beholdenness to the financial elite.
In Shadow Elite, Wedel points out that the new breed of power broker is skilled at evading accountability – often by using ambiguity to create built-in deniability. As the Iceland crisis unfolded, senior ministers, answering mainly to each other, established an ad hoc crisis coordination group. But it had no clear mandate or formal reporting procedures and did little more than throw ideas around. Iceland’s Special Investigative Commission later revealed that the group did not report to ministers in any way that could be verified, allowing the latter to evade legal responsibility and later to deny that they knew how serious the problem was becoming.
This new kind of power broker is also skilled at turning failure into opportunity. Case in point: David Oddsson. Far from being held accountable, Oddsson was rewarded in September 2009 with the position of Editor-in-Chief at the leading Icelandic daily. From there, he orchestrates coverage of the crisis, yet again helping to brand events for the public. This is roughly the equivalent, as one commentator has pointed out, of appointing Nixon editor of the Washington Post during Watergate. External investors who have bought into some Icelandic firms at knock-down prices are urging the Icelandic government to ‘move on’ and not keep raking over the past. Another crucial outside actor – the IMF- is headed in Reykjavik by a former roommate of Haarde’s (Brandeis in the 1970s), and still close friend. And strangely, despite an expansive team of 30 people, and after 20 months of work, the special prosecutors’ office has brought only one case to court so far. It involves a very minor figure.
Even Parliament’s recommendation last week to indict Geir Haarde is a letdown for those demanding real accountability: the parliament voted to charge Haarde, but not three others facing similar charges. The former ministers who prescribed the policies of the bubble economy, i.e. David Oddsson and his then partner in a coalition government, face no charges whatsoever because of a 3 year statute of limitations. Meanwhile the current leadership is unable to avoid one thing: popular outrage – misleadingly directed at it rather than at the previous leaders responsible. The Guardian reported that politicians had to flee 2,000 angry protestors at the recent Parliament opening. Polls show that “trust in parliament” is running at about 10%. One can hope that those responsible for Iceland’s implosion will face more consequences than hurled eggs, but Geir Haarde, for one, is undaunted at the prospect of being the first world leader indicted for economic mismanagement. He told Bloomberg News two weeks ago that he will be “completely vindicated”, and called the charges “absurd.”
This article was adapted from a lengthy analysis of the Iceland crisis by Robert Wade and Silla Sigurgeirsdottir, appearing in the September/October issue of the New Left Review.
Photo by Representational Pictures, Courtesy of Sony Pictures Classics
A new documentary that takes a deep dive into the events and people that caused the global financial collapse opens in Los Angeles this weekend. While it brought in about $42,000 in two theaters during its opening week in New York that may have something to do with its subject being about a home town industry — Wall Street. Will a film about finance resonate in the city of Angels?
After seeing screening of a new documentary, Inside Job, that uncovers how a group of “evil doers” tanked the system I think it’s a must see no matter where you live.
It’s a densely packed film that methodically lays out the, who, what, when and where of the ultimate bank job. “My first choice for a title was Bank Job, but that was taken,” said filmmaker, Charles Ferguson when we sat down to discuss his latest film.
Charles Ferguson, Director
Photo by Mariusz Cichon/Representational Pictures, Courtesy of Sony Pictures Classics
Ferguson’s film is not peopled with a group of charming rogues like The Lavender Hill Mob or sexy, populist, anti-heroes like Dillinger who held up one bank at a time. His characters are the pillars of Wall Street, the banks, analysts, ratings agencies, the regulators, and their lackeys in Congress and academia who together tunneled into the banking system and made off with all the loot. The response to this calamity was to engineer a shake down of taxpayers and depositors in order to fill the banks back up so this gang can do it again.
So far only one of the big players has been charged, the former CEO of Countrywide Financial, Angelo Mozilla. “He’s only being charged with civil fraud not criminal fraud,” said Ferguson.
Ferguson believes the Securities and Exchange Commission (SEC) zeroed in on Mozilla because what he did was “so egregious and he’s not connected.” Mozilla spent most of his career independent of the large financial institutions and brokerage houses. “Anyone else would be able to apply pressure,” from powerful friends.
That’s not to say others shouldn’t be doing the perp walk. “Many people knew this (the financial boom) was going to end badly,” said Ferguson, “and their financial behavior suggests that.”
At the same time they touted the shares of their firms they weren’t investing their own money in the companies. “They took out hundreds of millions of dollars, much of it in cash,” said Ferguson. These actions constitute, “potentially both civil and criminal fraud.”
There’s nothing stopping the SEC from going after these guys but, “for anything else to happen would be due to public pressure,” said Ferguson.
