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Inside Job (2010)
Retail OCR with Foreign Parts

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NARRATOR:
Iceland is a stable democracy

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with a high standard of living,

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and, until recently,

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extremely low unemployment
and government debt.

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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, education,
clean air.

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Not much crime.

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It's a good place for families to live.

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We had almost
end-of-history status.

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But in 2000, Iceland's government
began a broad policy of deregulation

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that would have
disastrous consequences,

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first for the environment
and then for the economy.

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They started by allowing
multinational corporations
like Alcoa

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to build giant
aluminum-smelting plants

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and exploit Iceland's geothermal
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 consequence.

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NARRATOR:
At the same time,

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the government privatized
Iceland's three largest banks.

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The result was one of
the purest experiments

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in financial deregulation
ever conducted.

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[SPEAKING IN
FOREIGN LANGUAGE]

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[CROWDS SHOUTING
IN FOREIGN LANGUAGE]

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We have had enough.
How could all of this happen?

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Finance took over
and more or less
wrecked the place.

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In a five-year period,
these three tiny banks,

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which had never operated
outside of Iceland,

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borrowed 120 billion dollars,

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10 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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ZOEGA:
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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He borrowed billions
to buy up high-end
retail businesses in London.

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He also bought
a pinstriped private jet,

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a 40-million-dollar yacht

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and a Manhattan penthouse.

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MAGNASON:
Newspapers always had
the headline:

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This millionaire bought
this company

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in the U.K. Or in Finland
or in France or wherever,

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instead of saying:

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"This millionaire took
a billion-dollar loan

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to buy this company,
and he took it from your local bank."

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ZOEGA:
The banks set up
money market funds,

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and the banks advised
deposit-holders to withdraw money

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and put them
in the money market funds.

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The Ponzi scheme needed
everything it could.

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NARRATOR:
American accounting firms
like KPMG

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audited the Icelandic banks
and investment firms

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and found nothing wrong.

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And American credit-rating agencies
said Iceland was wonderful.

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In February 2007,

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the rating agency upgraded
the banks to the highest
possible rate, triple-A.

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It went so far as the government here
traveling with the bankers

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as a PR show.

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When Iceland's banks collapsed
at the end of 2008,

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unemployment tripled
in six months.

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ZOEGA:
There is nobody unaffected
in Iceland.

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INTERVIEWER:
A lot of people lost their savings.

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Yes, that's the case.

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NARRATOR: Government regulators
who should've been protecting
the citizens

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had done nothing.

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You have two lawyers from
the regulator going down to a bank

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to talk about some issue.

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When they approach the bank,

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they would see 19 SUVs
outside the bank.

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You enter the bank,

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and you have the 19 lawyers
sitting in front of you, right,

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very well prepared,
ready to kill any argument you make.

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And then, if you do really well,
they'll offer you a job.

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One-third of Iceland's
financial regulators

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went to work for the banks.

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But this is
a universal problem, huh?

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In New York,
you have the same problem, right?

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[PETER GABRIEL'S
"BIG TIME" PLAYS]

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INTERVIEWER:
What do you think
of Wall Street incomes these days?

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Excessive.

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INTERVIEWER:
I've been told
it's extremely difficult for the IMF

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to criticize the United States.

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I wouldn't say that.

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We deeply regret our breaches
of U.S. Law.

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MAN:
They're amazed at how much cocaine
these Wall Streeters can use

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and get up
and go to work the next day.

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I didn't know
what credit default swaps are.

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I'm a little bit old-fashioned.

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INTERVIEWER:
Has Larry Summers
ever expressed remorse?

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I don't hear confessions.

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MAN:
The government's
just writing checks.

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That's plan A, that's plan B
and that's plan C.

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INTERVIEWER:
Would you support legal controls
on executive pay?

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I would not.

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INTERVIEWER:
Are you comfortable with the level of
compensation in financial services?

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If they've earned it,
yes, I am.

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Do you think they've earned it?
I think so.

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INTERVIEWER:
And so you've helped these people
blow the world up?

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You could say that.

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They were having massive
private gains at public loss.

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MAN:
When you think you can create
something out of nothing

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it's difficult to resist.

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WOMAN:
I'm concerned people
want to go back to the old way,

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the way they were operating
prior to the crisis.

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I was getting a lot of anonymous
e-mails from bankers saying:

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"You can't quote me,
but I'm really concerned."

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INTERVIEWER:
Why do you think there isn't

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a more systematic investigation
being undertaken?

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Because then
you'll find the culprits.

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INTERVIEWER:
You think Columbia Business School
has any conflict-of-interest problem?

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I don't see that we do.

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The regulators
didn't do their job.

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They had the power to do
every case that I made.
They just didn't want to.

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MAN:
Lehman Brothers,
one of the most venerable

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and biggest investment banks,
was forced to declare itself bankrupt.

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Another, Merrill Lynch,
was forced to sell itself today.

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World financial markets
are way down,
following dramatic developments.

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[SPEAKING IN CHINESE]

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[MAN SPEAKING IN FRENCH]

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NARRATOR:
In September 2008,

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the bankruptcy of the U.S.
Investment bank Lehman Brothers

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and the collapse of the world's
largest insurance company, AIG,

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triggered a global crisis.

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MAN 1:
Fears gripped markets overnight.

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MAN 2:
Stocks fell off a cliff.

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The largest single point drop
in history.

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MAN 3:
Share prices continued to tumble

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in the aftermath
of the Lehman collapse.

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[CROWD SHOUTING
IN FOREIGN LANGUAGE]

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The result was a global recession,

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which cost the world
tens of trillions of dollars,

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rendered 30 million people
unemployed

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and doubled the national debt
of the United States.

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With the destruction
of equity and housing wealth,

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the destruction of income,
of jobs,

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50 million people globally could
end up below the poverty line again.

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This is just a hugely,
hugely expensive crisis.

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This crisis was not an accident.

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It was caused
by an out-of-control industry.

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Since the 1980s,

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the rise of the U.S. Financial sector
has led to a series

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of increasingly severe
financial crises.

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Each crisis has caused
more damage,

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while the industry has made
more and more money.

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NARRATOR:
After the Great Depression

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the United States had 40 years
of economic growth

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without a single financial crisis.

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The financial industry
was tightly regulated.

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Most regular banks
were local businesses

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prohibited from speculating

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with depositors' savings.

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Investment banks, which handled
stock and bond trading,

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were small, private partnerships.

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In the traditional
investment banking model,

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the partners put the money up,

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and they watch that money
very carefully.

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They wanted to live well,

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but they didn't want to bet the ranch
on anything.

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Paul Volcker served
in the Treasury Department

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and was chairman of the
Federal Reserve from 1979 to 1987.

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Before going into government,

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he was a financial economist
at Chase Manhattan Bank.

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When I left Chase
to go in the Treasury in 1969,

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my income was in the neighborhood
of $45,000 a year.

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INTERVIEWER:
Forty-five thousand dollars a year.

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Morgan Stanley, in 1972,

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had approximately
110 total personnel,

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one office,
and capital of 12 million dollars.

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Now Morgan Stanley
has 50,000 workers

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and has capital of several billion

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and has offices all over the world.

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In the 1980s,
the financial industry exploded.

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The investment banks
went public,

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giving them huge amounts
of stockholder money.

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People on Wall Street
started getting rich.

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I had a friend
who was a bond trader

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at Merrill Lynch in the 1970s.

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He had a job as a train conductor
at night

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because he had three kids
and couldn't support them

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on what a trader made.

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By 1986,
he was making millions of dollars

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and thought
it was because he was smart.

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The highest order of business
before the nation

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is to restore
our economic prosperity.

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NARRATOR:
In 1981, President Ronald Reagan
chose as Treasury secretary

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the CEO of the investment bank
Merrill Lynch, Donald Regan.

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Wall Street and the president
see eye to eye.

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I've talked to leaders of Wall Street.

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They say, "We're behind
the president 100 percent."

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The Reagan administration,

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supported by economists
and financial lobbyists,

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started a 30-year period
of financial deregulation.

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In 1982,
the Reagan administration

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deregulated
savings-and-loan companies,

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allowing them to make risky
investments with depositors' money.

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By the end of the decade,

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hundreds of savings-and-loan
companies had failed.

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This crisis cost taxpayers
$ 124 billion

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and cost many people
their life savings.

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It may be the biggest bank heist
in our history.

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Thousands of executives went to jail
for looting their companies.

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One of the most extreme cases
was Charles Keating.

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MAN:
Mr. Keating, got a word?

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In 1985, when federal regulators
began investigating him,

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Keating hired an economist
named Alan Greenspan.

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In this letter to regulators,

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Greenspan praised Keating's
sound business plans and expertise

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00:15:34,823 --> 00:15:39,624
and said he saw no risk in allowing
Keating to invest customers' money.

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Keating reportedly
paid Greenspan $40,000.

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00:15:46,535 --> 00:15:49,003
Keating went to prison
shortly afterwards.

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00:15:49,571 --> 00:15:50,833
As for Alan Greenspan,

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Reagan appointed him
chairman of America's central bank,

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the Federal Reserve.

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00:15:57,012 --> 00:15:58,536
Greenspan was reappointed

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by presidents Clinton
and George W. Bush.

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00:16:03,252 --> 00:16:05,152
During the Clinton administration,

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deregulation continued
under Greenspan

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and Treasury secretaries
Robert Rubin,

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the former CEO of the
investment bank Goldman Sachs,

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and Larry Summers,
a Harvard economics professor.

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The financial sector,
Wall Street being powerful,

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having lobbies, lots of money,

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step by step,
captured the political system.

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Both on the Democratic
and the Republican side.

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NARRATOR:
By the late 1990s,
the financial sector had consolidated

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into a few gigantic firms,
each of them so large

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that their failure could threaten
the whole system.

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00:16:41,155 --> 00:16:44,750
And the Clinton administration
helped them grow even larger.

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00:16:45,326 --> 00:16:48,693
In 1998,
Citicorp and Travelers merged

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to form Citigroup,

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the largest financial services
company in the world.

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00:16:53,568 --> 00:16:56,002
The merger violated
the Glass-Steagall Act,

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a law passed
after the Great Depression,

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preventing banks
with consumer deposits

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from engaging in
risky investment-banking activities.

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00:17:04,579 --> 00:17:07,412
It was illegal
to acquire Travelers.

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00:17:07,582 --> 00:17:09,345
Greenspan said nothing.

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The Federal Reserve gave them
an exemption for a year,

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then they got the law passed.

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00:17:14,722 --> 00:17:18,419
In 1999,
at the urging of Summers and Rubin,

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Congress passed
the Gramm-Leach-Bliley Act,

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00:17:21,396 --> 00:17:24,422
known to some
as the Citigroup Relief Act.

245
00:17:24,599 --> 00:17:26,726
It overturned Glass-Steagall

246
00:17:26,901 --> 00:17:29,893
and cleared the way
for future mergers.

247
00:17:38,446 --> 00:17:39,674
Why do you have big banks?

248
00:17:39,847 --> 00:17:43,874
Because banks like monopoly power,
lobbying power.

249
00:17:44,051 --> 00:17:48,545
Because banks know
that when they're too big,

250
00:17:48,723 --> 00:17:49,985
they will be bailed.

251
00:17:50,158 --> 00:17:52,626
Markets are inherently unstable.

252
00:17:52,794 --> 00:17:55,228
Or at least potentially unstable.

253
00:17:55,396 --> 00:17:59,230
An appropriate metaphor
is the oil tankers.

254
00:17:59,400 --> 00:18:00,697
They are very big,

255
00:18:01,035 --> 00:18:03,731
and therefore,
you have to put in compartments

256
00:18:04,205 --> 00:18:07,401
to prevent
the sloshing around of oil

257
00:18:07,574 --> 00:18:09,405
from capsizing the boat.

258
00:18:09,576 --> 00:18:12,909
The design of the boat
has to take that into account.

259
00:18:13,079 --> 00:18:16,048
And after the Depression,

260
00:18:16,216 --> 00:18:21,916
the regulations actually introduced
these very watertight compartments.

261
00:18:22,556 --> 00:18:28,392
And deregulation has led
to the end of compartmentalization.

262
00:18:29,162 --> 00:18:31,426
NARRATOR:
The next crisis came
at the end of the '90s.

263
00:18:32,399 --> 00:18:35,891
The investment banks fueled
a massive bubble in Internet stocks,

264
00:18:36,069 --> 00:18:38,765
which was followed by a crash
in 2001

265
00:18:38,939 --> 00:18:41,840
that caused $5 trillion
in investment losses.

266
00:18:42,409 --> 00:18:45,606
The Securities and Exchange
Commission, the federal agency

267
00:18:45,779 --> 00:18:49,237
created during the Depression
to regulate investment banking,

268
00:18:49,416 --> 00:18:51,077
had done nothing.

269
00:18:51,251 --> 00:18:54,880
In the absence of meaningful
federal action,

270
00:18:55,055 --> 00:18:57,580
and given the clear failure
of self-regulation,

271
00:18:57,757 --> 00:19:00,282
it's become necessary for others
to step in

272
00:19:00,460 --> 00:19:02,360
and adopt the protections needed.

273
00:19:02,529 --> 00:19:05,692
Eliot Spitzer's investigation
revealed the investment banks

274
00:19:05,866 --> 00:19:09,302
promoted Internet companies
they knew would fail.

275
00:19:09,469 --> 00:19:13,030
Analysts were being paid based on
how much business they brought in.

276
00:19:13,206 --> 00:19:17,540
What they said publicly
was quite different from
what they said privately.

277
00:19:17,711 --> 00:19:20,179
WOMAN:
Infospace,
given the highest possible rating,

278
00:19:20,347 --> 00:19:22,872
dismissed by an analyst
as a "piece of junk."

279
00:19:23,049 --> 00:19:27,110
Excite, also highly rated,
called "such a piece of crap."

280
00:19:27,287 --> 00:19:33,624
The defense that was proffered
by many of the investment banks

281
00:19:33,960 --> 00:19:36,520
was not "you're wrong,"

282
00:19:36,696 --> 00:19:40,154
it was, "Everybody's doing it,
everybody knows it's going on.

283
00:19:40,332 --> 00:19:42,459
Nobody should rely
on these analysts anyway."

284
00:19:42,935 --> 00:19:44,960
In December, 2002,

285
00:19:45,137 --> 00:19:49,665
10 investment banks settled
the case for a total of $ 1.4 billion

286
00:19:49,842 --> 00:19:52,572
and promised
to change their ways.

287
00:19:52,978 --> 00:19:56,846
Scott Talbott is the chief lobbyist for
the Financial Services Roundtable,

288
00:19:57,016 --> 00:19:59,416
one of Washington's
most powerful groups,

289
00:19:59,585 --> 00:20:03,453
which represents nearly all of the
world's largest financial companies.

290
00:20:03,622 --> 00:20:07,524
INTERVIEWER:
Are you comfortable with the fact that
several of your member companies

291
00:20:07,693 --> 00:20:10,685
have engaged
in large-scale criminal activity?

292
00:20:10,863 --> 00:20:12,922
L... You'll have to be specific.
Okay.

293
00:20:13,098 --> 00:20:16,966
And first of all, criminal activity
shouldn't be accepted, period.

294
00:20:17,136 --> 00:20:19,161
[BACHMAN-TURNER OVERDRIVE'S
"TAKIN' CARE OF BUSINESS"
PLAYS]

295
00:20:25,477 --> 00:20:28,810
NARRATOR:
Since deregulation began,
the world's biggest financial firms

296
00:20:28,981 --> 00:20:32,178
have been caught laundering
money, defrauding customers

297
00:20:32,351 --> 00:20:36,287
and cooking their books
again and again and again.

298
00:20:47,132 --> 00:20:50,795
Credit Suisse helped funnel money
for Iran's nuclear program

299
00:20:50,970 --> 00:20:53,461
and for Iran's
Aerospace Industries Organization,

300
00:20:53,639 --> 00:20:55,402
which builds ballistic missiles.

301
00:20:55,574 --> 00:20:59,806
Any information that would identify it
as Iranian would be removed.

302
00:20:59,979 --> 00:21:03,039
The bank was fined $536 million.

303
00:21:03,215 --> 00:21:07,151
Citibank helped funnel $ 100 million
of drug money out of Mexico.

304
00:21:07,319 --> 00:21:09,879
WOMAN:
Did you comment that
she should, quote:

305
00:21:10,055 --> 00:21:12,888
"Lose any documents connected
with the account"?

306
00:21:13,058 --> 00:21:16,515
I said that in a kidding manner.
It was at the early stages of this.

307
00:21:16,694 --> 00:21:18,059
I did not mean it seriously.

308
00:21:20,398 --> 00:21:23,231
Between 1998 and 2003,

309
00:21:23,401 --> 00:21:26,734
Fannie Mae overstated its earnings
by more than $ 10 billion.

310
00:21:26,904 --> 00:21:29,031
These accounting standards
are complex

311
00:21:29,207 --> 00:21:33,041
and require determinations
over which experts often disagree.

312
00:21:33,211 --> 00:21:37,375
CEO Franklin Raines,
who used to be
President Clinton's budget director,

313
00:21:37,548 --> 00:21:40,540
received over $52 million
in bonuses.

314
00:21:45,289 --> 00:21:48,622
When UBS was caught helping
wealthy Americans evade taxes,

315
00:21:48,793 --> 00:21:51,318
they refused to cooperate
with the government.

316
00:21:51,496 --> 00:21:53,794
Would you be willing
to supply the names?

317
00:21:54,332 --> 00:21:57,426
If there's a treaty framework.
No treaty framework.

318
00:21:57,602 --> 00:21:59,695
You've agreed
you participated in a fraud.

319
00:21:59,871 --> 00:22:00,895
Hm.

320
00:22:11,315 --> 00:22:13,715
MAN:
But while the companies face
unprecedented fines,

321
00:22:13,885 --> 00:22:17,753
the investment firms do not
have to admit any wrongdoing.

322
00:22:17,922 --> 00:22:22,120
When dealing with this many
products, this many customers,
mistakes happen.

323
00:22:22,293 --> 00:22:27,128
INTERVIEWER:
The financial services industry
seems to have a level of criminality

324
00:22:27,298 --> 00:22:29,266
that is somewhat distinctive.

325
00:22:29,434 --> 00:22:33,131
You know, when was the last time
that Cisco

326
00:22:33,304 --> 00:22:37,434
or Intel or Google or Apple or IBM,
you know...?

327
00:22:37,608 --> 00:22:40,304
I agree about high-tech
versus financial services...

