Inside Job (2010) Documentary Movie:
Iceland is a stable democracy with a high standard of living, and, until recently, extremely low unemployment and government debt. We had the complete infrastructure of a modern society. Clean energy, food production. Fisheries with a quota system to manage them. Good healthcare, education, clean air. Not much crime. It's a good place for families to live. We had almost end-of-history status. But in 2000, Iceland's government began a broad policy of deregulation that would have disastrous consequences, first for the environment and then for the economy. They started by allowing multinational corporations like Alcoa to build giant aluminum-smelting plants and exploit Iceland's geothermal and hydroelectric energy sources. Many of the most beautiful areas in the highlands with the most spectacular colors are geothermal. So nothing comes without consequence. At the same time, the government privatized Iceland's three largest banks. The result was one of the purest experiments in financial deregulation ever conducted. We have had enough. How could all of this happen? Finance took over and more or less wrecked the place. In a five-year period, these three tiny banks, which had never operated outside of Iceland, borrowed 120 billion dollars, 10 times the size of Iceland's economy. The bankers showered money on themselves, each other, and their friends. There was a massive bubble. Stock prices went up by a factor of nine. House prices more than doubled. He borrowed billions to buy up high-end retail businesses in London. He also bought a pinstriped private jet, a 40-million-dollar yacht and a Manhattan penthouse. Newspapers always had the headline: This millionaire bought this company in the U.K. Or in Finland or in France or wherever, instead of saying: "This millionaire took a billion-dollar loan to buy this company, and he took it from your local bank." The banks set up money market funds, and the banks advised deposit-holders to withdraw money and put them in the money market funds. The Ponzi scheme needed everything it could. American accounting firms like KPMG audited the Icelandic banks and investment firms and found nothing wrong. And American credit-rating agencies said Iceland was wonderful. In February 2007, the rating agency upgraded the banks to the highest possible rate, triple-A. It went so far as the government here traveling with the bankers as a PR show. When Iceland's banks collapsed at the end of 2008, unemployment tripled in six months. There is nobody unaffected in Iceland. A lot of people lost their savings. Yes, that's the case. Government regulators who should've been protecting the citizens had done nothing. You have two lawyers from the regulator going down to a bank to talk about some issue. When they approach the bank, they would see 19 SUVs outside the bank. You enter the bank, and you have the 19 lawyers sitting in front of you, right, very well prepared, ready to kill any argument you make. And then, if you do really well, they'll offer you a job. One-third of Iceland's financial regulators went to work for the banks. But this is a universal problem, huh? In New York, you have the same problem, right? What do you think of Wall Street incomes these days? Excessive. I've been told it's extremely difficult for the IMF to criticize the United States. I wouldn't say that. We deeply regret our breaches of U.S. Law. They're amazed at how much cocaine these Wall Streeters can use and get up and go to work the next day. I didn't know what credit default swaps are. I'm a little bit old-fashioned. Has Larry Summers ever expressed remorse? I don't hear confessions. The government's just writing checks. That's plan A, that's plan B and that's plan C. Would you support legal controls on executive pay? I would not. Are you comfortable with the level of compensation in financial services? If they've earned it, yes, I am. Do you think they've earned it? I think so. And so you've helped these people blow the world up? You could say that. They were having massive private gains at public loss. When you think you can create something out of nothing it's difficult to resist. I'm concerned people want to go back to the old way, the way they were operating prior to the crisis. I was getting a lot of anonymous e-mails from bankers saying: "You can't quote me, but I'm really concerned." Why do you think there isn't a more systematic investigation being undertaken? Because then you'll find the culprits. You think Columbia Business. School has any conflict-of-interest problem? I don't see that we do. The regulators didn't do their job. They had the power to do every case that I made. They just didn't want to. Lehman Brothers, one of the most venerable and biggest investment banks, was forced to declare itself bankrupt. Another, Merrill Lynch, was forced to sell itself today. World financial markets are way down, following dramatic developments. In September 2008, the bankruptcy of the U.S. Investment bank Lehman Brothers and the collapse of the world's largest insurance company, AIG, triggered a global crisis. Fears gripped markets overnight. Stocks fell off a cliff. The largest single point drop in history. Share prices continued to tumble in the aftermath of the Lehman collapse. The result was a global recession, which cost the world tens of trillions of dollars, rendered 30 million people