1

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Iceland is a stable democracy
with the high standard of living...
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and until recently...
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extremely low unemployment
and government debt.
4
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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 and good education,
8
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clean air, not much crime,
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It's good place for families to life...
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We had almost "end of history" status.
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But in 2000 Iceland government
began a broad policy of deregulation...
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that would have disastrous consequences...
13
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first for the environment
and then for the economy...
14
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They started by allowing...

15
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multinational corporations like Alcova...
16
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to build giant aluminum smelting plants...
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and exploit Iceland s
natural geothermal...
18
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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 consequences.
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At the same time
the government privatized...
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Iceland s three largest banks...
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The result was one of the purest
experiments in financial deregulation...
25
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ever conducted.
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Finance took over and uh,
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more or less wrecked the place.
28

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In a 5 year period this three tiny banks...
29
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which have never operated
outside of Island...
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borrowed 120 billion dollars...
31
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ten time the size of Iceland s economy.
32
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The bankers showered money
on themselves...
33
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each other and their friends.
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There was a massive bubble...
35
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Stock prices went up by a factor of nine,
36
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house prices more than doubled...
37
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Iceland bubble gave rise to people...
38
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like Jon Asgeir Johannesson.
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He borrowed billions from the banks...
40
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to buy up high-end retail businesses
in London.
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He also bought a pinstriped private jet,
42
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a 40 million dollar yacht...

43
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and a Manhattan penthouse.
44
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Newspapers always had headlines:
45
00:04:05,501 --> 00:04:07,500
this millionaire bought this company...
46
00:04:07,501 --> 00:04:13,000
in UK or in Finland
or in France or wherever.
47
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Instead of saying...
48
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this millionaire
took a billion dollars loan...
49
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to buy this company...
50
00:04:21,401 --> 00:04:24,000
and it took it from your local bank.
51
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The banks set up money market funds...
52
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and the banks advised
deposit-holders to...
53
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withdraw money and put them
in a money market funds.
54
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The Ponzi scheme
needed everything it could, huh?
55
00:04:34,001 --> 00:04:37,500
American accounted firms like KPMG...
56

00:04:37,501 --> 00:04:40,500

audit the Iceland s banks
and investment firms...
57
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and found nothing wrong.
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And American credit rating agencies...
59
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said Iceland was wonderful.
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In February 2007...
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the rating agencies decided...
62
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to upgrade the banks...
63
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to a highest possible rate
AAA.
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It went so far as the government here...
65
00:04:57,501 --> 00:05:03,000
traveling with the bankers 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 6 months.
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There is nobody unaffected in Iceland.
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00:05:24,000 --> 00:05:28,500
- So a lotta people here lost their savings.
- Yes that s the case.
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The government regulators...

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who should ve been protecting
the citizens of Iceland...
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had done nothing.
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You have two lawyers...
74
00:05:37,001 --> 00:05:39,000
from regulator company
who're coming to a bank...
75
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to talk about some issues.
76
00:05:41,001 --> 00:05:43,000
When they approach the bank...
77
00:05:43,001 --> 00:05:49,000
they would see nineteen SUV's
outside the bank...
78
00:05:49,001 --> 00:05:50,000
so you went to the bank
and you have...
79
00:05:50,001 --> 00:05:54,000
nineteen lawyers
sitting in front of you...
80
00:05:54,001 --> 00:05:56,500
that very well prepared,
81
00:05:56,501 --> 00:05:59,700
ready to kill any argument
you make...
82
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and then if you do very well...
83
00:06:01,401 --> 00:06:03,000
they offer you job.

84
00:06:03,001 --> 00:06:06,100
One third of Iceland s
financial regulators...
85
00:06:06,101 --> 00:06:09,000
went to work for the banks.
86
00:06:09,001 --> 00:06:12,300
But this is universal problem,
87
00:06:12,301 --> 00:06:16,500
in New York
you have the same problem, right?
88
00:06:46,001 --> 00:06:49,000
What do you think
of Wall Street incomes this days?
89
00:06:49,001 --> 00:06:50,500
Excessive.
90
00:06:53,000 --> 00:06:55,000
I've been told
that it's extremly difficult...
91
00:06:55,001 --> 00:06:58,000
for the IMF to critisize United States.
92
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I wouldn't say that.
93
00:07:06,000 --> 00:07:10,500
We deeply regret our breaches of US law.
94
00:07:13,000 --> 00:07:15,000
They re amazed at...
95
00:07:15,001 --> 00:07:18,000
how much cocain
these Wall Streeters can use...
96
00:07:18,001 --> 00:07:21,000
and get up and go to work
the next day.
97
00:07:23,000 --> 00:07:27,000

I didn't know
what credit default swaps are.
98
00:07:27,001 --> 00:07:29,500
I'm little bit old fashioned.
99
00:07:34,000 --> 00:07:37,000
Has Larry Summers ever expressed remorse?
100
00:07:37,001 --> 00:07:40,000
I don't hear confessiones.
101
00:07:54,000 --> 00:07:55,700
The government just writing checks...
102
00:07:55,701 --> 00:07:59,000
that's plan A,
that's plan B and that's plan C.
103
00:07:59,001 --> 00:08:02,000
Would you support legal controls
on executive pay?
104
00:08:02,001 --> 00:08:05,000
I would not.
105
00:08:08,001 --> 00:08:10,000
Are you comfortable with...
106
00:08:10,001 --> 00:08:12,500
law of compensation
in financial service industry?
107
00:08:12,501 --> 00:08:14,500
If they waranted, then yes, I am.
108
00:08:14,501 --> 00:08:17,000
- Do you think they waranted?
- I think they waranted.
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00:08:19,000 --> 00:08:22,000
And so you help this people
blow the world up?
110
00:08:22,001 --> 00:08:24,000
You could say that.

111
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They were having massive private gains
at public loss.
112
00:08:45,000 --> 00:08:46,700
When you start thinking...
113
00:08:46,701 --> 00:08:48,700
you can create something
out of nothing...
114
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it's very difficult to resist.
115
00:09:04,000 --> 00:09:06,500
I'm concerned that a lot of people...
116
00:09:06,501 --> 00:09:08,000
want go back to the old way...
117
00:09:08,001 --> 00:09:11,500
the way they were operating
prior to the crisis.
118
00:09:21,000 --> 00:09:24,400
I was getting a lot of anonymus e-mails
from bankers...
119
00:09:24,401 --> 00:09:26,400
saying "You can't quote me,
120
00:09:26,401 --> 00:09:28,400
but I'm really concerned".
121
00:09:33,500 --> 00:09:35,000
Why do you think there isn't...
122
00:09:35,001 --> 00:09:38,500
a more systematic investigation
being undertaking?
123
00:09:38,501 --> 00:09:41,000
Because then you will find the culprits.
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Do you think

that Columbia Business School...

125
00:09:45,501 --> 00:09:48,999
has any significant conflict
of interest problem?
126
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Don't see that we do.
127
00:10:00,000 --> 00:10:02,000
The regulators didn't do their job...
128
00:10:02,001 --> 00:10:04,200
they had the power to do
129
00:10:04,201 --> 00:10:06,000
every case that I made
when I was state attorney general...
130
00:10:06,001 --> 00:10:08,000
they just didn't want it.
131
00:10:25,500 --> 00:10:27,800
Over the weekend, Lehman Brothers
one of the most venerable...
132
00:10:27,801 --> 00:10:30,800
and biggest investment banks,
was forced to declare itself bankrupt...
133
00:10:30,801 --> 00:10:33,500
another, Merrill Lynch,
was forced to sell itself today.
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00:10:33,501 --> 00:10:35,500
- Crisis talks are underway...
- World financial markets...
135
00:10:35,501 --> 00:10:37,000
are way down today...
136
00:10:37,001 --> 00:10:41,000
dramatic developments
for two Wall Street giants...
137
00:10:46,000 --> 00:10:48,800
In september 2008...

138
00:10:48,801 --> 00:10:52,000
the bankruptcy of US investment bank
Lehman Brothers...
139
00:10:52,001 --> 00:10:53,500
and the collapse of the world...
140
00:10:53,501 --> 00:10:56,000
largest insurance company AIG...
141
00:10:56,001 --> 00:10:58,500
triggered the global financial crisis...
142
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fears gripped markets overnight...
143
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with Asian stocks slammed by...
144
00:11:01,301 --> 00:11:02,600
Stocks fell off a cliff...
145
00:11:02,601 --> 00:11:05,400
the largest single point drop in history.
146
00:11:05,401 --> 00:11:07,600
Share prices continued to tumble in...
147
00:11:07,601 --> 00:11:11,000
the aftermath of the Lehman collapse.
148
00:11:12,000 --> 00:11:14,500
The result was the global recession...
149
00:11:14,501 --> 00:11:17,500
which costs the world
tens of trillions of dollars...
150
00:11:17,501 --> 00:11:20,000
rendered 30 millions people unemployed...
151
00:11:20,001 --> 00:11:23,500
and doubled the national debt of the US.
152

00:11:23,501 --> 00:11:25,500

If you looked at the costs of it:
153
00:11:25,501 --> 00:11:28,500
the structure of equity welth,
of housing wealth...
154
00:11:28,501 --> 00:11:31,000
then the structure of income, of jobs,
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00:11:31,001 --> 00:11:33,500
15 million people globally...
156
00:11:33,501 --> 00:11:37,999
could end up below the poverty line again.
157
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This is just a hugely,
hugely expensive crisis.
158
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This crisis was not an accident.
159
00:11:45,001 --> 00:11:48,500
It was caused by an out of control industry.
160
00:11:48,501 --> 00:11:52,000
Since the 1980s
the rise of US financial sector...
161
00:11:52,001 --> 00:11:53,500
has led to a series...
162
00:11:53,501 --> 00:11:57,000
of increasingly severe financial crises.
163
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Each crisis has caused more damage...
164
00:12:00,001 --> 00:12:04,000
while the industry has made more
and more money.
165
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Part I. How we got here
166

00:12:11,001 --> 00:12:14,200

After the Great Depression
United States...
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00:12:14,201 --> 00:12:16,500
have 40 years of economic growth...
168
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without a single financial crisis...
169
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the financial industry
was tightly regulated...
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most regular banks
were local businesses...
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and they were prohibited
from speculating...
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with depositors savings.
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Investment banks...
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00:12:30,001 --> 00:12:32,400
which handle stock
and bond tradings...
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were small private partnerships.
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In the traditional investment banking...
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00:12:37,401 --> 00:12:39,300
partnership model...
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the partners put the money up...
179
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and obviously the partners...

180
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watch that money very carefully.
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They wanted to live well...
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but they didn't want to...
183
00:12:48,001 --> 00:12:49,500
bet the ranch on anything.
184
00:12:49,501 --> 00:12:53,000
Paul Volcker served
on the treasury department...
185
00:12:53,001 --> 00:12:54,300
and was chairman
of the Federal Reserve...
186
00:12:54,301 --> 00:12:57,800
from 1979... 1987.
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Before going into government,
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he was a financial economist...
189
00:13:01,301 --> 00:13:03,000
at Chase Manhattan Bank.
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00:13:03,001 --> 00:13:08,001
When I left Chase
to go in Treasury in 1969...
191
00:13:08,002 --> 00:13:10,300
I think my income was in the neighbour...
192
00:13:10,301 --> 00:13:13,399
- of 45,000 dollars per year.
- 45,000 dollars a year?
193
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Morgan Stanley in 1972...

194
00:13:16,501 --> 00:13:21,500
had approximately
110 total personnel.
195
00:13:21,501 --> 00:13:26,013
One office
and capital of $12,000,000
196
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Now Morgan Stanley has
50,000 workers...
197
00:13:31,001 --> 00:13:36,000
and has capital of several billion...
198
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and has offices all over the world.
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In the 1980's
the financial industry exploded.
200
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The investment banks went public...
201
00:13:43,501 --> 00:13:47,000
given them huge amount
of stock holding money.
202
00:13:47,001 --> 00:13:51,500
People on Wall Street started getting rich.
203
00:13:51,501 --> 00:13:54,500
I had a friend who was a bond trader...
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00:13:54,501 --> 00:13:59,000
at Merilyn Lynch in 1970s.
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He had a job as a train conducter
at night.
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00:14:03,001 --> 00:14:04,000
Because he had 3 kids...
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00:14:04,001 --> 00:14:06,500

and couldn't support them...

208
00:14:06,501 --> 00:14:08,000
on what a bond trader made.
209
00:14:08,001 --> 00:14:11,400
By 1986 he was making
millions of dollars...
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00:14:11,401 --> 00:14:15,000
and thought it was
because he was smart.
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00:14:15,001 --> 00:14:17,600
The highest order of business
before the nation...
212
00:14:17,601 --> 00:14:20,600
is to restore our economic prosperity.
213
00:14:20,601 --> 00:14:23,300
In 1981 president Ronald Reagan...
214
00:14:23,301 --> 00:14:25,000
choses Treasury Secretary...
215
00:14:25,001 --> 00:14:27,500
the CEO of investment bank
Merrill Lynch...
216
00:14:27,501 --> 00:14:29,000
Donald Regan.
217
00:14:29,001 --> 00:14:32,701
Wall Street and the President
do see eye to eye.
218
00:14:32,702 --> 00:14:34,700
I've talked to many leaders
of Wall Street...
219
00:14:34,701 --> 00:14:38,200
they also will be behind
the President on 100%.
220
00:14:38,201 --> 00:14:39,500
The Reagan administration...

221
00:14:39,501 --> 00:14:42,000
supported by economists
and financial lobbyist...
222
00:14:42,001 --> 00:14:47,000
started the 30 years period
of financial deregulations.
223
00:14:47,500 --> 00:14:50,200
In 1982 the Reagan administration...
224
00:14:50,201 --> 00:14:53,000
deregulated savings
and loan companies...
225
00:14:53,001 --> 00:14:54,500
allowing them to make
risky investments...
226
00:14:54,501 --> 00:14:56,999
with their depositors' money.
227
00:14:57,000 --> 00:14:58,600
By the end of the decade...
228
00:14:58,601 --> 00:15:01,800
hundreds of saving and loan compnies
had failed.
229
00:15:01,801 --> 00:15:06,000
This crises cost tax payers
124 billion dollars...
230
00:15:06,001 --> 00:15:09,000
and cost many people
their live savings.
231
00:15:09,001 --> 00:15:12,003
It may be the biggest bank heist
in our history.
232
00:15:12,004 --> 00:15:14,000
Thousands of saving and loan executives...
233
00:15:14,001 --> 00:15:16,900
went to jail for looting their companies.

234
00:15:16,901 --> 00:15:18,500
One of the most extreme cases...
235
00:15:18,501 --> 00:15:20,500
was Charles Keating.
236
00:15:20,501 --> 00:15:23,500
In 1985 when federal regulators...
237
00:15:23,501 --> 00:15:25,500
began investigating him...
238
00:15:25,501 --> 00:15:27,000
Keating hired an economist...
239
00:15:27,001 --> 00:15:29,500
named Alan Greenspan.
240
00:15:29,501 --> 00:15:30,800
In this letter to regulators...
241
00:15:30,801 --> 00:15:32,500
Greenspan praised Keating's...
242
00:15:32,501 --> 00:15:35,000
sound business plan
and expertise...
243
00:15:35,001 --> 00:15:36,500
and said he saw no risk
in allowing...
244
00:15:36,501 --> 00:15:40,000
Keating to invest
his customers money.
245
00:15:40,001 --> 00:15:43,210
Keating reportedly paid Greenspan
40,000 dollars.
246
00:15:46,500 --> 00:15:49,011
Charles Keating went
to prison shortly afterwords.
247
00:15:49,012 --> 00:15:51,500

As for Alan Greenspan...

248
00:15:51,501 --> 00:15:53,000
President Reagan appointed him...
249
00:15:53,001 --> 00:15:55,000
chairman of America's central bank...
250
00:15:55,001 --> 00:15:56,999
The Federal Reserve.
251
00:15:57,015 --> 00:15:58,500
Greenspan was reappointed...
252
00:15:58,501 --> 00:16:03,000
by presidents Clinton
and George W. Bush.
253
00:16:03,001 --> 00:16:05,000
During the Clinton administration...
254
00:16:05,001 --> 00:16:07,800
deregulation continued under Greenspan.
255
00:16:07,801 --> 00:16:10,200
And Treasury Secretary Robert Rubin,
256
00:16:10,201 --> 00:16:12,000
the former CEO
of the investment bank...
257
00:16:12,001 --> 00:16:13,800
Goldman Sachs...
258
00:16:13,801 --> 00:16:17,000
and Larry Summers,
Harvard economics professor...
259
00:16:17,001 --> 00:16:21,000
The financial sector
of Wall Street being powerfull,
260
00:16:21,001 --> 00:16:24,000
having lobbyist,
having lots of money...
261

00:16:24,002 --> 00:16:26,502

step by step
captured the political system...
262
00:16:26,503 --> 00:16:29,503
both on the Democratic
and the Republican side.
263
00:16:30,000 --> 00:16:32,400
By the late 1990s...
264
00:16:32,401 --> 00:16:34,300
the financial sector had consolidated...
265
00:16:34,301 --> 00:16:36,000
into few gigantic firms.
266
00:16:36,001 --> 00:16:37,700
Each of them so large...
267
00:16:37,701 --> 00:16:40,500
that their failure can threaten whole system
268
00:16:40,501 --> 00:16:42,700
And the Clinton administration...
269
00:16:42,701 --> 00:16:45,000
helped them grow even larger.
270
00:16:45,001 --> 00:16:48,000
In 1999 Citicorp and Travelers...
271
00:16:48,001 --> 00:16:50,300
merged to form Citigroup...
272
00:16:50,301 --> 00:16:52,000
the largest financial services company...
273
00:16:52,001 --> 00:16:53,500
in the world.
274
00:16:53,501 --> 00:16:56,000
The merger violated
the Glass-Steagal act...
275
00:16:56,001 --> 00:16:58,000

a law passed after Great Depression...

276
00:16:58,001 --> 00:17:00,800
which prevented banks
with costumer deposits...
277
00:17:00,801 --> 00:17:04,000
from engaging
in risky investment banking activities.
278
00:17:04,001 --> 00:17:07,801
It was illegal to acquire Travelers.
279
00:17:07,802 --> 00:17:09,000
Greenspan said nothing.
280
00:17:09,001 --> 00:17:11,200
The Federal Reserve
gave him exemption...
281
00:17:11,201 --> 00:17:15,000
for a year
and then they got the law passed.
282
00:17:15,001 --> 00:17:18,000
In 1999 at the urging
of Summers and Rubin...
283
00:17:18,001 --> 00:17:21,000
Congress passed the "Glemm-Leach-Bliley Act"
284
00:17:21,001 --> 00:17:24,700
Known to some as the Citigroup Relive Act.
285
00:17:24,701 --> 00:17:27,000
It overturned "Glass-Steagal"...
286
00:17:27,001 --> 00:17:30,000
and clear the way
for future mergers...
287
00:17:37,901 --> 00:17:39,400
Why do you have big banks...
288
00:17:39,401 --> 00:17:41,300
because banks like monopoly power...