328
00:22:40,478 --> 00:22:43,879
So how come?
High-tech is a creative business

329
00:22:44,048 --> 00:22:45,948
where the value generation

330
00:22:46,117 --> 00:22:49,352
and income derives from
actually creating something new.

331
00:22:50,620 --> 00:22:52,019
NARRATOR:
Beginning in the 1990s,

332
00:22:52,189 --> 00:22:54,885
deregulation
and advances in technology

333
00:22:55,058 --> 00:22:59,222
led to an explosion of complex
financial products called derivatives.

334
00:22:59,396 --> 00:23:02,832
Economists and bankers
claimed they made markets safer.

335
00:23:02,999 --> 00:23:06,457
But instead,
they made them unstable.

336
00:23:06,636 --> 00:23:08,934
Since the end of the Cold War,

337
00:23:09,106 --> 00:23:12,098
a lot of former physicists,
mathematicians,

338
00:23:12,275 --> 00:23:14,436
decided to apply their skills,

339
00:23:14,611 --> 00:23:17,341
not on, you know,
Cold War technology,

340
00:23:17,514 --> 00:23:19,379
but on financial markets.

341
00:23:19,549 --> 00:23:21,676
And together
with investment bankers...

342
00:23:21,852 --> 00:23:23,149
INTERVIEWER:
Creating different weapons.

343
00:23:23,320 --> 00:23:24,344
Absolutely.

344
00:23:24,521 --> 00:23:27,490
You know, as Warren Buffett said,
weapons of mass destruction.

345
00:23:27,657 --> 00:23:30,990
Regulators, politicians,
business people

346
00:23:31,161 --> 00:23:34,756
did not take seriously
the threat of innovation

347
00:23:34,931 --> 00:23:37,627
on the stability
of the financial system.

348
00:23:38,235 --> 00:23:39,532
Using derivatives,

349
00:23:39,703 --> 00:23:42,501
bankers could gamble
on virtually anything.

350
00:23:42,672 --> 00:23:45,334
They could bet on the rise or fall
of oil prices,

351
00:23:45,509 --> 00:23:48,376
the bankruptcy of a company,
even the weather.

352
00:23:49,112 --> 00:23:50,807
By the late 1990s,

353
00:23:50,981 --> 00:23:55,975
derivatives were a 50-trillion-dollar
unregulated market.

354
00:23:56,319 --> 00:24:00,881
In 1998,
someone tried to regulate them.

355
00:24:01,057 --> 00:24:04,959
Brooksley Born graduated first
in her class at Stanford Law School

356
00:24:05,128 --> 00:24:08,461
and was the first woman
to edit a major law review.

357
00:24:08,632 --> 00:24:11,760
After running the derivatives practice
at Arnold & Porter,

358
00:24:11,935 --> 00:24:13,800
Born was appointed by Clinton

359
00:24:13,970 --> 00:24:16,837
to chair the Commodity Futures
Trading Commission,

360
00:24:17,007 --> 00:24:19,601
which oversaw
the derivatives market.

361
00:24:19,776 --> 00:24:23,336
GREENBERGER:
Brooksley Born asked me
if I would come work with her.

362
00:24:23,946 --> 00:24:27,677
We decided that this was a serious,

363
00:24:27,850 --> 00:24:31,183
potentially destabilizing market.

364
00:24:31,353 --> 00:24:36,791
In May of 1998, the CFTC issued
a proposal to regulate derivatives.

365
00:24:36,959 --> 00:24:40,156
Clinton's Treasury Department
had an immediate response.

366
00:24:40,329 --> 00:24:44,891
I happened to go
into Brooksley's office,

367
00:24:45,067 --> 00:24:49,094
and she was just putting down
the receiver on her telephone,

368
00:24:49,271 --> 00:24:53,002
and the blood had drained
from her face.

369
00:24:53,175 --> 00:24:56,542
And she looked at me and said,
"That was Larry Summers."

370
00:24:56,712 --> 00:24:59,909
He had 13 bankers in his office.

371
00:25:00,316 --> 00:25:04,082
He conveyed it
in a very bullying fashion,

372
00:25:04,253 --> 00:25:07,518
sort of directing her to stop.

373
00:25:07,957 --> 00:25:11,449
Banks were now reliant for earnings
on these activities.

374
00:25:11,660 --> 00:25:17,997
And that led to a titanic battle
to prevent this from being regulated.

375
00:25:18,167 --> 00:25:20,533
Shortly after the phone call
from Summers,

376
00:25:20,703 --> 00:25:24,935
Greenspan, Rubin,
and SEC chairman Arthur Levitt

377
00:25:25,107 --> 00:25:27,507
issued a joint statement
condemning Born

378
00:25:27,676 --> 00:25:32,272
and recommending legislation
to keep derivatives unregulated.

379
00:25:32,715 --> 00:25:35,616
Regulation of
derivatives transactions

380
00:25:35,784 --> 00:25:40,653
that are privately negotiated
by professionals is unnecessary.

381
00:25:40,823 --> 00:25:45,419
She was overruled, unfortunately.
First by the Clinton administration

382
00:25:45,594 --> 00:25:47,255
and then by the Congress.

383
00:25:47,429 --> 00:25:51,456
In 2000, Senator Phil Gramm took
a major role in getting a bill passed

384
00:25:51,634 --> 00:25:54,694
that pretty much exempted
derivatives from regulation.

385
00:25:54,870 --> 00:25:58,566
They are unifying markets,
reducing regulatory burden.

386
00:25:58,740 --> 00:26:00,537
I believe we need to do it.

387
00:26:07,982 --> 00:26:10,951
It is our very great hope

388
00:26:11,119 --> 00:26:14,555
that it will be possible
to move this year

389
00:26:14,722 --> 00:26:17,816
on legislation that,
in a suitable way

390
00:26:17,992 --> 00:26:24,329
goes to create legal certainty
for OTC derivatives.

391
00:26:30,972 --> 00:26:32,769
I wish to associate myself

392
00:26:32,941 --> 00:26:36,206
with all the remarks
of Secretary Summers.

393
00:26:36,611 --> 00:26:39,444
NARRATOR:
In December of 2000,
Congress passed

394
00:26:39,614 --> 00:26:42,412
the Commodity Futures
Modernization Act.

395
00:26:42,583 --> 00:26:45,518
Written with the help
of financial-industry lobbyists,

396
00:26:45,687 --> 00:26:48,747
it banned the regulation
of derivatives.

397
00:26:49,691 --> 00:26:52,785
After that, it was off to the races.

398
00:26:53,361 --> 00:26:56,489
Use of derivatives
and financial innovation

399
00:26:56,664 --> 00:26:59,030
exploded dramatically after 2000.

400
00:26:59,200 --> 00:27:01,691
MAN: So help me God.
So help me God.

401
00:27:01,869 --> 00:27:05,566
By the time George W. Bush
took office in 2001,

402
00:27:05,740 --> 00:27:08,766
the U.S. Financial sector
was vastly more profitable,

403
00:27:08,943 --> 00:27:12,743
concentrated and powerful
than ever before.

404
00:27:12,981 --> 00:27:16,781
Dominating this industry
were five investment banks,

405
00:27:16,951 --> 00:27:19,215
two financial conglomerates,

406
00:27:19,387 --> 00:27:22,049
three securities insurance
companies

407
00:27:22,223 --> 00:27:24,521
and three rating agencies.

408
00:27:25,259 --> 00:27:28,626
And linking them all together
was the securitization food chain.

409
00:27:28,796 --> 00:27:31,662
A new system
which connected trillions of dollars

410
00:27:31,832 --> 00:27:36,326
in mortgages and other loans
with investors all over the world.

411
00:27:36,503 --> 00:27:39,165
Thirty years ago,
if you went to get
a loan for a home,

412
00:27:39,339 --> 00:27:43,036
the person lending you the money
expected you to pay him or her back.

413
00:27:43,210 --> 00:27:46,145
You got a loan from a lender
who wanted to be paid back.

414
00:27:46,313 --> 00:27:50,147
We've since developed
securitization, whereby
people who make the loan

415
00:27:50,317 --> 00:27:52,751
are no longer at risk
if they fail to repay.

416
00:27:53,220 --> 00:27:57,122
In the old system,
when a homeowner paid
their mortgage every month,

417
00:27:57,290 --> 00:27:59,758
the money went
to their local lender.

418
00:27:59,926 --> 00:28:04,920
And since mortgages took decades
to repay, lenders were careful.

419
00:28:05,265 --> 00:28:09,759
In the new system, lenders sold
mortgages to investment banks.

420
00:28:09,936 --> 00:28:13,303
The banks combined
thousands of mortgages and loans,

421
00:28:13,473 --> 00:28:17,534
including car loans, student loans,
and credit card debt,

422
00:28:17,711 --> 00:28:21,875
to create complex derivatives called
collateralized debt obligations,

423
00:28:22,049 --> 00:28:23,778
or CDOs.

424
00:28:23,950 --> 00:28:28,819
The investment banks then sold
the CDOs to investors.

425
00:28:28,989 --> 00:28:31,287
Now when homeowners paid
their mortgages,

426
00:28:31,458 --> 00:28:34,552
the money went to investors
all over the world.

427
00:28:34,828 --> 00:28:37,296
The investment banks
paid rating agencies

428
00:28:37,464 --> 00:28:39,159
to evaluate the CDOs,

429
00:28:39,332 --> 00:28:41,994
and many of them
were given a triple-A rating,

430
00:28:42,169 --> 00:28:44,797
which is the highest possible
investment grade.

431
00:28:44,971 --> 00:28:47,997
This made CDOs popular
with retirement funds,

432
00:28:48,175 --> 00:28:51,941
which could only purchase
highly rated securities.

433
00:28:53,613 --> 00:28:56,446
This system
was a ticking time bomb.

434
00:28:56,616 --> 00:29:00,279
Lenders didn't care anymore about
whether a borrower could repay,

435
00:29:00,454 --> 00:29:03,150
so they started making
riskier loans.

436
00:29:03,323 --> 00:29:05,484
The investment banks
didn't care either.

437
00:29:05,659 --> 00:29:09,389
The more CDOs they sold,
the higher their profits.

438
00:29:09,562 --> 00:29:13,123
And the rating agencies,
which were paid
by the investment banks,

439
00:29:13,299 --> 00:29:17,759
had no liability if their ratings
of CDOs proved wrong.

440
00:29:18,904 --> 00:29:23,136
You weren't gonna be on the hook,
there weren't regulatory constraints.

441
00:29:23,309 --> 00:29:26,506
So it was a green light to just
pump out more and more loans.

442
00:29:26,979 --> 00:29:29,812
NARRATOR:
Between 2000 and 2003,

443
00:29:29,982 --> 00:29:34,749
the number of mortgage loans
made each year nearly quadrupled.

444
00:29:34,920 --> 00:29:37,855
Everybody in this
securitization food chain,

445
00:29:38,023 --> 00:29:40,514
from the very beginning
until the end,

446
00:29:40,693 --> 00:29:43,025
didn't care about
the quality of the mortgage.

447
00:29:43,195 --> 00:29:45,720
They were caring
about maximizing their volume

448
00:29:45,898 --> 00:29:47,661
and getting a fee out of it.

449
00:29:47,833 --> 00:29:49,323
In the early 2000s,

450
00:29:49,502 --> 00:29:54,235
there was a huge increase
in the riskiest loans,
called subprime.

451
00:29:54,406 --> 00:29:58,968
When thousands of subprime loans
were combined to create CDOs,

452
00:29:59,145 --> 00:30:02,774
many of them still received
triple-A ratings.

453
00:30:04,984 --> 00:30:09,478
INTERVIEWER:
Now, it would have been possible
to create derivative products

454
00:30:09,655 --> 00:30:11,885
that don't have these risks,

455
00:30:12,057 --> 00:30:14,457
that carry the equivalent
of deductibles,

456
00:30:14,627 --> 00:30:19,428
where there are limits on the risks
that can be taken on, and so forth.

457
00:30:19,598 --> 00:30:22,032
They didn't do that, did they?
They didn't.

458
00:30:22,201 --> 00:30:24,066
In retrospect,
they should've done.

459
00:30:24,236 --> 00:30:27,000
INTERVIEWER:
So did these guys know they were
doing something dangerous?

460
00:30:27,173 --> 00:30:28,470
I think they did.

461
00:30:46,291 --> 00:30:51,251
All the incentives
financial institutions offered
to their mortgage brokers

462
00:30:51,429 --> 00:30:55,024
were based on selling
the most profitable products,

463
00:30:55,200 --> 00:30:56,827
which were predatory loans.

464
00:30:57,168 --> 00:31:01,339
If they make more money,
that's where they'll put you.

465
00:31:07,178 --> 00:31:10,170
NARRATOR:
Suddenly, hundreds of billions
of dollars a year

466
00:31:10,348 --> 00:31:13,146
were flowing through
the securitization chain.

467
00:31:13,318 --> 00:31:15,183
Since anyone could get
a mortgage,

468
00:31:15,353 --> 00:31:18,379
home purchases
and housing prices skyrocketed.

469
00:31:18,556 --> 00:31:23,016
The result was the biggest
financial bubble in history.

470
00:31:23,194 --> 00:31:25,628
Real estate is real.
They can see their asset.

471
00:31:25,797 --> 00:31:28,925
They can live in their asset.
They can rent out their asset.

472
00:31:29,100 --> 00:31:32,331
You had a huge boom in housing
that made no sense at all.

473
00:31:32,704 --> 00:31:39,041
The financing appetites
of the financial sector

474
00:31:39,377 --> 00:31:42,312
drove what everybody else did.

475
00:31:42,480 --> 00:31:46,348
Last time we had a housing bubble
was in the late '80s.

476
00:31:47,485 --> 00:31:51,615
In that case,
the increase in home price
had been relatively minor.

477
00:31:51,990 --> 00:31:56,723
That housing bubble led
to a relatively severe recession.

478
00:31:56,894 --> 00:32:00,955
From 1996 until 2006,

479
00:32:01,132 --> 00:32:03,965
real home prices
effectively doubled.

480
00:32:08,906 --> 00:32:13,366
MAN: At $500 a ticket,
they've come to hear
how to buy their very own piece

481
00:32:13,544 --> 00:32:15,738
of the American dream.

482
00:32:15,912 --> 00:32:20,076
Goldman Sachs, Bear Stearns,
Lehman Brothers,

483
00:32:20,250 --> 00:32:23,048
Merrill Lynch were all in on this.

484
00:32:23,220 --> 00:32:29,090
The subprime lending alone
increased from 30 billion a year
in funding

485
00:32:29,259 --> 00:32:33,195
to over 600 billion a year
in 10 years.

486
00:32:33,363 --> 00:32:34,887
They knew what was happening.

487
00:32:35,265 --> 00:32:38,632
NARRATOR:
Countrywide Financial,
the largest subprime lender,

488
00:32:38,802 --> 00:32:42,829
issued $97 billion worth of loans.

489
00:32:43,006 --> 00:32:47,568
It made over $ 11 billion in profits
as a result.

490
00:32:48,312 --> 00:32:51,645
On Wall Street,
annual cash bonuses spiked.

491
00:32:51,815 --> 00:32:53,305
Traders and CEOs

492
00:32:53,483 --> 00:32:56,179
became enormously wealthy
during the bubble.

493
00:32:56,353 --> 00:33:00,312
Lehman Brothers was a top
underwriter of subprime lending,

494
00:33:00,490 --> 00:33:02,720
and their CEO, Richard Fuld,

495
00:33:03,060 --> 00:33:06,791
took home $485 million.

496
00:33:06,963 --> 00:33:10,228
On Wall Street,
this housing and credit bubble

497
00:33:10,400 --> 00:33:13,927
was leading to hundreds
of billions of dollars of profits.

498
00:33:14,104 --> 00:33:17,540
You know, by 2006
about 40 percent of all profits

499
00:33:17,708 --> 00:33:21,804
of S&P 500 firms was coming
from financial institutions.

500
00:33:21,978 --> 00:33:24,139
It wasn't real profits or income.

501
00:33:24,314 --> 00:33:29,183
It was money created by the system
and booked as income.

502
00:33:29,353 --> 00:33:32,948
Two, three years down the road
there's a default, it's all wiped out.

503
00:33:33,123 --> 00:33:37,082
I think it was, in fact, in retrospect,
a great big national...

504
00:33:37,260 --> 00:33:39,922
And not just national,
global Ponzi scheme.

505
00:33:40,664 --> 00:33:43,531
Through the Home Ownership
and Equity Protection Act,

506
00:33:43,700 --> 00:33:46,362
the Federal Reserve board
had broad authority

507
00:33:46,536 --> 00:33:48,504
to regulate the mortgage industry.

508
00:33:48,671 --> 00:33:52,300
But Fed chairman Alan Greenspan
refused to use it.

509
00:33:52,475 --> 00:33:55,000
Alan Greenspan said,
"No, that's regulation.

510
00:33:55,177 --> 00:33:56,508
I don't believe in it."

511
00:33:56,679 --> 00:34:00,513
For 20 years, Robert Gnaizda
was the head of Greenlining,

512
00:34:00,683 --> 00:34:03,117
a powerful consumer
advocacy group.

513
00:34:03,285 --> 00:34:06,049
He met with Greenspan
on a regular basis.

514
00:34:06,222 --> 00:34:08,690
We gave him an example
of Countrywide

515
00:34:08,858 --> 00:34:13,921
and 150 different complex
adjustable-rate mortgages.

516
00:34:14,096 --> 00:34:16,929
He said,
"If you had a doctorate in math

517
00:34:17,099 --> 00:34:19,795
you wouldn't be able
to understand them enough

518
00:34:19,969 --> 00:34:23,302
to know which was good for you
and which wasn't."

519
00:34:23,706 --> 00:34:26,539
So we thought
he was gonna take action.

520
00:34:26,709 --> 00:34:28,939
But as the conversation continued,

521
00:34:29,111 --> 00:34:31,944
it was clear he was stuck
with his ideology.

522
00:34:32,114 --> 00:34:35,208
We met again
with Greenspan in '05.

523
00:34:35,384 --> 00:34:39,286
Often we met with him twice a year,
and never less than once a year.

524
00:34:39,455 --> 00:34:41,616
And he wouldn't change his mind.

525
00:34:46,695 --> 00:34:50,392
In this world
of global communications,

526
00:34:50,566 --> 00:34:52,591
the efficient movement
of capital

527
00:34:52,768 --> 00:34:56,465
is helping to create the greatest
prosperity in human history.

528
00:35:02,845 --> 00:35:06,713
A hundred and forty-six people
were cut from
the SEC Enforcement Division?