unemployed and doubled the national debt of the United States. With the destruction of equity and housing wealth, the destruction of income, of jobs, 50 million people globally could end up below the poverty line again. This is just a hugely, hugely expensive crisis. This crisis was not an accident. It was caused by an out-of-control industry. Since the 1980s, the rise of the U.S. Financial sector has led to a series of increasingly severe financial crises. Each crisis has caused more damage, while the industry has made more and more money. After the Great Depression the United States had 40 years of economic growth without a single financial crisis. The financial industry was tightly regulated. Most regular banks were local businesses prohibited from speculating with depositors' savings. Investment banks, which handled stock and bond trading, were small, private partnerships. In the traditional investment banking model, the partners put the money up, and they watch that money very carefully. They wanted to live well, but they didn't want to bet the ranch on anything. Paul Volcker served in the Treasury Department and was chairman of the Federal Reserve from 1979 to 1987. Before going into government, he was a financial economist at Chase Manhattan Bank. When I left Chase to go in the Treasury in 1969, my income was in the neighborhood of $45,000 a year. Forty-five thousand dollars a year. Morgan Stanley, in 1972, had approximately 110 total personnel, one office, and capital of 12 million dollars. Now Morgan Stanley has 50,000 workers and has capital of several billion and has offices all over the world. In the 1980s, the financial industry exploded. The investment banks went public, giving them huge amounts of stockholder money. People on Wall Street started getting rich. I had a friend who was a bond trader at Merrill Lynch in the 1970s. He had a job as a train conductor at night because he had three kids and couldn't support them on what a trader made. By 1986, he was making millions of dollars and thought it was because he was smart. The highest order of business before the nation is to restore our economic prosperity. In 1981, President Ronald Reagan chose as Treasury secretary the CEO of the investment bank Merrill Lynch, Donald Regan. Wall Street and the president see eye to eye. I've talked to leaders of Wall Street. They say, "We're behind the president 100 percent." The Reagan administration, supported by economists and financial lobbyists, started a 30-year period of financial deregulation. In 1982, the Reagan administration deregulated savings-and-loan companies, allowing them to make risky investments with depositors' money. By the end of the decade, hundreds of savings-and-loan companies had failed. This crisis cost taxpayers $ 124 billion and cost many people their life savings. It may be the biggest bank heist in our history. Thousands of executives went to jail for looting their companies. One of the most extreme cases was Charles Keating. Mr. Keating, got a word? In 1985, when federal regulators began investigating him, Keating hired an economist named Alan Greenspan. In this letter to regulators, Greenspan praised Keating's sound business plans and expertise and said he saw no risk in allowing Keating to invest customers' money. Keating reportedly paid Greenspan $40,000. Keating went to prison shortly afterwards. As for Alan Greenspan, Reagan appointed him chairman of America's central bank, the Federal Reserve. Greenspan was reappointed by presidents Clinton and George W. Bush. During the Clinton administration, deregulation continued under Greenspan and Treasury secretaries Robert Rubin, the former CEO of the investment bank Goldman Sachs, and Larry Summers, a Harvard economics Professor. The financial sector, Wall Street being powerful, having lobbies, lots of money, step by step, captured the political system. Both on the Democratic and the Republican side. By the late 1990s, the financial sector had consolidated into a few gigantic firms, each of them so large that their failure could threaten the whole system. And the Clinton administration helped them grow even larger. In 1998, Citicorp and Travelers merged to form Citigroup, the largest financial services company in the world. The merger violated the Glass-Steagall Act, a law passed after the Great Depression, preventing banks with consumer deposits from engaging in risky investment-banking activities. It was illegal to acquire Travelers. Greenspan said nothing. The Federal Reserve gave them an exemption for a year, then they got the law passed. In 1999, at the urging of Summers and Rubin, Congress passed the Gramm-Leach-Bliley Act, known to some as the Citigroup Relief Act. It overturned Glass-Steagall and cleared the way for future mergers. Why do you have big banks? Because banks like monopoly power, lobbying power. Because banks know that when they're too big, they will be bailed. Markets are inherently unstable. Or at least potentially unstable. An appropriate metaphor is the oil tankers. They are very big, and therefore, you have to put in compartments to prevent the sloshing around of oil from capsizing the boat. The design of the boat has to take that into account. And after the Depression, the regulations actually introduced these very watertight compartments. And deregulation has led to the end of compartmentalization. The next crisis came