1 00:01:08,000 --> 00:01:12,500 Iceland is a stable democracy with the high standard of living... 2 00:01:12,501 --> 00:01:14,000 and until recently... 3 00:01:14,001 --> 00:01:19,000 extremely low unemployment and government debt. 4 00:01:19,001 --> 00:01:23,000 We had the complete infrastructure of a modern society: 5 00:01:23,001 --> 00:01:26,000 clean energy, food production, 6 00:01:26,001 --> 00:01:29,000 fisheries with a quota system to manage them. 7 00:01:29,001 --> 00:01:31,000 Good healthcare and good education, 8 00:01:31,001 --> 00:01:35,000 clean air, not much crime, 9 00:01:35,001 --> 00:01:37,000 It's good place for families to life... 10 00:01:37,001 --> 00:01:41,000 We had almost "end of history" status. 11 00:01:42,000 --> 00:01:47,000 But in 2000 Iceland government began a broad policy of deregulation... 12 00:01:47,001 --> 00:01:49,400 that would have disastrous consequences... 13 00:01:49,401 --> 00:01:54,000 first for the environment and then for the economy... 14 00:01:54,001 --> 00:01:55,000 They started by allowing... 15 00:01:55,001 --> 00:01:57,500 multinational corporations like Alcova... 16 00:01:57,501 --> 00:02:00,000 to build giant aluminum smelting plants... 17 00:02:00,001 --> 00:02:02,800 and exploit Iceland’s natural geothermal... 18 00:02:02,801 --> 00:02:05,000 and hydroelectric energy sources. 19 00:02:05,600 --> 00:02:08,000 Many of the most beautiful areas in the highlands... 20 00:02:08,001 --> 00:02:14,000 with the most spectacular colors are geothermal. 21 00:02:14,001 --> 00:02:19,000 So nothing comes without consequences. 22 00:02:54,000 --> 00:02:57,800 At the same time the government privatized... 23 00:02:57,801 --> 00:03:00,000 Iceland’s three largest banks... 24 00:03:00,001 --> 00:03:04,000 The result was one of the purest experiments in financial deregulation... 25 00:03:04,001 --> 00:03:06,000 ever conducted. 26 00:03:15,000 --> 00:03:19,000 Finance took over and uh, 27 00:03:19,001 --> 00:03:20,701 more or less wrecked the place. 28 00:03:21,001 --> 00:03:24,000 In a 5 year period this three tiny banks... 29 00:03:24,001 --> 00:03:27,000 which have never operated outside of Island... 30 00:03:27,001 --> 00:03:30,000 borrowed 120 billion dollars... 31 00:03:30,001 --> 00:03:33,000 ten time the size of Iceland’s economy. 32 00:03:33,001 --> 00:03:35,500 The bankers showered money on themselves... 33 00:03:35,501 --> 00:03:38,000 each other and their friends. 34 00:03:38,001 --> 00:03:39,000 There was a massive bubble... 35 00:03:39,001 --> 00:03:43,000 Stock prices went up by a factor of nine, 36 00:03:43,001 --> 00:03:47,000 house prices more than doubled... 37 00:03:47,500 --> 00:03:49,500 Iceland bubble gave rise to people... 38 00:03:49,501 --> 00:03:52,000 like Jon Asgeir Johannesson. 39 00:03:52,001 --> 00:03:53,500 He borrowed billions from the banks... 40 00:03:53,501 --> 00:03:56,300 to buy up high-end retail businesses in London. 41 00:03:56,301 --> 00:03:59,500 He also bought a pinstriped private jet, 42 00:03:59,501 --> 00:04:01,300 a 40 million dollar yacht... 43 00:04:01,301 --> 00:04:04,000 and a Manhattan penthouse. 44 00:04:04,001 --> 00:04:05,500 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 00:04:13,001 --> 00:04:15,500 Instead of saying... 48 00:04:15,501 --> 00:04:19,000 this millionaire took a billion dollars loan... 49 00:04:19,001 --> 00:04:21,400 to buy this company... 50 00:04:21,401 --> 00:04:24,000 and it took it from your local bank. 51 00:04:24,001 --> 00:04:26,000 The banks set up money market funds... 52 00:04:26,001 --> 00:04:28,600 and the banks advised deposit-holders to... 53 00:04:28,601 --> 00:04:32,000 withdraw money and put them in a money market funds. 54 00:04:32,001 --> 00:04:34,000 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 00:04:40,501 --> 00:04:42,000 and found nothing wrong. 58 00:04:42,001 --> 00:04:44,500 And American credit rating agencies... 59 00:04:44,501 --> 00:04:46,000 said Iceland was wonderful. 60 00:04:46,001 --> 00:04:49,000 In February 2007... 61 00:04:49,001 --> 00:04:50,200 the rating agencies decided... 62 00:04:50,201 --> 00:04:52,000 to upgrade the banks... 63 00:04:52,001 --> 00:04:55,000 to a highest possible rate – AAA. 64 00:04:55,001 --> 00:04:57,500 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. 