289
00:17:41,301 --> 00:17:43,900
because banks like lobbying power,
290
00:17:43,901 --> 00:17:48,500
because banks know
that when you too big...
291
00:17:48,501 --> 00:17:50,000
they will be bailed.
292
00:17:50,100 --> 00:17:52,600
Markets are inherently unstable...
293
00:17:52,601 --> 00:17:55,500
or at least potentially unstable...
294
00:17:55,501 --> 00:17:59,000
and appropriate metaphor is
the old tankers...
295
00:17:59,001 --> 00:18:02,000
they very big and therefore...
296
00:18:02,001 --> 00:18:04,000
you have to put in compartments...
297
00:18:04,001 --> 00:18:07,500
to prevent the sloshing around of oil...
298
00:18:07,501 --> 00:18:10,000
from capsizing the boat...
299
00:18:10,001 --> 00:18:13,000
the design of the boat
has to take it into account...
300
00:18:13,001 --> 00:18:16,200
and after the Depression...
301
00:18:16,201 --> 00:18:19,000
the regulation actually introduced...
302
00:18:19,001 --> 00:18:22,000
this very watertight compartments...
303

00:18:22,001 --> 00:18:25,000

and deregulation has led to...
304
00:18:25,001 --> 00:18:29,000
the end of compartmentalisation.
305
00:18:29,100 --> 00:18:31,500
The next crisis came
at the end of the 90's.
306
00:18:31,501 --> 00:18:36,000
The investment banks fuel the
mass of the bubble in internet stocks
307
00:18:36,001 --> 00:18:38,500
Which were followed
by a crash in 2001...
308
00:18:38,501 --> 00:18:42,000
that caused 5 trillion dollars
in investment losses.
309
00:18:42,001 --> 00:18:44,500
The Securities and Exchange Commission...
310
00:18:44,501 --> 00:18:46,000
the federal agency
which had been created...
311
00:18:46,001 --> 00:18:49,000
during the depression
to regulate investment banking...
312
00:18:49,001 --> 00:18:51,000
had done nothing.
313
00:18:51,001 --> 00:18:53,000
In the absence
of meaning for federal action...
314
00:18:53,001 --> 00:18:55,200
and there has been none...
315
00:18:55,201 --> 00:18:57,500
and given the clear failure
of self regulation.
316

00:18:57,501 --> 00:19:00,000

It is become necessary for others
to step in...
317
00:19:00,001 --> 00:19:02,600
and adopt the protections needed.
318
00:19:02,601 --> 00:19:04,700
Eliot Spitzers investigation
revealed that...
319
00:19:04,701 --> 00:19:06,200
the investments banks
had promoted...
320
00:19:06,201 --> 00:19:08,500
internet companies
they knew would fail.
321
00:19:08,501 --> 00:19:10,500
Stock analysts were being paid...
322
00:19:10,501 --> 00:19:13,000
based on how much business
they brought in...
323
00:19:13,001 --> 00:19:14,700
and what they sad publicly...
324
00:19:14,701 --> 00:19:17,700
was quite different
from what they sad privately.
325
00:19:17,701 --> 00:19:20,200
Infospace given
the highest possible rating...
326
00:19:20,201 --> 00:19:23,000
dismissed by the analysts
as the "piece of junk".
327
00:19:23,001 --> 00:19:25,000
Excite... also highly rated...
328
00:19:25,001 --> 00:19:27,000
called "such a piece of crap".
329

00:19:27,001 --> 00:19:30,300

The defence that was proffered...
330
00:19:30,301 --> 00:19:34,000
by many of the investment banks...
331
00:19:34,001 --> 00:19:37,500
was not, you're wrong, it was...
332
00:19:37,501 --> 00:19:40,000
Everybodie's doing it
and everybodie knew what's going on...
333
00:19:40,001 --> 00:19:43,001
and therefore nobody should rely
on this analysts anyway.
334
00:19:43,002 --> 00:19:46,500
In december 2002
ten investment banks...
335
00:19:46,501 --> 00:19:49,500
settle the case for a total
of 1.4 billion dollars...
336
00:19:49,501 --> 00:19:52,403
and promised to change their ways.
337
00:19:52,600 --> 00:19:55,000
Scott Talbott is the chief lobbyist...
338
00:19:55,001 --> 00:19:57,000
for the Financial Services Roundtable...
339
00:19:57,001 --> 00:19:59,000
one of the most powerfull groups
in Washington...
340
00:19:59,001 --> 00:20:01,000
which represents nearly all of...
341
00:20:01,001 --> 00:20:03,000
the world largest financial companies.
342
00:20:03,001 --> 00:20:05,700
Are you comfortable with the fact...

343
00:20:05,701 --> 00:20:07,700
that several
of your member companies...
344
00:20:07,701 --> 00:20:11,000
have engaged
in large scale criminal activity?
345
00:20:11,001 --> 00:20:13,000
- You'll have to be specific
- Okay...
346
00:20:13,001 --> 00:20:14,500
And first of all criminal activity...
347
00:20:14,501 --> 00:20:18,000
shouldn't be accepted, period.
348
00:20:25,500 --> 00:20:27,400
Since deregulation began...
349
00:20:27,401 --> 00:20:28,800
the world's biggest financial firms...
350
00:20:28,801 --> 00:20:30,500
have been caught laundering money,
351
00:20:30,501 --> 00:20:34,000
defrauding customers
and cooking thier books...
352
00:20:34,001 --> 00:20:36,500
again, and again, and again.
353
00:20:47,002 --> 00:20:48,700
Credit Suisse helped funnel money...
354
00:20:48,701 --> 00:20:51,002
for Iran's nuclear program...
355
00:20:51,003 --> 00:20:53,500
and for the Aerospace Industries
Organization of Iran...
356
00:20:53,501 --> 00:20:55,000
which built ballistic missiles.

357
00:20:55,001 --> 00:20:57,000
Any information that would identify it...
358
00:20:57,001 --> 00:21:00,000
as Iranian would be removed.
359
00:21:00,001 --> 00:21:03,000
The bank was fined
536 million dollars.
360
00:21:03,001 --> 00:21:05,500
Citibank helped funnel
1.5 million dollars...
361
00:21:05,501 --> 00:21:07,500
of drug money out of Mexico.
362
00:21:07,501 --> 00:21:09,700
Did you comment that she should...
363
00:21:09,701 --> 00:21:13,000
"loose any documents connected
with the account".
364
00:21:13,001 --> 00:21:14,500
I said that in a kidding manner...
365
00:21:14,501 --> 00:21:16,400
it was at the early stages of this.
366
00:21:16,401 --> 00:21:18,999
I did not mean it seriously.
367
00:21:20,003 --> 00:21:23,000
Between 1998 and 2003
368
00:21:23,001 --> 00:21:25,000
Fannie Mae overstated its earnings...
369
00:21:25,001 --> 00:21:26,800
by more than 10 billion dollars.
370
00:21:26,801 --> 00:21:29,000
This accounted standarts
are highly complex...

371
00:21:29,001 --> 00:21:30,500
and required determinations...
372
00:21:30,501 --> 00:21:33,000
over which experts often disagree.
373
00:21:33,001 --> 00:21:35,000
CEO Franklin Raines...
374
00:21:35,001 --> 00:21:37,600
who used to be
President Clinton's budget director...
375
00:21:37,601 --> 00:21:41,500
recieved over 52 million dollars
in bonuses.
376
00:21:44,800 --> 00:21:46,200
When UBS was caught...
377
00:21:46,201 --> 00:21:49,000
helping wealthy americans
evade taxes...
378
00:21:49,001 --> 00:21:52,000
they refused to cooperate
with US goverment.
379
00:21:52,001 --> 00:21:54,001
Would you be willing to supply the names?
380
00:21:54,002 --> 00:21:56,000
If there is a treaty framework...
381
00:21:56,001 --> 00:21:57,300
No treaty framework,
382
00:21:57,301 --> 00:21:59,400
you've agreed you participated
in a fraud.
383
00:21:59,401 --> 00:22:00,603
Hm...
384
00:22:11,004 --> 00:22:14,004

But while the company is faced

an unprecedented fines...
385
00:22:14,005 --> 00:22:15,500
the investment firms do not...
386
00:22:15,501 --> 00:22:17,600
have to admit any wrong doing.
387
00:22:17,601 --> 00:22:19,000
When you this large
and you are dealing...
388
00:22:19,001 --> 00:22:21,000
with this many products
and this many customers...
389
00:22:21,001 --> 00:22:22,500
mistakes happen.
390
00:22:22,501 --> 00:22:23,500
The financial services industry...
391
00:22:23,501 --> 00:22:27,500
seems to have level of criminality that is,
392
00:22:27,501 --> 00:22:29,500
you know, somewhat distinctive.
393
00:22:29,701 --> 00:22:32,500
When was the last time when...
394
00:22:32,501 --> 00:22:37,000
CISCO or Intel or Google
or Apple or IBM you know...
395
00:22:37,001 --> 00:22:38,500
I'm totaly agree with you...
396
00:22:38,501 --> 00:22:40,000
about hightech
versus financial services...
397
00:22:40,001 --> 00:22:44,000
but hightech is fundamentally
creative business...

398
00:22:44,001 --> 00:22:47,000
where value generation
and income derives...
399
00:22:47,001 --> 00:22:49,999
when you actually create
something new and different.
400
00:22:50,000 --> 00:22:52,000
Begining at 1990's...
401
00:22:52,001 --> 00:22:55,001
deregulations
and advances in technology...
402
00:22:55,002 --> 00:22:57,500
led to an explosion
of complex financial products...
403
00:22:57,501 --> 00:22:59,000
called derivatives.
404
00:22:59,001 --> 00:23:01,000
Economists and bankers...
405
00:23:01,001 --> 00:23:03,000
claimed they made market safer.
406
00:23:03,001 --> 00:23:05,300
But instead they made it unstable.
407
00:23:06,000 --> 00:23:08,700
Since the end of Cold War...
408
00:23:08,701 --> 00:23:12,000
a lot of former physicist
and mathematicians...
409
00:23:12,002 --> 00:23:14,700
decided to apply their skills...
410
00:23:14,701 --> 00:23:17,500
not on Cold War technology...
411
00:23:17,501 --> 00:23:19,500
but on financial markets.

412
00:23:19,501 --> 00:23:22,200
And together with investment
bankers and hedge funds...
413
00:23:22,201 --> 00:23:24,300
- Create a different weapons?
- Absolutely.
414
00:23:24,301 --> 00:23:25,500
As Warren Buffett said:
415
00:23:25,501 --> 00:23:27,500
"Weapons of mass destruction".
416
00:23:27,501 --> 00:23:31,000
Regulators, politicians
and business people...
417
00:23:31,001 --> 00:23:32,500
did not take seriously...
418
00:23:32,501 --> 00:23:35,000
the threat of financial innovation...
419
00:23:35,001 --> 00:23:38,000
on the stability of the financial system.
420
00:23:38,001 --> 00:23:40,000
Using derivatives bankers...
421
00:23:40,001 --> 00:23:42,000
could gamble on virtually anything.
422
00:23:42,001 --> 00:23:45,001
They could bet on rise or fall
of oil prises...
423
00:23:45,002 --> 00:23:48,500
the bankruptcy of the company,
even the whether.
424
00:23:49,000 --> 00:23:52,000
By the late 1990s derivatives...
425
00:23:52,001 --> 00:23:56,000

were a 15 trillion dollar

unregulated market.
426
00:23:56,001 --> 00:24:00,000
In 1998 someone tried to
regulate them.
427
00:24:00,001 --> 00:24:05,000
Brooksley Born graduated first in her
class in Stanford Law School...
428
00:24:05,001 --> 00:24:06,300
and was the first woman...
429
00:24:06,301 --> 00:24:09,000
to edit the major law review.
430
00:24:09,001 --> 00:24:11,500
After running derivatives practice
at Arnold & Porter...
431
00:24:11,501 --> 00:24:14,000
Born was appointed by president Clinton...
432
00:24:14,001 --> 00:24:16,800
to chair the Commodity Futures
Trading Commission...
433
00:24:16,801 --> 00:24:19,500
which oversaw the derivatives' market
434
00:24:19,501 --> 00:24:22,000
Brooksley Born ask me if...
435
00:24:22,001 --> 00:24:24,000
I would come work with her.
436
00:24:24,001 --> 00:24:27,500
We decided that this was a serious,
437
00:24:27,501 --> 00:24:31,000
potentially destabilizing market.
438
00:24:31,001 --> 00:24:34,000
In may of 1998 the CFTC...
439

00:24:34,001 --> 00:24:36,500

issued a proposal to regulate derivatives
440
00:24:36,501 --> 00:24:39,999
Clinton Treasury department
had an immediate response
441
00:24:40,000 --> 00:24:45,000
I happened to go into Brooksley's office...
442
00:24:45,001 --> 00:24:49,000
and she was just putting down
the reciever of her telephone...
443
00:24:49,001 --> 00:24:53,000
and the blood
had drained from her face.
444
00:24:53,001 --> 00:24:55,000
And she looked at me and said:
445
00:24:55,001 --> 00:25:00,000
"That was Larry Summers.
He had 13 bankers in his office"
446
00:25:00,001 --> 00:25:04,000
He conveyed it in a very bullying fashion
447
00:25:04,001 --> 00:25:07,500
Sort of directing her to stop.
448
00:25:07,700 --> 00:25:09,400
The banks were now heavily reliant...
449
00:25:09,401 --> 00:25:11,000
for earnings
on this types of activities...
450
00:25:11,001 --> 00:25:14,000
and that led to titanic battle...
451
00:25:14,001 --> 00:25:18,000
to prevent this set of instruments
from been regulated.
452
00:25:18,001 --> 00:25:20,001
Shortly after the phone call from Summers

453
00:25:20,002 --> 00:25:25,000
Greenspan, Rubin
and SEC chairman Arthur Levitt...
454
00:25:25,001 --> 00:25:27,500
issued a joint statement
condemning Born...
455
00:25:27,501 --> 00:25:29,000
and recomended legislation...
456
00:25:29,001 --> 00:25:32,000
to keep derivatives unregulated.
457
00:25:32,001 --> 00:25:35,200
Regulations of derivatives transactions...
458
00:25:35,201 --> 00:25:38,899
that are privately negotiated
by professionals...
459
00:25:38,900 --> 00:25:41,000
is unnecessary.
460
00:25:41,001 --> 00:25:43,000
She was overruled,
unfortunately...
461
00:25:43,001 --> 00:25:45,000
first by the Clinton administration...
462
00:25:45,001 --> 00:25:47,000
and then by the Congress...
463
00:25:47,001 --> 00:25:50,000
in 2000 Senator Phil Gramm
took a major role...
464
00:25:50,001 --> 00:25:51,800
and getting a bill passed...
465
00:25:51,801 --> 00:25:55,000
that pretty much exempted derivatives
from regulation.
466

00:25:55,001 --> 00:25:58,000

They are unifying markets
they are reducing regulatory burden.
467
00:25:58,001 --> 00:26:01,000
I believe that we need to do it.
468
00:26:01,001 --> 00:26:04,001
After leaving the Senate, Phill Gramm
became Vice-Chairman of UBS.
469
00:26:04,002 --> 00:26:08,000
Since 1993, his wife Wendy
had served on the board of Enron.
470
00:26:08,001 --> 00:26:11,000
But its our very great hope...
471
00:26:11,001 --> 00:26:17,400
that it would be possible to move this year
on legislation in a suitable way...
472
00:26:17,401 --> 00:26:24,600
goes to create legal certainty
for OTC derivatives.
473
00:26:30,001 --> 00:26:34,000
I wished to assosiate myself
with all of...
474
00:26:34,001 --> 00:26:37,000
the remarks of secretary Summers.
475
00:26:37,001 --> 00:26:39,500
In december 2000
Congress passed...
476
00:26:39,501 --> 00:26:42,000
The Commodity Futures Modernization Act.
477
00:26:42,001 --> 00:26:45,000
Written with a help
of financial industry lobbyists...
478
00:26:45,001 --> 00:26:49,700
it banned the regulation of derivatives.
479

00:26:49,701 --> 00:26:52,000

Once that's was done
it was off to the races.
480
00:26:52,001 --> 00:26:56,000
And use of derivatives
and financial innovation...
481
00:26:56,001 --> 00:26:59,500
exploded dramatically after 2000.
482
00:26:59,501 --> 00:27:01,800
- So help me God.
- So help me God.
483
00:27:01,801 --> 00:27:05,400
By the time George W. Bush
took office in 2001...
484
00:27:05,401 --> 00:27:08,500
the US financial sector
was vastly more profitable,
485
00:27:08,501 --> 00:27:13,000
concentrated and powerfull
then ever before.
486
00:27:13,001 --> 00:27:16,500
Dominating this industry
were five investment banks,
487
00:27:16,501 --> 00:27:19,500
two financial conglomerates,
488
00:27:19,501 --> 00:27:22,500
three securities insurance companies...
489
00:27:22,501 --> 00:27:25,000
and three rating agencies.
490
00:27:25,001 --> 00:27:26,500
And linking them all together...
491
00:27:26,501 --> 00:27:30,000
was a securitization food chain,
a new system...
492

00:27:30,001 --> 00:27:33,500

which connected trillion of dollars,
mortgages and other loans...
493
00:27:33,501 --> 00:27:35,501
with investors all over the world.
494
00:27:36,000 --> 00:27:39,000
30 years ago
if you wanted get a loan for a home...
495
00:27:39,001 --> 00:27:40,700
the person lending you a money...
496
00:27:40,701 --> 00:27:43,000
expecting you
to pay him or her back...
497
00:27:43,001 --> 00:27:45,301
you got a loan from a lender
who wanted you to pay him back...
498
00:27:45,302 --> 00:27:48,302
we've since developed securitization
thereby...
499
00:27:48,303 --> 00:27:50,000
people who made the loan...
500
00:27:50,001 --> 00:27:53,000
are no loger at risk of failure to repay.
501
00:27:53,001 --> 00:27:55,400
In old system when home owner...
502
00:27:55,401 --> 00:27:57,200
paid their mortgage every months...
503
00:27:57,201 --> 00:28:00,000
the money went to their local lender.
504
00:28:00,001 --> 00:28:02,200
And since mortgages
took decades to repay...
505
00:28:02,201 --> 00:28:04,201
lenders were carefull.

506
00:28:04,202 --> 00:28:09,202
In a new system lenders sold
the mortgages to investment banks.
507
00:28:09,203 --> 00:28:13,200
The investment banks combined
thousands of mortgages and other loans...
508
00:28:13,201 --> 00:28:17,000
including car loans,
student loans and credit card debt...
509
00:28:17,001 --> 00:28:19,600
to create complex derivatives...
510
00:28:19,601 --> 00:28:24,000
called collateralized debt obligation,
or CDO...
511
00:28:24,001 --> 00:28:29,000
the investment banks
then sold the CDO's to investors.
512
00:28:29,001 --> 00:28:31,000
Now when home owners
paid their mortgages...
513
00:28:31,001 --> 00:28:34,000
the money went to investors
all over the world.
514
00:28:34,001 --> 00:28:39,000
The investment banks paid rating agencies
to evaluate the CDO's...
515
00:28:39,001 --> 00:28:42,000
and many of them were given a AAA rating...
516
00:28:42,001 --> 00:28:45,000
which is highest possible investment rate.
517
00:28:45,001 --> 00:28:48,000
This made CDO's popular
with retirement funds...
518
00:28:48,001 --> 00:28:52,000

which can only purchase

highly rated securities.
519
00:28:52,800 --> 00:28:56,000
This system was a ticking time bomb.
520
00:28:56,001 --> 00:29:00,000
Lenders didn't care anymore
about whether a borrower can repay.
521
00:29:00,001 --> 00:29:01,000
So they started making riskier loans.
522
00:29:01,001 --> 00:29:05,000
The investment banks didn't care either.
523
00:29:05,001 --> 00:29:09,600
The more CDO's they sold
the higher their profits...
524
00:29:09,601 --> 00:29:13,000
and the rating agencies which were paid
by the investment banks...
525
00:29:13,001 --> 00:29:18,001
had no liability if their ratings
of CDO's proved wrong.
526
00:29:18,002 --> 00:29:20,500
You were getting to be on the hook...
527
00:29:20,501 --> 00:29:23,000
and there weren't
regulationly constraints...
528
00:29:23,001 --> 00:29:26,000
so there were a green light
to just pump out more and more loans.
529
00:29:26,001 --> 00:29:30,000
Bentween 2000 and 2003...
530
00:29:30,001 --> 00:29:32,300
the number of mortgage loans
made each year...
531
00:29:32,301 --> 00:29:35,000

nearly quadrupled.
532
00:29:35,001 --> 00:29:38,000
Everybody in this
securitization food chain...
533
00:29:38,001 --> 00:29:40,000
from the very beginning
until the end...
534
00:29:40,001 --> 00:29:43,000
didn't care about quality
of the mortgage...
535
00:29:43,001 --> 00:29:45,500
they caring about maximazing
their volume...
536
00:29:45,501 --> 00:29:48,000
and getting a fee out of it.
537
00:29:48,001 --> 00:29:50,500
In the early 2000's
there was a huge increase...
538
00:29:50,501 --> 00:29:54,000
in the riskiest loans called subprime...
539
00:29:54,001 --> 00:29:56,300
but when thousands of subprime loans...
540
00:29:56,301 --> 00:29:59,000
were combined to create CDO's.
541
00:29:59,001 --> 00:30:03,001
Many of them still received AAA ratings
542
00:30:04,000 --> 00:30:09,000
Now it wouldn't have been possible
to create derivative products...
543
00:30:09,001 --> 00:30:12,000
that don't have this risks...
544
00:30:12,001 --> 00:30:14,000
that carry the equivalent of deductibles...