529
00:35:06,882 --> 00:35:08,816
Is that what you also testified to?

530
00:35:08,984 --> 00:35:10,281
Yes.

531
00:35:10,453 --> 00:35:15,789
Yeah, I think there has been
a systematic gutting,

532
00:35:15,958 --> 00:35:18,552
or whatever you wanna call it,
of the agency

533
00:35:18,727 --> 00:35:21,821
and its capability
through cutting back of staff.

534
00:35:21,997 --> 00:35:24,726
WELCH:
The SEC
Office of Risk Management

535
00:35:24,899 --> 00:35:28,858
was reduced to a staff,
did you say, of one?

536
00:35:29,037 --> 00:35:33,167
TURNER:
Yeah. When that gentleman would
go home, he could turn the lights out.

537
00:35:35,143 --> 00:35:38,340
NARRATOR:
During the bubble, investment banks
were borrowing heavily

538
00:35:38,513 --> 00:35:42,313
to buy more loans
and create more CDOs.

539
00:35:43,117 --> 00:35:46,245
The ratio between borrowed money
and the banks' own money

540
00:35:46,421 --> 00:35:48,286
was called leverage.

541
00:35:48,456 --> 00:35:52,620
The more the banks borrowed,
the higher their leverage.

542
00:35:53,862 --> 00:35:58,356
In 2004, Henry Paulson,
the CEO of Goldman Sachs,

543
00:35:58,533 --> 00:36:02,799
helped lobby the SEC
to relax limits on leverage,

544
00:36:03,238 --> 00:36:07,072
allowing the banks
to sharply increase their borrowing.

545
00:36:07,242 --> 00:36:09,767
The SEC somehow decided

546
00:36:09,944 --> 00:36:13,311
to let investment banks
gamble a lot more.

547
00:36:13,481 --> 00:36:16,609
That was nuts. I don't know why
they did that, but they did.

548
00:36:23,324 --> 00:36:26,555
GOLDSCHMID [ON RECORDING]:
We've said these are the big guys,
and clearly that's true.

549
00:36:26,728 --> 00:36:32,394
But that means
if anything goes wrong,
it's going to be an awfully big mess.

550
00:36:33,535 --> 00:36:39,098
NAZARETH:
You are dealing with the most highly
sophisticated financial institutions.

551
00:36:39,274 --> 00:36:43,074
CAMPOS:
These are the firms that do
most of the derivative activity.

552
00:36:43,244 --> 00:36:46,680
We talked to some
as to what their comfort level was.

553
00:36:46,848 --> 00:36:51,842
NAZARETH:
The firms actually thought
that the number was appropriate.

554
00:36:52,020 --> 00:36:56,320
DONALDSON:
The commissioners vote to adopt
the new rules as recommended.

555
00:36:56,491 --> 00:36:57,684
MAN: Yes.
WOMAN: Yes.

556
00:36:58,091 --> 00:37:01,862
DONALDSON:
We do indeed. It's unanimous.
And we are adjourned.

557
00:37:04,698 --> 00:37:07,929
MAN:
The degree of leverage
in the financial system

558
00:37:08,101 --> 00:37:10,626
became absolutely frightening.

559
00:37:10,804 --> 00:37:15,264
Investment banks leveraging
up to the level of 33-to-1.

560
00:37:15,442 --> 00:37:18,138
Which means that
a tiny 3-percent decrease

561
00:37:18,312 --> 00:37:21,645
in the value of their asset base
would leave them insolvent.

562
00:37:23,951 --> 00:37:27,216
NARRATOR:
There was another ticking
time bomb in the financial system.

563
00:37:27,387 --> 00:37:30,652
AIG, the world's largest
insurance company,

564
00:37:30,824 --> 00:37:33,315
was selling huge quantities
of derivatives

565
00:37:33,493 --> 00:37:35,324
called credit default swaps.

566
00:37:37,264 --> 00:37:39,459
For investors who owned CDOs,

567
00:37:39,633 --> 00:37:43,160
credit default swaps worked
like an insurance policy.

568
00:37:43,337 --> 00:37:45,965
An investor who purchased
a credit default swap

569
00:37:46,139 --> 00:37:49,131
paid AIG a quarterly premium.

570
00:37:49,309 --> 00:37:51,072
If the CDO went bad,

571
00:37:51,244 --> 00:37:55,374
AIG promised to pay the investor
for their losses.

572
00:37:56,416 --> 00:37:58,350
But unlike regular insurance,

573
00:37:58,518 --> 00:38:02,113
speculators could also buy
credit default swaps from AIG

574
00:38:02,289 --> 00:38:05,884
in order to bet against CDOs
they didn't own.

575
00:38:06,360 --> 00:38:09,454
In insurance, you can only
insure something you own.

576
00:38:09,630 --> 00:38:12,690
Let's say you and I own property.
I own a house.

577
00:38:12,866 --> 00:38:15,232
I can only insure that house once.

578
00:38:15,402 --> 00:38:18,337
The derivatives universe
essentially enables anybody

579
00:38:18,505 --> 00:38:20,473
to actually insure that house.

580
00:38:20,641 --> 00:38:22,973
You could insure that,
somebody else could.

581
00:38:23,143 --> 00:38:25,202
So 50 people might insure
my house.

582
00:38:25,379 --> 00:38:28,109
So what happens is,
if my house burns down,

583
00:38:28,281 --> 00:38:32,114
the number of losses in the system
becomes proportionately larger.

584
00:38:32,685 --> 00:38:35,449
Since credit default swaps
were unregulated,

585
00:38:35,621 --> 00:38:39,955
AIG didn't have to put aside
any money to cover potential losses.

586
00:38:40,126 --> 00:38:44,187
Instead, AIG paid its employees
huge cash bonuses

587
00:38:44,363 --> 00:38:46,729
as soon as contracts
were signed.

588
00:38:46,899 --> 00:38:49,367
But if the CDOs later went bad,

589
00:38:49,535 --> 00:38:52,163
AIG would be on the hook.

590
00:38:52,338 --> 00:38:56,502
People were essentially being
rewarded for taking massive risks.

591
00:38:56,676 --> 00:39:00,510
In good times, they generate
short-term revenues and profits

592
00:39:00,680 --> 00:39:02,113
and, therefore, bonuses.

593
00:39:02,281 --> 00:39:05,648
But that's gonna lead to the firm
to be bankrupt over time.

594
00:39:05,818 --> 00:39:08,309
That's a distorted system
of compensation.

595
00:39:09,055 --> 00:39:12,081
AIG's Financial Products division
in London

596
00:39:12,258 --> 00:39:16,627
issued $500 billion worth of credit
default swaps during the bubble,

597
00:39:17,329 --> 00:39:21,789
many of them for CDOs
backed by subprime mortgages.

598
00:39:21,967 --> 00:39:24,401
The 400 employees at AIGFP

599
00:39:24,570 --> 00:39:28,597
made $3.5 billion
between 2000 and 2007.

600
00:39:29,375 --> 00:39:32,105
Joseph Cassano,
the head of AIGFP,

601
00:39:32,278 --> 00:39:35,475
personally made $315 million.

602
00:39:35,648 --> 00:39:37,047
CASSANO [ON RECORDING]:
It's hard for us,

603
00:39:37,216 --> 00:39:41,880
and without being flippant,
to even see a scenario

604
00:39:42,054 --> 00:39:44,352
within any kind of realm of reason

605
00:39:44,523 --> 00:39:49,426
that would see us losing one dollar
in any of those transactions.

606
00:39:49,762 --> 00:39:53,926
NARRATOR:
In 2007,
AIG's auditors raised warnings.

607
00:39:54,100 --> 00:39:56,193
One of them, Joseph St. Denis,

608
00:39:56,368 --> 00:39:59,997
resigned in protest after
Cassano repeatedly blocked him

609
00:40:00,172 --> 00:40:03,107
from investigating
AIGFP's accounting.

610
00:40:03,275 --> 00:40:07,210
Let me tell you one person
that didn't get a bonus while
everybody else was getting bonuses.

611
00:40:07,378 --> 00:40:11,371
That was St. Denis.
Mr. St. Denis tried to
alert the two of you

612
00:40:11,549 --> 00:40:14,211
to the fact you were running
into big problems.

613
00:40:14,753 --> 00:40:18,018
He quit in frustration,
and he didn't get a bonus.

614
00:40:18,389 --> 00:40:21,153
In 2005, Raghuram Rajan,

615
00:40:21,326 --> 00:40:24,818
then the chief economist
of the International Monetary Fund,

616
00:40:24,996 --> 00:40:27,624
delivered a paper
at the Jackson Hole symposium,

617
00:40:27,799 --> 00:40:30,461
the most elite banking conference
in the world.

618
00:40:30,635 --> 00:40:32,125
INTERVIEWER:
Who was in the audience?

619
00:40:32,303 --> 00:40:37,138
It was the central bankers
of the world,

620
00:40:37,308 --> 00:40:40,675
ranging from
Mr. Greenspan himself,

621
00:40:40,845 --> 00:40:42,039
Ben Bernanke

622
00:40:42,213 --> 00:40:43,339
Larry Summers.

623
00:40:43,615 --> 00:40:45,480
Tim Geithner was there.

624
00:40:45,650 --> 00:40:47,618
The title of the paper
was essentially:

625
00:40:47,919 --> 00:40:51,514
"Is Financial Development
Making the World Riskier?"

626
00:40:51,689 --> 00:40:55,056
And the conclusion was, it is.

627
00:40:57,095 --> 00:40:59,825
Rajan's paper focused
on incentive structures

628
00:40:59,998 --> 00:41:04,230
that generated huge cash bonuses
based on short-term profits,

629
00:41:04,402 --> 00:41:07,667
but which imposed no penalties
for later losses.

630
00:41:07,839 --> 00:41:10,774
Rajan argued that these incentives
encouraged bankers

631
00:41:10,942 --> 00:41:14,537
to take risks that might eventually
destroy their own firms

632
00:41:14,712 --> 00:41:17,943
or even the entire
financial system.

633
00:41:20,518 --> 00:41:24,750
It's very easy to
generate performance
by taking on more risk.

634
00:41:24,923 --> 00:41:29,451
So what you need to do
is compensate for
risk-adjusted performance.

635
00:41:29,627 --> 00:41:31,891
And that's where
all the bodies are buried.

636
00:41:32,063 --> 00:41:35,191
Rajan, you know,
hit the nail on the head.

637
00:41:35,366 --> 00:41:37,357
What he particularly said was:

638
00:41:37,535 --> 00:41:39,935
"You guys have claimed
you've found a way

639
00:41:40,103 --> 00:41:42,571
to make more profits
with less risk.

640
00:41:42,739 --> 00:41:45,936
I say you've found a way
to make more profits with more risk.

641
00:41:46,109 --> 00:41:47,474
There's a big difference."

642
00:41:47,644 --> 00:41:50,238
Summers was vocal.

643
00:41:50,581 --> 00:41:52,776
He basically thought

644
00:41:52,950 --> 00:41:58,217
that I was criticizing the change
in the financial world

645
00:41:58,388 --> 00:42:01,687
and was worried about,
you know, regulation,

646
00:42:01,859 --> 00:42:03,884
which would reverse
this change.

647
00:42:04,061 --> 00:42:06,461
Essentially he accused me
of being a Luddite.

648
00:42:07,531 --> 00:42:11,092
He wanted to make sure
that we didn't bring in

649
00:42:11,268 --> 00:42:13,065
a whole new set of regulations

650
00:42:13,237 --> 00:42:15,728
to constrain the financial sector.

651
00:42:19,843 --> 00:42:23,973
You're gonna make
an extra $2 million a year,
or $ 10 million a year,

652
00:42:24,147 --> 00:42:26,741
for putting your financial institution
at risk.

653
00:42:26,917 --> 00:42:29,044
Someone else pays the bill,
you don't.

654
00:42:29,219 --> 00:42:30,652
Would you make that bet?

655
00:42:30,821 --> 00:42:34,091
Most people on Wall Street said,
"Sure, I'd make that bet."

656
00:42:34,157 --> 00:42:36,148
[ACE FREHLE Y'S
"NEW YORK GROOVE" PLAYS]

657
00:43:17,400 --> 00:43:18,890
GNAIZDA:
It never was enough.

658
00:43:19,068 --> 00:43:22,333
They don't wanna own one home,
they wanna own five homes.

659
00:43:22,505 --> 00:43:25,303
And they wanna have
an expensive penthouse

660
00:43:25,474 --> 00:43:27,601
on Park Avenue.

661
00:43:28,177 --> 00:43:31,044
And they wanna have
their own private jet.

662
00:43:31,213 --> 00:43:34,080
INTERVIEWER:
You think this is an industry
where high...?

663
00:43:34,250 --> 00:43:36,480
Very high compensation levels
are justified?

664
00:43:36,652 --> 00:43:39,348
I think I would take caution,
or take heed,

665
00:43:39,522 --> 00:43:42,719
or take exception to your word
"very high." It's relative.

666
00:43:42,892 --> 00:43:45,258
You have a 14-million-dollar home
in Florida.

667
00:43:45,428 --> 00:43:48,329
You have a summer home
in Sun Valley, Idaho.

668
00:43:48,497 --> 00:43:51,933
An art collection filled
with million-dollar paintings.

669
00:43:52,101 --> 00:43:54,729
MAN:
Richard Fuld never appeared
on the trading floor.

670
00:43:54,904 --> 00:43:57,202
There were art advisors there
all the time.

671
00:43:57,373 --> 00:43:58,965
He had a private elevator.

672
00:43:59,141 --> 00:44:01,701
He wanted to be disconnected.

673
00:44:01,877 --> 00:44:04,710
His elevator,
they hired technicians to program it

674
00:44:04,880 --> 00:44:07,644
so that his driver would call in
in the morning

675
00:44:07,817 --> 00:44:09,944
and a security guard
would hold it.

676
00:44:10,119 --> 00:44:14,579
There's only a three-second window
where he actually has to see people.

677
00:44:14,757 --> 00:44:17,783
And he hops into this elevator
and it goes straight to 31.

678
00:44:17,960 --> 00:44:20,258
INTERVIEWER:
Lehman owned corporate jets.

679
00:44:20,429 --> 00:44:22,454
You know about this?
Yes.

680
00:44:22,631 --> 00:44:23,791
INTERVIEWER:
How many were there?

681
00:44:23,966 --> 00:44:26,628
MILLER:
Well, there were six,
including the 767 s.

682
00:44:26,902 --> 00:44:28,563
They also had a helicopter.

683
00:44:28,738 --> 00:44:31,229
INTERVIEWER:
Isn't that kind of a lot of planes
to have?

684
00:44:34,110 --> 00:44:36,078
We're dealing with
type-A personalities.

685
00:44:36,278 --> 00:44:38,508
And type-A personalities know
everything in the world.

686
00:44:38,681 --> 00:44:41,013
Banking became a pissing contest.

687
00:44:41,183 --> 00:44:43,447
"Mine's bigger than yours."
That kind of stuff.

688
00:44:43,619 --> 00:44:45,780
It was all men that ran it,
incidentally.

689
00:44:45,955 --> 00:44:49,947
Fifty-billion-dollar deals
weren't large enough,
so we'd do 100-billion deals.

690
00:44:50,125 --> 00:44:52,958
These people are risk-takers.
They're impulsive.

691
00:44:58,433 --> 00:45:01,561
It's part of their behavior.
It's part of their personality.

692
00:45:01,736 --> 00:45:04,796
And that manifests
outside of work as well.

693
00:45:04,973 --> 00:45:07,498
It was quite typical
for the guys to go out

694
00:45:07,675 --> 00:45:09,666
to go to strip bars, to use drugs.

695
00:45:09,844 --> 00:45:12,642
I see a lot of cocaine use,
use of prostitution.

696
00:45:19,754 --> 00:45:22,086
Recently, neuroscientists
have done experiments

697
00:45:22,257 --> 00:45:27,217
where they've taken individuals
and put them into an MRI machine,

698
00:45:27,395 --> 00:45:31,661
and they have them play a game
where the prize is money.

699
00:45:31,833 --> 00:45:35,428
And they noticed that when
the subjects earn money,

700
00:45:35,603 --> 00:45:37,901
the part of the brain
that gets stimulated

701
00:45:38,073 --> 00:45:40,439
is the same part
that cocaine stimulates.

702
00:45:40,608 --> 00:45:44,271
JONATHAN:
A lot of people feel that they need
to participate in that behavior

703
00:45:44,446 --> 00:45:46,880
to make it, to get promoted,
get recognized.

704
00:45:47,048 --> 00:45:50,108
NARRATOR:
According to a Bloomberg article,
business entertainment

705
00:45:50,285 --> 00:45:53,618
represents 5 percent of revenue
for derivatives brokers

706
00:45:53,788 --> 00:45:58,122
and often includes strip clubs,
prostitution and drugs.

707
00:45:58,293 --> 00:46:01,956
A New York broker filed a lawsuit
in 2007 against his firm

708
00:46:02,530 --> 00:46:07,331
alleging he was required to retain
prostitutes to entertain traders.

709
00:46:07,502 --> 00:46:09,367
There's just a blatant disregard

710
00:46:09,537 --> 00:46:14,201
for the impact that their actions
might have on society, on family.

711
00:46:14,375 --> 00:46:17,606
They have no problem
using a prostitute

712
00:46:17,779 --> 00:46:20,009
and going home to their wife.

713
00:46:29,022 --> 00:46:30,922
INTERVIEWER:
How many customers?

714
00:46:31,091 --> 00:46:33,389
About 10,000
at that point in time.

715
00:46:37,531 --> 00:46:39,692
INTERVIEWER:
What fraction
were from Wall Street?

716
00:46:39,867 --> 00:46:44,327
Of the higher-end clients,
probably 40 to 50 percent.

717
00:46:44,505 --> 00:46:46,939
INTERVIEWER:
Were all the major Wall Street firms
represented?

718
00:46:47,107 --> 00:46:48,131
Goldman Sachs?

719
00:46:48,308 --> 00:46:51,243
Lehman Brothers.
They're all in there.

720
00:46:51,411 --> 00:46:55,211
Morgan Stanley was
a little less of that.

721
00:46:55,382 --> 00:46:58,408
I think Goldman was
pretty, pretty big with that.

722
00:46:58,719 --> 00:47:00,152
DAVIS:
Clients would call and say:

723
00:47:00,320 --> 00:47:03,084
"Can you get me a Lamborghini
for the girl?"

724
00:47:03,257 --> 00:47:05,555
These guys were spending
corporate money.

