Wednesday, January 5, 2011

Inside Job Review

Charles Ferguson’s Inside Job is a trenchant, chilling expose on the2008 financial meltdown. Like his most recent documentary on the Iraq War, No End In Sight, it is taut, well-researched, highly provocative, and impressive in scope. Ferguson explained that the choices he made in the documentary were with the idea of making the seemingly highly esoteric subject of this particular economic crisis “accessible to all viewers” and he sought to not only narrate what occurred but also in a more current sense, “explain why America is still in such economic difficulty.”

The documentary begins with an apt case-study, Iceland, which Ferguson describes in the film as “one of the purest experiments” in the potential outcomes of de-regulation. The very grim statistic that, at the time, Iceland’s GDP was 10 billion, and bank losses were 130 billion gives viewers a keen grasp of the sheer enormity of the collapse. Inside Job posits that the de-regulation policies begun in 2000 had an adverse effect on both the environment and the economy.

Inside Job presents a well-researched timeline of the series of developments that combined to create the perfect storm. After the Great Depression, the United States experienced 40 years of growth with no economic crises. The landscape began to change in the 1980s. At the time, many investment banks went public. During the Reagan era, de-regulation under Rubin and Summers allowed behemoth mergers to take place, such as the creation of Citigroup, which would have been impossible under the older legal standards set by the Glass-Steagall Act of 1933. The Gramm–Leach–Bliley Act repealed part of that act, opening up the market for the existence of behemoth hybrid banking, securities, and insurance companies. Ferguson then touches upon the long-standing track record of nefarious activity by financial institutions—the litany of culprit banks who were fined for too many things to name and not the least of which for money laundering for corrupt politicians stretches far and wide.

Ferguson does a brilliant job of demystifying the often-heard during the crisis but rarely understood buzzwords of “subprime mortgages,” “mortgage-backed securities,” and “derivatives.” In interviews with a veritable treasure trove of who’s-whos including economists, business-school faculty, Justice Department officials, Federal Reserve chairmen, Congressmen, financial press members, foreign government ministers, he constructs a picture of a massive inter-relationship critical for the viewers’ understanding of why things got as bad as they did. To put it in the most basic terms, Inside Job diagrams that the historical chain of home buyers to lenders was essentially replaced by the home buyers-lenders-investment banks-investors chain, which allowed banks to make riskier and riskier loan offers because they were no longer concerned about the ability of the buyers to repay the loans directly to them. The creation of complex financial instruments such as collateralized debt obligations [CDOs] came hand in hand with increasingly predatory lending since the interest rates on the subprime mortgages were the highest. As early as 1998, people like Brooksley Born, the head of the Commodity Future Trading Commission, feared the consequences of having a 50 trillion unregulated derivates market and lobbied for legislation, but Larry Summers and Alan Greenspan firmly objected to it and none passed. In addition, the relaxation of leverage standards, which passed SEC approval in 2004, allowed unheretofore seen shockingly high levels of borrowed-to-bank money, such as 33:1, having enormous implications for bank liquidity. Combine that with the fact that rating agencies continued to rate CDOs at super high grades [two days before its collapse, Lehman was rated as 2A] and later on washed their hands of this oversight error [to put it mildly] by calling their ratings at Congressional hearings mere “opinions.” In the increasingly complicated picture, the true testament to Wall Street greed was that investment banks were selling and betting against the same CDOs at the same time and routinely deceiving their clients about the quality of the investments. Inside Job also features interviews with the two leading voices of reason—Raghuram Rajan and Nouriel Roubini, who were sounding alarm bells as early as 2005. Rajan, IMF’s former Chief Economist delivered a paper, "Has Financial Development Made the World Riskier” warning of the looming disaster. Other leading economists are also interviewed including Paul Volcker, Andrew Sheng, and Christine Lagard.

Ferguson does not shy away from tackling controversial issues and the courageous gusto with which he peppers his interview subjects with uncomfortable questions is amusingly droll. A major point that the documentary drives home is that almost entirely independent of political lines, the government remains a “Wall Street government,” as Ferguson put it. The fact that the financial industry routinely spends 5 billion in political contributions and the fact that most of the key government economics advisors are former financial industry honchos speaks to how deep this collusion is. Inside Job also delivers a searing indictment on the lack of criminal prosecution for the culprits, who not only walked away free but they walked away with staggering pay packages to the tune of hundreds of millions. Ferguson stated in the discussion after the film that, “the fact these guys are going to get away with this is a major public policy failure.” In further testament to the “structural corruption,” Ferguson also very smartly illustrates the ideological impact of having professors from the top business schools engage in blatant conflict-of-interest activities such as earning 80% of the their income consulting for the very same financial companies that precipitated the crisis.