545
00:30:14,001 --> 00:30:17,000
where there are limits on risks...
546
00:30:17,001 --> 00:30:19,000
that can be taken on and so forth...
547
00:30:19,001 --> 00:30:21,001
they didn't do that, did they.
548
00:30:21,002 --> 00:30:24,000
They didn't do that and in retrospect
they should have done.
549
00:30:24,001 --> 00:30:26,900
So these guys knew
they were doing something dangerous?
550
00:30:26,901 --> 00:30:29,000
I think they did.
551
00:30:46,001 --> 00:30:49,000
All incentives
that the financial institutions...
552
00:30:49,001 --> 00:30:51,000
offered to the mortgage brokers...
553
00:30:51,001 --> 00:30:54,300
were based on sawing
the most profitable...
554
00:30:54,301 --> 00:30:57,000
products which were predatory loans.
555
00:30:57,001 --> 00:30:59,000
The bankers makes more money
if they put you on subprime loan.
556
00:30:59,001 --> 00:31:01,000
That's what they gonna put you
557
00:31:07,000 --> 00:31:10,000
Suddenly hundreds of billions
of dollars a year...
558
00:31:10,001 --> 00:31:13,000

were flowing through securitization chain.

559
00:31:13,001 --> 00:31:15,000
Since anyone can get a mortgage...
560
00:31:15,001 --> 00:31:18,500
home purchases
and house's prises skyrocketed.
561
00:31:18,501 --> 00:31:22,400
The result was the biggest
financial bubble in history.
562
00:31:22,401 --> 00:31:26,000
Real estate is real,
they can see their asset...
563
00:31:26,001 --> 00:31:28,901
their can live in their asset,
they can rent out their asset.
564
00:31:29,001 --> 00:31:33,000
You had huge boom in housing
that had no sense at all...
565
00:31:33,001 --> 00:31:39,000
financing appetites
out of financial sector...
566
00:31:39,001 --> 00:31:42,000
droved what everyboby else did.
567
00:31:42,001 --> 00:31:46,000
Last time we had a housing bubble
was in the late 80's.
568
00:31:46,001 --> 00:31:52,000
In that case the increasing
home praises were relatively minor.
569
00:31:52,001 --> 00:31:57,000
That housing bubble led
to relatively severe recession.
570
00:31:57,001 --> 00:32:04,000
From 1996 until 2006 real home praises
effectively doubled.

571
00:32:09,000 --> 00:32:10,500
At 500 dollar a ticket...
572
00:32:10,501 --> 00:32:12,000
they come to hear how to buy...
573
00:32:12,001 --> 00:32:16,000
their very own piece
of the American dream.
574
00:32:16,001 --> 00:32:21,000
Goldman Sachs, Bear Stearns,
Lehman Brothers, Merrill Lynch...
575
00:32:21,001 --> 00:32:26,000
were all in on this,
the subprime lending alone...
576
00:32:26,001 --> 00:32:29,000
increase from 30 billion a year
in funding...
577
00:32:29,001 --> 00:32:33,500
to over six hundred billion a year
in ten years...
578
00:32:33,501 --> 00:32:35,000
they new what was happening.
579
00:32:35,001 --> 00:32:38,500
Countrywide Financial
the largest subprime lender...
580
00:32:38,501 --> 00:32:43,000
issued 97 billion dollars
worth of loans.
581
00:32:43,001 --> 00:32:47,000
It made over 11 million dollars
in profits as a result.
582
00:32:47,001 --> 00:32:52,000
On Wall Street
annual cash bonuses spiked...
583
00:32:52,001 --> 00:32:56,000
traders and CEO's became enormously

wealthy during the bubble.

584
00:32:56,001 --> 00:33:00,000
Lehman Brothers was the top uderwriter
of subprime lending.
585
00:33:00,001 --> 00:33:07,000
And their CEO Richard Fuld took home
485 million dollars.
586
00:33:07,001 --> 00:33:10,000
On Wall Street this housing
and credit bubble...
587
00:33:10,001 --> 00:33:13,000
was leading to hundreds of billions
of dollars of profits.
588
00:33:13,001 --> 00:33:19,000
By 2006 about 40% of all profits
of S&P 500 firms...
589
00:33:19,001 --> 00:33:21,800
was coming from financial institutions.
590
00:33:21,801 --> 00:33:24,000
It wasn't real profits,
it wasn't real income.
591
00:33:24,001 --> 00:33:26,000
It was just money that was being...
592
00:33:26,001 --> 00:33:29,000
created by the system
and booked as income...
593
00:33:29,001 --> 00:33:33,000
to 3 years down the road
this a default it's all wiped out.
594
00:33:33,001 --> 00:33:37,000
I think it was in fact, in retrospect,
a great big national,
595
00:33:37,001 --> 00:33:40,000
and not just national global ponzi scheme.
596

00:33:40,001 --> 00:33:43,000

Through the home ownership
and equality protection act...
597
00:33:43,001 --> 00:33:46,000
the Federal Reserve Board
had brought authority...
598
00:33:46,001 --> 00:33:49,000
to regulate mortgage industry...
599
00:33:49,001 --> 00:33:52,500
but Federal Chairman Alan Greenspan
refuse to use it.
600
00:33:52,501 --> 00:33:55,500
Alan Greenspan said no that regulation:
"I don't even believe in it".
601
00:33:57,001 --> 00:34:00,000
For 20 years Robert Gnaizda
was the head of Greenlining...
602
00:34:00,001 --> 00:34:03,300
a powerfull consumer advocacy group.
603
00:34:03,301 --> 00:34:06,000
He met with Greenspan on a regular basis.
604
00:34:06,001 --> 00:34:08,500
We gave him an example
of Countrywide...
605
00:34:08,501 --> 00:34:14,000
150 different complex adjustable
rate mortgages.
606
00:34:14,001 --> 00:34:17,000
He said if you'd had a doctorate
in math...
607
00:34:17,001 --> 00:34:19,500
you wouldn't be able
to understand them enough...
608
00:34:19,501 --> 00:34:23,000
to know which was good for you
and which wasn't.

609
00:34:23,001 --> 00:34:26,000
So we thought
he was gonna take action...
610
00:34:26,001 --> 00:34:29,000
but as the conversation continues...
611
00:34:29,001 --> 00:34:31,800
it was clear he was stuck with his ideology.
612
00:34:31,801 --> 00:34:34,300
We met again with Greenspan at '05...
613
00:34:34,301 --> 00:34:39,000
often we met with him twice a year
never less than once a year...
614
00:34:39,001 --> 00:34:41,000
and he wouldn't change his mind.
615
00:34:41,001 --> 00:34:46,000
Alan Greenspan declined
to be interviewed for this film.
616
00:34:46,001 --> 00:34:50,000
In this amazing world
of instant global communications.
617
00:34:50,001 --> 00:34:52,000
The free and efficient movement
of capital...
618
00:34:52,001 --> 00:34:57,000
is helping to create the greatest
prosperity in human history.
619
00:35:02,500 --> 00:35:06,000
146 people were cut
from the enforcement division of SEC...
620
00:35:06,001 --> 00:35:10,000
is that what you also testified to.
621
00:35:10,001 --> 00:35:15,000
Yeah, I think there has been a,
a systematic...

622
00:35:15,001 --> 00:35:17,200
gutting, or whatever you want to call it,
623
00:35:17,201 --> 00:35:20,000
of the agency and its capability,
624
00:35:20,001 --> 00:35:22,000
through cutting back of staff.
625
00:35:22,001 --> 00:35:24,500
The SEC office of risk managment...
626
00:35:24,501 --> 00:35:29,000
was reduce to a staff,
did you say, of one?
627
00:35:29,001 --> 00:35:34,500
Yeah, when that gentelman would go home
at night he could turn the lights out.
628
00:35:35,000 --> 00:35:38,000
During the bubble the investment banks
were borrowing heavily...
629
00:35:38,001 --> 00:35:42,000
to buy more loans
and create more CDO's.
630
00:35:42,001 --> 00:35:45,000
The ratio between
borrowed money and...
631
00:35:45,001 --> 00:35:48,000
bank's own money was called leverage.
632
00:35:48,001 --> 00:35:52,000
The more banks borrowed
the higher their leverage.
633
00:35:53,000 --> 00:35:58,000
In 2004 Henry Paulson
the CEO of Goldman Sachs...
634
00:35:58,001 --> 00:36:01,000
helped lobby the
Securities and Exchange Commission...

635
00:36:01,001 --> 00:36:03,000
to relax limits on leverage...
636
00:36:03,001 --> 00:36:07,000
allowing the banks to sharply
increase their borrowing.
637
00:36:07,001 --> 00:36:10,000
The SEC somehow decided to let...
638
00:36:10,001 --> 00:36:13,200
investment banks gamble a lot more.
639
00:36:13,201 --> 00:36:17,000
That was nuts I don't know why they did that
but they did that.
640
00:36:23,001 --> 00:36:26,200
We've said these are the big guys
and clearly that's true.
641
00:36:26,201 --> 00:36:33,000
But that means if anything goes wrong,
it's going to be an awfully big mess.
642
00:36:33,001 --> 00:36:35,800
At this levels
you're obviously dealing with...
643
00:36:35,801 --> 00:36:39,301
the most highly sofisticated
financial institutions.
644
00:36:39,401 --> 00:36:43,300
These are the firms that do most of the
derivative activity in the United States.
645
00:36:43,301 --> 00:36:46,300
We talked to some of them
as to what their comfort level was.
646
00:36:46,301 --> 00:36:51,900
The firms actually thought
that the number was appropriate.
647
00:36:51,901 --> 00:36:54,300

Do the commissioners vote to adopt

the rule amendments and new rules...
648
00:36:54,301 --> 00:36:57,001
as recommended by the staff?
649
00:36:57,501 --> 00:37:01,101
We do indeed. Unanimous.
And we are adjourned.
650
00:37:04,500 --> 00:37:08,000
The degree of leverage
in financial systemas...
651
00:37:08,001 --> 00:37:10,300
became absolutely frightening...
652
00:37:10,301 --> 00:37:15,000
investment banks leveraging
up to the level 33 to 1...
653
00:37:15,301 --> 00:37:19,500
which means that tiny 3% decrease
in a value of asset base...
654
00:37:19,501 --> 00:37:22,000
would leave them insolvent.
655
00:37:24,000 --> 00:37:27,000
There was another ticking time bomb
in the financial system.
656
00:37:27,001 --> 00:37:31,000
AIG, the worlds largest insurence company...
657
00:37:31,001 --> 00:37:36,000
was selling huge quantities of derivatives
called credit default swaps.
658
00:37:37,000 --> 00:37:39,400
For investers who owned CDO's...
659
00:37:39,401 --> 00:37:42,901
credit default swaps
worked like an insurance policy.
660
00:37:43,501 --> 00:37:48,800

An investor who purchase credit

default swap paid AIG a guatrerly premium.
661
00:37:48,801 --> 00:37:56,000
If CDO went bad, AIG promised
to pay to investor for their losses.
662
00:37:56,001 --> 00:38:02,000
But unlike regularly insurance speculators
could also buy credit default swaps from AIG
663
00:38:02,001 --> 00:38:06,000
in order to bet against CDO's
they didn't own.
664
00:38:06,001 --> 00:38:09,700
In insurence you could only insure
something you own.
665
00:38:09,701 --> 00:38:12,500
Let's say you and I own property
and I own a house...
666
00:38:12,501 --> 00:38:15,000
I can only insure that house once...
667
00:38:15,001 --> 00:38:21,000
the derivatives universe essentially enables
anybody to actually insure that house.
668
00:38:21,001 --> 00:38:25,000
So you could insure that somebody else could
do that so 50 people could insure my house.
669
00:38:25,001 --> 00:38:29,000
So what happens is
if my house burns down...
670
00:38:29,001 --> 00:38:32,000
the number of losses in the system
becomes proportionally large.
671
00:38:32,001 --> 00:38:35,600
Since credit default swaps
were unregulated...
672
00:38:35,601 --> 00:38:40,000
AIG didn't have put aside any money

to cover potential losses.

673
00:38:40,001 --> 00:38:44,500
Instead AIG paid its employees
huge cash bonuses...
674
00:38:44,501 --> 00:38:47,000
as soon as contract was signed...
675
00:38:47,001 --> 00:38:52,500
but if a CDO's later went bad
AIG would be on the hook.
676
00:38:52,501 --> 00:38:57,500
People were essentially been rewarded
for taking massive risks. In good times...
677
00:38:57,501 --> 00:39:02,000
they generate short-term revenues
and profits and therefore bonuses...
678
00:39:02,001 --> 00:39:05,500
but that's gonna lead to the firm
to be bankrupt over time...
679
00:39:05,501 --> 00:39:09,000
that's totally distorted system
of compensation.
680
00:39:09,001 --> 00:39:12,500
AIG Financial Products division
in Lonodon...
681
00:39:12,501 --> 00:39:17,000
issued 500 billion dollars worth of
credit default swaps during the bubble.
682
00:39:17,001 --> 00:39:23,000
Many of them for CDO's backed
by subprime mortgages.
683
00:39:23,001 --> 00:39:29,000
The AIG FP made 3.5 billion dollars
between 2000 and 2007.
684
00:39:29,001 --> 00:39:35,500
Joseph Cassano, the head of AIG FP,
personally made 315 million dollars.

685
00:39:35,501 --> 00:39:39,900
It's hard for us,
without being flippant, to even...
686
00:39:39,901 --> 00:39:45,000
to even see a scenario
within any kind of realm of reason...
687
00:39:45,001 --> 00:39:49,401
that would see us losing 1 dollar
in any of those transactions.
688
00:39:49,501 --> 00:39:54,000
In 2007 AIG auditors
raised warnings.
689
00:39:54,001 --> 00:39:58,200
One of them Joseph St. Denis
resigned in protest.
690
00:39:58,201 --> 00:40:03,000
After Cassano repeatedly blocked him
from investigating AIG FP's accounting.
691
00:40:03,001 --> 00:40:04,200
Let me tell you one person...
692
00:40:04,201 --> 00:40:07,300
who didn't get a bonus when everybody else
was getting bonuses.
693
00:40:07,301 --> 00:40:08,700
That was Sant Denis.
694
00:40:08,701 --> 00:40:11,500
Mr. St. Denis who tried to alert
the two of you...
695
00:40:11,501 --> 00:40:14,500
to the fact that you are running
into big problems...
696
00:40:14,501 --> 00:40:17,900
he quit in frustration
and he didn't get a bonus.
697

00:40:18,301 --> 00:40:21,000

In 2005, Raghuram Rajan...
698
00:40:21,001 --> 00:40:24,101
then the Chief economist of the
International Monetary Fund...
699
00:40:24,501 --> 00:40:27,500
delivered a paper at the
Annual Jackson Hole symposium...
700
00:40:27,501 --> 00:40:30,500
the most elite banking conference
in the world.
701
00:40:30,501 --> 00:40:31,700
Who was in the audience?
702
00:40:31,901 --> 00:40:35,601
It was, uh... I guess
the central bankers of the world...
703
00:40:36,001 --> 00:40:40,000
uh... ranging
from Mr. Greenspan himself,
704
00:40:40,001 --> 00:40:42,000
Ben Bernanke,
705
00:40:42,001 --> 00:40:43,500
Larry Summers was there,
706
00:40:43,501 --> 00:40:45,500
Tim Geithner was there.
707
00:40:45,501 --> 00:40:48,000
The title of the paper was essentially:
708
00:40:48,001 --> 00:40:51,800
Is Financial Development
Making the World Riskier?
709
00:40:51,801 --> 00:40:56,600
And the conclusion was,
uh... it is.
710
00:40:56,601 --> 00:40:59,800

Rajan's paper
focused on incentives structures...
711
00:40:59,801 --> 00:41:01,901
that generated huge cash bonuses...
712
00:41:02,001 --> 00:41:04,000
based on short-term profits...
713
00:41:04,001 --> 00:41:07,500
but which imposed no penalties
for later losses.
714
00:41:07,501 --> 00:41:11,700
Rajan argued that these incentives
encouraged bankers to take risks...
715
00:41:11,701 --> 00:41:14,500
that might eventually destroy
their own firms...
716
00:41:14,501 --> 00:41:18,500
or even the entire financial system.
717
00:41:20,000 --> 00:41:25,000
It's very easy to generate
perfomance by taking on more risk.
718
00:41:25,001 --> 00:41:29,000
And so what you need to do is compensate
for risk-adjusted performance...
719
00:41:29,001 --> 00:41:32,000
and that's where all the bodies
are buried.
720
00:41:32,001 --> 00:41:35,400
Rajan hit the nail on the head.
721
00:41:35,401 --> 00:41:37,400
What he particularly said was:
722
00:41:37,401 --> 00:41:43,000
"You guys have claimed you found a way
to make more profit with less risk,
723
00:41:43,001 --> 00:41:46,000

I say you found a way

to make more profit with more risk"...
724
00:41:46,001 --> 00:41:48,000
and that's a big difference.
725
00:41:48,001 --> 00:41:50,200
Summers was vocal
726
00:41:50,201 --> 00:41:58,000
He basically thought that I was criticizing
the change in the financial world.
727
00:41:58,001 --> 00:42:04,000
And was worried about regulation
which reverse this whole change.
728
00:42:04,001 --> 00:42:08,000
So essentially he accused me
of being a Luddite.
729
00:42:08,001 --> 00:42:13,000
He wanted to make sure that we didn't
bring a whole new set of regulations...
730
00:42:13,001 --> 00:42:15,800
to constrain the financial sector
at that point.
731
00:42:15,801 --> 00:42:20,000
Larry Summers declined
to be interviewed for this film.
732
00:42:20,001 --> 00:42:24,000
You gonna make an extra 2 million dollars
a year or 10 million dollars a year.
733
00:42:24,001 --> 00:42:26,600
For putting your financial institution
at risk.
734
00:42:26,601 --> 00:42:29,000
Someone else pays the bill,
you don't pay the bill.
735
00:42:29,001 --> 00:42:31,000
Would you make that bet?

736
00:42:31,001 --> 00:42:34,000
Most people who worked on Wall Street
said: "Sure, I make that bet".
737
00:43:00,000 --> 00:43:04,000
The Hamptons
2 hours from New York City...
738
00:43:17,000 --> 00:43:19,000
That's never was enough.
739
00:43:19,001 --> 00:43:21,000
They don't wanna own one home.
740
00:43:21,001 --> 00:43:28,000
They wanna own 5 homes and they wanna have
an expensive Penthouse on Park Avenue.
741
00:43:28,001 --> 00:43:31,000
And they wanna have
their own private jet.
742
00:43:31,001 --> 00:43:36,500
You think this is an industry were high,
very high compensation levels is just fine?
743
00:43:36,501 --> 00:43:41,300
I think I would take caution, take heed,
or take exception at your word very high,
744
00:43:41,301 --> 00:43:42,500
I mean it's all relative.
745
00:43:42,501 --> 00:43:45,500
You have a 14 million dollar
oceanfront home in Florida,
746
00:43:45,501 --> 00:43:48,201
you have a summer vacation home
in Sun Valley, Idaho...
747
00:43:48,301 --> 00:43:49,301
you and your wife have art collection
filled with million dollar paintings.
748
00:43:52,401 --> 00:43:55,000
Richard Fuld never appeared

on the trading floor.

749
00:43:55,001 --> 00:43:57,000
There was art advisors up there
all the time.
750
00:43:57,001 --> 00:44:01,500
You know, he had his own private elevator,
he were out of his way to be disconnected
751
00:44:01,501 --> 00:44:05,000
I mean, his elevator, the hire technicians
to program it, you know,
752
00:44:05,001 --> 00:44:07,500
so that his driver would call in
in the morning, and...
753
00:44:07,501 --> 00:44:09,600
a security guard would hold it.
754
00:44:09,601 --> 00:44:15,000
and there'a only like 2 or 3 seconds window
when he actually he has to see people...
755
00:44:15,001 --> 00:44:18,500
and he hops in the elevator
and he goes straight to 31.
756
00:44:18,501 --> 00:44:21,200
Lehman owned a bunch of corporate jets,
do you know about this?
757
00:44:21,201 --> 00:44:22,201
Yes.
758
00:44:22,701 --> 00:44:24,000
How many were there?
759
00:44:24,001 --> 00:44:26,800
Well, there were 6, including 767's.
760
00:44:26,801 --> 00:44:29,200
- They also had a helicopter.
- I see.
761
00:44:29,201 --> 00:44:32,200

Isn't that kind a lot of planes to have?

762
00:44:34,000 --> 00:44:36,100
We deal with type A personalities
and, uh...
763
00:44:36,101 --> 00:44:38,401
type A personalities
know everything in the world.
764
00:44:38,501 --> 00:44:41,000
Banking became a pissing contest, you know
765
00:44:41,001 --> 00:44:43,500
mine is bigger than yours,
that's kind of stuff.
766
00:44:43,501 --> 00:44:45,500
It was all men that ran it, incidentally.
767
00:44:45,501 --> 00:44:50,000
15 billion dollar deals weren't large enough
so we do 100 billion dollar deals.
768
00:44:50,001 --> 00:44:53,500
These people are risk-takers,
they're impulsive.
769
00:44:53,501 --> 00:44:58,000
Jonathan Alpert is a therapist whose clients
include high-level Wall Street executive...
770
00:44:58,001 --> 00:45:01,500
That's part of their behavior
it's part of their personality...
771
00:45:01,501 --> 00:45:05,000
and that manifests
outside of work as well.
772
00:45:05,001 --> 00:45:09,000
It's quite typical for the guys
to go out, to go strip bars,
773
00:45:09,001 --> 00:45:13,500
to use drugs. I see a lot of cocain use,
a lot of use of prostitution.