725
00:47:05,726 --> 00:47:10,095
I had many black cards from,
you know, the various financial firms.

726
00:47:10,597 --> 00:47:13,998
JONATHAN:
What's happening is
services are being charged

727
00:47:14,168 --> 00:47:15,931
to computer repair.

728
00:47:16,270 --> 00:47:20,434
Trading research, you know,
consulting for market compliance.

729
00:47:20,607 --> 00:47:23,872
Just gave them letterhead and said,
"Make your own invoice."

730
00:47:24,044 --> 00:47:27,207
INTERVIEWER:
This behavior extends to
the senior management of the firm?

731
00:47:27,381 --> 00:47:29,008
Absolutely does. Yeah.

732
00:47:29,183 --> 00:47:31,276
I know for a fact that it does.

733
00:47:31,451 --> 00:47:34,215
It extends to the very top.

734
00:47:37,691 --> 00:47:41,855
A friend of mine in a company that
has a big financial presence said:

735
00:47:42,029 --> 00:47:45,988
"It's about time you learned
about subprime mortgages."

736
00:47:46,166 --> 00:47:49,932
So he set up a session
with his trading desk and me.

737
00:47:50,337 --> 00:47:53,966
And the techie who did all this
gets very excited,

738
00:47:54,141 --> 00:47:57,632
runs to his computer,
pulls up in about three seconds

739
00:47:57,810 --> 00:48:00,836
this Goldman Sachs
issue of securities.

740
00:48:01,013 --> 00:48:02,446
It was a complete disaster.

741
00:48:02,815 --> 00:48:08,185
Borrowers had borrowed,
on average, 99.3 percent
of the price of the house.

742
00:48:08,354 --> 00:48:10,254
They have no money
in the house.

743
00:48:10,423 --> 00:48:13,654
If anything goes wrong,
they walk away from the mortgage.

744
00:48:13,826 --> 00:48:16,590
This is not a loan
you'd really make, right?

745
00:48:16,762 --> 00:48:18,195
You've gotta be crazy.

746
00:48:18,364 --> 00:48:21,492
But somehow,
you took 8000 of these loans,

747
00:48:21,667 --> 00:48:23,862
and by the time
the guys were done

748
00:48:24,036 --> 00:48:26,834
at Goldman Sachs
and the rating agencies,

749
00:48:27,006 --> 00:48:29,440
two-thirds of the loans
were rated triple-A.

750
00:48:29,609 --> 00:48:32,476
They were rated as safe
as government securities.

751
00:48:32,645 --> 00:48:34,169
It's utterly mad.

752
00:48:35,047 --> 00:48:38,608
NARRATOR:
Goldman Sachs sold
at least $3. 1 billion worth

753
00:48:38,784 --> 00:48:42,550
of these toxic CDOs
in the first half of 2006.

754
00:48:42,955 --> 00:48:46,891
The CEO of Goldman Sachs
at this time was Henry Paulson,

755
00:48:47,059 --> 00:48:49,550
the highest paid CEO
on Wall Street.

756
00:48:52,231 --> 00:48:54,461
Good morning.
I'm pleased to announce

757
00:48:54,634 --> 00:48:58,502
that I will nominate Henry Paulson
to be the Secretary of the Treasury.

758
00:48:58,671 --> 00:49:00,400
He has a lifetime of experience.

759
00:49:00,573 --> 00:49:02,734
He has knowledge
of financial markets.

760
00:49:02,908 --> 00:49:05,809
He's earned a reputation
for candor and integrity.

761
00:49:06,312 --> 00:49:08,177
NARRATOR:
You might think it would be hard

762
00:49:08,347 --> 00:49:10,907
to adjust to a meager
government salary.

763
00:49:11,083 --> 00:49:13,313
But taking the job
as Treasury secretary

764
00:49:13,486 --> 00:49:16,478
was the best
financial decision of his life.

765
00:49:16,656 --> 00:49:20,990
Paulson had to sell his $485 million
of Goldman stock

766
00:49:21,160 --> 00:49:23,321
when he went to work
for the government.

767
00:49:23,496 --> 00:49:26,522
But because of a law passed
by the first President Bush,

768
00:49:26,699 --> 00:49:28,860
he didn't have to pay
any taxes on it.

769
00:49:29,035 --> 00:49:32,060
It saved him $50 million.

770
00:49:38,843 --> 00:49:42,472
SLOAN:
The article came out
in October of 2007.

771
00:49:42,814 --> 00:49:46,341
Already, a third of
the mortgages defaulted.

772
00:49:46,518 --> 00:49:48,952
Now most of them are going.

773
00:49:51,189 --> 00:49:54,420
One group that had purchased
these now worthless securities

774
00:49:54,592 --> 00:49:58,084
was the Public Employees'
Retirement System of Mississippi,

775
00:49:58,263 --> 00:50:01,790
which provides monthly benefits
to over 80,000 retirees.

776
00:50:02,734 --> 00:50:07,535
They lost millions of dollars
and are now suing Goldman Sachs.

777
00:50:21,519 --> 00:50:25,853
By late 2006, Goldman had
taken things a step further.

778
00:50:26,024 --> 00:50:28,515
It didn't just sell toxic CDOs,

779
00:50:28,693 --> 00:50:32,857
it started betting against them at the
same time it was telling customers

780
00:50:33,031 --> 00:50:35,761
that they were
high-quality investments.

781
00:50:36,668 --> 00:50:39,933
By purchasing credit default swaps
from AIG,

782
00:50:40,105 --> 00:50:43,074
Goldman could bet against
CDOs it didn't own

783
00:50:43,241 --> 00:50:46,472
and get paid
when the CDOs failed.

784
00:50:47,445 --> 00:50:51,643
I asked if anybody
called the customers and said:

785
00:50:51,816 --> 00:50:54,614
"We don't really like this kind
of mortgage anymore,

786
00:50:54,786 --> 00:50:56,947
and we thought
you ought to know."

787
00:50:57,122 --> 00:51:01,650
They didn't say anything,
but you could feel the laughter
over the phone.

788
00:51:02,927 --> 00:51:05,793
Goldman Sachs bought
at least $22 billion

789
00:51:05,963 --> 00:51:08,557
of credit default swaps from AIG.

790
00:51:08,732 --> 00:51:13,635
It was so much
that Goldman realized
that AIG itself might go bankrupt.

791
00:51:13,804 --> 00:51:16,773
So they spent $ 150 million
insuring themselves

792
00:51:16,940 --> 00:51:19,738
against AIG's potential collapse.

793
00:51:19,910 --> 00:51:23,505
Then in 2007,
Goldman went even further.

794
00:51:23,680 --> 00:51:26,376
They started selling CDOs
specifically designed

795
00:51:26,550 --> 00:51:29,075
so that the more money
their customers lost,

796
00:51:29,253 --> 00:51:31,655
the more money
Goldman Sachs made.

797
00:51:38,061 --> 00:51:43,089
Six hundred million dollars
of Timberwolf securities
is what you sold.

798
00:51:43,267 --> 00:51:45,895
Before you sold them,

799
00:51:46,069 --> 00:51:49,402
this is what your sales team
were telling to each other:

800
00:51:50,207 --> 00:51:53,904
"Boy, that Timberwolf
was one shitty deal."

801
00:51:54,077 --> 00:51:59,174
This was an e-mail to me
in late June,
after the transaction.

802
00:51:59,349 --> 00:52:02,648
No, no. You sold Timberwolf
after as well.

803
00:52:02,820 --> 00:52:05,050
SPARKS: We did trades after that.
Yeah. Okay.

804
00:52:05,322 --> 00:52:08,553
The next e-mail...
Take a look. July 1, '07.

805
00:52:08,725 --> 00:52:11,888
- Tells the sales force,
"The top priority is Timberwolf."

806
00:52:12,162 --> 00:52:15,495
Your top priority to sell
is that shitty deal.

807
00:52:15,666 --> 00:52:17,930
If you have an adverse interest
to your client,

808
00:52:18,101 --> 00:52:19,932
do you have the duty
to disclose it?

809
00:52:20,103 --> 00:52:22,435
To tell that client
of your adverse interest?

810
00:52:22,606 --> 00:52:25,097
That's my question.
I'm trying to understand...

811
00:52:25,275 --> 00:52:27,766
LEVIN:
I think you understand.
You don't wanna answer.

812
00:52:27,945 --> 00:52:30,243
Do you believe you have a duty

813
00:52:30,414 --> 00:52:34,180
to act in your clients'
best interest?

814
00:52:35,552 --> 00:52:40,420
I repeat, we have a duty
to serve our clients

815
00:52:40,590 --> 00:52:45,050
by showing prices on transactions
that they ask us to show prices for.

816
00:52:45,228 --> 00:52:47,992
What do you think
about selling securities

817
00:52:48,164 --> 00:52:51,292
which your own people think
are crap?

818
00:52:51,467 --> 00:52:53,230
Does that bother you?

819
00:52:53,402 --> 00:52:55,666
BLANKFEIN:
I think they would.

820
00:52:55,872 --> 00:52:58,636
As a hypothetical?
LEVIN: No, this is real.

821
00:52:58,808 --> 00:53:01,208
Well, then I don't know...
LEVIN: We heard it today.

822
00:53:01,377 --> 00:53:04,437
We heard it today.
"This is a shitty deal."
"This is crap."

823
00:53:04,614 --> 00:53:06,639
I heard nothing today

824
00:53:06,816 --> 00:53:10,582
that makes me think
anything went wrong.

825
00:53:10,753 --> 00:53:14,814
Is there not a conflict when you
sell something to somebody

826
00:53:14,991 --> 00:53:20,395
and then are determined
to bet against that same security,

827
00:53:20,563 --> 00:53:24,158
and you don't disclose that
to the person you're selling it to?

828
00:53:24,333 --> 00:53:25,357
You see a problem?

829
00:53:25,535 --> 00:53:28,629
In the context of market making,
that is not a conflict.

830
00:53:28,804 --> 00:53:31,898
LEVIN:
When you heard your employees
in e-mails said,

831
00:53:32,074 --> 00:53:35,635
"What a shitty deal,"
"What a piece of crap,"

832
00:53:35,811 --> 00:53:37,176
did you feel anything?

833
00:53:37,346 --> 00:53:39,507
That's very unfortunate
to have on e-mail.

834
00:53:39,682 --> 00:53:40,706
LEVIN:
Are you embar...?

835
00:53:40,883 --> 00:53:42,214
[PEOPLE LAUGH AND GROAN]

836
00:53:42,385 --> 00:53:44,182
And very unfortunate...
I don't... I don't...

837
00:53:44,353 --> 00:53:47,083
LEVIN:
"On e-mail"?
How about feeling that way?

838
00:53:47,256 --> 00:53:50,657
It's very unfortunate for anyone
to have said that in any form.

839
00:53:50,826 --> 00:53:55,422
Are your competitors engaged
in similar activities?

840
00:53:55,598 --> 00:53:59,830
Yes, and to a greater extent
than us in most cases.

841
00:54:00,202 --> 00:54:03,660
NARRATOR:
Hedge fund manager John Paulson
made $ 12 billion

842
00:54:03,839 --> 00:54:05,864
betting against
the mortgage market.

843
00:54:06,042 --> 00:54:09,239
When Paulson ran out of
mortgage securities to bet against,

844
00:54:09,412 --> 00:54:13,872
he worked with Goldman Sachs
and Deutsche Bank to create more.

845
00:54:14,282 --> 00:54:15,874
Morgan Stanley was also selling

846
00:54:16,051 --> 00:54:19,782
mortgage securities it was betting
against, and it's now being sued by

847
00:54:19,955 --> 00:54:23,447
the Government Employees'
Retirement Fund
of the Virgin Islands

848
00:54:23,625 --> 00:54:24,853
for fraud.

849
00:54:25,026 --> 00:54:27,460
The lawsuit alleges
that Morgan Stanley knew

850
00:54:27,629 --> 00:54:29,256
that the CDOs were junk.

851
00:54:29,431 --> 00:54:31,365
Although they were rated triple-A,

852
00:54:31,533 --> 00:54:34,161
Morgan Stanley
was betting they would fail.

853
00:54:34,336 --> 00:54:38,534
A year later,
Morgan Stanley had made
hundreds of millions of dollars,

854
00:54:38,707 --> 00:54:42,643
while the investors
had lost almost all of their money.

855
00:54:58,660 --> 00:55:01,424
You would have thought
pension funds would have said:

856
00:55:01,596 --> 00:55:05,123
"Those are subprime.
Why am I buying them?"

857
00:55:05,834 --> 00:55:08,826
They had these guys at Moody's
and Standard & Poor's

858
00:55:09,004 --> 00:55:10,733
who said, "That's a triple-A."

859
00:55:10,905 --> 00:55:16,935
No securities got issued
without the seal of approval
of the rating agencies.

860
00:55:17,112 --> 00:55:21,845
The three rating agencies,
Moody's, S&P and Fitch,

861
00:55:22,017 --> 00:55:25,680
made billions of dollars
giving high ratings
to risky securities.

862
00:55:26,488 --> 00:55:30,322
Moody's, the largest rating agency,
quadrupled its profits

863
00:55:30,492 --> 00:55:33,757
between 2000 and 2007.

864
00:55:34,162 --> 00:55:37,757
Moody's and S&P get compensated
based on putting out ratings reports.

865
00:55:37,932 --> 00:55:41,561
And the more structured securities
they gave a triple-A rating to,

866
00:55:41,736 --> 00:55:43,533
the higher their earnings were.

867
00:55:43,705 --> 00:55:45,502
Imagine going to
The Times saying:

868
00:55:45,674 --> 00:55:48,108
"Write a positive story,
I'll pay you $500,000.

869
00:55:48,276 --> 00:55:50,243
If you don't,
I'll give you nothing."

870
00:55:50,411 --> 00:55:52,242
Rating agencies could have
stopped the party and said:

871
00:55:52,413 --> 00:55:55,849
"Sorry. We're gonna tighten
our standards,"

872
00:55:56,016 --> 00:56:01,147
and immediately cut off
the funding to risky borrowers.

873
00:56:01,321 --> 00:56:03,721
Triple-A-rated instruments

874
00:56:04,458 --> 00:56:10,795
mushroomed from just a handful
to thousands and thousands.

875
00:56:11,331 --> 00:56:15,768
Hundreds of billions of dollars
were being rated, you know, and...

876
00:56:15,936 --> 00:56:17,801
INTERVIEWER: Per year?
Per year. Oh, yeah.

877
00:56:17,971 --> 00:56:21,031
I've now testified before
both houses of Congress

878
00:56:21,208 --> 00:56:24,473
on the credit rating agency issue,

879
00:56:24,645 --> 00:56:29,105
and both times they trot out very
prominent First Amendment lawyers

880
00:56:29,283 --> 00:56:33,447
and argue that, "When we say
something is rated triple-A,

881
00:56:33,620 --> 00:56:37,249
that is merely our 'opinion.'
You shouldn't rely on it."

882
00:56:37,424 --> 00:56:39,585
S&P's ratings express our opinion.

883
00:56:39,760 --> 00:56:42,991
Our ratings are our opinions.
They're opinions.

884
00:56:43,230 --> 00:56:45,425
Opinions.
And they are just opinions.

885
00:56:45,599 --> 00:56:50,036
I think we are emphasizing the fact
that our ratings are opinions.

886
00:56:56,343 --> 00:56:59,141
They do not speak
to the market value of a security,

887
00:56:59,313 --> 00:57:03,951
the volatility of its price,
or its suitability as an investment.

888
00:57:22,436 --> 00:57:24,960
We have many
economists saying:

889
00:57:25,138 --> 00:57:27,402
"Oh. This is a bubble,
it's going to burst.

890
00:57:27,573 --> 00:57:29,973
This is going to be
an issue for the economy."

891
00:57:30,143 --> 00:57:33,010
Some say it could even cause
a recession at some point.

892
00:57:33,179 --> 00:57:37,115
What is the worst-case scenario
if, in fact, we were to see prices

893
00:57:37,283 --> 00:57:40,047
come down substantially
across the country?

894
00:57:40,219 --> 00:57:43,347
I don't buy your premise.
It's an unlikely possibility.

895
00:57:43,523 --> 00:57:47,892
We've never had a decline
in house prices
on a nationwide basis.

896
00:57:48,060 --> 00:57:50,358
NARRATOR:
Ben Bernanke became chairman
of the Federal Reserve

897
00:57:50,530 --> 00:57:52,555
in February 2006,

898
00:57:52,732 --> 00:57:55,633
the top year for subprime lending.

899
00:57:56,068 --> 00:57:58,229
But despite numerous warnings,

900
00:57:58,404 --> 00:58:01,532
Bernanke and the
Federal Reserve Board did nothing.

901
00:58:06,112 --> 00:58:09,479
Robert Gnaizda met with Bernanke
and the Federal Reserve Board

902
00:58:09,649 --> 00:58:12,777
three times after
Bernanke became chairman.

903
00:58:12,952 --> 00:58:17,912
Only at the last meeting
did he suggest that
there was a problem

904
00:58:18,090 --> 00:58:20,388
and that the government
ought to look into it.

905
00:58:20,560 --> 00:58:22,357
INTERVIEWER:
When? When was that? What year?

906
00:58:22,528 --> 00:58:25,656
It's 2009, March 11 th, in D.C.

907
00:58:25,832 --> 00:58:27,629
This year?
This year we met, yes.

908
00:58:27,800 --> 00:58:30,325
And so for the two previous years
you met him.

909
00:58:30,503 --> 00:58:33,131
Even in 2008?
Yes.

910
00:58:33,306 --> 00:58:37,140
One of the six
Federal Reserve Board governors
serving under Bernanke

911
00:58:37,310 --> 00:58:38,743
was Frederic Mishkin,

912
00:58:38,911 --> 00:58:42,347
who was appointed
by President Bush in 2006.

913
00:58:42,515 --> 00:58:46,611
INTERVIEWER:
Did you participate in the meetings
Robert Gnaizda

914
00:58:46,786 --> 00:58:49,584
and Greenlining had
with the Federal Reserve Board?

915
00:58:49,755 --> 00:58:52,622
Yes, I did.
I was on the committee
that was involved

916
00:58:52,792 --> 00:58:55,352
with the Consumer Community
Affairs Committee.

917
00:58:55,528 --> 00:58:59,361
INTERVIEWER:
He warned, in an extremely explicit
manner, about what was going on.

918
00:58:59,531 --> 00:59:02,830
He came to the Federal Reserve
Board with loan documentation

919
00:59:03,001 --> 00:59:05,936
of the kind of loans
that were frequently being made.

