The global economic crisis of 2008 costs tens of millions of people their savings, their jobs, and their homes.
This is how it happened.
Iceland
Popilation: 320 000
Gross domestic product: $13 billion
Bank losses: $100 billion
Iceland is a stable democracy with the high standard of living
and until recently extremely low unemployment and government debt
We had the complete infrastructure of a modern society:
clean energy, food production, fisheries with a quote system to manage them
Good healthcare and good education, clean air, the ??? crime,
It's good place for families to life
We had almost ?end of history? status
But in 2000 Iceland government began a broad policy of deregulation
that would have disastrous consequences
first for the environment and then for the economy
They started by allowing multinational corporations like Alcova
to build giant aluminum smelting plants
and exploit Iceland?s natural geothermal and hydroelectric energy sources
Many of the most beautiful areas in the highlands
with the most spectacular colors are theothermal
So nothing comes without consequences.
At the same time the government privatized Iceland?s three largest banks
The result was one of the purest experiments in financial deregulation
ever conducted
Finance took over and ??? wrecked the place
In a 5 year period this three tiny banks
which have never operated outside of Island
borrowed $120 billion ten time the size of Iceland?s economy
The bankers showered money on themselves each other and their friends
There was a massive bubble stock prices went up ???, house prices more than doubled
Iceland bubble gave rise to people like Jan Oskar Johannessen
He borrowed billions from the banks to buy ? retail businesses in London
He also bought a pinstriped private jet, a $40 million yacht and a Manhattan penthouse
Newspapers always had headlines: this millionaire bought this company
in UK or in Finland or in France or wherever
Instead of saying this millionaire took a billion dollars loan
to buy this company and it took it from your local bank
The banks ??? money market funds
and the banks otherwise deposit holders to withdraw money and put them in a money market funds
Deposit came needed everything it could
American accounted firms like KPMG
audit the Iceland?s banks and investment firms and found nothing wrong
And American credit rating agencies sad Iceland was wonderful
In February 2007 the rating agencies decided to upgrade the banks
to a highest possible rate ? AAA
It went so far as the government here traveling with the bankers as a PR show
When Iceland?s banks collapsed at the end of 2008
unemployment tripled in 6 months
There is nobody unaffected in Iceland
- So a lot of people here lost their savings - Yes that?s the case
The government regulators who should?ve been protecting the citizens of Iceland
had done nothing
You have two lawyers from regulator company who're coming to a bank to talk about some issues
When they approach the bank they would see nineteen SUVs outside the bank
so you went to the bank and you have nineteen lawyers sitting in front of you
that vary well prepared, ready to kill any argument you make
and then if you do very well they offer you job
One third of Iceland?s financial regulators went to work for the banks
But this is universal problem, in New York you have the same problem, right?
What do you think of Wall Street incomes this days?
Excessive
I've been told that it's extremly difficult for IMF to critisize United States
I wouldn't say that
We deeply regret outriches of US law
There are amazing how much cocain these wallstreeters can use
and get up and go to work the next day
I didn't know what kind default swaps are
I'm little bit old fashioned
Has Larry Summers ever expressed remorse?
I don't hear confessiones
The government just write in and checks that's plan A, that's plan B and that's plan C
Would you support legal controls on executive pay?
I would not
Are you comfortable with law of compensation in financial service industry?
If they waranted, then yes, I am
- Do you think they waranted? - I think they waranted.
And so you help this people blow the world up?
You could say that
They were having massive private games - a public loss
When you start thinking you can create something all of nothing
it's very difficult to resist
I'm concerned that a lot of people want go back to the old way
the way they were operating prior to the crisis
I was getting a lot of anonymus e-mails from bankers
saying "You can't quote me, but I really concerned"
Why do you think there isn't a more systematic investigation being undertaking?
Because then they would found culprits
Do you think that Columbia Business School has any significant conflict of interest problem?