774
00:45:19,501 --> 00:45:21,800
Recently neuroscientists
have done experiments...
775
00:45:21,801 --> 00:45:24,601
where, uh...
they've taken individuals,
776
00:45:25,001 --> 00:45:27,000
put them into MRI machine...
777
00:45:27,001 --> 00:45:32,000
and they have them play a game
where the prize is money.
778
00:45:32,001 --> 00:45:35,500
And they notice that
when the subjects earn money...
779
00:45:35,501 --> 00:45:40,500
the part of the brain that get stimulated
is the same part that cocain stimulates.
780
00:45:40,501 --> 00:45:44,000
A lot of people feel they need to really
participate in that behavior...
781
00:45:44,001 --> 00:45:46,900
to make it to get promoted,
to get recognized.
782
00:45:46,901 --> 00:45:48,800
According to a Bloomberg article...
783
00:45:48,801 --> 00:45:51,700
business entertainment
represents 5% of revenue...
784
00:45:51,701 --> 00:45:53,550
for New York derivatives brokers...
785
00:45:53,551 --> 00:45:58,000
and often includes strip clubs,
prostitution, and drugs.
786
00:45:58,001 --> 00:46:03,000
A New York broker filed a lawsuit

in 2007 against his firm...

787
00:46:03,001 --> 00:46:07,000
alleging he was required to retain
prostitutes to entertain traders.
788
00:46:07,001 --> 00:46:09,400
There's just a blatant disregard...
789
00:46:09,401 --> 00:46:11,999
for the impact that their actions
might have on,
790
00:46:12,000 --> 00:46:14,100
on society, or on family.
791
00:46:14,201 --> 00:46:19,900
They have no problem using a prostitute,
uh... and going home to their wife.
792
00:46:22,000 --> 00:46:25,000
Kristin Davis ran an elite prostitution ring
from her high-rise apartment.
793
00:46:25,001 --> 00:46:28,000
It was located a few blocks
from the new york stock exchange.
794
00:46:28,001 --> 00:46:30,000
How many customers?
795
00:46:30,001 --> 00:46:34,000
About 10,000 at that point in time.
796
00:46:38,000 --> 00:46:40,000
What fraction were from Wall Street?
797
00:46:40,001 --> 00:46:44,500
Of the higher-end clients, probably
40 to 50 percent.
798
00:46:44,501 --> 00:46:47,700
And were all the major Wall Street firms
represented? Goldman Sachs.
799
00:46:47,902 --> 00:46:51,100
Lehman Brothers,

yeah, they re all in there.

800
00:46:51,101 --> 00:46:54,700
Morgan Stanley
was a little less of that...
801
00:46:54,701 --> 00:46:58,800
uh... I think Goldman was,
was pretty, pretty big with that.
802
00:46:58,801 --> 00:47:01,000
A lot of clients would call me, and say,
can you get me a Lamborghini...
803
00:47:01,001 --> 00:47:03,000
for the night for the girl?
804
00:47:03,001 --> 00:47:05,500
These guys were spending
corporate money.
805
00:47:05,501 --> 00:47:10,500
I had many black cards from, you know,
the various financial firms.
806
00:47:10,501 --> 00:47:16,000
What's happening is services
are being charged to computer repair.
807
00:47:16,001 --> 00:47:20,500
Trading research, you know,
consulting for market compliance.
808
00:47:20,501 --> 00:47:22,200
I just usually gave them
a piece of letterhead,
809
00:47:22,201 --> 00:47:23,701
and said, make your own invoice.
810
00:47:23,801 --> 00:47:26,000
So this pattern of behavior,
you think, extends...
811
00:47:26,001 --> 00:47:27,001
to the senior management
of the firm.

812
00:47:27,101 --> 00:47:31,000
Absolutely does, yeah.
I know for a fact that it does.
813
00:47:31,001 --> 00:47:34,000
It extends to the very top.
814
00:47:38,000 --> 00:47:41,500
A friend of mine, who, who's involved in a
company that has a big financial presence,
815
00:47:41,501 --> 00:47:46,000
said: Well, it's about time you learned
about subprime mortgages.
816
00:47:46,001 --> 00:47:50,000
So he set up a session
with his trading desk and me...
817
00:47:50,001 --> 00:47:54,000
and, and a techie, who,
who did all this... gets very excited...
818
00:47:54,001 --> 00:47:57,700
runs to his computer, pulls up,
in about three seconds,
819
00:47:57,701 --> 00:48:00,600
this Goldman Sachs issue of securities.
820
00:48:00,601 --> 00:48:02,800
It was a complete disaster.
821
00:48:02,801 --> 00:48:08,000
Borrowers had borrowed, on average,
99.3 percent of the price of the house.
822
00:48:08,001 --> 00:48:11,000
Which means they have no money
in the house.
823
00:48:11,001 --> 00:48:13,600
If anything goes wrong, they're gonna
walk away from the mortgage.
824
00:48:13,601 --> 00:48:16,300
This is not a loan you'd really make, right?

825
00:48:16,301 --> 00:48:18,200
You've gotta be crazy.
826
00:48:18,201 --> 00:48:21,500
But somehow,
you took 8,000 of these loans...
827
00:48:21,501 --> 00:48:26,500
and by the time the guys were done at
Goldman Sachs and the rating agencies,
828
00:48:26,501 --> 00:48:29,000
two-thirds of the loans were rated AAA,
829
00:48:29,001 --> 00:48:32,200
which meant they were rated as safe
as government securities.
830
00:48:32,201 --> 00:48:34,000
It's, it's utterly mad.
831
00:48:35,000 --> 00:48:38,500
Goldman Sachs sold at least
3.1 billion dollars worth...
832
00:48:38,501 --> 00:48:42,500
of these toxic CDO's
in the first half of 2006.
833
00:48:42,801 --> 00:48:47,000
The CEO of Goldman Sachs at this time
was Henry Paulson,
834
00:48:47,001 --> 00:48:49,500
the highest-paid CEO on Wall Street.
835
00:48:49,501 --> 00:48:53,500
Good morning, welcome to the White House.
836
00:48:53,501 --> 00:48:56,000
I am pleased to announce
that I will nominate Henry Paulson...
837
00:48:56,001 --> 00:48:58,000
to be the secretary of the Treasury.

838
00:48:58,001 --> 00:49:00,000
He has a lifetime of business experience,
839
00:49:00,001 --> 00:49:03,000
he has an intimate knowledge
of financial markets...
840
00:49:03,001 --> 00:49:06,000
he has earned a reputation
for candor and integrity.
841
00:49:06,001 --> 00:49:08,200
You might think
it would be hard for Paulson...
842
00:49:08,201 --> 00:49:11,000
to adjust to a meager government salary.
843
00:49:11,001 --> 00:49:17,000
But taking the job as Treasury secretary
was the best financial decision of his life.
844
00:49:17,001 --> 00:49:21,000
Paulson had to sell his
485 million dollars of Goldman stock...
845
00:49:21,001 --> 00:49:23,000
when he went to work for the government.
846
00:49:23,001 --> 00:49:26,200
But because of a law passed
by the first President Bush,
847
00:49:26,201 --> 00:49:29,000
he didn't have to pay any taxes on it.
848
00:49:29,001 --> 00:49:32,000
It saved him 50 million dollars.
849
00:49:39,001 --> 00:49:42,000
The article came out in October of 2007.
850
00:49:42,001 --> 00:49:46,000
Already, a third of the mortgages defaulted.
851
00:49:46,001 --> 00:49:50,000

Now, uh, most of them are goin'.

852
00:49:51,500 --> 00:49:54,000
One group that had purchased
these now-worthless securities...
853
00:49:54,001 --> 00:49:58,200
was the Public Employees
Retirement System of Mississippi,
854
00:49:58,201 --> 00:50:02,800
which provides monthly benefits
to over 80,000 retirees.
855
00:50:02,801 --> 00:50:08,000
They lost millions of dollars,
and are now suing Goldman Sachs.
856
00:50:21,001 --> 00:50:26,000
By late 2006, Goldman had taken
things a step further.
857
00:50:26,001 --> 00:50:28,600
It didn't just sell toxic CDO's...
858
00:50:28,601 --> 00:50:31,000
it started actively betting against them
859
00:50:31,001 --> 00:50:32,600
at the same time
it was telling customers...
860
00:50:32,601 --> 00:50:35,500
that they were high-quality investments.
861
00:50:36,500 --> 00:50:40,000
By purchasing credit default swaps from AIG,
862
00:50:40,001 --> 00:50:43,000
Goldman could bet against CDO's
it didn't own,
863
00:50:43,001 --> 00:50:46,000
and get paid when the CDOs failed.
864
00:50:47,000 --> 00:50:51,000
I asked them if anybody

called the customers,

865
00:50:51,001 --> 00:50:54,300
and said, you know, we don't really like
this kind of mortgage anymore,
866
00:50:54,301 --> 00:50:57,000
and we thought you ought to know, you know.
867
00:50:57,001 --> 00:50:59,000
They, they didn't really say anything...
868
00:50:59,001 --> 00:51:02,500
but, you know, you could just feel
the laughter coming over the phone.
869
00:51:03,000 --> 00:51:08,500
Goldman Sachs bought at least 22 billion
dollars of credit default swaps from AIG.
870
00:51:08,501 --> 00:51:13,500
It was so much that Goldman realized
that AIG itself might go bankrupt...
871
00:51:13,501 --> 00:51:15,500
so they spent 150 million dollars...
872
00:51:15,501 --> 00:51:20,000
insuring themselves against
AIG's potential collapse.
873
00:51:20,001 --> 00:51:23,500
Then, in 2007, Goldman went even further.
874
00:51:23,501 --> 00:51:26,000
They started selling CDO's
specifically designed...
875
00:51:26,001 --> 00:51:28,600
so that the more money their customers lost,
876
00:51:28,601 --> 00:51:31,500
the more money Goldman Sachs made.
877
00:51:38,001 --> 00:51:43,000
Six hundred million dollars,
Timberwolf Securities is what you sold.

878
00:51:43,001 --> 00:51:46,000
Before you sold them,
879
00:51:46,001 --> 00:51:50,100
this is what your sales team
were tellin' to each other.
880
00:51:50,101 --> 00:51:54,000
Boy, that Timberwolf was one shitty deal.
881
00:51:54,001 --> 00:51:57,000
This was an e-mail to me in late June.
882
00:51:57,001 --> 00:51:59,300
- Right. And you're callin' Timberwol
- After the transaction.
883
00:51:59,301 --> 00:52:02,800
No, no,
you sold Timberwolf after as well.
884
00:52:02,801 --> 00:52:04,200
W... we did trades after that.
885
00:52:04,201 --> 00:52:05,300
Yeah, okay.
886
00:52:05,301 --> 00:52:08,700
The next e-mail, take a look,
July 1, '07...
887
00:52:08,801 --> 00:52:12,000
tells the sales force,
"the top priority is Timberwolf".
888
00:52:12,001 --> 00:52:15,400
Your top priority to sell is
that shitty deal.
889
00:52:15,401 --> 00:52:17,500
if you have an adverse interest
to your client,
890
00:52:17,501 --> 00:52:20,000
do you have the duty
to disclose that to your client...

891
00:52:20,001 --> 00:52:23,000
to tell that client of your adverse
interest? That's my question.
892
00:52:23,001 --> 00:52:25,500
Mr. Chairman,
just tryin' to understand...
893
00:52:25,501 --> 00:52:28,000
No, I think you understand it
I don't think you want to answer it.
894
00:52:28,001 --> 00:52:31,000
Do you believe
that you have a duty to act...
895
00:52:31,001 --> 00:52:34,550
in the best interests of your clients?
896
00:52:35,500 --> 00:52:37,000
Again, uh...
uh... Senator, I,
897
00:52:37,001 --> 00:52:40,400
I will repeat, you know, we have a,
a duty to, to serve our clients...
898
00:52:40,401 --> 00:52:45,000
by showing prices on transaction
where they ask us to show prices for.
899
00:52:45,001 --> 00:52:47,000
What do you think about...
900
00:52:47,401 --> 00:52:51,800
selling securities which your own people
think are... crap?
901
00:52:51,801 --> 00:52:53,500
Does that bother you?
902
00:52:53,501 --> 00:52:57,500
I think they would,
again, as a hypothetical?
903
00:52:57,501 --> 00:52:58,500

No. This is real

904
00:52:58,501 --> 00:53:00,400
- Well then I don't...
- We heard it today.
905
00:53:00,401 --> 00:53:02,200
- Well...
- We heard it today:
906
00:53:02,201 --> 00:53:03,901
this is a shitty deal, this is crap.
907
00:53:04,001 --> 00:53:09,000
I... I... I heard nothing today
that makes me think anything, um...
908
00:53:09,001 --> 00:53:10,500
went wrong
909
00:53:10,501 --> 00:53:14,700
Is there not a conflict
when you sell something to somebody,
910
00:53:14,701 --> 00:53:20,500
and then are determined to bet
against that same security...
911
00:53:20,501 --> 00:53:24,000
and you don't disclose that
to the person you're selling it.
912
00:53:24,001 --> 00:53:25,200
- In the...
- Do you see a problem?
913
00:53:25,201 --> 00:53:28,700
In the context of market-making,
that is not a conflict.
914
00:53:28,701 --> 00:53:32,000
When you heard that your employees,
in these e-mails, said,
915
00:53:32,001 --> 00:53:35,200
"god, what a shitty deal,
god, what a piece of crap"...

916
00:53:35,201 --> 00:53:36,500
do you feel anything?
917
00:53:36,501 --> 00:53:39,600
If... I think that's very unfortunate
to have on e-mail.
918
00:53:39,601 --> 00:53:41,200
Are you b...
919
00:53:41,201 --> 00:53:44,300
And, and, and very unfortunate...
I don't, I don't...
920
00:53:44,301 --> 00:53:47,500
On e-mail?
How about feeling that way?
921
00:53:47,501 --> 00:53:50,500
I think it's very unfortunate for anyone
to have said that, in any form.
922
00:53:50,501 --> 00:53:51,600
Is it your understanding...
923
00:53:51,601 --> 00:53:54,801
that your competitors
were engaged in similar activities?
924
00:53:55,101 --> 00:53:59,700
Uh... yes. And, and to a greater extent
than us, in most cases.
925
00:54:00,001 --> 00:54:02,000
Hedge fund manager John Paulson...
926
00:54:02,001 --> 00:54:06,000
made 12 billion dollars betting against
the mortgage market.
927
00:54:06,001 --> 00:54:09,100
When John Paulson ran out of
mortgage securities to bet against,
928
00:54:09,101 --> 00:54:14,000
he worked with Goldman Sachs and
Deutsche Bank to create more of them.

929
00:54:14,001 --> 00:54:18,700
Morgan Stanley was also selling mortgage
securities that it was betting against,
930
00:54:18,701 --> 00:54:21,800
and it's now being sued by the
government employees retirement fund,
931
00:54:21,801 --> 00:54:25,000
of the Virgin Islands for fraud.
932
00:54:25,001 --> 00:54:29,300
The lawsuit alleges that Morgan Stanley
knew that the CDO's were junk.
933
00:54:29,301 --> 00:54:32,000
Although they were rated AAA,
934
00:54:32,001 --> 00:54:34,100
Morgan Stanley was betting they would fail.
935
00:54:34,101 --> 00:54:38,600
A year later, Morgan Stanley had made
hundreds of millions of dollars,
936
00:54:38,601 --> 00:54:42,900
while the investors had lost
almost all of their money.
937
00:54:58,001 --> 00:55:03,000
You would have thought that pension funds
would have said, "those are subprime...
938
00:55:03,001 --> 00:55:05,500
why am I buying them?"
939
00:55:05,501 --> 00:55:10,700
And they had these guys at Moody's and
Standard and Poor's who said, that's a AAA.
940
00:55:10,701 --> 00:55:14,500
None of these securities got issued
without the imprimatur, you know,
941
00:55:14,501 --> 00:55:17,100
the Good Housekeeping Seal of Approval,

of the rating agencies.

942
00:55:17,101 --> 00:55:22,000
The three rating agencies...
Moody's, S&P, and Fitch...
943
00:55:22,001 --> 00:55:26,500
made billions of dollars giving high ratings
to risky securities.
944
00:55:26,501 --> 00:55:28,500
Moody's, the largest rating agency,
945
00:55:28,501 --> 00:55:32,701
quadrupled its profits
between 2000 and 2007.
946
00:55:34,001 --> 00:55:37,500
Moody's and S&P get compensated
based on putting out ratings reports.
947
00:55:37,501 --> 00:55:41,500
And the more structured securities
they gave a AAA rating to,
948
00:55:41,501 --> 00:55:43,500
the higher their earnings
were gonna be for the quarter.
949
00:55:43,501 --> 00:55:44,500
Imagine if you went to the New York Times,
950
00:55:44,501 --> 00:55:47,500
and you said, look, if you write a positive
story, I'll pay you 500,000 dollars.
951
00:55:47,501 --> 00:55:50,500
But if you don't, I'll give you nothing.
952
00:55:50,501 --> 00:55:52,000
The rating agencies could have
stopped the party, and said:
953
00:55:52,001 --> 00:55:55,000
We're sorry, you know...
we're gonna tighten our standards.
954

00:55:55,001 --> 00:55:57,700

This is, and... and...
and immediately cut off...
955
00:55:57,701 --> 00:56:00,901
a lot of the flow of funding
to risky borrowers.
956
00:56:01,001 --> 00:56:11,000
AAA-rated instruments mushroomed from
just a handful to thousands and thousands.
957
00:56:11,001 --> 00:56:16,000
Hundreds of billions of dollars, uh...
were being rated. You know, and...
958
00:56:16,001 --> 00:56:18,000
- Per year.
- Per year; oh, yeah.
959
00:56:18,001 --> 00:56:20,900
I ve now testified
before both houses of Congress...
960
00:56:20,901 --> 00:56:23,401
on the credit rating agency issue.
961
00:56:23,701 --> 00:56:29,300
And both times, they trot out very
prominent First Amendment lawyers,
962
00:56:29,301 --> 00:56:33,600
and argue that when we
say something is rated AAA,
963
00:56:33,601 --> 00:56:37,000
that is merely our opinion
you shouldn't rely on it.
964
00:56:37,001 --> 00:56:39,400
S&P's ratings express our opinion.
965
00:56:39,401 --> 00:56:42,901
Our ratings are, uh... are our opinions.
But they're opinions.
966
00:56:42,902 --> 00:56:45,700
Opinions, and those are,

they are just opinions.

967
00:56:45,701 --> 00:56:49,500
I think we are emphasizing the fact
that our ratings are, uh... uh...
968
00:56:49,501 --> 00:56:51,000
are opinions.
969
00:56:56,001 --> 00:56:59,300
They do not speak to the market value
of a security,
970
00:56:59,301 --> 00:57:04,000
the volatility of its price,
or its suitability as an investment.
971
00:57:22,000 --> 00:57:25,000
We have so many economists
coming on our air, and saying,
972
00:57:25,001 --> 00:57:27,000
oh, this is a bubble,
and it's going to burst,
973
00:57:27,001 --> 00:57:30,000
and this is going to be a real issue
for the economy.
974
00:57:30,001 --> 00:57:33,300
Some say it could even cause
a recession at some point.
975
00:57:33,301 --> 00:57:36,600
What is the worst-case scenario,
if in fact we were to see...
976
00:57:36,601 --> 00:57:40,000
prices come down substantially
across the country?
977
00:57:40,001 --> 00:57:43,300
Well, I, I guess I don't buy your premise.
It's a pretty unlikely possibility.
978
00:57:43,301 --> 00:57:47,600
We've never had a decline in house prices
on a nationwide ba... a nationwide basis.