66 00:05:05,000 --> 00:05:08,500 When Iceland’s banks collapsed at the end of 2008... 67 00:05:08,501 --> 00:05:13,000 unemployment tripled in 6 months. 68 00:05:14,000 --> 00:05:19,000 There is nobody unaffected in Iceland. 69 00:05:24,000 --> 00:05:28,500 - So a lotta people here lost their savings. - Yes that’s the case. 70 00:05:28,501 --> 00:05:30,200 The government regulators... 71 00:05:30,201 --> 00:05:32,300 who should’ve been protecting the citizens of Iceland... 72 00:05:32,301 --> 00:05:35,000 had done nothing. 73 00:05:35,001 --> 00:05:37,000 You have two lawyers... 74 00:05:37,001 --> 00:05:39,000 from regulator company who're coming to a bank... 75 00:05:39,001 --> 00:05:41,000 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 00:05:59,701 --> 00:06:01,400 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 00:06:58,001 --> 00:07:00,500 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. 109 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 00:08:33,000 --> 00:08:37,000 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 00:08:48,701 --> 00:08:51,000 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. 124 00:09:44,001 --> 00:09:45,500 Do you think that Columbia Business School... 125 00:09:45,501 --> 00:09:48,999 has any significant conflict of interest problem? 126 00:09:49,000 --> 00:09:51,000 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. 134 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 00:10:58,501 --> 00:10:59,700 fears gripped markets overnight... 143 00:10:59,701 --> 00:11:01,300 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, 155 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 00:11:38,000 --> 00:11:42,000 This is just a hugely, hugely expensive crisis. 158 00:11:42,001 --> 00:11:45,000 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 00:11:57,001 --> 00:12:00,000 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 00:12:05,000 --> 00:12:09,000 Part I. How we got here 166 00:12:11,001 --> 00:12:14,200 After the Great Depression United States... 167 00:12:14,201 --> 00:12:16,500 have 40 years of economic growth... 168 00:12:16,501 --> 00:12:19,002 without a single financial crisis... 169 00:12:19,003 --> 00:12:22,000 the financial industry was tightly regulated... 170 00:12:22,004 --> 00:12:24,400 most regular banks were local businesses... 171 00:12:24,401 --> 00:12:26,500 and they were prohibited from speculating... 172 00:12:26,501 --> 00:12:29,000 with depositors savings. 173 00:12:29,001 --> 00:12:30,000 Investment banks... 174 00:12:30,001 --> 00:12:32,400 which handle stock and bond tradings... 175 00:12:32,401 --> 00:12:35,500 were small private partnerships. 176 00:12:35,501 --> 00:12:37,400 In the traditional investment banking... 177 00:12:37,401 --> 00:12:39,300 partnership model... 178 00:12:39,301 --> 00:12:41,001 the partners put the money up... 179 00:12:41,002 --> 00:12:43,000 and obviously the partners... 180 00:12:43,001 --> 00:12:45,000 watch that money very carefully. 181 00:12:45,001 --> 00:12:46,700 They wanted to live well... 182 00:12:46,701 --> 00:12:48,000 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. 187 00:12:57,801 --> 00:12:59,500 Before going into government, 188 00:12:59,501 --> 00:13:01,300 he was a financial economist... 189 00:13:01,301 --> 00:13:03,000 at Chase Manhattan Bank. 190 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 00:13:13,400 --> 00:13:16,500 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 00:13:26,014 --> 00:13:31,000 Now Morgan Stanley has 50,000 workers... 197 00:13:31,001 --> 00:13:36,000 and has capital of several billion... 198 00:13:36,001 --> 00:13:38,000 and has offices all over the world. 199 00:13:38,001 --> 00:13:41,015 In the 1980's the financial industry exploded. 200 00:13:41,500 --> 00:13:43,500 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... 204 00:13:54,501 --> 00:13:59,000 at Merilyn Lynch in 1970s. 205 00:13:59,001 --> 00:14:03,000 He had a job as a train conducter at night. 206 00:14:03,001 --> 00:14:04,000 Because he had 3 kids... 207 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... 210 00:14:11,401 --> 00:14:15,000 and thought it was because he was smart. 211 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...