920
00:59:06,104 --> 00:59:08,902
And he was listened to politely,
and nothing was done.

921
00:59:09,074 --> 00:59:14,637
So again, I don't know the details
in terms of, um...

922
00:59:15,080 --> 00:59:17,776
In fact, I just don't... l...

923
00:59:17,949 --> 00:59:21,680
Whatever information he provided,
I'm not sure exactly.

924
00:59:22,053 --> 00:59:25,511
To be honest with you,
I can't remember
this kind of discussion,

925
00:59:25,690 --> 00:59:30,525
but certainly there were issues
that were coming up.

926
00:59:30,695 --> 00:59:32,993
The question is,
how pervasive are they?

927
00:59:33,164 --> 00:59:34,495
INTERVIEWER:
Why didn't you try looking?

928
00:59:34,666 --> 00:59:36,293
I think that people did.

929
00:59:36,468 --> 00:59:38,026
We had people looking at...

930
00:59:38,203 --> 00:59:41,434
INTERVIEWER:
Excuse me. You can't be serious.
You would have found things.

931
00:59:41,606 --> 00:59:45,975
That's very easy to always say
that you can always find it.

932
00:59:46,144 --> 00:59:47,839
NARRATOR:
As early as 2004,

933
00:59:48,013 --> 00:59:52,313
the FBI was already warning
about an epidemic
of mortgage fraud.

934
00:59:52,484 --> 00:59:54,748
They reported inflated appraisals,

935
00:59:54,920 --> 00:59:58,549
doctored loan documentation
and other fraudulent activity.

936
00:59:59,691 --> 01:00:03,923
In 2005, the IMF's chief economist,
Raghuram Rajan,

937
01:00:04,095 --> 01:00:07,724
warned that dangerous incentives
could lead to a crisis.

938
01:00:08,266 --> 01:00:11,827
Then came Nouriel Roubini's
warnings in 2006,

939
01:00:12,003 --> 01:00:14,494
Allan Sloan's articles
in Fortune magazine

940
01:00:14,673 --> 01:00:16,732
and The Washington Post
in 2007,

941
01:00:17,275 --> 01:00:19,709
and repeated warnings
from the IMF.

942
01:00:19,878 --> 01:00:22,073
I said,
and on behalf of the institution,

943
01:00:22,247 --> 01:00:25,648
the crisis in front of us
is a huge crisis.

944
01:00:25,817 --> 01:00:26,875
INTERVIEWER:
Who did you talk to?

945
01:00:27,052 --> 01:00:29,213
The government, Treasury,
Fed, everybody.

946
01:00:29,387 --> 01:00:35,222
In May of 2007,
hedge fund manager Bill Ackman
circulated a presentation,

947
01:00:35,392 --> 01:00:37,019
"Who is Holding the Bag?"

948
01:00:37,194 --> 01:00:40,027
Which described
how the bubble would unravel.

949
01:00:40,564 --> 01:00:43,829
And in early 2008,
Charles Morris published his book

950
01:00:44,001 --> 01:00:46,299
about the impending crisis.

951
01:00:48,405 --> 01:00:50,635
You're not sure. What do you do?

952
01:00:50,808 --> 01:00:54,972
You might have some suspicions
that underwriting standards
are weakened.

953
01:00:55,145 --> 01:00:58,603
But then the question is,
should you do anything about it?

954
01:01:00,050 --> 01:01:03,713
By 2008, home foreclosures
were skyrocketing

955
01:01:03,887 --> 01:01:07,050
and the securitization food chain
imploded.

956
01:01:07,224 --> 01:01:10,660
Lenders could no longer sell
their loans to the investment banks.

957
01:01:10,828 --> 01:01:15,060
And as the loans went bad,
dozens of lenders failed.

958
01:01:15,699 --> 01:01:20,432
Chuck Prince of Citibank
famously said

959
01:01:21,605 --> 01:01:24,506
that we have to dance
until the music stops.

960
01:01:24,675 --> 01:01:27,974
Actually, the music had stopped
already when he said that.

961
01:01:28,145 --> 01:01:30,613
The market for CDOs collapsed,

962
01:01:30,781 --> 01:01:34,114
leaving investment banks holding
hundreds of billions of dollars

963
01:01:34,284 --> 01:01:38,482
in loans, CDOs, and real estate
they couldn't sell.

964
01:01:38,655 --> 01:01:42,216
When the crisis started,
both the Bush administration

965
01:01:42,393 --> 01:01:46,762
and the Federal Reserve
were totally behind the curve.

966
01:01:46,930 --> 01:01:49,262
They did not understand
the extent of it.

967
01:01:49,500 --> 01:01:53,493
INTERVIEWER:
At what point do you remember
thinking for the first time:

968
01:01:53,670 --> 01:01:56,002
"This is dangerous, this is bad"?

969
01:01:56,173 --> 01:02:00,337
I remember very well one...
I think it was a G 7 meeting

970
01:02:00,511 --> 01:02:02,502
of February, 2008.

971
01:02:02,679 --> 01:02:06,580
And I remember discussing
the issue with Hank Paulson.

972
01:02:06,749 --> 01:02:09,809
And I clearly remember
telling Hank:

973
01:02:09,986 --> 01:02:12,978
"We are watching
this tsunami coming,

974
01:02:13,156 --> 01:02:16,887
and you're just proposing
that we ask

975
01:02:17,060 --> 01:02:19,654
which swimming costume
we're going to put on."

976
01:02:19,829 --> 01:02:22,161
INTERVIEWER:
What was his response?
What was his feeling?

977
01:02:22,331 --> 01:02:23,730
"Things are under control.

978
01:02:23,900 --> 01:02:27,859
Yes, we are looking
at this situation carefully,

979
01:02:28,037 --> 01:02:31,473
and, yeah, it's under control."

980
01:02:32,175 --> 01:02:36,703
We're gonna keep growing. Okay?
And, obviously, I'll say it:

981
01:02:36,879 --> 01:02:39,473
If you're growing,
you're not in recession, right?

982
01:02:39,649 --> 01:02:41,640
I mean, we all know that.

983
01:02:46,856 --> 01:02:48,881
WOMAN:
One of the pillars of Wall Street...

984
01:02:49,058 --> 01:02:53,324
NARRATOR:
In March 2008, the investment bank
Bear Stearns ran out of cash

985
01:02:53,963 --> 01:02:57,694
and was acquired for $2 a share
by JPMorgan Chase.

986
01:02:57,867 --> 01:03:01,530
The deal was backed by $30 billion
in emergency guarantees

987
01:03:01,704 --> 01:03:03,171
from the Federal Reserve.

988
01:03:04,707 --> 01:03:07,642
That was when the administration
could have come in

989
01:03:07,810 --> 01:03:13,407
and put in place various measures
to reduce system risk.

990
01:03:13,583 --> 01:03:18,452
The information I'm receiving
is the end is not here,

991
01:03:18,621 --> 01:03:20,816
that there are other shoes to fall.

992
01:03:20,990 --> 01:03:23,515
Well, I've seen
those investment banks,

993
01:03:23,693 --> 01:03:27,288
working with the Fed
and the SEC,

994
01:03:27,463 --> 01:03:33,527
strengthen their liquidity,
strengthen their capital positions.

995
01:03:33,703 --> 01:03:37,764
I get reports all the time.
Our regulators are very vigilant.

996
01:03:38,441 --> 01:03:40,340
On September 7 th, 2008,

997
01:03:40,509 --> 01:03:43,103
Henry Paulson announced
the federal takeover

998
01:03:43,278 --> 01:03:47,840
of Fannie Mae and Freddie Mac,
giant lenders on the brink
of collapse.

999
01:03:48,016 --> 01:03:52,248
Nothing about our actions today
reflects a changed view

1000
01:03:52,420 --> 01:03:54,047
of the housing correction

1001
01:03:54,222 --> 01:03:57,248
or the strength
of other U.S. Financial institutions.

1002
01:03:57,492 --> 01:03:58,516
Two days later,

1003
01:03:58,693 --> 01:04:02,356
Lehman Brothers announced
record losses of $3.2 billion,

1004
01:04:02,531 --> 01:04:04,829
and its stock collapsed.

1005
01:04:05,634 --> 01:04:10,071
INTERVIEWER:
The effects of Lehman and AIG in
September still came as a surprise.

1006
01:04:10,238 --> 01:04:13,674
I mean, this is even after July
and Fannie and Freddie.

1007
01:04:13,842 --> 01:04:18,711
So clearly there was stuff that,
as of September,

1008
01:04:18,880 --> 01:04:22,782
major stuff,
that nobody knew about.

1009
01:04:22,951 --> 01:04:25,146
I think that's... I think that's fair.

1010
01:04:25,320 --> 01:04:29,086
INTERVIEWER:
Bear Stearns was rated triple-A
like a month before it went bankrupt?

1011
01:04:29,257 --> 01:04:31,919
More likely A2.
A2?

1012
01:04:32,093 --> 01:04:33,185
Yeah.
Okay.

1013
01:04:33,361 --> 01:04:35,124
A2 is still not bankrupt.

1014
01:04:35,297 --> 01:04:38,789
No, that's a high investment grade.
Solid investment grade rating.

1015
01:04:38,967 --> 01:04:42,027
Lehman Brothers,
A2 within days of failing.

1016
01:04:42,204 --> 01:04:47,005
AIG, double-A
within days of being bailed out.

1017
01:04:47,876 --> 01:04:51,812
Fannie Mae and Freddie Mac
were triple-A
when they were rescued.

1018
01:04:51,980 --> 01:04:55,916
Citigroup, Merrill, all of them
had investment-grade ratings.

1019
01:04:56,084 --> 01:04:58,644
How can that be?
Well, that's a good question.

1020
01:04:58,820 --> 01:05:00,549
[LAUGHING]

1021
01:05:00,722 --> 01:05:01,984
That's a great question.

1022
01:05:02,157 --> 01:05:03,488
INTERVIEWER:
At no point did the administration

1023
01:05:03,658 --> 01:05:07,059
ever go to
all the major institutions and say:

1024
01:05:07,229 --> 01:05:10,130
"This is serious.
Tell us what your positions are.

1025
01:05:10,298 --> 01:05:14,165
You know, no bullshit.
Where are you?"

1026
01:05:14,635 --> 01:05:18,366
Well, first,
that's what the regulators...
That's their job, right?

1027
01:05:18,539 --> 01:05:22,635
Their job is to understand
the exposure across
these institutions.

1028
01:05:22,810 --> 01:05:25,711
And they have
a very refined understanding

1029
01:05:25,879 --> 01:05:30,282
that I think became more respon...
More refined as the crisis proceeded.
So...

1030
01:05:30,451 --> 01:05:33,113
INTERVIEWER:
Forgive me,
but that's clearly not true.

1031
01:05:33,287 --> 01:05:35,152
What do you mean, that's not true?

1032
01:05:35,322 --> 01:05:36,755
INTERVIEWER:
In August of 2008,

1033
01:05:36,924 --> 01:05:42,419
were you aware of the credit ratings
held by Lehman Brothers,

1034
01:05:42,596 --> 01:05:44,291
Merrill Lynch, AIG,

1035
01:05:44,465 --> 01:05:46,933
and did you think
that they were accurate?

1036
01:05:47,101 --> 01:05:50,093
Well, certainly by that time,

1037
01:05:50,271 --> 01:05:53,172
it was clear earlier credit ratings
weren't accurate.

1038
01:05:53,340 --> 01:05:56,002
They had been downgraded.
INTERVIEWER: No, they hadn't.

1039
01:05:56,176 --> 01:06:00,272
There was downgrading in terms
of the industry and concerns of the...

1040
01:06:00,447 --> 01:06:02,813
All those firms were rated
at least A2

1041
01:06:02,983 --> 01:06:05,747
until a couple of days
before they were rescued.

1042
01:06:05,919 --> 01:06:10,515
The answer is I don't know enough
to answer your question
on this issue.

1043
01:06:10,691 --> 01:06:14,058
Governor Fred Mishkin is resigning,
effective August 31.

1044
01:06:14,228 --> 01:06:18,164
He plans to return to Columbia's
Graduate School of Business.

1045
01:06:18,332 --> 01:06:21,358
INTERVIEWER:
Why did you leave the
Federal Reserve in August of 2008

1046
01:06:21,535 --> 01:06:24,299
in the middle
of the worst financial crisis?

1047
01:06:24,471 --> 01:06:28,601
So that...
I had to revise a textbook.

1048
01:06:28,776 --> 01:06:32,542
His departure leaves the board
with three of its seven seats vacant

1049
01:06:32,713 --> 01:06:34,874
just when the economy
needs it most.

1050
01:06:35,049 --> 01:06:38,917
INTERVIEWER:
I'm sure your textbook is important
and widely read, but in August 2008,

1051
01:06:39,086 --> 01:06:43,182
some more important things
were going on in the world,
don't you think?

1052
01:06:43,724 --> 01:06:45,692
NARRATOR:
By Friday, September 12th,

1053
01:06:45,859 --> 01:06:47,986
Lehman Brothers had
run out of cash

1054
01:06:48,162 --> 01:06:51,858
and the entire investment-banking
industry was sinking fast.

1055
01:06:52,031 --> 01:06:55,694
The stability of the global
financial system was in jeopardy.

1056
01:06:56,903 --> 01:06:59,701
That weekend, Henry Paulson
and Timothy Geithner

1057
01:06:59,872 --> 01:07:02,306
president of
the New York Federal Reserve,

1058
01:07:02,475 --> 01:07:05,933
called an emergency meeting
with the CEOs of the major banks

1059
01:07:06,112 --> 01:07:07,636
in an effort to rescue Lehman.

1060
01:07:08,448 --> 01:07:09,972
But Lehman wasn't alone.

1061
01:07:10,383 --> 01:07:15,184
Merrill Lynch was also
on the brink of failure.

1062
01:07:15,355 --> 01:07:19,155
And that Sunday,
it was acquired by Bank of America.

1063
01:07:19,325 --> 01:07:24,388
The only bank interested
in buying Lehman
was the British firm Barclays.

1064
01:07:24,564 --> 01:07:28,432
But British regulators demanded
a financial guarantee from the U.S.

1065
01:07:28,968 --> 01:07:30,993
Paulson refused.

1066
01:07:35,541 --> 01:07:40,808
We got in a cab and went
to the Federal Reserve Bank.

1067
01:07:42,548 --> 01:07:45,847
They wanted the bankruptcy case
commenced before midnight

1068
01:07:46,018 --> 01:07:48,009
of September 14.

1069
01:07:48,187 --> 01:07:54,456
We kept pressing
that this would be a terrible event,

1070
01:07:54,627 --> 01:07:57,221
and at some point
I used the word Armageddon,

1071
01:07:57,397 --> 01:08:02,027
and they consider the consequences
of what they were proposing.

1072
01:08:02,201 --> 01:08:04,726
The effect on the market
would be extraordinary.

1073
01:08:04,904 --> 01:08:06,701
INTERVIEWER: You said this?
Yes.

1074
01:08:06,873 --> 01:08:11,970
They just said they had considered
all of the comments we had made,

1075
01:08:12,145 --> 01:08:17,583
and they were still of the belief
that in order to calm the markets

1076
01:08:17,750 --> 01:08:21,481
and move forward,
it was necessary for Lehman
to go into bankruptcy.

1077
01:08:21,654 --> 01:08:23,018
INTERVIEWER: "Calm the markets"?
Yes.

1078
01:08:23,422 --> 01:08:27,791
INTERVIEWER:
When were you first told that Lehman,
in fact, was going to go bankrupt?

1079
01:08:28,593 --> 01:08:31,687
After the fact.
After the fact?

1080
01:08:32,798 --> 01:08:36,063
Wow. Okay. Um...

1081
01:08:36,234 --> 01:08:41,262
And what was your reaction
when you learned of it?

1082
01:08:41,873 --> 01:08:43,608
"Holy cow."

1083
01:08:43,675 --> 01:08:47,008
NARRATOR:
Paulson and Bernanke had not
consulted with other governments

1084
01:08:47,179 --> 01:08:50,148
and didn't know the consequences
of foreign bankruptcy laws.

1085
01:08:50,315 --> 01:08:53,284
MAN:
- Lehman Brothers London
empty their desks.

1086
01:08:53,452 --> 01:08:54,680
NARRATOR:
Under British law,

1087
01:08:54,853 --> 01:08:58,186
Lehman's London office
had to be closed immediately.

1088
01:08:58,356 --> 01:09:02,554
All transactions came to a halt,
and there are thousands
of transactions.

1089
01:09:02,727 --> 01:09:06,094
The hedge funds who had had
assets with Lehman in London

1090
01:09:06,264 --> 01:09:09,062
discovered overnight,
to their complete horror,

1091
01:09:09,234 --> 01:09:11,327
they couldn't get
those assets back.

1092
01:09:11,503 --> 01:09:14,267
One of the points of the hub failed.

1093
01:09:14,439 --> 01:09:17,567
And that had huge knock-on effects
around the system.

1094
01:09:17,742 --> 01:09:19,733
The oldest money market fund
in the nation

1095
01:09:19,911 --> 01:09:24,041
wrote off three-quarters
of a billion dollars in bad debt

1096
01:09:24,216 --> 01:09:26,207
issued by now-bankrupt
Lehman Brothers.

1097
01:09:26,384 --> 01:09:29,979
NARRATOR:
Lehman's failure caused a collapse
in the commercial paper market,

1098
01:09:30,155 --> 01:09:33,454
which many companies depend on
to pay for expenses

1099
01:09:33,625 --> 01:09:34,956
such as payroll.

1100
01:09:35,126 --> 01:09:38,095
That means they have to lay off
employees, they can't buy parts.

1101
01:09:38,263 --> 01:09:40,060
It stops business in its tracks.

1102
01:09:40,232 --> 01:09:43,099
People stood and said,
"Listen, what can we believe in?

1103
01:09:43,268 --> 01:09:45,236
There's nothing
we can trust anymore."

1104
01:09:45,403 --> 01:09:48,964
That same week,
AIG owed $ 13 billion

1105
01:09:49,140 --> 01:09:53,008
to holders of credit default swaps,
and it didn't have the money.

1106
01:09:53,178 --> 01:09:55,146
SHENG:
AIG was another hub.

1107
01:09:55,313 --> 01:09:59,408
If AIG had stopped, you know,
all planes may have to stop flying.

1108
01:09:59,583 --> 01:10:02,984
On September 17 th,
AIG is taken over
by the government.