979
00:57:47,601 --> 00:57:52,700
Ben Bernanke became chairman of the
Federal Reserve Board in February 2006,
980
00:57:52,701 --> 00:57:56,300
the top year for subprime lending.
981
00:57:56,301 --> 00:58:01,700
But despite numerous warnings, Bernanke
and the Federal Reserve Board did nothing.
982
00:58:06,001 --> 00:58:09,800
Robert Gnaizda met with Ben Bernanke
and the Federal Reserve Board
983
00:58:09,801 --> 00:58:12,500
three times after Bernanke became chairman.
984
00:58:12,501 --> 00:58:15,100
Only at the last meeting...
985
00:58:15,101 --> 00:58:18,000
did he suggest that there was a problem,
986
00:58:18,001 --> 00:58:20,700
and that the government
ought to look into it.
987
00:58:20,701 --> 00:58:22,400
When? When was that? What year?
988
00:58:22,501 --> 00:58:25,600
In 2009, March 11th,
in D.C.
989
00:58:25,601 --> 00:58:27,400
- This year.
- This year we met, yes.
990
00:58:27,401 --> 00:58:30,200
And so for the two previous years
you met him,
991
00:58:30,201 --> 00:58:33,301
- even in 2008?
- Yes.

992
00:58:33,401 --> 00:58:37,300
One of the six Federal Reserve Board
governors serving under Bernanke...
993
00:58:37,301 --> 00:58:42,000
was Frederic Mishkin, who was appointed
by President Bush in 2006.
994
00:58:42,001 --> 00:58:45,500
Did you participate in the
semiannual meetings that, uh...
995
00:58:45,501 --> 00:58:48,000
Robert Gnaizda and, and, uh...
Greenlining...
996
00:58:48,001 --> 00:58:49,500
had with the Federal Reserve Board?
997
00:58:49,501 --> 00:58:52,000
Yes I did. I was actually
on the committee that, uh...
998
00:58:52,001 --> 00:58:55,700
that was involved, involved with that
the Consumer Community Affairs Committee.
999
00:58:55,701 --> 00:58:59,700
He warned, in an extremely explicit manner,
about what was going on...
1000
00:58:59,701 --> 00:59:01,500
and he came to the
Federal Reserve Board...
1001
00:59:01,501 --> 00:59:04,000
with loan documentation
of the kind of loans that were...
1002
00:59:04,001 --> 00:59:05,001
frequently being made.
1003
00:59:05,101 --> 00:59:08,600
And he was listened to politely,
and nothing was done.
1004

00:59:08,601 --> 00:59:11,400

Yeah. So, uh... again,
I... I don't know the details,
1005
00:59:11,401 --> 00:59:14,301
in terms of, of, uh...
of, uh... um...
1006
00:59:15,001 --> 00:59:18,000
in fact, I... I just don't...
I... I really don't,
1007
00:59:18,001 --> 00:59:22,000
whatever information he provide,
I'm not sure exactly, that, uh...
1008
00:59:22,201 --> 00:59:25,500
it's, it's actually, to be honest, I can't
remember this, this kind of discussion,
1009
00:59:25,502 --> 00:59:30,600
but certainly, uh, there, there were issues
that were, uh... uh... coming up.
1010
00:59:30,601 --> 00:59:33,000
But then the question is,
how pervasive are they?
1011
00:59:33,001 --> 00:59:34,601
Why didn't you try looking?
1012
00:59:34,602 --> 00:59:35,600
I think that people did.
1013
00:59:35,601 --> 00:59:38,000
We had people looking at,
a whole group of people looking at this,
1014
00:59:38,001 --> 00:59:39,500
- for whatever reason...
- Excuse me, you can't be serious.
1015
00:59:39,501 --> 00:59:41,200
If you would've looked,
you would have found things.
1016
00:59:41,201 --> 00:59:45,700
Uh... you know, that's very, very easy

to always say that you can always find it.

1017
00:59:45,701 --> 00:59:48,000
As early as 2004,
1018
00:59:48,001 --> 00:59:52,500
the FBI was already warning about
an epidemic of mortgage fraud.
1019
00:59:52,501 --> 00:59:55,000
They reported inflated appraisals,
1020
00:59:55,001 --> 00:59:57,000
doctored loan documentation,
1021
00:59:57,001 --> 00:59:59,300
and other fraudulent activity.
1022
00:59:59,301 --> 01:00:04,000
In 2005, the IMF's chief economist,
Raghuram Rajan,
1023
01:00:04,001 --> 01:00:08,000
warned that dangerous incentives
could lead to a crisis.
1024
01:00:08,001 --> 01:00:12,000
Then came Nouriel Roubini's warnings
in 2006.
1025
01:00:12,001 --> 01:00:17,300
Allan Sloan's articles in Fortune magazine
and the Washington Post in 2007...
1026
01:00:17,301 --> 01:00:19,200
and repeated warnings from the IMF.
1027
01:00:19,201 --> 01:00:22,100
I said it, and on behalf of the institution:
1028
01:00:22,101 --> 01:00:25,500
uh, the crisis which is in front of us
is a huge crisis.
1029
01:00:25,501 --> 01:00:26,500
Who did you talk to?

1030
01:00:26,501 --> 01:00:29,100
The government, Treasury,
so, the Fed, everybody.
1031
01:00:29,101 --> 01:00:33,100
In May of 2007,
hedge fund manager Bill Ackman...
1032
01:00:33,101 --> 01:00:36,800
circulated a presentation called
"Who's Holding the Bag?",
1033
01:00:36,801 --> 01:00:40,000
which described
how the bubble would unravel.
1034
01:00:40,001 --> 01:00:46,500
And in early 2008, Charles Morris published
his book about the impending crisis.
1035
01:00:46,501 --> 01:00:49,000
Easy Money, High Rollers,
and the Great Credit Crash.
1036
01:00:49,001 --> 01:00:51,000
You're just not sure, what do you do?
1037
01:00:51,001 --> 01:00:54,800
And you might have some suspicions that
underwriting standards are being weakened
1038
01:00:54,801 --> 01:00:58,500
but then the question is,
should you do anything about it?
1039
01:01:00,000 --> 01:01:04,000
By 2008, home foreclosures
were skyrocketing,
1040
01:01:04,001 --> 01:01:07,000
and the securitization food chain imploded.
1041
01:01:07,001 --> 01:01:11,000
Lenders could no longer sell their loans
to the investment banks...
1042
01:01:11,001 --> 01:01:15,000

and as the loans went bad,

dozens of lenders failed
1043
01:01:15,001 --> 01:01:21,500
Chuck Prince, of Citibank,
famously said that, uh, uh...
1044
01:01:21,501 --> 01:01:24,700
we have to dance until the music stops.
1045
01:01:24,701 --> 01:01:28,300
Actually, the music had stopped
already when he said that.
1046
01:01:28,301 --> 01:01:30,800
The market for CDOs collapsed,
1047
01:01:30,801 --> 01:01:34,700
leaving the investment banks holding
hundreds of billions of dollars in loans,
1048
01:01:34,701 --> 01:01:38,500
CDOs, and real estate they couldn't sell.
1049
01:01:38,501 --> 01:01:43,500
When the crisis started
both the Bush administration...
1050
01:01:43,501 --> 01:01:47,000
and the Federal Reserve
were totally behind the curve.
1051
01:01:47,001 --> 01:01:49,600
They did not understand the extent of it.
1052
01:01:49,601 --> 01:01:53,500
At what point do you remember
thinking, for the first time,
1053
01:01:53,501 --> 01:01:56,000
this is dangerous, this is bad?
1054
01:01:56,001 --> 01:01:59,000
I remember very well, uh, one
1055
01:01:59,001 --> 01:02:02,600
I think it was a G7 meeting,

of February 2008.
1056
01:02:02,601 --> 01:02:06,700
And I remember discussing
the issue with, with Hank Paulson.
1057
01:02:06,701 --> 01:02:10,000
And I clearly remember telling Hank:
1058
01:02:10,001 --> 01:02:12,700
we are watching
this tsunami coming...
1059
01:02:12,701 --> 01:02:16,301
and just...
proposing...
1060
01:02:16,401 --> 01:02:20,000
that we ask which swimming costume
we're going to put on.
1061
01:02:20,001 --> 01:02:22,400
What was his response,
what was his feeling?
1062
01:02:22,401 --> 01:02:26,500
Things are pretty much under control.
Yes, we are looking at,
1063
01:02:26,501 --> 01:02:29,400
this situation carefully, and uh...
1064
01:02:29,401 --> 01:02:32,000
yeah, it's under control.
1065
01:02:32,001 --> 01:02:36,000
We're gonna keep growing, okay?
And obviously, I'll say it:
1066
01:02:36,001 --> 01:02:40,000
if you're growing, you're not
in recession, right? I mean,
1067
01:02:40,001 --> 01:02:42,000
we all know that.
1068
01:02:49,000 --> 01:02:54,000

In March of 2008, the investment bank

Bear Stearns ran out of cash,
1069
01:02:54,001 --> 01:02:57,500
and was acquired for two dollars
a share by JP Morgan Chase.
1070
01:02:57,501 --> 01:03:02,000
The deal was backed by 30 billion dollars
in emergency guarantees...
1071
01:03:02,001 --> 01:03:04,300
from the Federal Reserve.
1072
01:03:04,301 --> 01:03:07,700
That was the time when the administration
could have come in,
1073
01:03:07,701 --> 01:03:11,800
and put in place various kinds
of measures...
1074
01:03:11,801 --> 01:03:13,500
that would have reduced system risk.
1075
01:03:13,501 --> 01:03:16,500
The information that I'm receiving
from some entities...
1076
01:03:16,501 --> 01:03:21,000
is the end is not here,
that there are other shoes to fall.
1077
01:03:21,001 --> 01:03:25,700
I've seen those investment banks
working with...
1078
01:03:25,701 --> 01:03:30,600
the Fed and the SEC
to strengthen their liquidity,
1079
01:03:30,601 --> 01:03:33,800
to strengthen their the,
their capital positions.
1080
01:03:33,801 --> 01:03:38,500
I get reports all the time.
Our regulators are, are very vigilant.

1081
01:03:38,501 --> 01:03:40,800
On September 7th, 2008...
1082
01:03:40,801 --> 01:03:42,800
Henry Paulson announced
the federal takeover...
1083
01:03:42,801 --> 01:03:45,000
of Fannie Mae and Freddie Mac,
1084
01:03:45,001 --> 01:03:48,000
two giant mortgage lenders
on the brink of collapse.
1085
01:03:48,001 --> 01:03:50,000
Nothing about our actions today...
1086
01:03:50,001 --> 01:03:52,800
in any way reflects a changed view...
1087
01:03:52,801 --> 01:03:55,000
of the housing correction
or the strength...
1088
01:03:55,001 --> 01:03:57,500
of other U.S. financial institutions.
1089
01:03:57,501 --> 01:04:00,000
Two days later, Lehman Brothers
announced record losses...
1090
01:04:00,001 --> 01:04:04,500
of 3.2 billion dollars,
and its stock collapsed.
1091
01:04:05,501 --> 01:04:08,500
The effects of Lehman
and AIG in September...
1092
01:04:08,501 --> 01:04:10,000
still came as a surprise.
1093
01:04:10,001 --> 01:04:13,800
I mean, this is even after July,
and Fannie and Freddie. So...

1094
01:04:13,801 --> 01:04:20,500
clearly, there was stuff
that as of September... major stuff...
1095
01:04:20,501 --> 01:04:23,000
that nobody knew about.
1096
01:04:23,001 --> 01:04:25,500
I think that's, I think that's fair.
1097
01:04:25,501 --> 01:04:29,600
Bear Stearns was rated AAA, like,
a month before it went bankrupt?
1098
01:04:29,601 --> 01:04:32,000
- Uh... more likely A2.
- A2.
1099
01:04:32,001 --> 01:04:33,001
- Yeah.
- Okay.
1100
01:04:33,002 --> 01:04:36,500
- A2 is still not bankrupt.
- No no no. No.
1101
01:04:36,501 --> 01:04:39,000
That's, that's a high investment grade,
solid investment-grade rating
1102
01:04:39,001 --> 01:04:42,500
Lehman Brothers; A2, within days of failing.
1103
01:04:42,501 --> 01:04:47,500
Um... AIG, AA,
within days of being bailed out.
1104
01:04:47,501 --> 01:04:52,000
Fannie Mae and Freddie Mac
were AAA when they were rescued.
1105
01:04:52,001 --> 01:04:56,000
Um... Citigroup, Merrill, all, all of 'em
had investment-grade ratings.
1106
01:04:56,001 --> 01:04:57,500
How can that be?

1107
01:04:57,501 --> 01:05:02,000
Well, that's a good question.
That's a great question
1108
01:05:02,001 --> 01:05:06,000
At no point did the administration ever go
to all the major institutions, and say,
1109
01:05:06,001 --> 01:05:10,600
you know: this is serious, tell us
what your positions are, you know,
1110
01:05:10,601 --> 01:05:15,000
uh... no bullshit, where are you?
1111
01:05:15,001 --> 01:05:18,500
Well, first, that's what the regulators,
that's their job, right?
1112
01:05:18,501 --> 01:05:21,000
Their job is to understand
the exposure...
1113
01:05:21,001 --> 01:05:25,500
across these different institutions,
and they have a very refined, uh...
1114
01:05:25,501 --> 01:05:28,500
understanding that I think became
more respon, more refined...
1115
01:05:28,501 --> 01:05:30,500
as the crisis, um, proceeded. So...
1116
01:05:30,501 --> 01:05:33,600
Forgive me, but that's clearly not true. I m
1117
01:05:33,601 --> 01:05:35,000
What do you mean, it's not true?
1118
01:05:35,201 --> 01:05:38,800
In August of 2008, were you aware of the,
1119
01:05:38,801 --> 01:05:44,500
the credit ratings held then by
Lehman Brothers, Merrill Lynch, AIG...

1120
01:05:44,501 --> 01:05:46,400
and did you think that they were accurate?
1121
01:05:46,401 --> 01:05:51,000
Well, uh... uh... certainly
by that time, it was clear...
1122
01:05:51,001 --> 01:05:53,000
that that earlier credit ratings
were inaccurate,
1123
01:05:53,001 --> 01:05:55,000
because they had been
downgraded substantially.
1124
01:05:55,001 --> 01:05:56,000
No they hadn't.
1125
01:05:56,001 --> 01:05:58,500
Uh... there's still, there was still
some downgrading, in terms of the,
1126
01:05:58,501 --> 01:06:01,500
the industry, concerns of the ind...
certainly the stock prices
1127
01:06:01,501 --> 01:06:03,000
Not some, all those firms were rated
at least A2...
1128
01:06:03,001 --> 01:06:06,000
until a couple of days
before they, uh... were rescued.
1129
01:06:06,001 --> 01:06:08,500
Well then, you know, then the answer is,
I just don't, don't know enough to...
1130
01:06:08,501 --> 01:06:10,500
really answer your question
on this particular issue.
1131
01:06:10,501 --> 01:06:14,000
Governor Fred Mishkin is resigning,
effective August 31.
1132

01:06:14,001 --> 01:06:16,000

He says he plans to return
to his teaching post...
1133
01:06:16,001 --> 01:06:17,801
at Columbia's Graduate School
of Business.
1134
01:06:18,501 --> 01:06:21,200
Why did you leave the Federal Reserve
in August of 2008?
1135
01:06:21,201 --> 01:06:25,000
I mean, in, in the middle
of the worst financial crisis.
1136
01:06:25,001 --> 01:06:28,600
So, so, uh, that, uh...
I had to, to revise a textbook.
1137
01:06:28,601 --> 01:06:32,500
His departure leaves the Fed board
with three of its seven seats vacant...
1138
01:06:32,501 --> 01:06:34,600
just when the economy needs it most.
1139
01:06:34,601 --> 01:06:36,800
Well, I'm sure your textbook
is important and widely read.
1140
01:06:36,801 --> 01:06:40,000
But in August of 2008, you know, some,
1141
01:06:40,001 --> 01:06:44,000
somewhat more important things
were going on in the world, don't you think?
1142
01:06:44,001 --> 01:06:46,000
By Friday, September 12th,
1143
01:06:46,001 --> 01:06:48,000
Lehman Brothers had run out of cash,
1144
01:06:48,001 --> 01:06:52,000
and the entire investment banking
industry was sinking fast.

1145
01:06:52,001 --> 01:06:56,500
The stability of the global
financial system was in jeopardy.
1146
01:06:56,501 --> 01:07:00,000
That weekend, Henry Paulson
and Timothy Geithner,
1147
01:07:00,001 --> 01:07:02,400
president of the New York
Federal Reserve...
1148
01:07:02,401 --> 01:07:06,000
called an emergency meeting
with the CEO's of the major banks...
1149
01:07:06,001 --> 01:07:08,000
in an effort to rescue Lehman.
1150
01:07:08,001 --> 01:07:11,000
But Lehman wasn't alone.
1151
01:07:11,001 --> 01:07:13,300
Merrill Lynch,
another major investment bank,
1152
01:07:13,301 --> 01:07:15,500
was also on the brink of failure.
1153
01:07:15,501 --> 01:07:19,000
And that Sunday,
it was acquired by Bank of America.
1154
01:07:19,001 --> 01:07:24,000
The only bank interested in buying
Lehman was the British firm Barclay's.
1155
01:07:24,001 --> 01:07:29,000
But British regulators demanded a financial
guarantee from the U.S. government.
1156
01:07:29,001 --> 01:07:31,000
Paulson refused.
1157
01:07:35,001 --> 01:07:39,000
We all jumped into a yellow cab

1158
01:07:39,001 --> 01:07:42,500
and went down to the Federal Reserve Bank.
1159
01:07:42,501 --> 01:07:46,000
They wanted the bankruptcy case
commenced before midnight...
1160
01:07:46,001 --> 01:07:48,000
of September 14.
1161
01:07:48,001 --> 01:07:54,700
We kept pressing that this would be a,
uh... terrible event.
1162
01:07:54,701 --> 01:07:57,200
And at some point,
I used the word "Armageddon".
1163
01:07:57,201 --> 01:08:02,200
Had they fully considered the
consequences of what they were proposing?
1164
01:08:02,201 --> 01:08:05,000
The effect on the market
would be extraordinary.
1165
01:08:05,001 --> 01:08:07,000
- You said this?
- Yes.
1166
01:08:07,001 --> 01:08:12,400
They just said they had considered all
of the comments that we had made...
1167
01:08:12,401 --> 01:08:14,000
and they were still of the belief...
1168
01:08:14,001 --> 01:08:18,500
that in order to calm the markets
and move forward
1169
01:08:18,501 --> 01:08:22,000
it was necessary for Lehman
to go into bankruptcy.
1170
01:08:22,001 --> 01:08:23,300
- Calm the markets?

- Yes.
1171
01:08:23,301 --> 01:08:28,500
When were you first told that
Lehman in fact was going to go bankrupt?
1172
01:08:28,501 --> 01:08:30,000
Ah, after the fact.
1173
01:08:30,001 --> 01:08:33,000
After the fact?
1174
01:08:33,001 --> 01:08:36,500
Wow. Okay.
1175
01:08:36,501 --> 01:08:42,000
And... what was your reaction
when you learned of it?
1176
01:08:42,001 --> 01:08:44,000
Holy cow.
1177
01:08:44,001 --> 01:08:47,000
Paulson and Bernanke had
not consulted with other governments
1178
01:08:47,001 --> 01:08:52,000
and didn't understand the
consequences of foreign bankruptcy laws.
1179
01:08:52,001 --> 01:08:58,000
Under British law, Lehman's
London office had to be closed immediately.
1180
01:08:58,001 --> 01:08:59,900
All transactions came to a halt.
1181
01:08:59,901 --> 01:09:03,000
And there are thousands and
thousands and thousands of transactions.
1182
01:09:03,001 --> 01:09:06,100
The hedge funds who had had assets
with Lehman in London...
1183
01:09:06,101 --> 01:09:09,000
discovered overnight,

to their complete horror,

1184
01:09:09,001 --> 01:09:11,500
that they couldn't get those assets back.
1185
01:09:11,501 --> 01:09:14,400
One of the points of the hub failed.
1186
01:09:14,401 --> 01:09:17,400
And that had huge knock-on
effects around the system.
1187
01:09:17,401 --> 01:09:19,900
The oldest money market fund
in the nation...
1188
01:09:19,901 --> 01:09:24,000
wrote off roughly three quarters
of a billion dollars in bad debt...
1189
01:09:24,001 --> 01:09:26,400
issued by the now-bankrupt Lehman Brothers.
1190
01:09:26,401 --> 01:09:30,000
Lehman's failure also caused
a collapse in the commercial paper market,
1191
01:09:30,001 --> 01:09:32,000
which many companies depend on...
1192
01:09:32,001 --> 01:09:35,300
to pay for operating expenses,
such as payroll.
1193
01:09:35,301 --> 01:09:37,000
That means maybe
they have to lay off employees...
1194
01:09:37,001 --> 01:09:40,500
they can't buy parts.
It stops business in its tracks.
1195
01:09:40,501 --> 01:09:42,300
Suddenly, people stood, and said:
1196
01:09:42,301 --> 01:09:45,500
Listen; what can we believe in?