Don't see that we do
The regulators didn't do their job
they had the power to do every case that I made when I was state attorney general
they just didn't want it
In september 2008 the bankruptcy of US investment bank Lehman Brothers
and the collapse of the world largest insurance company AIG
triggered the global financial crisis
The result was the global recession which costs the world tens of trillions of dollars
rendered 30 millions people unemployed and doubled the national debt of the US
If you looked at the costs of it: the structure of equity welth, of housing wealth
then the structure of income, of jobs,
15 million people globally could end up behind poverty line again
This is just a hugely, hugely expensive crisis
This crisis was no an accident
It was caused by an out of control industry
Since the 1980s the rise of US financial sector
has led to a serious of increasingly severe financial crises
Each crisis has caused more damage
while the industry has made more and more money
Part I. How we got here
After the Great Depression United States have 40 years of economic growth
without a single financial crisis
the financial industry was tightly regulated
most regular banks were local businesses and they were prohibited from speculating with depositors savings
Investment banks which handle stock and bond tradings were small private partnerships
In the traditional investment banking partnership model the partners put the money up
and obviously the partners watch that money very carefully
They wanted to live well but they didn't want to bend the wrench on anything
Paul Volcker served on the treasury department
and was chairman of the Federal Reserve from 1979 - 1987
When I left Chase to go in Treasury in 1969
I think my income was in the neighbour of $45000 per year
Morgan Stanley in 1972 had approximately 110 total personnel
One office and capital of $12 000 000
Now Morgan Stanley has 50 000 workers and has capital of several billion
and has offices all over the world
In the 1980s the financial industry exploded
The investment banks went public given them huge amount of stock holding money
People on Wall Street started getting rich
My friend was a bond trader at Merilyn Lynch in 1970s
He had a job as a train conducter at night
Because he had 3 kids and couldn't support with what bond trader made
By 1986 he was making millions of dollars and I thought it was because he was smart
The highest owe of business before the nation is to restore our economic prosperity
In 1981 president Ronald Reagan choses Treasury Secretary the CEO of investment bank Merrill Lynch
- Donald Regan
Wall Street and the President do see eye to eye
I've talked to many leaders of Wall Street they also will be behind the President on 100%
The Reagan administration supported by economists and financial lobbyist
started the 30 years period of financial deregulations
In 1982 the Reagan administration deregulated savings and loan companies
allowing them to make risky investments for depositors money
By the end of the decade hundreds of saving and loan compnies had failed
This crises cost tax payers $124 billion
and cost many people their savings
It may be the biggest bank crisis in our history
Thousands of saving and loan executives went to jail for looting their companies
One of the most extreme cases was Charles Keating
In 1985 when federal regulators began investigate him
Keating haired an economist named Alan Greenspan
In this latter to regulators Greenspan praised Keating "sound business plan, managerial expertise"
and sad he saw no risk in allowing Keating to invest his customers money
Keating reportedly paid Greenspan $40 000
Charles Keating went to prison shortly afterwords
As for Alan Greenspan
President Reagan appointed him chairman of America's central bank
- The Federal Reserve
Greenspan was reappointed by presidents Clinton and George W. Bush
During the Clinton administration deregulation continued under Greenspan
And Treasury Secretary Robert Rubin,
the former CEO of the investment bank Goldman Sachs
and Larry Summers - Harvard economic professor
The financial sector of Wall Street being powerfull, having lobbyist, having lots of money
step by step captured the political system
??? democratic and republican side
By the late 1990s the financial sector had consolidated into few gigantic firms
Each of them so large that their failure can threaten wnole system
And the Clinton administration helped them grow even larger
In 1999 Citicorp and Travelers merged to form Citigroup
- the largest financial services company in the world
The merger violated the Glass-Steagal act - a law past after Great Depression
which prevented banks with costumer deposits from engaging in risky investment banking activities
It was illegal to acquire Travelers
Greenspan sad nothing
The Federal Reserve gave him exemption for a year and then they got the law past
In 1999 at the urging of Summers and Rubin
Congress past the "Glemm-Leach-Bliley Act"
Known to some as the Citigroup Relive Act
It overturned "Glass-Steagal" and clear the way for future mergers
Robert Rubin would later make $126 million as Vice Chairman of Citigroup.
He declined to be interviewed for this film.
