Inside Job

Sony Pictures Home Entertainment

R4 DVD

The financial crash of 2008 had worldwide repercussions. It is important for our leaders to understand how it happened and how to stop it happening again. Essentially in the United States it became a conflict between greed and regulation in which greed won. It was helped by administrations that simply weren’t doing their job.

In the old financial system loans were approved by the partners of the banks who laid out their own money and therefore kept a close eye on the borrowers. As the banks got bigger the level of scrutiny was maintained by law, but that law was under threat by a growing group of economists to whom any form of control was anathema. Gradually these people moved into positions of power in the U.S. government and academia and started to weaken the supervision laws. As the banks went public and collected money for shares from investors, any supervision the investors may have had was eroded.

Meanwhile the banks were looking at ways to increase their earnings. A number of inventive ideas were put into practice. Mostly these involved continuing to issue mortages but insuring the loan repayments so in the event of a crash the banks would not lose out – at the expense of the insurance companies. To feed the mortgage flow the banks loaned money on “sub-prime” mortgages, those on which a high rate of defaults could be expected. They could charge higher interest rates for these. Along the way everyone made a big profit or big bonuses. It seemed the bubble in these new “financial products” would never burst.

It could only have worked if the investors were satisfied that the loans were safe, and the credit rating companies, especially Standard and Poors and Moodys, took an active part in this. They gave AAA credit ratings to products that were decidedly dodgy and took a good commission for a favourable rating. A former managing director of Moody’s points out that had accurate ratings been given the ratings agency could have stopped the money flow to the banks and financiers. The current heads of the agencies took shelter behind the First Amendment allowing freedom of speech and said that their ratings were simply opinions.

In 2004 the FBI warned of financial crimes being committed. As usual nothing was done. The international financial people including the International Monetary Fund were becoming worried about the U.S. practices. They had already seen the stable financial system of Iceland crippled after its deregulation, when greedy bankers borrowed billions of dollars to finance international deals. The amount of outstanding debt in the U.S. backed by poor securities was concerning to everyone but the U.S. who kept reassuring everyone that the market was still growing.

The bubble burst when industry and business could not afford to borrow money at the exorbitant interest rates they would have to pay to take money away from the lucrative housing loans. People were laid off, defaults on housing loans began to reach concerning levels. Many sub-prime mortgagees had been encouraged to borrow the full value of their house. By 2008, with no equity in the house, the occupiers simply walked away. The houses could not be resold at the new inflated prices. Insurance companies covered the defaults then they, too, began to run out of money. The debt crisis snowballed out of control and we are still living with the aftermath today.

One by one the investment banks went under and were only saved by massive injections of Federal (that is, taxpayers) money.

The documentary gives the best and clearest description I have so far seen of the causes of the crisis. Names are named and some people are prepared to front the camera and state their case. Others simply refused to be interviewed for the film. In 2010 a Senate enquiry tried to get to the bottom of the matter. We watch senior executives of major companies wriggle and waffle through questions put to them by the Senate Inquiry. Responsibility to their customers seems to have been lost in the mass greed. They seem completely unashamed at the conflict of interest between their commercial or academic roles and their employment by the government as advisers, or the way they kept selling dodgy products knowing full well they were not as solid as the ratings suggested.

Some Senators seemed to sense what was coming and warned against the repeal of what little oversight there was. They were largely ignored. The Securities Exchange Commission, the body that regulated trading, had to have been aware of the growing problem but actively refused to do anything about it. Alan Greenspan, one-time head of the Federal Reserve and economic advisor to three Presidents, was blinded by his anti-regulation ideology to what was going on.

When Lehman Brothers finally failed and went bankrupt the seriousness of the situation could no longer be hidden. Companies fell over like dominoes, crippling the U.S. economy. Firms like General Motors and Chrysler were on the verge of bankruptcy themselves as nobody could afford to buy their products. The ripples spread and the worldwide global recession began. Even in China recession began as the firms that exported to the U.S. couldn’t sell their products. Staff layoffs began there as well. By early 2010 six million mortgages had been foreclosed in the U.S. . Evictees were living in tent cities.

So “Qui Bono”? (Who Benefits?). Greedy executives made huge bonuses. The top five executives at Lehmans made over a billion dollars in bonuses in the five years before the crash. Merrill Lynch paid bonuses of more than 3.6 million dollars from the bailout money after the firm failed. Greedy stockholders made huge dividends on their investments. Greedy academics made their money and prestige then bailed out to go back to their academic world. Credit rating firms made good money giving high ratings to highly doubtful debts. Successive Presidents made political capital out of the “booming financial economy”. The greedy companies were bailed out with public money that the U.S. can ill afford. And the academics still want further deregulation?

At the end of the film consumer advocate Robert Gnaizda lists organisations that he feels should be prosecuted for criminal fraud. When Barack Obama became President one of his promises was to reform the financial system and regulate it more effectively. The laws were eventually watered down by government members paid off by financial lobbies and are largely ineffective. As Gnaizda points out, “It’s a Wall Street government". There are still economists who argue in favour of a no-intervention government policy. These people do not seem to live in the same world as the rest of us but many have political or academic influence and their opinions are taken seriously. There is no requirement on them to disclose any financial involvement so their conflict of interest is unnoticed. The Presidents of Harvard and Columbia Universities refused to be interviewed.

The documentary is at a loss to suggest what can now be done. Any remedy to the problem will be stopped in Congress by the financial lobby. So what’s to stop it happening again?

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