1109
01:10:03,654 --> 01:10:07,090
One day later, Paulson
and Bernanke ask Congress

1110
01:10:07,258 --> 01:10:09,692
for $700 billion
to bail out the banks.

1111
01:10:09,860 --> 01:10:11,191
We're coming together.

1112
01:10:11,362 --> 01:10:15,765
NARRATOR:
They warned that the alternative
would be a catastrophic collapse.

1113
01:10:15,933 --> 01:10:18,595
It was scary. You know,
the entire system froze up.

1114
01:10:18,769 --> 01:10:22,535
Every part of the financial system,
every part of the credit system.

1115
01:10:22,706 --> 01:10:24,435
Nobody could borrow money.

1116
01:10:24,608 --> 01:10:27,771
It was like a cardiac arrest
of the global financial system.

1117
01:10:27,945 --> 01:10:29,879
I'm playing the hand dealt me.

1118
01:10:30,047 --> 01:10:32,481
A lot of what I'm dealing with...

1119
01:10:32,650 --> 01:10:37,087
I'm dealing with the consequences
of things that were done years ago.

1120
01:10:37,254 --> 01:10:39,119
McCORMICK:
Secretary Paulson spoke
through the fall.

1121
01:10:39,290 --> 01:10:42,316
All the potential root causes of this,
and there are plenty,

1122
01:10:42,493 --> 01:10:44,552
he called them. I'm not sure...

1123
01:10:44,728 --> 01:10:46,127
INTERVIEWER:
You're not being serious about that.

1124
01:10:46,297 --> 01:10:48,993
I am being serious.
What would you have expected?

1125
01:10:49,166 --> 01:10:51,566
What were you looking for
that you didn't see?

1126
01:10:51,735 --> 01:10:54,533
INTERVIEWER:
He was the senior advocate

1127
01:10:54,705 --> 01:10:59,074
for prohibiting the regulation
of credit default swaps

1128
01:10:59,243 --> 01:11:02,838
and also lifting the leverage limits
on the investment banks.

1129
01:11:03,013 --> 01:11:04,037
So again, what...?

1130
01:11:04,214 --> 01:11:07,672
He mentioned those things?
I never heard him mention
those things.

1131
01:11:07,851 --> 01:11:10,547
Could we turn this off for a second?

1132
01:11:15,359 --> 01:11:16,986
NARRATOR:
When AIG was bailed out,

1133
01:11:17,161 --> 01:11:19,129
the owners of
its credit default swaps,

1134
01:11:19,296 --> 01:11:21,958
the most prominent of which
was Goldman Sachs,

1135
01:11:22,132 --> 01:11:25,693
were paid $61 billion
the next day.

1136
01:11:25,869 --> 01:11:27,996
Paulson, Bernanke
and Tim Geithner

1137
01:11:28,172 --> 01:11:31,368
forced AIG to pay 100 cents
on the dollar

1138
01:11:31,541 --> 01:11:34,305
rather than negotiate
lower prices.

1139
01:11:34,477 --> 01:11:40,643
Eventually, the AIG bailout
cost taxpayers over $ 150 billion.

1140
01:11:40,817 --> 01:11:44,218
A hundred and sixty billion dollars
went through AIG.

1141
01:11:44,387 --> 01:11:47,185
Fourteen billion went
to Goldman Sachs.

1142
01:11:47,357 --> 01:11:50,554
At the same time,
Paulson and Geithner forced AIG

1143
01:11:50,727 --> 01:11:54,629
to surrender its right to sue Goldman
and the other banks for fraud.

1144
01:11:54,797 --> 01:11:59,894
INTERVIEWER:
Isn't there a problem when the person
in charge of dealing with this crisis

1145
01:12:00,069 --> 01:12:02,230
is the former CEO
of Goldman Sachs?

1146
01:12:02,405 --> 01:12:05,966
Someone who had a major role
in causing it.

1147
01:12:06,142 --> 01:12:08,872
It's fair to say
that the financial markets today

1148
01:12:09,045 --> 01:12:10,842
are incredibly complicated.

1149
01:12:11,014 --> 01:12:12,743
- And supply
urgently needed money.

1150
01:12:12,915 --> 01:12:15,145
On October 4th, 2008,

1151
01:12:15,318 --> 01:12:19,345
President Bush signs
a 700-billion-dollar bailout bill.

1152
01:12:19,522 --> 01:12:21,854
But world stock markets
continue to fall

1153
01:12:22,025 --> 01:12:24,892
amid fears that a global recession
is now underway.

1154
01:12:30,199 --> 01:12:33,498
The bailout legislation does nothing
to stem the tide of layoffs

1155
01:12:33,670 --> 01:12:35,467
and foreclosures.

1156
01:12:35,638 --> 01:12:40,735
Unemployment in the United States
and Europe rises to 10 percent.

1157
01:12:40,910 --> 01:12:44,243
The recession accelerates
and spreads globally.

1158
01:12:48,051 --> 01:12:52,317
I began to get really scared
because I hadn't foreseen

1159
01:12:52,488 --> 01:12:57,050
the whole world going down
at the same rate at the same time.

1160
01:12:57,760 --> 01:12:59,591
By December of 2008,

1161
01:12:59,762 --> 01:13:03,254
General Motors and Chrysler
are facing bankruptcy.

1162
01:13:03,599 --> 01:13:06,328
And as U.S. Consumers cut back
on spending,

1163
01:13:06,501 --> 01:13:10,028
Chinese manufacturers
see sales plummet.

1164
01:13:11,106 --> 01:13:15,566
Over 10 million migrant workers
in China lose their jobs.

1165
01:13:16,044 --> 01:13:20,606
At the end of the day,
the poorest, as always,
pay the most.

1166
01:13:26,088 --> 01:13:28,079
WOMAN:
Here, you can earn a lot of money.

1167
01:13:28,256 --> 01:13:34,217
Like 70, 80 U.S. Dollars per month.

1168
01:13:35,430 --> 01:13:40,299
As a farmer in the countryside,
you cannot earn as much money.

1169
01:13:40,469 --> 01:13:44,530
The workers, they just wire
their salary to their hometown

1170
01:13:44,706 --> 01:13:47,436
to give to their families.

1171
01:13:47,843 --> 01:13:50,710
The crisis started in America.

1172
01:13:50,879 --> 01:13:54,610
We all know it will be coming
to China.

1173
01:13:59,054 --> 01:14:02,114
Some of the factories try
to cut off some workers.

1174
01:14:03,625 --> 01:14:06,890
And some people will get poor
because they'll lose their jobs.

1175
01:14:07,062 --> 01:14:08,086
[SPEAKS INDISTINCTLY]

1176
01:14:08,263 --> 01:14:09,696
Life gets harder.

1177
01:14:18,240 --> 01:14:20,800
MAN:
We were growing
at about 20 percent.

1178
01:14:21,576 --> 01:14:23,976
It was a super year.

1179
01:14:24,146 --> 01:14:28,048
Then we suddenly went
to minus-nine this quarter.

1180
01:14:28,216 --> 01:14:32,949
Exports collapsed,
and we're talking like 30 percent.

1181
01:14:33,755 --> 01:14:37,384
So we just took a hit, you know.
Fell off a cliff. Boomp.

1182
01:14:37,559 --> 01:14:41,654
Even as the crisis unfolded,
we didn't know how wide
it was going to spread

1183
01:14:41,829 --> 01:14:43,694
or how severe it was going to be.

1184
01:14:43,864 --> 01:14:46,458
We were still hoping
that there would be some way

1185
01:14:46,634 --> 01:14:51,628
for us to have a shelter
and be less battered by the storm.

1186
01:14:51,806 --> 01:14:53,000
But it's not possible.

1187
01:14:53,474 --> 01:14:55,203
It's a very globalized world.

1188
01:14:55,376 --> 01:14:58,174
The economies
are all linked together.

1189
01:15:29,777 --> 01:15:32,211
Every time a home
goes into foreclosure,

1190
01:15:32,379 --> 01:15:34,711
it affects everyone
who lives around that house.

1191
01:15:34,882 --> 01:15:38,045
When that house goes on the market,
it'll be sold at a lower price.

1192
01:15:38,219 --> 01:15:41,552
Maybe before it goes on the market,
it won't be well-maintained.

1193
01:15:41,722 --> 01:15:45,055
We estimate another 9 million
homeowners will lose their homes.

1194
01:15:51,665 --> 01:15:56,693
[IN SPANISH]
We went out on a weekend to see
what houses were for sale.

1195
01:15:56,871 --> 01:15:58,429
We saw one we liked.

1196
01:15:58,606 --> 01:16:01,837
The payment
was going to be $3200.

1197
01:16:13,420 --> 01:16:16,081
Everything was beautiful,
the house was very pretty.

1198
01:16:16,256 --> 01:16:18,315
The payment low.
Everything was...

1199
01:16:18,491 --> 01:16:20,186
We won the lottery.

1200
01:16:20,360 --> 01:16:23,261
But the reality was when
the first payment arrived.

1201
01:16:28,034 --> 01:16:32,733
I felt very bad
for my husband

1202
01:16:33,840 --> 01:16:40,143
because he works too much.
And we have three children.

1203
01:16:49,656 --> 01:16:53,490
The majority I've seen are
people hurt by the economy.

1204
01:16:53,660 --> 01:16:56,652
They were living day to day,
paycheck to paycheck,

1205
01:16:56,829 --> 01:16:58,057
and that ran out.

1206
01:16:58,231 --> 01:17:01,564
Unemployment won't
pay a mortgage.
It won't pay a car bill.

1207
01:17:02,168 --> 01:17:03,897
STEPHEN:
I was a log truck driver.

1208
01:17:04,070 --> 01:17:08,905
They shut down the logging systems,
shut down the sawmills.

1209
01:17:09,075 --> 01:17:11,543
So I moved down here
on a construction job.

1210
01:17:11,711 --> 01:17:14,578
And the construction jobs
got shut down too, so...

1211
01:17:14,747 --> 01:17:17,272
Things are so tough.
There's a lot of people out there.

1212
01:17:17,450 --> 01:17:19,850
Soon you're gonna be seeing
more camps like this

1213
01:17:20,019 --> 01:17:22,180
because there's just no jobs
right now.

1214
01:17:28,494 --> 01:17:33,090
When the company did well,
we did well.

1215
01:17:33,266 --> 01:17:37,066
When the company did not do well,
sir, we did not do well.

1216
01:17:37,470 --> 01:17:39,495
NARRATOR:
The men who destroyed
their own companies

1217
01:17:39,672 --> 01:17:41,435
and plunged the world
into crisis

1218
01:17:41,607 --> 01:17:44,940
walked away from the wreckage
with their fortunes intact.

1219
01:17:45,111 --> 01:17:48,705
The top five executives at Lehman
Brothers made over a billion dollars

1220
01:17:48,880 --> 01:17:51,610
between 2000 and 2007.

1221
01:17:51,783 --> 01:17:55,583
And when the firm went bankrupt,
they got to keep all the money.

1222
01:17:55,754 --> 01:17:57,346
The system worked.

1223
01:17:57,522 --> 01:18:00,457
It doesn't make sense to make
a failing loan because we lose.

1224
01:18:00,625 --> 01:18:04,527
The borrower loses,
the community loses
and we lose.

1225
01:18:04,696 --> 01:18:07,028
Countrywide's CEO,
Angelo Mozilo,

1226
01:18:07,199 --> 01:18:11,568
made $470 million
between 2003 and 2008.

1227
01:18:11,937 --> 01:18:15,566
One hundred forty million came from
dumping his Countrywide stock

1228
01:18:15,741 --> 01:18:18,471
in the 12 months
before the company collapsed.

1229
01:18:18,643 --> 01:18:21,305
I hold the board accountable
when a business fails.

1230
01:18:21,480 --> 01:18:24,176
They're responsible
for hiring and firing the CEO

1231
01:18:24,349 --> 01:18:26,510
and overseeing
big strategic decisions.

1232
01:18:26,685 --> 01:18:29,677
The problem with boards
in America is the way
boards are elected.

1233
01:18:29,855 --> 01:18:33,382
You know, the boards are
pretty much, in many cases,
picked by the CEO.

1234
01:18:33,558 --> 01:18:36,049
The board of directors
and compensation committees

1235
01:18:36,228 --> 01:18:41,325
are the two bodies
best situated to determine
pay for executives.

1236
01:18:41,500 --> 01:18:43,968
INTERVIEWER:
How do you think they've done
over the past 10 years?

1237
01:18:44,136 --> 01:18:49,506
Well, I think that if you look at those...
I would give about a B, because...

1238
01:18:49,674 --> 01:18:50,698
A B?
A B, yes.

1239
01:18:50,876 --> 01:18:52,605
Not an F?
Not an F, not an F.

1240
01:18:52,911 --> 01:18:55,607
NARRATOR:
Stan O'Neal,
the CEO of Merrill Lynch,

1241
01:18:55,781 --> 01:19:00,218
received $90 million
in 2006 and 2007 alone.

1242
01:19:00,385 --> 01:19:02,546
After driving his firm
into the ground,

1243
01:19:02,721 --> 01:19:05,315
the board of directors
allowed him to resign,

1244
01:19:05,490 --> 01:19:09,449
and he collected $ 161 million
in severance.

1245
01:19:09,795 --> 01:19:13,822
INTERVIEWER:
Instead of being fired,
Stan O'Neal is allowed to resign

1246
01:19:13,999 --> 01:19:17,196
and takes away $ 151 million.

1247
01:19:17,369 --> 01:19:19,837
That's a decision that
that board of directors made.

1248
01:19:20,005 --> 01:19:21,836
What grade
do you give that decision?

1249
01:19:22,007 --> 01:19:24,873
That's a tougher one.
I don't know if I'd give it
a B as well.

1250
01:19:25,409 --> 01:19:31,473
O'Neal's successor, John Thain,
was paid $87 million in 2007.

1251
01:19:31,649 --> 01:19:33,241
And in December of 2008,

1252
01:19:33,417 --> 01:19:37,114
two months after Merrill
was bailed out by U.S. Taxpayers,

1253
01:19:37,288 --> 01:19:41,520
Thain and Merrill's board
handed out billions in bonuses.

1254
01:19:42,259 --> 01:19:46,252
In March of 2008,
AIG's Financial Products division

1255
01:19:46,430 --> 01:19:48,728
lost $ 11 billion.

1256
01:19:48,899 --> 01:19:53,199
Instead of being fired,
Joseph Cassano, head of AIGFP,

1257
01:19:53,571 --> 01:19:57,473
was kept on as a consultant
for a million dollars a month.

1258
01:19:57,641 --> 01:20:03,136
You wanna make sure key players
and key employees within AIGFP,

1259
01:20:03,314 --> 01:20:05,475
we retain
that intellectual knowledge.

1260
01:20:05,649 --> 01:20:07,617
I attended
a very interesting dinner

1261
01:20:07,785 --> 01:20:11,448
organized by Hank Paulson
a little more than one year ago

1262
01:20:11,622 --> 01:20:14,250
with some officials
and a couple of CEOs

1263
01:20:14,425 --> 01:20:16,689
from the biggest banks
in the U.S.

1264
01:20:16,861 --> 01:20:21,161
And surprisingly enough,
all these gentlemen were arguing:

1265
01:20:21,332 --> 01:20:25,632
"We were too greedy,
so we have part of
the responsibility." Fine.

1266
01:20:25,803 --> 01:20:27,430
Then they were turning
to the treasurer,

1267
01:20:27,605 --> 01:20:29,300
Secretary of the Treasury,
and saying:

1268
01:20:29,473 --> 01:20:32,636
"You should regulate more.
We're too greedy,
we can't avoid it.

1269
01:20:32,810 --> 01:20:35,779
The only way to avoid this
is to have more regulation."

1270
01:20:35,946 --> 01:20:38,847
INTERVIEWER:
I have spoken to many bankers
about this question,

1271
01:20:39,016 --> 01:20:40,950
including very senior ones.

1272
01:20:41,118 --> 01:20:45,919
And this is the first time
that I've ever heard anybody say

1273
01:20:46,090 --> 01:20:49,116
they wanted their compensation
to be regulated in any way.

1274
01:20:49,293 --> 01:20:52,490
Yeah, because
it was at the moment
where they were afraid.

1275
01:20:52,663 --> 01:20:56,962
And after, when solution
to the crisis began to appear,

1276
01:20:57,133 --> 01:20:59,397
then probably
they changed their mind.

1277
01:21:01,804 --> 01:21:05,638
NARRATOR:
In the U.S., the banks
are now bigger, more powerful

1278
01:21:05,808 --> 01:21:08,868
and more concentrated
than ever before.

1279
01:21:09,045 --> 01:21:10,910
There are fewer competitors.

1280
01:21:11,080 --> 01:21:15,039
A lot of smaller banks have been
taken over by big ones.

1281
01:21:15,218 --> 01:21:17,652
J.P. Morgan is even bigger
than it was before.

1282
01:21:17,820 --> 01:21:21,779
J.P. Morgan took over first
Bear Stearns and then WaMu.

1283
01:21:21,958 --> 01:21:25,792
Bank of America took over
Countrywide and Merrill Lynch.

1284
01:21:25,962 --> 01:21:28,453
Wells Fargo took over Wachovia.

1285
01:21:28,631 --> 01:21:30,929
After the crisis,
the financial industry,

1286
01:21:31,100 --> 01:21:33,898
including the
Financial Services Roundtable,

1287
01:21:34,070 --> 01:21:36,595
worked harder than ever
to fight reform.

1288
01:21:36,773 --> 01:21:39,435
The financial sector
employs 3000 lobbyists,

1289
01:21:39,976 --> 01:21:43,412
more than five
for each member of Congress.

1290
01:21:43,913 --> 01:21:45,904
INTERVIEWER:
You think
the financial services industry

1291
01:21:46,082 --> 01:21:48,744
has excessive political influence
in the United States?

1292
01:21:48,918 --> 01:21:53,355
No. I think that every
person in the country

1293
01:21:53,523 --> 01:21:55,320
is represented
here in Washington.

1294
01:21:55,491 --> 01:21:59,222
INTERVIEWER:
And you think that all segments
of American society

1295
01:21:59,395 --> 01:22:02,728
have equal and fair access
to the system?

1296
01:22:02,899 --> 01:22:07,768
That you can walk into
any hearing room that
you would like. Yes, I do.

1297
01:22:08,037 --> 01:22:11,234
INTERVIEWER:
One can walk into any hearing room.
One cannot necessarily

1298
01:22:11,407 --> 01:22:14,240
write the lobbying checks
that your industry writes

1299
01:22:14,410 --> 01:22:18,314
or engage in the level
of political contributions
your industry engages in.