Why do you have big banks - because banks like monopoly power
because banks like lobbying power, because banks know that when you too big they will be built
Markets are inherently ustable or at least potentially unstable
and appropriate metaphor is the old tankers
they very big and therefore you have to put in compertments
to prevent the sloshing around of oil from capsizing the boat
the design of the boat has to take it into account
and after the Depression the regulation actually introduced this very water tied compartments
and deregulation has led to the end of compartmentalisation
The next crisis came at the end of the 90s
The investment banks fuel the mass of the bubble in internet stocks
Which were followed by a crash in 2001 that caused $5 trillion dollars in investment loses
The securities and exchange commission
- the federal agency that were being created during the depression to regulate investment banking
had done nothing
In the absence of meaning for federal action and there has been none
and given the clear failure of self regulation It is become necessary
to others to step in and adopt the protections needed
Eliot Spitzers investigations revealed
that the investments banks hed promoted internet companies they knew would fail
Stock analysts were being paid based on how much business they brought in
and what they say publicly - long term BUY- was quite different from what they say privately
Infospace given the highest possible rating dismissed by the analysts as the "piece of junk"
Excite - also highly rated - called "such a piece of crap"
The defence that was proffered by many of the investment banks
was not wrong, it was...
Everybodies doing it and everybodies knew what's going on and therefore nobody should rely on this analysts anyway.
In december 2002 ten investment banks settle the case for a total of $1.4 billion
and promised to change their ways
Scott Talbott is the chief lobbyist for the Financial Services Roundtable
one of the most powerfull groups in Washington
which represents almost all of the world largest financial companies
Are you comfortable with the fact that several of your member companies
have engaged in large scale criminal activity?
You'll have to be specific
- Ok... - And first of all criminal activity shouldn't be accepted.
Since deregulation began the world's biggest financial firms
have been caught laundering money, frauding customers and cooking thier books
again, and again, and again
JP Morgan Bribed Goverment Officials
RIGGS BANK Laundered money for Chilean Dictator Augusto Pinochet
CREDIT SUISSE Laundered money for Iran in violation of US Sanctions
CREDIT SUISSE helped found money for Iran's nuclear programm
and for the aero-space industry organisation of Iran which built ballistic missiles
Any information that would identify it as Iranian would be removed
The bank was fined $536 million
Citi bank helped laund $1.5 million of drug money out of Mexico
Did you comment that she "should loose any documents connected with the account"
I sad that in a kidding maner it was at the early stages of this I did not mean it seriously
Freddie Mac Accounted Fraud Fined $125 million - Fannie Mae $400 million
Between 1998 and 2003 Fannie Mae overstated its earnings by more than $10 billion
This accounted standarts are highly complex
And required determinations over which experts often disagree
CEO Franklin Raines who used to be President Clinton's budget director
recieved over $22 million and bonuses
When UBS was caught helping wealthy americans evade taxes
they refused to cooperate with US goverment
Will you be willing to supply their names
- If there is a treaty framework...
-No treaty framework, you agreed you participated in a fraud
hm...
But while the company is faced an unprecedented fines
the investment firms do not have to admit any wrong doing
When you this large and you are dealing with this many products and this many customers
mistakes happen
The financial services industry seems to have of level of criminality that is, you know, somewhat distinctive.
When were the last time when CISCO or Intel or Google or Apple or IBM you know...
I'm totaly agree with you about hightech versus financial services
but hightech is fundamentally creative busness
where value generation and income derive when you actually create something new and different
Begining at 1990s deregulations and advances in technology led to an explosion of complex financial products called derivatives
Economists and bankers claimed they make market safer
But instead they made it unstable
Since the end of Cold War a lot of former physicist and mathematicians
decided to apply their skills not on Cold War technology
but on financial markets. And together with investment bankers and
- Create a different weapons? - Absolutely
As Warren Buffett sad: "Weapons of mass destruction"
Regulators, politicians and business people
did not take seriously the threat of financial innovation on the stability of the financial system.