Flag New York Stock Exchange
Photo by Representational Pictures, Courtesy of Sony Pictures Classics
Right now the vocal pressure for reform, however misguided, is coming from the Tea Party whose members, the Republican Party hopes, will support its recently announced “Pledge to America.” This platform is what a friend used to call, “the same old sandwich,” a retread of the same policies that party stalwarts have championed for years — tax cuts, a spending freeze, rolling back health care reform, missile defense and a raid on Social Security as the prescription for what ails the country. There’s no mention in their manifesto of any financial regulatory reform let alone a call to lock up the malefactors who took down the system while lining their own pockets.
They also fail to point out that America’s financial system, once the world’s gold standard (no pun intended), is no longer trusted.
Wall Street news ticker
Photo by Representational Pictures, Courtesy of Sony Pictures Classics
“If you talk to people in Europe, Asia and Latin America, they don’t take seriously what America’s bankers have to say,” said Ferguson.
These countries, all with vibrant, growing economies are looking for other places to put their money besides Wall Street.
“It will reduce the amount of investments and will have an enormous impact on America. America’s impact is declining,” warned Ferguson.
This wasn’t the first time an economy has melted down. The world has experienced numerous financial crashes over the last several centuries, according to Carmen Reinhart and Kenneth Rogoff who took the long view in their book, This Time Is Different: Eight Centuries of Financial Folly. What they found was as far back as the 1300′s elements like rapid deregulation and real estate bubbles coupled with arrogance and ignorance were the sparks that set fire to an economy.
Ferguson agrees with the authors who say that these calamities can be avoided if politicians and regulators step in. “If we don’t fix this it’s going to happen again.”
It’s up to us to apply the pressure. First step. Go see Inside Job. Bring your friends and better yet, bring someone who doesn’t agree with you. Then see it again and bring some more people.
Then let your legislators know that you don’t want any silly, faux fixes you want them to really put some teeth in regulations. Demand someone like Elizabeth Warren be appointed at the SEC and at Treasury and that the ratings agencies be held accountable. And while you’re working yourself up into high umbrage tell them to appoint a special prosecutor and put some of the financial system arsonists behind bars. Nothing like the threat of serious jail time to shake things up in the Hamptons. It’s not going happen without you. Ferguson’s done his job, now it’s up to the rest of us.
Inside Job, narrated by actor Matt Damon, it opened on October 8th in New York and as we said, is reported to have taken in about $ 42,000 in two theaters over the weekend.
The film will open this Friday, Oct 15th in Los Angeles. Then rolls out to additional cities — Chicago, Boston, San Francisco staring Oct 22nd.
To track the financial collapse, follow these links on the Sony Classics website:
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On September 15, 2008, one of the most venerable and storied financial institutions in the world, Lehman Brothers, declared bankruptcy. Charles Ferguson smelled a rat.
Like he had done with No End in Sight, his 2007 film about the failed U.S. war effort in Iraq, Ferguson set out, in his clear and unblinking manner, to document what actually caused the monumental financial collapse.
As was the case in Iraq, not everything was at it seemed during the financial crisis. Ferguson spoke to me about Inside Job, and what he thinks is in store for America, and New York City.
Inside Job features footage of the Goldman Sachs congressional testimony in April. CEO Lloyd Blankfein is questioned as to whether or not his firm behaved improperly. He replies, “In the context of market-making, no.” Can market-making be squared with morality?
Market-making can be, but what was deeply deceptive about his answer was Goldman weren’t just making markets. When you make a market, when you’re doing it properly, you create an arena where buyers and sellers can come together and transact on fair terms. That’s not what they were doing.
Goldman was taking one side of a transaction that they were themselves creating and structuring so that it would cause the other side of the transaction to fail. Then they could profit from their side of the transaction. That is not market-making. They were claiming that it was because they wanted to pull the wool over the public’s eyes, and more importantly, wanted to avoid criminal prosecution.
Inside Job doesn’t paint a pretty picture of post-crisis America. Will things change?
I am optimistic that the American people are going to respond to this. It’s going to be slower and more gradual than certainly I would like. I think we had an opportunity when President Obama was elected, and he had an opportunity and a mandate, in fact, to really do something transformative about this, and he blew it. And that’s a huge tragedy for this country.
He really did have an opportunity at a historically important moment and he had the power to do it, I think. Now that he has chosen not to, it’s going to have to be a much more gradual process of the American people becoming more informed and angry and activist and eventually forcing their leaders to act.
Is that what the Tea Party is?
So far I would not say so. So far I don’t think they are a very prodcutive reaction. But there are many people in the United States, including quite influential people, who are very distubed at all of this.
What’s your perspective on Obama?