1300
01:22:18,514 --> 01:22:21,381
NARRATOR:
Between 1998 and 2008,

1301
01:22:21,551 --> 01:22:24,486
the financial industry
spent over $5 billion

1302
01:22:24,654 --> 01:22:27,145
on lobbying
and campaign contributions.

1303
01:22:27,323 --> 01:22:30,190
And since the crisis,
they're spending even more money.

1304
01:22:31,927 --> 01:22:34,395
The financial industry
also exerts its influence

1305
01:22:34,563 --> 01:22:38,499
in a more subtle way,
one that most Americans
don't know about.

1306
01:22:40,102 --> 01:22:43,697
It has corrupted the study
of economics itself.

1307
01:22:44,172 --> 01:22:50,202
Deregulation had tremendous
financial and intellectual support

1308
01:22:50,379 --> 01:22:54,816
because people argued it
for their own benefit.

1309
01:22:54,983 --> 01:22:59,647
The economics profession was
the main source of that illusion.

1310
01:22:59,988 --> 01:23:03,048
Since the 1980s,
academic economists

1311
01:23:03,225 --> 01:23:05,659
have been major advocates
of deregulation

1312
01:23:05,827 --> 01:23:09,228
and played powerful roles
in shaping U.S. Government policy.

1313
01:23:09,798 --> 01:23:13,564
Very few of these economic experts
warned about the crisis.

1314
01:23:13,735 --> 01:23:18,263
And even after the crisis,
many of them opposed reform.

1315
01:23:18,540 --> 01:23:22,408
The guys who taught these things
tended to get paid a lot of money

1316
01:23:22,577 --> 01:23:24,670
being consultants.

1317
01:23:24,846 --> 01:23:29,442
Business school professors
don't live on a faculty salary.

1318
01:23:30,519 --> 01:23:33,215
They do very, very well.

1319
01:23:33,655 --> 01:23:36,647
INTERVIEWER:
Over the last decade,
the financial services industries

1320
01:23:36,825 --> 01:23:42,821
made about $5 billion worth of
political contributions in the U.S.

1321
01:23:43,899 --> 01:23:46,197
That's kind of a lot of money.

1322
01:23:46,702 --> 01:23:49,364
That doesn't bother you?
No.

1323
01:23:49,538 --> 01:23:52,063
NARRATOR:
Martin Feldstein
is a professor at Harvard

1324
01:23:52,240 --> 01:23:54,640
and one of the world's
most prominent economists.

1325
01:23:55,010 --> 01:23:57,808
As President Reagan's
chief economic advisor,

1326
01:23:57,979 --> 01:24:00,413
he was a major architect
of deregulation.

1327
01:24:00,582 --> 01:24:03,608
And from 1988 until 2009,

1328
01:24:03,919 --> 01:24:07,012
he was on the board of directors
of both AIG

1329
01:24:07,188 --> 01:24:09,156
and AIG Financial Products,

1330
01:24:09,323 --> 01:24:11,553
which paid him millions of dollars.

1331
01:24:11,826 --> 01:24:14,693
INTERVIEWER:
You have any regrets
about having been on AIG's board?

1332
01:24:14,862 --> 01:24:18,525
I have no comments.
No, I have no regrets about
being on AIG's board.

1333
01:24:18,699 --> 01:24:22,135
INTERVIEWER: None?
That I can say. Absolutely none.

1334
01:24:22,303 --> 01:24:23,736
Okay.

1335
01:24:26,173 --> 01:24:30,872
You have any regrets
about AIG's decisions?

1336
01:24:31,045 --> 01:24:33,809
I cannot say anything more
about AIG.

1337
01:24:33,981 --> 01:24:38,042
I've taught at Northwestern
in Chicago, Harvard
and Columbia.

1338
01:24:38,219 --> 01:24:41,154
NARRATOR:
Glenn Hubbard is the dean
of Columbia Business School

1339
01:24:41,322 --> 01:24:44,018
and was chairman
of the Council of Economic Advisers

1340
01:24:44,191 --> 01:24:46,182
under George W. Bush.

1341
01:24:46,360 --> 01:24:48,487
INTERVIEWER:
Do you think
the financial services industry

1342
01:24:48,662 --> 01:24:52,063
has too much political power
in the United States?

1343
01:24:52,533 --> 01:24:56,663
I don't think so. No.
You certainly wouldn't
get that impression

1344
01:24:56,837 --> 01:25:00,637
by the drubbing
that they regularly get
in Washington.

1345
01:25:00,808 --> 01:25:03,641
Many prominent academics
quietly make fortunes

1346
01:25:03,811 --> 01:25:08,612
helping the financial industry
shape public debate
and government policy.

1347
01:25:08,783 --> 01:25:12,048
The Analysis Group,
Charles River Associates,

1348
01:25:12,219 --> 01:25:13,550
Compass Lexecon

1349
01:25:13,721 --> 01:25:15,985
and the Law and Economics
Consulting Group

1350
01:25:16,157 --> 01:25:18,352
manage a multibillion-dollar
industry

1351
01:25:18,526 --> 01:25:21,825
that provides academic experts
for hire.

1352
01:25:21,996 --> 01:25:23,987
Two bankers
who used these services

1353
01:25:24,165 --> 01:25:27,191
were Ralph Cioffi
and Matthew Tannin,

1354
01:25:27,368 --> 01:25:31,327
Bear Stearns hedge fund managers
prosecuted for securities fraud.

1355
01:25:31,505 --> 01:25:34,633
After hiring the Analysis Group,
both were acquitted.

1356
01:25:35,009 --> 01:25:40,241
Glenn Hubbard was paid $ 100,000
to testify in their defense.

1357
01:25:40,914 --> 01:25:46,853
INTERVIEWER:
Do you think the economics discipline
has a conflict-of-interest problem?

1358
01:25:47,787 --> 01:25:49,379
I'm not sure
I know what you mean.

1359
01:25:49,556 --> 01:25:53,822
Do you think a significant fraction
of the economics discipline,
economists,

1360
01:25:53,993 --> 01:25:59,192
have financial conflicts of interest
that might call into question
or color...?

1361
01:25:59,365 --> 01:26:01,333
I see what you're saying.
I doubt it.

1362
01:26:01,501 --> 01:26:06,666
Most academic economists
aren't wealthy business people.

1363
01:26:06,840 --> 01:26:11,038
Hubbard makes $250,000 a year
as a board member of MetLife

1364
01:26:11,211 --> 01:26:13,611
and was formerly
on the board of Capmark,

1365
01:26:13,780 --> 01:26:16,806
a major commercial
mortgage lender during the bubble,

1366
01:26:16,983 --> 01:26:19,042
which went bankrupt in 2009.

1367
01:26:19,219 --> 01:26:21,585
He has also advised
Nomura Securities,

1368
01:26:21,754 --> 01:26:26,157
KKR Financial Corporation
and many other financial firms.

1369
01:26:27,460 --> 01:26:30,588
Laura Tyson, who declined
to be interviewed for this film,

1370
01:26:30,763 --> 01:26:34,529
is a professor at the
University of California, Berkeley.

1371
01:26:34,701 --> 01:26:37,932
She was the chair of
the Council of Economic Advisers,

1372
01:26:38,104 --> 01:26:41,562
then director of the National
Economic Council under Clinton.

1373
01:26:41,741 --> 01:26:45,404
After leaving government, she joined
the board of Morgan Stanley,

1374
01:26:45,578 --> 01:26:49,105
which pays her $350,000 a year.

1375
01:26:49,282 --> 01:26:51,773
Ruth Simmons,
president of Brown University,

1376
01:26:51,951 --> 01:26:57,014
makes over $300,000 a year
on the board of Goldman Sachs.

1377
01:26:57,257 --> 01:27:00,283
Larry Summers, who,
as Treasury secretary,
played a role

1378
01:27:00,460 --> 01:27:05,796
in the deregulation of derivatives,
became president of Harvard
in 2001.

1379
01:27:06,132 --> 01:27:09,465
While at Harvard, he made millions
consulting to hedge funds

1380
01:27:09,636 --> 01:27:14,004
and millions more in speaking fees,
much of it from investment banks.

1381
01:27:16,742 --> 01:27:20,143
According to
his federal disclosure report,
Summers' net worth

1382
01:27:20,312 --> 01:27:25,340
is between $ 16.5 million
and $39.5 million.

1383
01:27:26,118 --> 01:27:28,916
Frederic Mishkin, who returned
to Columbia Business School

1384
01:27:29,087 --> 01:27:33,217
after leaving the Federal Reserve,
reported on his disclosure report

1385
01:27:33,392 --> 01:27:37,761
that his net worth was between
$6 million and $ 17 million.

1386
01:27:38,230 --> 01:27:42,667
INTERVIEWER:
In 2006, you coauthored a study
of Iceland's financial system.

1387
01:27:42,868 --> 01:27:44,665
"Iceland is an advanced country

1388
01:27:44,836 --> 01:27:48,033
with excellent institutions,
low corruption, rule of law.

1389
01:27:48,206 --> 01:27:51,198
The economy has adjusted
to financial liberalization

1390
01:27:51,376 --> 01:27:55,608
while prudential regulation
and supervision is generally
quite strong."

1391
01:27:55,781 --> 01:27:58,511
And that was the mistake,
that it turns out

1392
01:27:58,684 --> 01:28:02,142
prudential regulation and supervision
was not strong in Iceland

1393
01:28:02,321 --> 01:28:05,188
during this period...
What led you to think it was?

1394
01:28:05,357 --> 01:28:07,621
You're going with
the information you had

1395
01:28:07,793 --> 01:28:13,322
and generally, the view was that
Iceland had very good institutions.

1396
01:28:13,498 --> 01:28:15,966
It was an advanced country...
Who told you that?

1397
01:28:16,134 --> 01:28:18,568
What research did you do?
You talk to people.

1398
01:28:18,737 --> 01:28:23,299
You have faith in the central bank,
which actually did fall down
on the job.

1399
01:28:23,475 --> 01:28:25,943
That clearly it... This...

1400
01:28:26,111 --> 01:28:29,672
Why have faith in a central bank?
Well, that faith... You try...

1401
01:28:29,848 --> 01:28:32,009
Because you go with
the information you have.

1402
01:28:32,184 --> 01:28:34,778
How much were you paid to write it?
I was paid...

1403
01:28:34,953 --> 01:28:37,353
I think the number...
It's public information.

1404
01:28:44,930 --> 01:28:48,023
INTERVIEWER:
On your CV, the title of this report
has been changed

1405
01:28:48,199 --> 01:28:52,329
from "Financial Stability in Iceland"
to "Financial Instability in Iceland."

1406
01:28:52,503 --> 01:28:57,065
Well, I don't know. Whatever it is...
If there's a typo, there's a typo.

1407
01:28:57,241 --> 01:28:59,106
What should be publicly available

1408
01:28:59,276 --> 01:29:01,710
is whenever anybody
does research on a topic

1409
01:29:01,879 --> 01:29:06,578
that they disclose if they have any
financial conflict with that research.

1410
01:29:06,751 --> 01:29:10,744
INTERVIEWER:
But if I recall,
there is no policy to that effect.

1411
01:29:11,288 --> 01:29:16,749
I can't imagine anybody
not doing that in terms of
putting it in a paper. You...

1412
01:29:16,927 --> 01:29:20,522
There would be significant
professional sanction
for failure to do that.

1413
01:29:20,698 --> 01:29:25,328
INTERVIEWER:
I didn't see any place in the study
where you indicated you'd been paid

1414
01:29:25,503 --> 01:29:28,802
by the Icelandic Chamber
of Commerce to produce it.

1415
01:29:28,973 --> 01:29:31,771
No, I don't... You know.
Okay.

1416
01:29:32,143 --> 01:29:35,135
NARRATOR:
Richard Portes, the most
famous economist in Britain

1417
01:29:35,312 --> 01:29:37,439
and a professor at
London Business School,

1418
01:29:37,615 --> 01:29:41,676
was also commissioned by the
Icelandic Chamber of Commerce

1419
01:29:41,852 --> 01:29:45,879
to write a report which praised
the Icelandic financial sector.

1420
01:29:46,457 --> 01:29:48,322
The banks themselves
are highly liquid.

1421
01:29:48,492 --> 01:29:51,290
They've made money
on the fall of the Icelandic krona.

1422
01:29:51,462 --> 01:29:52,861
These are strong banks.

1423
01:29:53,030 --> 01:29:56,295
Their market funding is assured
for the coming year.

1424
01:29:56,467 --> 01:29:58,435
These are well-run banks.
MAN: Thank you.

1425
01:29:58,602 --> 01:30:01,935
Like Mishkin, Portes' report
didn't disclose his payment

1426
01:30:02,106 --> 01:30:04,597
from the Icelandic
Chamber of Commerce.

1427
01:30:04,775 --> 01:30:09,735
INTERVIEWER:
Does Harvard require disclosures
of financial conflict of interest?

1428
01:30:10,715 --> 01:30:12,148
Not to my knowledge.

1429
01:30:12,316 --> 01:30:15,342
Do you require people
to report the compensation

1430
01:30:15,519 --> 01:30:18,044
received from outside activities?
No.

1431
01:30:18,222 --> 01:30:19,917
Don't you think that's a problem?

1432
01:30:20,091 --> 01:30:21,353
I don't see why.

1433
01:30:21,525 --> 01:30:24,186
INTERVIEWER:
Martin Feldstein
being on the board of AIG,

1434
01:30:24,360 --> 01:30:26,260
Laura Tyson at Morgan Stanley,

1435
01:30:26,429 --> 01:30:31,264
Larry Summers making $ 10 million
consulting to financial services firms.

1436
01:30:31,434 --> 01:30:32,492
Irrelevant?

1437
01:30:32,669 --> 01:30:33,966
Hm. Yeah.

1438
01:30:34,137 --> 01:30:35,627
Yeah. Basically irrelevant.

1439
01:30:36,439 --> 01:30:41,274
INTERVIEWER:
You've written many articles
about a wide array of subjects.

1440
01:30:41,444 --> 01:30:44,208
You never saw fit
to investigate the risks

1441
01:30:44,380 --> 01:30:47,713
of unregulated
credit default swaps?

1442
01:30:47,984 --> 01:30:49,611
I never did.

1443
01:30:49,786 --> 01:30:53,552
Same question with regard
to executive compensation?

1444
01:30:53,723 --> 01:30:55,714
The regulation
of corporate governance?

1445
01:30:55,892 --> 01:30:58,224
The effect of political contributions?

1446
01:30:58,394 --> 01:31:02,353
I don't know that I would have
anything to add to those discussions.

1447
01:31:02,532 --> 01:31:04,591
INTERVIEWER:
I'm looking at your resume now.

1448
01:31:04,768 --> 01:31:09,569
It looks to me as if the majority
of your outside activities

1449
01:31:09,739 --> 01:31:12,572
are consulting
and directorship arrangements

1450
01:31:12,742 --> 01:31:14,835
with the financial services
industry.

1451
01:31:15,011 --> 01:31:17,172
Would you not agree
with that characterization?

1452
01:31:17,347 --> 01:31:20,612
To my knowledge, I don't
think my consulting clients
are on my CV.

1453
01:31:20,784 --> 01:31:23,582
So I wouldn't know.
Who are your consulting clients?

1454
01:31:23,753 --> 01:31:25,744
I don't believe I have to
discuss that with you.

1455
01:31:25,922 --> 01:31:27,355
Okay.

1456
01:31:27,957 --> 01:31:31,893
In fact,
you have a few more minutes
and the interview's over.

1457
01:31:32,061 --> 01:31:34,655
INTERVIEWER:
Do you consult for
any financial services firms?

1458
01:31:34,831 --> 01:31:37,391
The answer is I do.
And?

1459
01:31:37,567 --> 01:31:40,730
And... But I do not wanna go
into details about that.

1460
01:31:40,904 --> 01:31:43,702
INTERVIEWER:
Do they include
other financial services firms?

1461
01:31:43,873 --> 01:31:45,033
Possibly.

1462
01:31:45,208 --> 01:31:46,869
You don't remember?

1463
01:31:47,043 --> 01:31:50,274
This isn't a deposition, sir.
I was polite enough
to give you time.

1464
01:31:50,446 --> 01:31:54,143
Foolishly, I now see.
But you have
three more minutes.

1465
01:31:54,317 --> 01:31:56,148
Give it your best shot.

1466
01:31:56,319 --> 01:31:58,946
NARRATOR:
In 2004,
at the height of the bubble,

1467
01:31:59,121 --> 01:32:02,955
Glenn Hubbard coauthored a widely
read paper with William C. Dudley,

1468
01:32:03,125 --> 01:32:05,923
the chief economist
of Goldman Sachs.

1469
01:32:06,094 --> 01:32:08,654
In the paper,
Hubbard praised credit derivatives

1470
01:32:08,831 --> 01:32:10,628
and the securitization chain,

1471
01:32:10,799 --> 01:32:13,393
stating they had improved
allocation of capital

1472
01:32:13,569 --> 01:32:16,037
and were enhancing
financial stability.

1473
01:32:16,205 --> 01:32:18,730
He cited reduced volatility
in the economy

1474
01:32:18,907 --> 01:32:23,537
and stated that recessions had
become less frequent and milder.

1475
01:32:23,712 --> 01:32:26,738
Credit derivatives were
protecting banks against losses

1476
01:32:26,915 --> 01:32:29,383
and helping to distribute risk.

1477
01:32:31,053 --> 01:32:34,022
INTERVIEWER:
A medical researcher
writes an article, saying:

1478
01:32:34,189 --> 01:32:38,751
"To treat this disease,
you should prescribe this drug."

1479
01:32:39,027 --> 01:32:42,087
Turns out doctor makes 80 percent
of personal income

1480
01:32:42,264 --> 01:32:45,427
from manufacture of this drug.
Does not bother you?

1481
01:32:45,601 --> 01:32:50,800
I think it's certainly important
to disclose the, um...

1482
01:32:50,973 --> 01:32:53,339
The, um...

1483
01:32:55,644 --> 01:32:57,805
Well, I think that's also
a little different

1484
01:32:57,980 --> 01:33:02,508
from cases that we're talking
about here because, um...

1485
01:33:17,266 --> 01:33:21,498
INTERVIEWER:
So, what do you think this says
about the economics discipline?

1486
01:33:21,670 --> 01:33:25,629
Well, I mean,
it has no relevance to anything,
really.

1487
01:33:25,807 --> 01:33:29,709
And, indeed,
I think it's a part of the...