Using derivatives bankers could gamble on virtually anything
They could bet on rise or fall of oil prises
the bankruptcy of the company, even the whether
By the late 1990s derivatives were a $15 trillion unregulated market
In 1998 someone tried to regulate them
Brooksley Born graduated first in her class in Stanford Law School
and was the first woman to edit the Major Law Review
After running derivatives practice at Arnold & Porter Born was appointed by president Clinton
to chair the Commodity Futures Trading Commission which oversaw the derivatives' market
Brooksley Born ask me if I would come work with her
We decided that this was a serious, potentially destabilizing market
In may of 1998 the CFTC issued a proposal to regulate derivatives
Clinton Treasury department had an immediate response
I happened to go into Brooksley's office and she was just putting down a reciever of her telephone
And the blood had drained from her face
And she looked at me and sad: "That was Larry Summers. He had 13 bankers in his office"
He conveyed in a very bullying fashion
Sort of directing her to stop.
The banks were now heavily reliant for earnings on this toss of activities
and that led to titanic battle to prevent this set of instruments from been regulated
Shortly after the phone call from Summers
Greenspan, Rubin and SEC chairman Arthur Levitt
issued a joint statement condemning Born and recomended legislation to keep derivatives unregulated
Regulations of derivatives transactions that are privately negotiated
by professionals is unnecessary
??? overruled it unfortunately
first by the Clinton administration and then by the Congress
in 2000 Senator Phil Gramm took a major role and getting a bill passed
that pretty much exempted derivatives from regulation
They are unifying markets they are reducing regulatory burden
I believe that we need to do it
After leaving the Senate, Phill Gramm became Vice-Chairman of UBS.
Since 1993, his wife Wendy had served on the board of Enron.
But its our very great hope
that it would be possible to move this year on legislation in a suitable way
goes to create legal certainty for OTC derivatives
Larry Summers later made $20 million as a consultant to a hedge fund that relied heavily on derivatives.
I wished to assosiate myself with all of the remarks of secretary Summers
In december 2000 Congress passed the The Commodity Futures Modernization Act
Written with a help of financial industry lobbyists
it banned the regulation of derivatives
Once that's was done it was off to the races
And use of derivatives and financial innovation exploded dramatically after 2000
-So help me God -So help me God
By the time G.W. Bush took office in 2001
The US financial sector was vastly more profitable, concentrated and powerfull then ever before
Dominating this industry were 5 investment banks
Two financial conglomerates
Three securities insurance companies and three rating agencies
And linking them all together was a securitization food chain, a new system
which connected trillion of dollars, mortgages and other loans
with investors all over the world
30 years ago if you wanted get a loan for a home
the person lending you a money expecting you to pay him or her back
you got a loan from a lender who wanted you to pay him back
we've since developed securitization thereby
people who made the loan are no loger at risk of failure to repay
In old system when home owner paid their cheks every months the money went to their local lender
And since mortgages took decades to repay
lenders were carefull
In a new system lenders sold the mortgages to investment banks
The investment banks combined thousands of mortgages and other loans including car loans, student loans and credit card debt
to create complex derivatives called collateralized debt obligation, or CDO
the investment banks then sold the CDOs to investors
Now when home owners paid their mortgages the money went to investors all over the world
The investment banks paid rating agencies to evaluate the CDOs
and many of them were given a AAA rating
which is highest possible investment rate
This made CDOs popular with retirement funds
which can only purchase highly rated securities
This system was a ticking time bomb
Lenders didn't care anymore about whether a borrower can repay
So they started making riskier loans
The investment banks didn't care either
The more CDOs they sold the higher their profits
and the rating agencies which were paid by the investment banks
had no liability if their ratings of CDOs proved wrong
You were getting to be on the hook and there weren't regulationly constraints
so there were a green light to just pump out more and more loans
Bentween 2000 and 2003 the number of mortgage loans made each year nearly quadrupled
Everybody in this securitization food chain from the very beggining until the end
didn't care about quality of the mortgage
they caring about maximazing their volume and getting a fee out of it
In the early 2000s there was a huge increase in the riskiest loans
called subprime
but when thousands of subprime loans were combined to create CDOs
Many of them still received AAA ratings
-Now it wouldn't have been possible to create derivative products
that don't have this risks that carry the equivalent of deductibles
where there are limits on risks that can be taken on and so forth
they didn't do that, did they
-They didn't do that and in retrospect they shouldn't have done
-So these guys knew they were doing something dangerous?