He had an opportunity to behave very differently. It’s extremely disapointing that he didn’t. He said things that made a lot of people, including me, very hopeful. But it turned out to be more of the same. Why? I don’t really know, but I’ve been told a number of things that seem plausible.
One is that he had very little experience with these issues when he was elected. Very little training in economics or finance, never held a private sector job. He never had a significant personal fortune so he knew what management of assets was like. He hadn’t had much contact with the financial world. He comes into office in this huge crisis, and I am sure people told him that he needed to appoint people that Wall Street could deal with and respected because otherwise the markets would fall further, and we’d have an even worse crisis.
Some people have also said he just made a cold-blooded political calculation. If so, he made a mistake. I don’t think it was in his long-term political interest to behave this way. It’s going to show in the mid-term elections and I think it is going to show even more strikingly when he tries to run for reelection.
“Inside Job” opens Friday, October 1 in New York City.
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Critics of the Obama administration’s remarkably friendly policies towards Wall Street have recently been encouraged by the appointment of Elizabeth Warren and the announced departure of Larry Summers. Unfortunately, these two developments do not solve our problems, or even indicate that President Obama is interested in solving them.
As usual with this administration, Elizabeth Warren’s semi-appointment was a cosmetic measure; she is there temporarily, reporting to Tim Geithner, and the new consumer protection agency has limited scope and enforcement powers, typical of the watered-down financial “reform” bill recently signed. As for Larry Summers’ departure, well, one down, about fifty more to go.
The Treasury Secretary is still Tim Geithner, who as president of the New York Federal Reserve did nothing to stop the fake economy created by the financial sector, and who then helped Henry Paulson botch the bankruptcy of Lehman Brothers and force AIG to pay off Goldman Sachs. Geithner’s successor at the New York Fed is William C. Dudley, formerly chief economist of Goldman Sachs.
Geithner’s chief of staff at Treasury is Mark Patterson, a former Goldman Sachs lobbyist. On the White House staff we have David Lipton and Mike Froman, fresh from Citigroup, which gave Froman a $2 million bonus just after his appointment. Chairing the SEC we have Mary Schapiro, formerly head of FINRA, the investment banking industry’s self-regulatory body, which stood by happily while all those AAA-rated securities were being sold, often by investment banks that were secretly betting they would fail.
At the Commodity Futures Trading Commission we still have Gary Gensler, a former Goldman Sachs executive who helped ban the regulation of derivatives in the Clinton administration. And Ben Bernanke still runs the Federal Reserve, despite Bernanke’s abysmal record before and even during the crisis.
Given this cast, their movie has been utterly predictable, as my movie makes painfully clear. In the wake of the financial crisis, Britain imposed a 50% tax on banking bonuses, and the European Parliament passed strict regulation of banking compensation to eliminate the ‘heads we win tails you lose’ pay structures that helped cause the crisis, and made it so much worse. The Obama administration has done nothing, and in fact has resisted attempts to tax or control financial compensation.
There have been no antitrust investigations of banking, despite the fact that five U.S. firms control more than 95% of global derivatives trading. No attempt to break up the biggest banks or control the “too big to fail” problem, despite a financial industry even more concentrated than before the crisis. The three big rating agencies are still paid by the banks who issue the securities they rate. Lobbying continues unabated and quite obviously, there are no controls on the revolving door, given who runs this administration. No attempts to force disclosure of the massive financial conflicts of interest that have corrupted academia and the economics discipline, turning supposedly independent professors into cheerleaders for the banks. No reforms of corporate governance, and no attempts to get back the billions of dollars that financial executives looted from the companies they destroyed.
And finally, we have the Justice Department’s absolutely perfect record — literally zero prosecutions; not a single Wall Street executive or company arrested or charged, much less tried and convicted. In the worst financial bubble in history, nobody committed a crime. It was possible to conceal liabilities, inflate assets, bet against the securities that you sold as totally secure, without committing a single fraud. Isn’t that amazing? So, yes, it’s nice that we won’t have Larry Summers making policy anymore, but it will take a lot more departures, and a lot better decisions, before we approach even minimal decency.
In fact, the most depressing part of the CNBC Town Hall was President Obama’s reaction when that amazing woman told him off — his timid evasions as the great orator was stripped away to reveal — emptiness. But people are getting angry and ever more impatient with a President who has turned out to be a wimp rather than a fearless agent of change.
It is unfortunate that so far, the only organized response has been the Tea Party; it might be time for a third party in America based on nothing more than common sense and honesty. With Arianna Huffington warning of Third World America and Paul Krugman writing “Banana Republic, here we come,” it might just be time to rise up and throw the rascals out, rather than waiting for them to comfortably resign.