There's nothing we can trust anymore.

1197
01:09:45,501 --> 01:09:49,000
That same week,
AIG owed 13 billion dollars...
1198
01:09:49,001 --> 01:09:51,400
to holders of credit default swaps...
1199
01:09:51,401 --> 01:09:53,400
and it didn't have the money.
1200
01:09:53,401 --> 01:09:55,000
AIG was another hub.
1201
01:09:55,001 --> 01:09:57,000
If AIG had stopped, you know,
1202
01:09:57,001 --> 01:09:59,500
all planes may have to be,
you know, stop flying.
1203
01:09:59,501 --> 01:10:03,500
On September 17th,
AIG is taken over by the government.
1204
01:10:03,501 --> 01:10:06,500
And one day later,
Paulson and Bernanke...
1205
01:10:06,501 --> 01:10:11,000
ask Congress for 700 billion dollars
to bail out the banks.
1206
01:10:11,001 --> 01:10:16,000
They warn that the alternative
would be a catastrophic financial collapse.
1207
01:10:16,001 --> 01:10:18,700
It was scary. You know,
the entire system froze up...
1208
01:10:18,701 --> 01:10:23,000
every part of the financial system,
every part of the credit system.
1209
01:10:23,001 --> 01:10:24,700

Nobody could borrow money.

1210
01:10:24,701 --> 01:10:27,900
It was like a cardiac arrest of
the global financial system.
1211
01:10:27,901 --> 01:10:30,300
am playing the hand that was dealt me.
1212
01:10:30,301 --> 01:10:32,100
a lot of what I am dealing with, you know,
1213
01:10:32,101 --> 01:10:35,200
I'm dealing with the consequences of
things that were done,
1214
01:10:35,201 --> 01:10:37,000
often, many years ago.
1215
01:10:37,001 --> 01:10:39,000
Secretary Paulson spoke throughout the fall.
1216
01:10:39,001 --> 01:10:41,200
And all the potential
root causes of this...
1217
01:10:41,201 --> 01:10:43,500
and there are plenty...
he called 'em, uh...
1218
01:10:43,601 --> 01:10:45,000
so I... I'm not sure...
1219
01:10:45,001 --> 01:10:46,201
You're not being serious
about that,
1220
01:10:46,202 --> 01:10:47,100
- are you?
- I am being serious.
1221
01:10:47,101 --> 01:10:49,000
What... what would you
have expected? Uh...
1222
01:10:49,001 --> 01:10:51,600
A... and what're you, what were you

looking for that you didn't see?

1223
01:10:51,601 --> 01:10:54,900
He was the senior advocate...
1224
01:10:54,901 --> 01:10:59,500
for prohibiting the regulation of
credit default swaps...
1225
01:10:59,501 --> 01:11:03,000
and also lifting the leverage limits
on the investment banks.
1226
01:11:03,001 --> 01:11:06,000
- So a-, again, what
- He mentioned those things?
1227
01:11:06,001 --> 01:11:08,000
I never heard him mention those things.
1228
01:11:08,001 --> 01:11:10,900
C... can we turn this
off for a second?
1229
01:11:15,001 --> 01:11:19,200
When AIG was bailed out, the owners
of its credit default swaps...
1230
01:11:19,201 --> 01:11:22,000
the most prominent
of which was Goldman Sachs...
1231
01:11:22,001 --> 01:11:25,900
were paid 61 billion dollars the next day.
1232
01:11:25,901 --> 01:11:29,300
Paulson, Bernanke,
and Tim Geithner forced AIG...
1233
01:11:29,301 --> 01:11:35,000
to pay 100 cents on the dollar, rather
than negotiate lower prices...
1234
01:11:35,001 --> 01:11:40,800
Eventually, the AIG bailout cost taxpayers
over 150 billion dollars.
1235

01:11:40,801 --> 01:11:44,000

A hundred and sixty billion dollars
went through AIG,
1236
01:11:44,001 --> 01:11:47,000
14 billion went to Goldman Sachs.
1237
01:11:47,001 --> 01:11:50,600
At the same time,
Paulson and Geithner forced AIG...
1238
01:11:50,601 --> 01:11:55,000
to surrender its right to sue
Goldman and the other banks for fraud.
1239
01:11:55,001 --> 01:12:00,000
Isn't there a problem when the person
in charge of dealing with this crisis...
1240
01:12:00,001 --> 01:12:02,500
is the former CEO of Goldman Sachs...
1241
01:12:02,501 --> 01:12:06,500
someone who had a major role in causing it?
1242
01:12:06,501 --> 01:12:08,700
Well, I think it's fair to say
that the financial markets today...
1243
01:12:08,701 --> 01:12:11,000
are incredibly complicated.
1244
01:12:11,001 --> 01:12:12,001
supply urgently needed money...
1245
01:12:12,002 --> 01:12:16,400
On October 4th, 2008,
President Bush...
1246
01:12:16,401 --> 01:12:20,000
signs a 700-billion-dollar bailout bill.
1247
01:12:20,001 --> 01:12:22,000
But world stock markets continue to fall,
1248
01:12:22,001 --> 01:12:26,000
amid fears that a global recession

is now underway...
1249
01:12:30,000 --> 01:12:32,400
The bailout legislation does nothing
1250
01:12:32,401 --> 01:12:35,400
to stem the tide of layoffs
and foreclosures.
1251
01:12:35,401 --> 01:12:41,000
Unemployment in the United States
and Europe quickly rises to 10 percent.
1252
01:12:41,001 --> 01:12:45,000
The recession accelerates,
and spreads globally.
1253
01:12:48,000 --> 01:12:50,000
I began to get really scared,
1254
01:12:50,001 --> 01:12:53,600
'cause I hadn't foreseen...
1255
01:12:53,601 --> 01:12:57,600
the whole world going down
at the same rate at the same time.
1256
01:12:57,601 --> 01:13:01,200
December of 2008,
General Motors and Chrysler...
1257
01:13:01,201 --> 01:13:04,000
are facing bankruptcy.
1258
01:13:04,001 --> 01:13:06,500
And as U.S. consumers cut back on spending,
1259
01:13:06,501 --> 01:13:11,200
Chinese manufacturers see sales plummet.
1260
01:13:11,201 --> 01:13:16,000
Over 10 million migrant workers
in China lose their jobs.
1261
01:13:16,001 --> 01:13:21,500
the end of the day, the poorest,
as always, pay the most.

1262
01:13:25,001 --> 01:13:29,000
Here you can earn a lot of money, like, uh,
1263
01:13:29,001 --> 01:13:35,000
70, 80, uh, U.S. dollars per month.
1264
01:13:35,001 --> 01:13:40,300
As a farmer in the countryside,
you cannot earn as much money.
1265
01:13:40,301 --> 01:13:44,500
The workers just wire their salaries
to their hometown.
1266
01:13:44,501 --> 01:13:48,000
To give to their families.
1267
01:13:48,001 --> 01:13:50,700
The crisis started in America.
1268
01:13:50,701 --> 01:13:56,000
We all know it will be coming to China.
1269
01:13:59,000 --> 01:14:03,700
Some of the factories
try to cut off some workers.
1270
01:14:03,701 --> 01:14:07,300
Some people will get poor
because they ll lose their jobs.
1271
01:14:07,301 --> 01:14:11,000
Life gets harder.
1272
01:14:18,000 --> 01:14:21,000
We were growing at about 20 percent.
1273
01:14:21,001 --> 01:14:24,000
It was a super year.
1274
01:14:24,001 --> 01:14:28,000
And then we suddenly went
to minus nine this quarter.
1275
01:14:28,001 --> 01:14:33,500

Exports collapsed.
And we're talking like 30 percent.
1276
01:14:33,501 --> 01:14:37,500
So we just took a hit, you know,
fell off a cliff, boom!
1277
01:14:37,501 --> 01:14:39,200
Even as the crisis unfolded,
1278
01:14:39,201 --> 01:14:41,900
we didn't know how wide
it was going to spread,
1279
01:14:41,901 --> 01:14:44,000
or how severe it was going to be.
1280
01:14:44,001 --> 01:14:47,000
And we were still hoping
that there would be some...
1281
01:14:47,001 --> 01:14:49,000
way for us to have a shelter...
1282
01:14:49,001 --> 01:14:52,000
and be, uh, less battered by the storm.
1283
01:14:52,001 --> 01:14:53,500
But it is not possible.
1284
01:14:53,501 --> 01:14:59,000
It's a very globalized world
the economies are all linked together.
1285
01:15:30,001 --> 01:15:32,500
Every time a home goes into foreclosure,
1286
01:15:32,501 --> 01:15:35,000
it affects everyone who
lives around that house.
1287
01:15:35,001 --> 01:15:36,400
'Cause when that property
goes on the market,
1288
01:15:36,401 --> 01:15:38,600
it's gonna be sold at a lower price...

1289
01:15:38,601 --> 01:15:42,000
maybe before it goes on the market,
it won't be well maintained.
1290
01:15:42,001 --> 01:15:46,000
We estimate another 9 million
homeowners will lose their homes.
1291
01:15:51,608 --> 01:15:54,108
We went out on a weekend|to see...
1292
01:15:54,209 --> 01:15:56,008
what houses were for sale.
1293
01:15:56,609 --> 01:15:57,898
We saw one we liked.
1294
01:15:58,710 --> 01:16:01,709
The payment was going to be
3200 dollars.
1295
01:16:13,210 --> 01:16:15,909
Everything was beautifull,
the house was very pretty.
1296
01:16:16,510 --> 01:16:19,509
The payments were low.
Everything was like... we won the lottery.
1297
01:16:20,210 --> 01:16:22,809
But the reality set in
when the first payment arrived.
1298
01:16:28,410 --> 01:16:31,809
I felt really, really bad
for my husband,
1299
01:16:33,910 --> 01:16:39,209
because... he works too much.
And we have three children.
1300
01:16:50,000 --> 01:16:51,900
The vast majority I've seen lately,
unfortunately,
1301
01:16:51,901 --> 01:16:53,800

are people who have just

been hurt by the economy.
1302
01:16:53,801 --> 01:16:56,400
They were living, you know,
day to day, paycheck to paycheck,
1303
01:16:56,401 --> 01:16:58,300
and unfortunately, that ran out
1304
01:16:58,301 --> 01:17:00,000
And unemployment isn't gonna pay
a house mortgage...
1305
01:17:00,001 --> 01:17:02,000
it's not gonna pay a car bill.
1306
01:17:02,001 --> 01:17:04,000
I was a log-truck driver.
1307
01:17:04,001 --> 01:17:06,000
And they shut down,
they shut down...
1308
01:17:06,001 --> 01:17:07,600
all the logging systems up there...
1309
01:17:07,601 --> 01:17:09,000
shut down the sawmills and everything.
1310
01:17:09,001 --> 01:17:11,800
So I moved down here,
I had a construction job.
1311
01:17:11,801 --> 01:17:16,000
And the construction jobs got shut down
too so... things are so tough...
1312
01:17:16,001 --> 01:17:18,000
there's a lot o' people out there,
and pretty soon...
1313
01:17:18,001 --> 01:17:20,000
you're gonna be seeing
more camps like this around
1314
01:17:20,001 --> 01:17:21,001

because there's just no jobs right now.

1315
01:17:28,001 --> 01:17:30,500
When the company did well,
1316
01:17:30,501 --> 01:17:33,300
we did well
1317
01:17:33,301 --> 01:17:35,600
when the company did not do well, sir,
1318
01:17:35,601 --> 01:17:37,000
we did not do well.
1319
01:17:37,001 --> 01:17:39,500
The men who destroyed
their own companies...
1320
01:17:39,501 --> 01:17:41,600
and plunged the world into crisis...
1321
01:17:41,601 --> 01:17:45,000
walked away from the wreckage
with their fortunes intact.
1322
01:17:45,001 --> 01:17:47,500
The top five executives
at Lehman Brothers...
1323
01:17:47,501 --> 01:17:52,000
made over a billion dollars
between 2000 and 2007...
1324
01:17:52,001 --> 01:17:53,800
and when the firm went bankrupt...
1325
01:17:53,801 --> 01:17:55,500
they got to keep all the money.
1326
01:17:55,501 --> 01:17:57,500
The system worked.
1327
01:17:57,501 --> 01:17:59,300
It doesn't make any sense for us
to make a loan that's gonna fail,
1328

01:17:59,301 --> 01:18:01,500

'cause we lose. They lose
1329
01:18:01,501 --> 01:18:04,500
the borrower loses,
the community loses, and we lose.
1330
01:18:04,501 --> 01:18:06,800
Countrywide's CEO Angelo Mozilo...
1331
01:18:06,801 --> 01:18:12,000
made 470 million dollars
between 2003 and 2008.
1332
01:18:12,001 --> 01:18:13,500
One hundred forty million...
1333
01:18:13,501 --> 01:18:15,700
came from dumping his
Countrywide stock...
1334
01:18:15,701 --> 01:18:18,600
in the 12 months
before the company collapsed.
1335
01:18:18,601 --> 01:18:21,600
Ultimately, I hold the board accountable
when a business fails.
1336
01:18:21,601 --> 01:18:24,000
'Cause the board is responsible
for hiring and firing the CEO...
1337
01:18:24,001 --> 01:18:26,500
and overseeing big strategic decisions.
1338
01:18:26,501 --> 01:18:28,300
The problem with board composition
in America...
1339
01:18:28,301 --> 01:18:30,000
is the way boards are elected.
1340
01:18:30,001 --> 01:18:31,600
The boards are pretty much, in many cases,
1341
01:18:31,601 --> 01:18:33,500

picked by the CEO.

1342
01:18:33,501 --> 01:18:36,000
The board of directors
and the compensation committees...
1343
01:18:36,001 --> 01:18:38,500
are the two bodies best situated...
1344
01:18:38,501 --> 01:18:41,500
to determine the pay packages,
uh... for executives.
1345
01:18:41,501 --> 01:18:44,100
How do you think they ve done
over the past 10 years?
1346
01:18:44,101 --> 01:18:46,800
Well, I think that, if you look at those,
1347
01:18:46,801 --> 01:18:49,500
uh, in, I would give about a B. Because...
1348
01:18:49,501 --> 01:18:51,000
- A B?
- Yes.
1349
01:18:51,001 --> 01:18:53,000
- Not an F.
- Not an F, not an F.
1350
01:18:53,001 --> 01:18:55,700
Stan O'Neal, the CEO of Merrill Lynch...
1351
01:18:55,701 --> 01:19:00,000
received 90 million dollars
in 2006 and 2007 alone.
1352
01:19:00,001 --> 01:19:02,600
After driving his firm into the ground.
1353
01:19:02,601 --> 01:19:05,500
Merrill Lynch's board of directors
allowed him to resign...
1354
01:19:05,501 --> 01:19:09,600
and he collected

161 million dollars in severance.

1355
01:19:09,601 --> 01:19:14,000
Instead of being fired,
Stan O'Neal is allowed to resign...
1356
01:19:14,001 --> 01:19:17,000
and takes away 151 million dollars.
1357
01:19:17,001 --> 01:19:20,500
That's a decision that that
board of directors made at that point.
1358
01:19:20,501 --> 01:19:22,000
And what grade do you give that decision?
1359
01:19:22,001 --> 01:19:23,300
Uh, that's a tougher one. I don't know
1360
01:19:23,301 --> 01:19:25,000
if I would give that one a B as well.
1361
01:19:25,001 --> 01:19:27,800
O'Neal's successor, John Thain,
1362
01:19:27,801 --> 01:19:31,300
was paid 87 million dollars in 2007...
1363
01:19:31,301 --> 01:19:33,500
and in December of 2008,
1364
01:19:33,501 --> 01:19:37,200
two months after Merrill
was bailed out by U.S. taxpayers
1365
01:19:37,201 --> 01:19:42,500
Thain and Merrill's board handed out
billions in bonuses.
1366
01:19:42,501 --> 01:19:44,000
In March of 2008...
1367
01:19:44,001 --> 01:19:49,000
AIG's Financial Products Division
lost 11 billion dollars
1368

01:19:49,001 --> 01:19:53,200

Instead of being fired, Joseph Cassano,
the head of AIG FP...
1369
01:19:53,201 --> 01:19:55,500
was kept on as a consultant...
1370
01:19:55,501 --> 01:19:57,300
for a million dollars a month.
1371
01:19:57,301 --> 01:19:59,700
And you want to make sure
that the key players...
1372
01:19:59,701 --> 01:20:03,500
and the key, key employees, uh...
within AIG FP...
1373
01:20:03,501 --> 01:20:05,500
yeah, we retain that intellectual knowledge.
1374
01:20:05,501 --> 01:20:07,600
I attended a very interesting, uh, dinner,
1375
01:20:07,601 --> 01:20:11,500
organized by Hank Paulson
a little more than one year ago...
1376
01:20:11,501 --> 01:20:13,900
with some officials
and a couple of, uh...
1377
01:20:13,901 --> 01:20:17,000
CEOs from the biggest, uh, banks in the U.S.
1378
01:20:17,001 --> 01:20:20,500
And, uh... surprisingly enough,
all these gentlemen...
1379
01:20:20,501 --> 01:20:23,000
were arguing we were too greedy,
1380
01:20:23,001 --> 01:20:26,000
so we have part responsibility. Fine.
1381
01:20:26,001 --> 01:20:29,000
And then they were turning to the treasurer,

to the secretary of the Treasury,

1382
01:20:29,001 --> 01:20:32,000
and say, you should regulate more
because we are too greedy...
1383
01:20:32,001 --> 01:20:33,500
we can't avoid it.
1384
01:20:33,501 --> 01:20:36,000
The only way
to avoid this is to have more regulation.
1385
01:20:36,001 --> 01:20:38,400
I have spoken to many bankers
about...
1386
01:20:38,401 --> 01:20:41,000
this question, including very senior ones.
1387
01:20:41,001 --> 01:20:46,000
And this is the first time
that I've ever heard anybody say...
1388
01:20:46,001 --> 01:20:50,400
that they actually wanted their compensation
to be regulated.
1389
01:20:50,401 --> 01:20:53,100
Yeah, because it was at the
moment where they were afraid.
1390
01:20:53,101 --> 01:20:57,000
And after, when solution to the crisis
began to appear...
1391
01:20:57,001 --> 01:21:00,000
then probably they,
they changed their mind.
1392
01:21:02,000 --> 01:21:05,700
In the U.S., the banks are now bigger,
more powerful,
1393
01:21:05,701 --> 01:21:09,000
and more concentrated than ever before.
1394

01:21:09,001 --> 01:21:12,500

There are fewer competitors,
and a lot of smaller banks...
1395
01:21:12,501 --> 01:21:14,700
have been taken over by big ones.
1396
01:21:14,701 --> 01:21:17,800
JP Morgan today is even bigger
than it was before.
1397
01:21:17,801 --> 01:21:21,800
JP Morgan took over first Bear Stearns
and then WAMU.
1398
01:21:21,801 --> 01:21:25,800
Bank of America took over
Countrywide and Merrill Lynch.
1399
01:21:25,801 --> 01:21:28,500
Wells Fargo took over Wachovia.
1400
01:21:28,501 --> 01:21:31,000
After the crisis,
the financial industry...
1401
01:21:31,001 --> 01:21:33,800
including the
Financial Services Roundtable...
1402
01:21:33,801 --> 01:21:36,800
worked harder than ever to fight reform.
1403
01:21:36,801 --> 01:21:40,000
he financial sector employs
3,000 lobbyists...
1404
01:21:40,001 --> 01:21:43,000
more than five for each member of Congress.
1405
01:21:43,001 --> 01:21:46,200
Do you think
the financial services industry...
1406
01:21:46,201 --> 01:21:48,800
has excessive political influence
in the United States?

1407
01:21:48,801 --> 01:21:52,900
No. I think that every person in,
in the wo...
1408
01:21:52,901 --> 01:21:55,500
in the country is represented
here in Washington.
1409
01:21:55,501 --> 01:21:59,000
And you think that all segments
of American society...
1410
01:21:59,001 --> 01:22:03,000
have equal and fair access to the system?
1411
01:22:03,001 --> 01:22:05,400
Yet, you can walk into
any hearing room, uh...
1412
01:22:05,401 --> 01:22:08,000
that you would like.
Yes, I do.
1413
01:22:08,001 --> 01:22:09,900
Um... one could walk into
any hearing room...
1414
01:22:09,901 --> 01:22:12,900
one can not necessarily write
the kind of lobbying checks...
1415
01:22:12,901 --> 01:22:14,000
that your industry writes...
1416
01:22:14,001 --> 01:22:17,000
or engage in the level
of political contributions...
1417
01:22:17,001 --> 01:22:18,501
that your industry engages in.
1418
01:22:18,502 --> 01:22:21,500
Between 1998 and 2008...
1419
01:22:21,501 --> 01:22:24,600
the financial industry
spent over 5 billion dollars...