- I think they did
The investment banks actally prefer subprime loans, because they carried higher inerest rates.
This led to a massive increase in predatory lending.
Borrowers were needlessly placed into expensive subprime loans, and many loans were given to people who could not repay them.
All incentives that the financial institutions offered to the mortgage brokers
were based on sawing the most profitable products which were predatory loans
The bankers makes more money if they put you on subprime loan
That's what they gonna put you
Part II: The bubble (2001-2007)
Suddenly hundreds of billions of dollars a year were flowing through securitization chain
Since anyone can get a mortgage home purchases and house's prises skyrocketed
The result was the biggest financial bubble in history
Real estate is real, they can see their houses, their can live in their houses,
they can rent out their houses
You had huge boom in housing that had no sense at all
financing appetites out of financial sector droved what everyboby else did
Last time we had a housing bubble was in the late 80s
In that case the increasing home praises were relatively minor
That housing bubble led to relatively severe recession
From 1996 until 2006 real home praises effectively doubled
At $500 a ticket
they come to here how buy their very own piece of American dream
Goldman Sachs, Bear Stearns, Lehman Brothers, Merrill Lynch
were all in on this subprime lending alone increase from $30 billion a year in funding
to over six hundred billion a year in ten years
they new what was happening
Countrywide Financial - the largest subprime lender - issued $97 billion worth of loans
It made over %11 million dollars in profits as a result
On Wall Street annual cash bonuses spiked
traders and CEOs became enormously wealthy during the bubble
Lehman Brothers was the top uderwriter of subprime lending
And their CEO Richard Fuld took home $485 million
On Wall Street this housing and credit bubble
was leading to hundreds of billions of dollars of profits
By 2006 about 40% of all profits of S&P 500 firms
was coming from financial institutions
It wasn't real profits, it wasn't real income
It was just money that was been created by the system and booked as income
to 3 years down the road this a default it's all wiped out
I think it was in fact, in retrospect, a great big national,
and not just national global poncy scheme
Through the home ownership and equality protection act
the Federal Reserve Board had brought authority to regulate mortgage industry
but Federal Chairman Alan Greenspan refuse to use it
Alan Greenspan sad no that regulation: "I don't even believe in it"
For 20 years Robert Gnaizda was the head of Greenlining
a powerfull consumer advocacy group
He met with Greenspan on a regular basis
We gave him an example of country wide 150 different complex adjustable rate mortgages
He sad if you'd had a doctorate in math you wouldn't be able to understand them enough
to know which was good for you and which wasn't
So we thought he was gonna take action
but as the conversation continues it was clear he was stuck with his ideology
We met again with Greenspan at '05
often we met with him 2 a year never less than 1 a year
and he wouldn't change his mind
Alan Greenspan declined to be interviewed for this film.
In this amazing world of instant global communications
The free and efficient movement of capital is helping to create the greatest prosperity in human history
The Securities and Exchange Commission conducted no major investigations of the investment banks during the bubble.
146 people were cut from the enforcement division of SEC
is that what you also testified to
Yes I think that has been systematic ??? or whatever you wanna call it
of the agency and its capability through cutting back a stuff
The SEC office of risk managment was reduce to stuff, did you say, of 1?
Year, when that gentelman would go home at night he can turn lights out
During the bubble the investment banks were borrowing heavily to buy more loans and create more CDOs
The ratio between borrowed money and bank's own money was called leverage
The more banks borrowed the higher their leverage
In 2004 Henry Paulson the CEO of Goldman Sachs
helped lobby the Securities and Exchange Commission to relax limits on leverage
allowing the banks to sharply increase their borrowing
The SEC somehow decided to let investment bank gamble a lot more
That was nuts !
I don't know why they did that but they did that
We've send this to the big guys to clear if it was true
But that means if anything goes wrong, it's gona be a awfully big mess