1488
01:33:29,878 --> 01:33:33,881
It's an important part
of the problem.

1489
01:33:48,496 --> 01:33:51,727
NARRATOR:
The rising power
of the U.S. Financial sector

1490
01:33:51,899 --> 01:33:54,663
was part of a wider change
in America.

1491
01:33:55,036 --> 01:33:59,632
Since the 1980s, the United States
has become a more unequal society,

1492
01:34:00,207 --> 01:34:03,608
and its economic dominance
has declined.

1493
01:34:03,911 --> 01:34:08,371
Companies like General Motors,
Chrysler and U.S. Steel,

1494
01:34:08,549 --> 01:34:11,109
formerly the core
of the U.S. Economy,

1495
01:34:11,285 --> 01:34:15,881
were poorly managed and falling
behind their foreign competitors.

1496
01:34:16,691 --> 01:34:19,751
And as countries like China
opened their economies,

1497
01:34:19,927 --> 01:34:24,091
American companies
sent jobs overseas to save money.

1498
01:34:26,067 --> 01:34:29,400
For many, many years,
the 660 million people

1499
01:34:29,570 --> 01:34:31,868
in the developed world
were sheltered

1500
01:34:32,039 --> 01:34:35,907
from all of this additional labor
that existed on the planet.

1501
01:34:36,077 --> 01:34:38,944
Suddenly the Bamboo Curtain
and the Iron Curtain are lifted

1502
01:34:39,113 --> 01:34:42,276
and you have 2.5 billion
additional people.

1503
01:34:42,984 --> 01:34:46,977
American factory workers
were laid off
by the tens of thousands.

1504
01:34:47,154 --> 01:34:49,782
Our manufacturing base
was destroyed, literally,

1505
01:34:49,957 --> 01:34:51,254
over a few years.

1506
01:34:51,425 --> 01:34:55,725
As manufacturing declined,
other industries rose.

1507
01:34:55,896 --> 01:34:59,127
The United States leads the world
in information technology,

1508
01:34:59,300 --> 01:35:02,360
where high-paying jobs
are easy to find.

1509
01:35:02,536 --> 01:35:04,697
But those jobs
require an education.

1510
01:35:05,006 --> 01:35:09,874
And for average Americans,
college is increasingly out of reach.

1511
01:35:10,210 --> 01:35:15,341
While universities like Harvard have
billions of dollars in endowments,

1512
01:35:15,515 --> 01:35:19,815
funding for public universities
is shrinking and tuition is rising.

1513
01:35:20,787 --> 01:35:23,255
Tuition for California's
public universities

1514
01:35:23,423 --> 01:35:29,760
rose from $650 in the 1970s
to over $ 10,000 in 2010.

1515
01:35:30,797 --> 01:35:35,063
The most important determinant
of whether Americans go to college

1516
01:35:35,235 --> 01:35:38,227
is whether they can find
the money to pay for it.

1517
01:35:38,505 --> 01:35:43,465
Meanwhile, American tax policy
shifted to favor the wealthy.

1518
01:35:43,643 --> 01:35:48,842
When I first came to office,
I thought taxes were too high,
and they were.

1519
01:35:49,015 --> 01:35:51,813
The most dramatic change
was a series of tax cuts

1520
01:35:51,985 --> 01:35:54,613
designed by Glenn Hubbard,
who was serving

1521
01:35:54,788 --> 01:35:58,087
as President Bush's
chief economic advisor.

1522
01:35:58,825 --> 01:36:02,454
The Bush administration sharply
reduced taxes on investment gains,

1523
01:36:02,629 --> 01:36:05,621
stock dividends,
and eliminated the estate tax.

1524
01:36:05,799 --> 01:36:08,927
We had a comprehensive plan
that when acted

1525
01:36:09,102 --> 01:36:12,868
has left nearly $ 1.1 trillion
in the hands of American workers,

1526
01:36:13,039 --> 01:36:15,633
families, investors
and small-business owners.

1527
01:36:15,809 --> 01:36:21,611
Most benefits of these cuts
went to the wealthiest
1 percent of Americans.

1528
01:36:22,148 --> 01:36:24,412
And by the way,
it was the cornerstone

1529
01:36:24,584 --> 01:36:26,950
in many ways,
of our economic recovery policy.

1530
01:36:27,420 --> 01:36:29,945
Inequality of wealth
in the United States

1531
01:36:30,123 --> 01:36:33,524
is now higher
than in any other developed country.

1532
01:36:34,127 --> 01:36:36,891
American families responded
to these changes in two ways:

1533
01:36:38,331 --> 01:36:42,892
By working longer hours
and by going into debt.

1534
01:36:43,068 --> 01:36:46,663
As the middle class falls
further and further behind,

1535
01:36:46,839 --> 01:36:50,707
there is a political urge
to respond

1536
01:36:50,876 --> 01:36:54,209
by making it easier to get credit.

1537
01:36:54,379 --> 01:36:56,870
You don't have to have
a lousy home.

1538
01:36:57,049 --> 01:37:02,646
The low-income home buyer
can have just as nice a house
as anybody else.

1539
01:37:03,188 --> 01:37:07,591
American families borrowed
to finance their homes, their cars,

1540
01:37:07,759 --> 01:37:11,525
their healthcare,
and their children's educations.

1541
01:37:11,897 --> 01:37:14,559
People in the bottom 90 percent

1542
01:37:15,033 --> 01:37:19,595
lost ground
between 1980 and 2007.

1543
01:37:19,771 --> 01:37:24,504
It all went to the top 1 percent.

1544
01:37:26,478 --> 01:37:29,379
For the first time in history,
average Americans

1545
01:37:29,548 --> 01:37:34,315
have less education
and are less prosperous
than their parents.

1546
01:37:36,488 --> 01:37:39,719
The era of greed and irresponsibility

1547
01:37:39,892 --> 01:37:43,191
on Wall Street and in Washington

1548
01:37:43,362 --> 01:37:45,421
has led us to a financial crisis

1549
01:37:45,597 --> 01:37:49,294
as serious as any that we've faced
since the Great Depression.

1550
01:37:49,468 --> 01:37:52,733
NARRATOR:
When the financial crisis struck
before the 2008 election,

1551
01:37:53,172 --> 01:37:55,436
Barack Obama pointed
to Wall Street greed

1552
01:37:55,607 --> 01:37:59,907
and regulatory failures as examples
of the need for change in America.

1553
01:38:00,078 --> 01:38:02,774
A lack of oversight in Washington
and on Wall Street

1554
01:38:02,948 --> 01:38:05,940
is exactly what got us
into this mess.

1555
01:38:06,552 --> 01:38:10,852
NARRATOR:
After taking office, Obama spoke
of the need to reform the industry.

1556
01:38:11,023 --> 01:38:14,321
We want a risk regulator,
increased capital requirements.

1557
01:38:14,492 --> 01:38:17,120
We need a consumer financial
protection agency.

1558
01:38:17,295 --> 01:38:19,126
We need to change
Wall Street's culture.

1559
01:38:19,764 --> 01:38:22,699
But when finally enacted
in mid-2010,

1560
01:38:22,867 --> 01:38:25,631
the administration's
financial reforms were weak.

1561
01:38:25,803 --> 01:38:29,239
And in some critical areas,
including the rating agencies,

1562
01:38:29,407 --> 01:38:31,671
lobbying and compensation,

1563
01:38:31,842 --> 01:38:34,811
nothing significant
was even proposed.

1564
01:38:34,979 --> 01:38:38,471
Addressing Obama and,
quote, "regulatory reform,"

1565
01:38:38,649 --> 01:38:42,847
my response,
if it was one word,
would be "ha."

1566
01:38:43,654 --> 01:38:46,088
There's very little reform.

1567
01:38:46,257 --> 01:38:47,815
INTERVIEWER:
How come?

1568
01:38:48,926 --> 01:38:51,087
It's a Wall Street government.

1569
01:38:53,564 --> 01:38:57,091
NARRATOR:
Obama chose Timothy Geithner
as Treasury secretary.

1570
01:38:57,268 --> 01:39:00,032
Geithner was president
of the New York Federal Reserve

1571
01:39:00,204 --> 01:39:03,071
during the crisis,
and a key player in the decision

1572
01:39:03,241 --> 01:39:05,835
to pay Goldman Sachs
100 cents on the dollar

1573
01:39:06,010 --> 01:39:07,910
for its bets against mortgages.

1574
01:39:08,079 --> 01:39:11,071
When Tim Geithner
was testifying

1575
01:39:11,249 --> 01:39:13,479
to be confirmed
as Treasury secretary

1576
01:39:13,651 --> 01:39:16,711
he said,
"I have never been a regulator."

1577
01:39:16,887 --> 01:39:19,481
That said to me
he did not understand his job

1578
01:39:19,657 --> 01:39:21,352
as president of the New York Fed.

1579
01:39:25,696 --> 01:39:28,893
The new president of the
New York Fed is William C. Dudley,

1580
01:39:29,066 --> 01:39:31,591
the former chief economist
of Goldman Sachs

1581
01:39:31,769 --> 01:39:34,932
whose paper with Glenn Hubbard
praised derivatives.

1582
01:39:35,106 --> 01:39:37,506
Geithner's chief of staff
is Mark Patterson,

1583
01:39:37,675 --> 01:39:39,734
a former lobbyist for Goldman.

1584
01:39:39,910 --> 01:39:42,435
And one of the senior advisors
is Lewis Sachs,

1585
01:39:42,613 --> 01:39:45,741
who oversaw Tricadia,
a company heavily involved

1586
01:39:45,916 --> 01:39:49,544
in betting against
the mortgage securities
it was selling.

1587
01:39:49,886 --> 01:39:52,548
To head the Commodity Futures
Trading Commission,

1588
01:39:52,722 --> 01:39:56,488
Obama picked Gary Gensler,
a former Goldman Sachs executive

1589
01:39:56,660 --> 01:39:59,595
who had helped ban
the regulation of derivatives.

1590
01:39:59,763 --> 01:40:02,061
To run the Securities
and Exchange Commission,

1591
01:40:02,232 --> 01:40:06,168
Obama picked Mary Schapiro,
the former CEO of FINRA,

1592
01:40:06,336 --> 01:40:09,999
the investment banking industry's
self-regulation body.

1593
01:40:10,173 --> 01:40:12,539
Obama's chief of staff,
Rahm Emanuel,

1594
01:40:12,709 --> 01:40:17,271
made $320,000 serving
on the board of Freddie Mac.

1595
01:40:17,514 --> 01:40:20,108
Both Martin Feldstein
and Laura Tyson are members

1596
01:40:20,283 --> 01:40:23,878
of Obama's
Economic Recovery Advisory Board.

1597
01:40:24,187 --> 01:40:28,886
And Obama's
chief economic advisor
is Larry Summers.

1598
01:40:29,426 --> 01:40:31,257
SPITZER:
The most senior
economic advisors

1599
01:40:31,428 --> 01:40:33,988
are the ones who were there,
who built the structure.

1600
01:40:34,264 --> 01:40:36,824
When it was clear
that Summers and Geithner

1601
01:40:37,000 --> 01:40:41,437
were going to play major roles
as advisors,

1602
01:40:41,604 --> 01:40:44,140
I knew this was
going to be status quo.

1603
01:40:44,708 --> 01:40:48,405
NARRATOR:
The Obama administration resisted
regulation of bank compensation

1604
01:40:48,578 --> 01:40:51,240
even as foreign leaders
took action.

1605
01:40:51,414 --> 01:40:53,780
The financial industry
is a service industry.

1606
01:40:53,950 --> 01:40:57,317
It should serve others
before it serves itself.

1607
01:40:57,787 --> 01:41:00,779
In September of 2009,
Christine Lagarde

1608
01:41:00,957 --> 01:41:03,721
and the finance ministers
of Sweden, the Netherlands,

1609
01:41:03,893 --> 01:41:07,260
Luxembourg, Italy,
Spain and Germany

1610
01:41:07,430 --> 01:41:10,729
called for the G20 nations,
including the United States,

1611
01:41:10,900 --> 01:41:14,461
to impose strict regulations
on bank compensation.

1612
01:41:14,637 --> 01:41:16,605
And in July of 2010,

1613
01:41:16,773 --> 01:41:20,766
the European Parliament
enacted those very regulations.

1614
01:41:21,044 --> 01:41:24,274
The Obama administration
had no response.

1615
01:41:24,446 --> 01:41:28,473
Their view is it's a temporary blip
and things will go back to normal.

1616
01:41:28,984 --> 01:41:32,078
That is why I am reappointing him

1617
01:41:32,254 --> 01:41:35,246
as chairman of the Federal Reserve.
Thank you, Ben.

1618
01:41:35,424 --> 01:41:39,258
In 2009, Barack Obama
reappointed Ben Bernanke.

1619
01:41:39,428 --> 01:41:40,622
Thank you, Mr. President.

1620
01:41:42,064 --> 01:41:45,966
As of mid-2010, not a single
senior financial executive

1621
01:41:46,135 --> 01:41:49,127
had been criminally prosecuted,
or even arrested.

1622
01:41:49,304 --> 01:41:51,864
No special prosecutor
had been appointed.

1623
01:41:52,040 --> 01:41:54,838
Not a single firm had been
prosecuted criminally

1624
01:41:55,010 --> 01:41:58,002
for securities fraud
or accounting fraud.

1625
01:41:58,180 --> 01:42:00,705
The Obama administration
has made no attempt

1626
01:42:00,883 --> 01:42:02,680
to recover any compensation

1627
01:42:02,851 --> 01:42:05,877
given to financial executives
during the bubble.

1628
01:42:07,055 --> 01:42:10,388
I certainly would think
of criminal action

1629
01:42:10,559 --> 01:42:14,222
against some of Countrywide's
top leaders, like Mozilo.

1630
01:42:14,396 --> 01:42:17,729
I'd certainly look at Bear Stearns,
Goldman Sachs

1631
01:42:17,900 --> 01:42:20,164
and Lehman Brothers
and Merrill Lynch.

1632
01:42:20,335 --> 01:42:21,461
INTERVIEWER:
For criminal prosecutions?

1633
01:42:21,637 --> 01:42:22,797
Yes.

1634
01:42:22,971 --> 01:42:26,634
INTERVIEWER: In regard to...
Yes. They'd be very hard to win,

1635
01:42:26,875 --> 01:42:32,370
but I think they could do it
if they got enough underlings
to tell the truth.

1636
01:42:32,714 --> 01:42:35,547
In an industry
in which drug use, prostitution

1637
01:42:35,717 --> 01:42:38,686
and billing of prostitutes
as a business expense

1638
01:42:38,854 --> 01:42:40,685
occur on an industrial scale,

1639
01:42:40,856 --> 01:42:44,792
it wouldn't be hard to make
people talk if you really wanted to.

1640
01:42:45,227 --> 01:42:48,492
They gave me a plea bargain
and I took it.

1641
01:42:48,664 --> 01:42:50,757
They were not interested
in my records.

1642
01:42:50,933 --> 01:42:52,594
They weren't interested in anything.

1643
01:42:52,768 --> 01:42:54,065
INTERVIEWER:
Not interested in your records?

1644
01:42:54,236 --> 01:42:55,863
That's correct. Correct.

1645
01:42:56,038 --> 01:43:02,203
There's a sensibility
that you don't use
people's personal vices

1646
01:43:02,376 --> 01:43:06,278
in the context of Wall Street cases,
necessarily, to get them to flip.

1647
01:43:06,447 --> 01:43:11,817
Maybe after the cataclysms
that we've been through,
people will reevaluate.

1648
01:43:11,986 --> 01:43:15,945
I'm not the one to pass judgment
on that right now.

1649
01:43:29,270 --> 01:43:34,640
CAPUANO:
You come to us today telling us,
"We're sorry, we didn't mean it.

1650
01:43:34,809 --> 01:43:38,006
We won't do it again. Trust us."

1651
01:43:38,179 --> 01:43:41,114
Well, I have some people
in my constituency

1652
01:43:41,282 --> 01:43:43,978
that actually robbed
some of your banks.

1653
01:43:44,151 --> 01:43:46,085
And they say the same thing.

1654
01:43:46,254 --> 01:43:49,314
They're sorry.
They didn't mean it.
They won't do it again.

1655
01:43:49,924 --> 01:43:54,793
In 2009, as unemployment hit
its highest level in 17 years,

1656
01:43:54,962 --> 01:43:58,261
Morgan Stanley paid its employees
over $ 14 billion,

1657
01:43:58,432 --> 01:44:01,595
and Goldman Sachs paid out
over $ 16 billion.

1658
01:44:01,769 --> 01:44:05,500
In 2010,
bonuses were even higher.

1659
01:44:05,673 --> 01:44:09,131
Why should a financial engineer
be paid

1660
01:44:09,310 --> 01:44:15,476
four times to 100 times more
than a real engineer?

1661
01:44:15,650 --> 01:44:17,811
A real engineer build bridges.

1662
01:44:17,985 --> 01:44:21,318
A financial engineer build dreams.

1663
01:44:21,489 --> 01:44:25,084
And, you know,
when those dreams
turn out to be nightmares,

1664
01:44:25,259 --> 01:44:26,988
other people pay for it.

1665
01:44:29,497 --> 01:44:30,589
For decades,

1666
01:44:30,764 --> 01:44:34,427
the American financial system
was stable and safe.

1667
01:44:34,834 --> 01:44:36,768
But then something changed.

1668
01:44:36,937 --> 01:44:40,270
The financial industry
turned its back on society,

1669
01:44:40,440 --> 01:44:42,908
corrupted our political system

1670
01:44:43,343 --> 01:44:46,005
and plunged the world economy
into crisis.

1671
01:44:48,014 --> 01:44:50,949
At enormous cost,
we've avoided disaster

1672
01:44:51,251 --> 01:44:53,219
and are recovering.

1673
01:44:53,587 --> 01:44:57,421
But the men and institutions that
caused the crisis are still in power,

1674
01:44:57,591 --> 01:44:59,650
and that needs to change.

1675
01:45:00,760 --> 01:45:02,887
They will tell us
that we need them,

1676
01:45:03,063 --> 01:45:07,227
and that what they do
is too complicated
for us to understand.

1677
01:45:08,034 --> 01:45:10,298
They will tell us
it won't happen again.

1678
01:45:10,704 --> 01:45:13,969
They will spend billions
fighting reform.

1679
01:45:14,374 --> 01:45:16,433
It won't be easy.

1680
01:45:17,744 --> 01:45:21,373
But some things
are worth fighting for.

1681
01:45:25,285 --> 01:45:27,276
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PLAYS]