1420
01:22:24,601 --> 01:22:27,300
on lobbying and campaign contributions.
1421
01:22:27,301 --> 01:22:31,500
And since the crisis,
they're spending even more money.
1422
01:22:32,000 --> 01:22:34,400
The financial industry also
exerts its influence...
1423
01:22:34,401 --> 01:22:36,300
in a more subtle way...
1424
01:22:36,301 --> 01:22:39,000
one that most Americans
don't know about.
1425
01:22:40,000 --> 01:22:43,100
It has corrupted the study
of economics itself.
1426
01:22:43,101 --> 01:22:50,300
Deregulation had tremendous financial
and intellectual support.
1427
01:22:50,301 --> 01:22:55,000
Because, uh, uh... people argued it
for their own benefit.
1428
01:22:55,001 --> 01:23:00,000
Economics profession was
the main source of that illusion.
1429
01:23:00,001 --> 01:23:04,000
Since the 1980s,
academic economists...
1430
01:23:04,001 --> 01:23:05,800
have been major advocates of deregulation,
1431
01:23:05,801 --> 01:23:09,800
and played powerful roles in shaping
U.S. government policy.
1432
01:23:09,801 --> 01:23:13,800

Very few of these economic experts

warned about the crisis.
1433
01:23:13,801 --> 01:23:15,500
And even after the crisis,
1434
01:23:15,501 --> 01:23:18,000
many of them opposed reform.
1435
01:23:18,001 --> 01:23:20,500
The guys who taught these things
1436
01:23:20,501 --> 01:23:24,900
tended to get paid a lot of
money being consultants.
1437
01:23:24,901 --> 01:23:30,000
Business school professors
don't live on a faculty salary.
1438
01:23:30,001 --> 01:23:33,000
They do very, very well.
1439
01:23:33,001 --> 01:23:36,000
Over the last decade,
the financial services industry...
1440
01:23:36,001 --> 01:23:39,100
has made about
5 billion dollars worth of...
1441
01:23:39,101 --> 01:23:43,000
political contributions
in the United States.
1442
01:23:43,001 --> 01:23:45,000
That's kind of a lot of money.
1443
01:23:45,001 --> 01:23:48,600
That doesn't bother you?
1444
01:23:48,601 --> 01:23:50,000
No.
1445
01:23:50,001 --> 01:23:52,200
Martin Feldstein is a professor at Harvard,

1446
01:23:52,201 --> 01:23:55,000
and one of the world's
most prominent economists.
1447
01:23:55,001 --> 01:23:57,700
As President Reagan's
chief economic advisor,
1448
01:23:57,701 --> 01:24:00,600
he was a major architect of deregulation.
1449
01:24:00,601 --> 01:24:04,000
And from 1988 until 2009,
1450
01:24:04,001 --> 01:24:09,500
he was on the board of directors
of both AIG and AIG Financial Products,
1451
01:24:09,501 --> 01:24:11,600
which paid him millions of dollars.
1452
01:24:11,601 --> 01:24:15,500
You have any regrets
about having been on AIG's board?
1453
01:24:15,501 --> 01:24:17,100
I have no comments.
No, I have no regrets...
1454
01:24:17,101 --> 01:24:18,600
about being on AIG's board.
1455
01:24:18,601 --> 01:24:20,500
- None.
- Than I can say, absolutely none.
1456
01:24:20,701 --> 01:24:22,001
Absolutely none.
1457
01:24:22,301 --> 01:24:25,000
Okay. Um...
1458
01:24:26,001 --> 01:24:31,000
You have any regrets about, uh...
AIG's decisions?
1459

01:24:31,001 --> 01:24:33,800

I cannot say anything more about AIG.
1460
01:24:33,801 --> 01:24:38,800
I've taught at Northwestern and Chicago,
Harvard and Columbia.
1461
01:24:38,801 --> 01:24:41,600
Glenn Hubbard is the dean
of Columbia Business School...
1462
01:24:41,601 --> 01:24:44,200
and was the chairman of the
Council of Economic Advisers...
1463
01:24:44,201 --> 01:24:46,300
under George W. Bush.
1464
01:24:46,301 --> 01:24:48,000
Do you think the financial services industry
1465
01:24:48,001 --> 01:24:52,000
has too much, uh... political power
in the United States?
1466
01:24:53,500 --> 01:24:55,000
I don't think so, no. You certainly,
1467
01:24:55,001 --> 01:24:57,000
you certainly wouldn't get
that impression...
1468
01:24:57,001 --> 01:25:01,000
by the drubbing that they regularly get,
uh... in Washington.
1469
01:25:01,001 --> 01:25:03,800
Many prominent academics
quietly make fortunes...
1470
01:25:03,801 --> 01:25:06,700
while helping the financial industry
shape public debate...
1471
01:25:06,701 --> 01:25:08,500
and government policy.
1472

01:25:08,501 --> 01:25:10,200

The Analysis Group,
1473
01:25:10,201 --> 01:25:12,000
Charles River Associates,
1474
01:25:12,001 --> 01:25:14,400
Compass Lexecon,
1475
01:25:14,401 --> 01:25:16,000
and the Law
and Economics Consulting Group...
1476
01:25:16,001 --> 01:25:18,400
manage a multi-billion-dollar industry...
1477
01:25:18,401 --> 01:25:21,900
that provides academic experts for hire.
1478
01:25:21,901 --> 01:25:25,000
Two bankers who used these services
were Ralph Ciofi...
1479
01:25:25,001 --> 01:25:27,200
and Matthew Tannin,
1480
01:25:27,201 --> 01:25:31,500
Bear Stearns hedge fund managers
prosecuted for securities fraud.
1481
01:25:31,501 --> 01:25:33,500
After hiring The Analysis Group,
1482
01:25:33,501 --> 01:25:35,000
both were acquitted.
1483
01:25:35,001 --> 01:25:37,500
Glenn Hubbard was paid
100,000 dollars...
1484
01:25:37,501 --> 01:25:40,000
to testify in their defense.
1485
01:25:40,700 --> 01:25:44,700
Do you think that the
economics discipline has, uh...

1486
01:25:44,701 --> 01:25:47,000
a conflict of interest problem?
1487
01:25:47,500 --> 01:25:49,100
I'm not sure I know what you mean.
1488
01:25:49,101 --> 01:25:52,700
Do you think that a significant fraction
of the economics discipline,
1489
01:25:52,701 --> 01:25:56,100
a number of economists,
have financial conflicts of interests...
1490
01:25:56,101 --> 01:25:59,600
that in some way might call into
question or color.
1491
01:25:59,601 --> 01:26:01,000
Oh, I see what you're saying. I doubt it.
1492
01:26:01,001 --> 01:26:04,000
You know, most academic economists,
uh... you know,
1493
01:26:04,001 --> 01:26:07,000
aren't wealthy business people.
1494
01:26:07,001 --> 01:26:09,500
Hubbard makes 250,000 dollars a year...
1495
01:26:09,501 --> 01:26:11,300
as a board member of Met Life...
1496
01:26:11,301 --> 01:26:13,700
and was formerly on the board of Capmark,
1497
01:26:13,701 --> 01:26:16,300
a major commercial mortgage lender
during the bubble,
1498
01:26:16,301 --> 01:26:19,000
which went bankrupt in 2009.
1499
01:26:19,001 --> 01:26:21,500
He has also advised Nomura Securities,

1500
01:26:21,501 --> 01:26:23,500
KKR Financial Corporation,
1501
01:26:23,501 --> 01:26:26,500
and many other financial firms.
1502
01:26:27,300 --> 01:26:30,400
Laura Tyson, who declined
to be interviewed for this film,
1503
01:26:30,401 --> 01:26:34,300
is a professor at the University
of California, Berkeley.
1504
01:26:34,301 --> 01:26:37,200
She was the chair of the
Council of Economic Advisers,
1505
01:26:37,201 --> 01:26:39,500
and then director of the
National Economic Council...
1506
01:26:39,501 --> 01:26:41,600
in the Clinton administration.
1507
01:26:41,601 --> 01:26:43,600
Shortly after leaving government,
1508
01:26:43,601 --> 01:26:45,600
she joined the board
of Morgan Stanley...
1509
01:26:45,601 --> 01:26:49,000
which pays her 350,000 dollars a year.
1510
01:26:49,001 --> 01:26:52,000
Ruth Simmons,
the president of Brown University,
1511
01:26:52,001 --> 01:26:54,500
makes over 300,000 dollars a year...
1512
01:26:54,501 --> 01:26:56,800
on the board of Goldman Sachs.
1513

01:26:56,801 --> 01:26:59,500

Larry Summers,
who as Treasury secretary...
1514
01:26:59,501 --> 01:27:02,500
played a critical role in the
deregulation of derivatives...
1515
01:27:02,501 --> 01:27:06,000
became president of Harvard in 2001.
1516
01:27:06,001 --> 01:27:09,300
While at Harvard, he made millions
consulting to hedge funds...
1517
01:27:09,301 --> 01:27:11,800
and millions more in speaking fees,
1518
01:27:11,801 --> 01:27:15,000
much of it from investment banks.
1519
01:27:17,000 --> 01:27:19,000
According to his federal disclosure report,
1520
01:27:19,001 --> 01:27:26,000
Summers's net worth is between
16.5 million and 39.5 million dollars.
1521
01:27:26,001 --> 01:27:28,700
Frederic Mishkin, who returned
to Columbia Business School...
1522
01:27:28,701 --> 01:27:30,700
after leaving the Federal Reserve,
1523
01:27:30,701 --> 01:27:33,400
reported on his federal disclosure report...
1524
01:27:33,401 --> 01:27:38,000
that his net worth was
between 6 million and 17 million dollars.
1525
01:27:38,001 --> 01:27:40,700
In 2006, you coauthored a study...
1526
01:27:40,701 --> 01:27:42,900
- of Iceland's financial system.

- Right, right.
1527
01:27:42,901 --> 01:27:46,200
Iceland is also an advanced country
with excellent institutions,
1528
01:27:46,201 --> 01:27:48,400
low corruption, rule of law.
1529
01:27:48,401 --> 01:27:51,400
The economy has already adjusted
to financial liberalization...
1530
01:27:51,401 --> 01:27:55,500
while prudential regulation and supervision
is generally quite strong.
1531
01:27:55,501 --> 01:27:59,000
Yeah. And that was the mistake.
That it turns out that, uh...
1532
01:27:59,001 --> 01:28:02,300
that the prudential regulation and
supervision was not strong in Iceland.
1533
01:28:02,301 --> 01:28:05,300
- And particularly during this period...
- So what led you to think that it was?
1534
01:28:05,301 --> 01:28:07,800
I think that, uh... you're going
with the information you have and...
1535
01:28:07,801 --> 01:28:11,700
and generally, uh...
the view was that, that, uh...
1536
01:28:11,701 --> 01:28:15,200
hat Iceland had very good institutions.
It was a very advanced country.
1537
01:28:15,201 --> 01:28:18,000
Who told you that?
Who did, what kind of research did you do?
1538
01:28:18,001 --> 01:28:21,000
You, you talk to people, you have faith
in, in, uh the Central Bank...

1539
01:28:21,001 --> 01:28:22,800
which actually did fall down on the job.
1540
01:28:22,801 --> 01:28:26,000
Uh... that, uh...
clearly, it, this, uh...
1541
01:28:26,001 --> 01:28:28,000
Why do you have "faith" in a central bank?
1542
01:28:28,001 --> 01:28:31,000
Well, that faith, you, ya, d-,
because you had,
1543
01:28:31,001 --> 01:28:32,000
go with the information you have.
1544
01:28:32,001 --> 01:28:33,700
Um... how much were you paid
to write it?
1545
01:28:33,701 --> 01:28:36,300
I was paid, uh... I think
the number was, uh...
1546
01:28:36,301 --> 01:28:37,500
it's public information.
1547
01:28:45,001 --> 01:28:48,400
Uh... on your CV, the title
of this report has been changed...
1548
01:28:48,401 --> 01:28:52,500
from "Financial Stability in Iceland"
to "Financial Instability in Iceland".
1549
01:28:52,501 --> 01:28:54,800
Oh. Well, I don't know, if, which...
whatever it is, is, the, uh...
1550
01:28:54,801 --> 01:28:57,400
thing... if it's a typo,
there's a typo.
1551
01:28:57,401 --> 01:28:59,000
I think what should be

publicly available is...

1552
01:28:59,001 --> 01:29:02,000
whenever anybody does research
on a topic...
1553
01:29:02,001 --> 01:29:06,800
they disclose if they have any
financial conflict with that research.
1554
01:29:06,801 --> 01:29:11,000
But if I recall,
there is no policy to that effect.
1555
01:29:11,001 --> 01:29:14,700
I can't imagine anybody
not doing that...
1556
01:29:14,701 --> 01:29:16,500
in terms of putting it in a paper.
1557
01:29:16,501 --> 01:29:19,100
If you would, there would be
significant professional sanction...
1558
01:29:19,101 --> 01:29:20,301
for failure to do that.
1559
01:29:20,501 --> 01:29:22,800
I didn't see any place
in the study where...
1560
01:29:22,801 --> 01:29:26,000
you indicated that you had been paid,
uh...
1561
01:29:26,001 --> 01:29:28,400
by the Icelandic Chamber of Commerce
to produce it.
1562
01:29:28,401 --> 01:29:31,500
- No, I
- Okay.
1563
01:29:31,501 --> 01:29:35,300
Richard Portes, the most famous
economist in Britain...

1564
01:29:35,301 --> 01:29:37,700
and a professor
at London Business School...
1565
01:29:37,701 --> 01:29:42,000
was also commissioned by the Icelandic
Chamber of Commerce in 2007...
1566
01:29:42,001 --> 01:29:46,000
to write a report which praised
the Icelandic financial sector.
1567
01:29:46,001 --> 01:29:48,700
The banks themselves are highly liquid.
1568
01:29:48,701 --> 01:29:51,600
They've actually made
money on the fall of the Icelandic krona.
1569
01:29:51,601 --> 01:29:53,500
These are strong banks, their funding,
1570
01:29:53,501 --> 01:29:56,200
their market funding is assured
for the coming year.
1571
01:29:56,201 --> 01:29:57,700
These are well-run banks.
1572
01:29:57,701 --> 01:29:58,701
Richard, thank you so much.
1573
01:29:58,702 --> 01:30:00,800
Like Mishkin, Portes's report...
1574
01:30:00,801 --> 01:30:04,700
didn't disclose his payment from
the Icelandic Chamber of Commerce.
1575
01:30:04,701 --> 01:30:06,500
Does Harvard require disclosures
1576
01:30:06,501 --> 01:30:09,200
of financial conflict of interest
in publications?
1577

01:30:09,201 --> 01:30:12,000

Um, not to my knowledge.
1578
01:30:12,001 --> 01:30:15,000
Do you require people
to report the compensation...
1579
01:30:15,001 --> 01:30:18,000
they ve received from outside activities?
- No
1580
01:30:18,001 --> 01:30:20,001
Don't you think that's a problem?
1581
01:30:20,002 --> 01:30:21,500
I don't see why.
1582
01:30:21,600 --> 01:30:24,200
Martin Feldstein being on the board of AIG
1583
01:30:24,201 --> 01:30:26,600
Laura Tyson going on the board
of Morgan Stanley, uh...
1584
01:30:26,601 --> 01:30:28,500
Larry Summer's making
10 million dollars a year...
1585
01:30:28,501 --> 01:30:29,901
consulting to financial services firms...
1586
01:30:31,001 --> 01:30:32,001
Irrelevant.
1587
01:30:33,100 --> 01:30:36,000
Well, uh... yeah,
basically irrelevant.
1588
01:30:36,001 --> 01:30:38,400
You've written a very large number
of articles...
1589
01:30:38,401 --> 01:30:40,800
about a very wide array of subjects.
1590
01:30:40,801 --> 01:30:44,500
You never saw fit

to investigate the risks...

1591
01:30:44,501 --> 01:30:47,200
of unregulated credit default swaps?
1592
01:30:47,201 --> 01:30:49,600
I never did.
1593
01:30:49,601 --> 01:30:53,000
Same question with regard
to executive compensation...
1594
01:30:53,001 --> 01:30:55,400
the regulation of corporate governance...
1595
01:30:55,401 --> 01:30:58,500
- the effect of political contributions...
- What, uh... what, uh... w...
1596
01:30:58,501 --> 01:31:00,000
I don't know
that I would have anything...
1597
01:31:00,001 --> 01:31:02,600
to add to those discussions.
1598
01:31:02,601 --> 01:31:05,000
I'm looking at your resume now.
1599
01:31:05,001 --> 01:31:07,000
It looks to me as if the majority...
1600
01:31:07,001 --> 01:31:11,000
of your outside activities are, uh...
1601
01:31:11,001 --> 01:31:12,001
consulting and directorship arrangements
with...
1602
01:31:12,002 --> 01:31:15,000
the financial services industry.
1603
01:31:15,001 --> 01:31:17,000
Is that, would you not agree
with that characterization?
1604

01:31:17,001 --> 01:31:18,001

No, to my knowledge,
1605
01:31:18,002 --> 01:31:21,600
I don't think my consulting clients
are even on my CV, so...
1606
01:31:21,601 --> 01:31:24,000
Uh... who are your consulting clients?
1607
01:31:24,001 --> 01:31:26,000
I don't believe
I have to discuss that with you.
1608
01:31:26,001 --> 01:31:28,000
Okay.
1609
01:31:28,001 --> 01:31:32,000
Look, you have a few more minutes,
and the interview is over.
1610
01:31:32,001 --> 01:31:34,500
Do you consult
for any financial services firms?
1611
01:31:34,501 --> 01:31:37,000
Uh... the answer is, I do.
1612
01:31:37,001 --> 01:31:38,600
- And...
- And, but I do...
1613
01:31:38,601 --> 01:31:41,000
I do not want to go into details
about that.
1614
01:31:41,001 --> 01:31:42,401
Do they include
other financial services firms?
1615
01:31:43,002 --> 01:31:44,600
Possibly.
1616
01:31:45,101 --> 01:31:47,000
You don't remember?
1617
01:31:47,001 --> 01:31:48,700

This isn't a deposition, sir.

1618
01:31:48,701 --> 01:31:52,000
I was polite enough to give you time,
foolishly, I now see.
1619
01:31:52,001 --> 01:31:54,300
But you have three more minutes.
1620
01:31:54,301 --> 01:31:56,000
Give it your best shot.
1621
01:31:56,001 --> 01:31:59,200
In 2004, at the height of the bubble,
1622
01:31:59,201 --> 01:32:03,000
Glenn Hubbard coauthored a widely
read paper with William C. Dudley
1623
01:32:03,001 --> 01:32:06,000
the chief economist of Goldman Sachs.
1624
01:32:06,001 --> 01:32:09,000
In the paper, Hubbard praised
credit derivatives...
1625
01:32:09,001 --> 01:32:11,000
and the securitization chain...
1626
01:32:11,001 --> 01:32:13,400
stating that they had improved
allocation of capital,
1627
01:32:13,401 --> 01:32:16,200
and were enhancing financial stability.
1628
01:32:16,201 --> 01:32:18,600
He cited reduced volatility
in the economy...
1629
01:32:18,601 --> 01:32:20,600
and stated that recessions...
1630
01:32:20,601 --> 01:32:23,900
had become less frequent and milder.
1631

01:32:23,901 --> 01:32:26,800

Credit derivatives
were protecting banks against losses...
1632
01:32:26,801 --> 01:32:30,000
and helping to distribute risk.
1633
01:32:30,500 --> 01:32:34,300
A medical researcher
writes an article, saying:
1634
01:32:34,301 --> 01:32:39,000
to treat this disease,
you should prescribe this drug.
1635
01:32:39,001 --> 01:32:41,001
It turns out Doctor makes 80% of...
1636
01:32:41,002 --> 01:32:44,300
personal income
from manufacturer of this drug.
1637
01:32:44,301 --> 01:32:46,000
Does not bother you.
1638
01:32:46,001 --> 01:32:49,000
I think, uh...
it's certainly important to disclose...
1639
01:32:49,001 --> 01:32:54,400
the, um... the, um...
1640
01:32:55,301 --> 01:32:58,700
Well, I think that's also
a little different from cases...
1641
01:32:58,701 --> 01:33:06,000
that we are talking about here.
Because, um... um...
1642
01:33:17,001 --> 01:33:21,700
So, uh, what do you think this says
about the economics discipline?
1643
01:33:21,701 --> 01:33:26,000
Well, heh heh, it has no relevance
to anything, really.

1644
01:33:26,001 --> 01:33:31,000
And indeed, I think, um...
it's a part of the, it's a...
1645
01:33:31,001 --> 01:33:34,000
important part of the problem
1646
01:33:34,001 --> 01:33:38,700
PART V: WHERE WE ARE NOW
1647
01:33:49,000 --> 01:33:51,300
The rising power
of the U.S. financial sector...
1648
01:33:51,301 --> 01:33:55,000
was part of a wider change in America.
1649
01:33:55,001 --> 01:33:58,000
Since the 1980's,
the United States has become...
1650
01:33:58,001 --> 01:34:00,600
a more unequal society,
1651
01:34:00,601 --> 01:34:04,000
and its economic dominance
has declined.
1652
01:34:04,001 --> 01:34:08,500
Companies like General Motors,
Chrysler, and U.S. Steel...
1653
01:34:08,501 --> 01:34:12,700
formerly the core of the U.S. economy...
were poorly managed...
1654
01:34:12,701 --> 01:34:16,000
and falling behind
their foreign competitors.
1655
01:34:16,001 --> 01:34:19,900
And as countries like China
opened their economies,
1656
01:34:19,901 --> 01:34:25,000
American companies sent jobs overseas
to save money.

1657
01:34:26,000 --> 01:34:27,600
For many, many years,
1658
01:34:27,601 --> 01:34:30,300
the 660 million people
in the developed world...
1659
01:34:30,301 --> 01:34:31,900
were effectively sheltered...
1660
01:34:31,901 --> 01:34:34,100
from all of this additional labor...
1661
01:34:34,101 --> 01:34:35,600
that existed on the planet.
1662
01:34:35,601 --> 01:34:39,000
Suddenly, the Bamboo Curtain
and the Iron Curtain are lifted...
1663
01:34:39,001 --> 01:34:43,000
and you have 2.5 billion
additional people.
1664
01:34:43,001 --> 01:34:44,200
American factory workers
1665
01:34:44,201 --> 01:34:47,000
were laid off
by the tens of thousands.
1666
01:34:47,001 --> 01:34:49,600
Our manufacturing base was destroyed,
1667
01:34:49,601 --> 01:34:51,500
literally over the course of a few years.
1668
01:34:51,501 --> 01:34:55,400
As manufacturing declined,
other industries rose.
1669
01:34:55,401 --> 01:34:58,800
The United States leads
the world in information technology,
1670

01:34:58,801 --> 01:35:02,000

where high-paying jobs are easy to find.
1671
01:35:02,001 --> 01:35:04,700
But those jobs require an education.
1672
01:35:04,701 --> 01:35:06,500
And for average Americans,
1673
01:35:06,501 --> 01:35:09,500
college is increasingly out of reach.
1674
01:35:09,501 --> 01:35:12,800
While top private universities
like Harvard...
1675
01:35:12,801 --> 01:35:15,300
have billions of dollars
in their endowments...
1676
01:35:15,301 --> 01:35:18,400
funding for public universities
is shrinking,
1677
01:35:18,401 --> 01:35:20,200
and tuition is rising.
1678
01:35:20,201 --> 01:35:23,100
Tuition for California's
public universities...
1679
01:35:23,101 --> 01:35:26,500
rose from 650 dollars in the 1970's,
1680
01:35:26,501 --> 01:35:30,500
to over 10,000 dollars in 2010.
1681
01:35:30,700 --> 01:35:33,200
Increasingly,
the most important determinant...
1682
01:35:33,201 --> 01:35:35,000
of whether Americans go to college
1683
01:35:35,001 --> 01:35:38,500
is whether they can find the money
to pay for it.

1684
01:35:38,501 --> 01:35:41,700
Meanwhile,
American tax policy shifted...
1685
01:35:41,701 --> 01:35:43,000
to favor the wealthy.
1686
01:35:43,001 --> 01:35:45,800
When I first came to office,
1687
01:35:45,801 --> 01:35:49,000
I thought taxes were too high,
and they were.
1688
01:35:49,001 --> 01:35:52,000
The most dramatic change
was a series of tax cuts...
1689
01:35:52,001 --> 01:35:53,900
designed by Glenn Hubbard...
1690
01:35:53,901 --> 01:35:55,000
who at the time was serving...
1691
01:35:55,001 --> 01:35:58,500
as President Bush's
chief economic advisor.
1692
01:35:58,501 --> 01:36:02,600
The Bush administration sharply
reduced taxes on investment gains,
1693
01:36:02,601 --> 01:36:03,800
stock dividends,
1694
01:36:03,801 --> 01:36:05,700
and eliminated the estate tax.
1695
01:36:05,701 --> 01:36:08,500
We had a comprehensive plan...
1696
01:36:08,501 --> 01:36:11,200
that, when acted
has left nearly 1.1 trillion dollars...
1697

01:36:11,201 --> 01:36:13,900

in the hands of American
workers, families, investors,
1698
01:36:13,901 --> 01:36:15,500
and small business owners.
1699
01:36:15,501 --> 01:36:18,000
Most of the benefits
of these tax cuts...
1700
01:36:18,001 --> 01:36:22,000
went to the wealthiest 1% of Americans.
1701
01:36:22,001 --> 01:36:24,500
And by the way,
it was really the cornerstone,
1702
01:36:24,501 --> 01:36:27,300
in many ways, of our
economic recovery policy.
1703
01:36:27,301 --> 01:36:30,000
Inequality of wealth
in the United States...
1704
01:36:30,001 --> 01:36:34,000
is now higher than in any other
developed country.
1705
01:36:34,001 --> 01:36:38,200
American families responded
to these changes in two ways:
1706
01:36:38,201 --> 01:36:43,000
by working longer hours,
and by going into debt.
1707
01:36:43,001 --> 01:36:46,300
As the middle class falls
further and further behind,
1708
01:36:46,301 --> 01:36:51,000
there is a political urge to respond...
1709
01:36:51,001 --> 01:36:54,000
by making it easier to get credit.

1710
01:36:54,001 --> 01:36:56,800
You don't have to have a lousy home.
1711
01:36:56,801 --> 01:36:58,600
The low-income home buyer...
1712
01:36:58,601 --> 01:37:03,000
can have just as nice a house
as anybody else.
1713
01:37:03,001 --> 01:37:06,600
American families borrowed
to finance their homes...
1714
01:37:06,601 --> 01:37:08,600
their cars, their healthcare,
1715
01:37:08,601 --> 01:37:11,800
and their children's educations.
1716
01:37:11,801 --> 01:37:15,000
People in the bottom 90%...
1717
01:37:15,001 --> 01:37:20,000
lost ground between 1980 and 2007.
1718
01:37:20,001 --> 01:37:25,500
It all went to the top 1 percent.
1719
01:37:26,000 --> 01:37:28,500
For the first time in history,
1720
01:37:28,501 --> 01:37:31,000
average Americans
have less education...
1721
01:37:31,001 --> 01:37:35,000
and are less prosperous
than their parents.
1722
01:37:36,500 --> 01:37:41,500
The era of greed
and irresponsibility on Wall Street...
1723
01:37:41,501 --> 01:37:43,400
and in Washington...

1724
01:37:43,401 --> 01:37:44,401
has led us to a financial crisis
as serious as
1725
01:37:44,402 --> 01:37:49,700
any that we have faced
since the Great Depression.
1726
01:37:49,701 --> 01:37:50,800
When the financial crisis struck...
1727
01:37:50,801 --> 01:37:53,400
just before the 2008 election...
1728
01:37:53,401 --> 01:37:55,500
Barack Obama
pointed to Wall Street greed...
1729
01:37:55,501 --> 01:37:57,200
and regulatory failures...
1730
01:37:57,201 --> 01:37:59,800
as examples of the need
for change in America.
1731
01:37:59,801 --> 01:38:01,800
A lack of oversight in Washington...
1732
01:38:01,801 --> 01:38:03,600
and on Wall Street is exactly...
1733
01:38:03,601 --> 01:38:06,000
what got us into this mess.
1734
01:38:06,001 --> 01:38:08,800
After taking office, President Obama...
1735
01:38:08,801 --> 01:38:11,000
spoke of the need to reform
the financial industry.
1736
01:38:11,001 --> 01:38:13,000
We want a systemic-risk regulator,
1737
01:38:13,001 --> 01:38:14,500

increased capital requirements.

1738
01:38:14,501 --> 01:38:17,300
We need a consumer financial
protection agency...
1739
01:38:17,301 --> 01:38:19,500
we need to change Wall Street's culture.
1740
01:38:19,501 --> 01:38:23,000
But when finally enacted in mid-2010...
1741
01:38:23,001 --> 01:38:25,800
the administration's financial reforms
were weak...
1742
01:38:25,801 --> 01:38:29,200
and in some critical areas,
including the rating agencies...
1743
01:38:29,201 --> 01:38:30,201
lobbying, and compensation...
1744
01:38:30,202 --> 01:38:34,500
nothing significant was even proposed.
1745
01:38:34,501 --> 01:38:38,700
Addressing Obama and, quote,
regulatory reform:
1746
01:38:38,701 --> 01:38:43,000
my response, if it was one word,
would be: Ha!
1747
01:38:43,001 --> 01:38:46,000
There s very little reform.
1748
01:38:46,001 --> 01:38:47,800
How come?
1749
01:38:47,801 --> 01:38:51,200
It's a Wall Street government.
1750
01:38:54,000 --> 01:38:57,400
Obama chose Timothy Geithner
as Treasury secretary.

1751
01:38:57,401 --> 01:38:59,900
Geithner was the president
of the New York Federal Reserve...
1752
01:38:59,901 --> 01:39:01,300
during the crisis...
1753
01:39:01,301 --> 01:39:02,600
and one of the key players...
1754
01:39:02,601 --> 01:39:04,300
in the decision to pay Goldman Sachs...
1755
01:39:04,301 --> 01:39:05,700
100 cents on the dollar...
1756
01:39:05,701 --> 01:39:08,000
for its bets against mortgages.
1757
01:39:08,001 --> 01:39:11,300
When Tim Geithner was testifying...
1758
01:39:11,301 --> 01:39:13,500
to be confirmed
as Treasury secretary...
1759
01:39:13,501 --> 01:39:16,700
he said: "I have never been a regulator".
1760
01:39:16,701 --> 01:39:19,500
Now that said to me,
he did not understand his job...
1761
01:39:19,501 --> 01:39:21,500
as president of the New York Fed.
1762
01:39:25,001 --> 01:39:29,000
The new president of
the New York Fed is William C. Dudley,
1763
01:39:29,001 --> 01:39:31,500
the former chief economist
of Goldman Sachs...
1764
01:39:31,501 --> 01:39:35,000
whose paper with Glenn Hubbard

praised derivatives.
1765
01:39:35,001 --> 01:39:37,600
Geithner's chief of staff
is Mark Paterson...
1766
01:39:37,601 --> 01:39:40,000
a former lobbyist for Goldman...
1767
01:39:40,001 --> 01:39:42,900
and one of the senior advisors
is Lewis Sachs...
1768
01:39:42,901 --> 01:39:44,700
who oversaw Tricadia...
1769
01:39:44,701 --> 01:39:46,700
a company heavily involved
in betting against...
1770
01:39:46,701 --> 01:39:50,000
the mortgage securities it was selling.
1771
01:39:50,001 --> 01:39:52,500
To head the Commodity Futures
Trading Commission...
1772
01:39:52,501 --> 01:39:56,600
Obama picked Gary Gensler.
A former Goldman Sachs executive...
1773
01:39:56,601 --> 01:39:59,700
who had helped ban
the regulation of derivatives...
1774
01:39:59,701 --> 01:40:02,000
To run the Securities
and Exchange Commission...
1775
01:40:02,001 --> 01:40:04,000
Obama picked Mary Shapiro...
1776
01:40:04,001 --> 01:40:06,500
the former CEO of FINRA...
1777
01:40:06,501 --> 01:40:10,000
the investment-banking

industry's self-regulation body.

1778
01:40:10,001 --> 01:40:12,700
Obama's chief of staff,
Rahm Emanuel...
1779
01:40:12,701 --> 01:40:14,700
made 320,000 dollars...
1780
01:40:14,701 --> 01:40:17,500
serving on the board of Freddie Mac.
1781
01:40:17,501 --> 01:40:20,000
Both Martin Feldstein
and Laura Tyson...
1782
01:40:20,001 --> 01:40:23,500
are members of Obama's
Economic Recovery Advisory Board.
1783
01:40:23,501 --> 01:40:29,000
And Obama's chief economic advisor
is Larry Summers.
1784
01:40:29,001 --> 01:40:31,300
The most senior economic advisors...
1785
01:40:31,301 --> 01:40:34,400
are the very people who were
there, who built the structure.
1786
01:40:34,401 --> 01:40:37,000
When it was clear
that Summers and Geithner...
1787
01:40:37,001 --> 01:40:41,000
were going to play major roles
as advisors...
1788
01:40:41,001 --> 01:40:44,700
I knew this was going to be status quo.
1789
01:40:44,701 --> 01:40:48,500
The Obama administration resisted
regulation of bank compensation...
1790
01:40:48,501 --> 01:40:51,000

even as foreign leaders took action.

1791
01:40:51,001 --> 01:40:53,700
I think the financial industry
is a service industry...
1792
01:40:53,701 --> 01:40:58,000
it should serve others
before it serves itself.
1793
01:40:58,001 --> 01:40:59,800
In September of 2009,
1794
01:40:59,801 --> 01:41:02,600
Christine Lagarde and the
finance ministers of Sweden,
1795
01:41:02,601 --> 01:41:07,300
the Netherlands, Luxembourg,
Italy, Spain, and Germany...
1796
01:41:07,301 --> 01:41:10,800
called for the G20 nations,
including the United States...
1797
01:41:10,801 --> 01:41:14,600
to impose strict regulations
on bank compensation.
1798
01:41:14,601 --> 01:41:18,200
And in July of 2010,
the European Parliament...
1799
01:41:18,201 --> 01:41:21,000
enacted those very regulations.
1800
01:41:21,001 --> 01:41:24,500
The Obama administration
had no response.
1801
01:41:24,501 --> 01:41:27,300
Their view is,
this is a temporary blip...
1802
01:41:27,301 --> 01:41:28,500
and things will go back to normal.
1803

01:41:28,501 --> 01:41:31,200

And that is why
I am reappointing him...
1804
01:41:31,201 --> 01:41:34,500
to another term as chairman
of the Federal Reserve.
1805
01:41:34,501 --> 01:41:35,800
Thank you so much, Ben.
1806
01:41:35,801 --> 01:41:39,300
In 2009, Barack Obama reappointed
Ben Bernanke.
1807
01:41:39,301 --> 01:41:40,301
Thank you, Mr. President
1808
01:41:40,302 --> 01:41:45,600
As of mid-2010, not a single
senior financial executive...
1809
01:41:45,601 --> 01:41:48,000
had been criminally prosecuted,
1810
01:41:48,001 --> 01:41:49,500
or even arrested...
1811
01:41:49,501 --> 01:41:51,600
no special prosecutor
had been appointed...
1812
01:41:51,601 --> 01:41:53,500
not a single financial firm...
1813
01:41:53,501 --> 01:41:55,000
had been prosecuted criminally...
1814
01:41:55,001 --> 01:41:58,000
for securities fraud
or accounting fraud.
1815
01:41:58,001 --> 01:42:00,800
The Obama administration
has made no attempt...
1816
01:42:00,801 --> 01:42:02,500

to recover any of the compensation...

1817
01:42:02,501 --> 01:42:07,000
given to financial executives
during the bubble.
1818
01:42:07,001 --> 01:42:10,500
I certainly would think
of criminal action...
1819
01:42:10,501 --> 01:42:13,000
against some of Countrywide's
top leaders...
1820
01:42:13,001 --> 01:42:14,500
like Mozilo
1821
01:42:14,501 --> 01:42:17,800
I'd certainly look at Bear Stearns,
Goldman Sachs...
1822
01:42:17,801 --> 01:42:20,500
and Lehman Brothers, and Merrill Lynch
1823
01:42:20,501 --> 01:42:24,000
- For criminal prosecutions.
- Yes. Yes.
1824
01:42:24,001 --> 01:42:26,800
They'd be very hard to, to win...
1825
01:42:26,801 --> 01:42:28,200
But I think they could do it...
1826
01:42:28,201 --> 01:42:33,000
if they got enough underlings
to tell the truth.
1827
01:42:33,001 --> 01:42:35,500
In an industry in which drug use,
prostitution,
1828
01:42:35,501 --> 01:42:38,500
and fraudulent billing of prostitutes
as a business expense...
1829
01:42:38,501 --> 01:42:40,500

occur on an industrial scale...

1830
01:42:40,501 --> 01:42:42,600
it wouldn't be hard to make people talk,
1831
01:42:42,601 --> 01:42:45,000
if you really wanted to.
1832
01:42:45,001 --> 01:42:48,000
They gave me a plea bargain, and I took it.
1833
01:42:48,001 --> 01:42:50,900
Um... they were not interested
in any of my records...
1834
01:42:50,901 --> 01:42:52,600
they weren't interested in anything.
1835
01:42:52,801 --> 01:42:54,300
They were not interested
in your records?
1836
01:42:54,301 --> 01:42:56,200
That's correct. That's correct.
1837
01:42:56,201 --> 01:42:59,200
There is a sensibility
that you don't use people's...
1838
01:42:59,201 --> 01:43:04,000
personal vices in the context
of Wall Street cases...
1839
01:43:04,001 --> 01:43:06,500
necessarily, to get them to flip.
1840
01:43:06,501 --> 01:43:08,000
I think maybe it's,
1841
01:43:08,001 --> 01:43:10,500
after the cataclysms
that we've been through...
1842
01:43:10,501 --> 01:43:12,000
maybe people will reevaluate that..
1843

01:43:12,001 --> 01:43:16,000

I'm not the one to pass judgment
on that right now.
1844
01:43:29,500 --> 01:43:32,000
You come to us today, telling us:
1845
01:43:32,001 --> 01:43:34,000
we're sorry, we didn't mean it...
1846
01:43:34,001 --> 01:43:38,400
we won't do it again, trust us.
1847
01:43:38,401 --> 01:43:41,000
Well, I have some people
in my constituency...
1848
01:43:41,001 --> 01:43:44,000
that actually robbed some of your banks.
1849
01:43:44,001 --> 01:43:46,500
And they say the same thing!
1850
01:43:46,501 --> 01:43:48,000
They're sorry, they didn't mean it...
1851
01:43:48,001 --> 01:43:50,000
they won't do it again
1852
01:43:50,001 --> 01:43:55,000
In 2009, as unemployment
hit its highest level in 17 years..
1853
01:43:55,001 --> 01:43:58,500
Morgan Stanley paid its employees
over 14 billion dollars...
1854
01:43:58,501 --> 01:44:01,600
and Goldman Sachs paid out
over 16 billion.
1855
01:44:01,601 --> 01:44:05,500
In 2010, bonuses were even higher.
1856
01:44:05,501 --> 01:44:11,100
Why should a financial engineer
be paid four, four times...

1857
01:44:11,101 --> 01:44:15,000
to a hundred times more
than the, uh... real engineer?
1858
01:44:15,001 --> 01:44:18,000
A real engineer build bridges...
1859
01:44:18,001 --> 01:44:21,400
a financial engineer build,
build dreams.
1860
01:44:21,401 --> 01:44:25,200
And when those dream
turn out to be nightmares,
1861
01:44:25,201 --> 01:44:28,000
other people pay for it.
1862
01:44:28,001 --> 01:44:34,500
For decades, the American financial system
was stable and safe.
1863
01:44:34,501 --> 01:44:37,000
But then something changed.
1864
01:44:37,001 --> 01:44:40,300
The financial industry
turned its back on society...
1865
01:44:40,301 --> 01:44:42,200
corrupted our political system,
1866
01:44:42,201 --> 01:44:45,500
and plunged the world economy
into crisis.
1867
01:44:48,000 --> 01:44:53,000
At enormous cost, we ve avoided disaster,
and are recovering.
1868
01:44:53,001 --> 01:44:57,000
But the men and institutions
that caused the crisis are still in power...
1869
01:44:57,001 --> 01:44:59,500
and that needs to change.

1870
01:45:00,000 --> 01:45:03,000
They will tell us that we need them...
1871
01:45:03,001 --> 01:45:07,500
and that what they do is too
complicated for us to understand.
1872
01:45:07,501 --> 01:45:10,500
They will tell us it won't happen again.
1873
01:45:10,501 --> 01:45:14,000
They will spend billions fighting reform.
1874
01:45:14,001 --> 01:45:16,000
It won't be easy
1875
01:45:18,000 --> 01:45:23,000
But some things are worth fighting for...