at the end of the '90s. The investment banks fueled a massive bubble in Internet stocks, which was followed by a crash in 2001 that caused $5 trillion in investment losses. The Securities and Exchange Commission, the federal agency created during the Depression to regulate investment banking, had done nothing. In the absence of meaningful federal action, and given the clear failure of self-regulation, it's become necessary for others to step in and adopt the protections needed. Eliot Spitzer's investigation revealed the investment banks promoted Internet companies they knew would fail. Analysts were being paid based on how much business they brought in. What they said publicly was quite different from what they said privately. Infospace, given the highest possible rating, dismissed by an analyst as a "piece of junk." Excite, also highly rated, called "such a piece of crap." The defense that was proffered by many of the investment banks was not "you're wrong," it was, "Everybody's doing it, everybody knows it's going on." Nobody should rely on these analysts anyway." In December, 2002, 10 investment banks settled the case for a total of $ 1.4 billion and promised to change their ways. Scott Talbott is the chief lobbyist for the Financial Services Roundtable, one of Washington's most powerful groups, which represents nearly all of the world's largest financial companies. Are you comfortable with the fact that several of your member companies have engaged in large-scale criminal activity? L... You'll have to be specific. Okay. And first of all, criminal activity shouldn't be accepted, period. Since deregulation began, the world's biggest financial firms have been caught laundering money, defrauding customers and cooking their books again and again and again. Credit Suisse helped funnel money for Iran's nuclear program and for Iran's Aerospace Industries Organization, which builds ballistic missiles. Any information that would identify it as Iranian would be removed. The bank was fined $536 million. Citibank helped funnel $ 100 million of drug money out of Mexico. Did you comment that she should, quote: "Lose any documents connected with the account"? I said that in a kidding manner. It was at the early stages of this. I did not mean it seriously. Between 1998 and 2003, Fannie Mae overstated it's earnings by more than $ 10 billion. These accounting standards are complex and require determinations over which experts often disagree. CEO Franklin Raines, who used to be President Clinton's budget director, received over $52 million in bonuses. When UBS was caught helping wealthy Americans evade taxes, they refused to cooperate with the government. Would you be willing to supply the names? If there's a treaty framework. No treaty framework. You've agreed you participated in a fraud. Hm. But while the companies face unprecedented fines, the investment firms do not have to admit any wrongdoing. When dealing with this many products, this many customers, mistakes happen. The financial services industry seems to have a level of criminality that is somewhat distinctive. You know, when was the last time that Cisco or Intel or Google or Apple or IBM, you know...? I agree about high-tech versus financial services... So how come? High-tech is a creative business where the value generation and income derives from actually creating something new. Beginning in the 1990s, deregulation and advances in technology led to an explosion of complex financial products called derivatives. Economists and bankers claimed they made markets safer. But instead, they made them unstable. Since the end of the Cold War, a lot of former physicists, mathematicians, decided to apply their skills, not on, you know, Cold War technology, but on financial markets. And together with investment bankers... Creating different weapons. Absolutely. You know, as Warren Buffett said, weapons of mass destruction. Regulators, politicians, business people did not take seriously the threat of innovation on the stability of the financial system. Using derivatives, bankers could gamble on virtually anything. They could bet on the rise or fall of oil prices, the bankruptcy of a company, even the weather. By the late 1990s, derivatives were a 50-trillion-dollar unregulated market. In 1998, someone tried to regulate them. Brooksley Born graduated first in her class at Stanford Law School and was the first woman to edit a major law review. After running the derivatives practice at Arnold & Porter, Born was appointed by Clinton to chair the Commodity Futures Trading Commission, which oversaw the derivatives market. Brooksley Born asked me if I would come work with her. We decided that this was a serious, potentially destabilizing market. In May of 1998, the CFTC issued a proposal to regulate derivatives. Clinton's Treasury Department had an immediate response. I happened to go into Brooksley's office, and she was just putting down the receiver on her telephone, and the blood had drained from her face. And she looked at me and said, "That was Larry Summers." He had 13 bankers in his office. He conveyed it in a very bullying fashion, sort of directing her to stop. Banks were now reliant for earnings on these activities. And that led to a Titanic battle to prevent this from being regulated. Shortly after the phone call from Summers, Greenspan, Rubin, and SEC chairman Arthur Levitt issued a joint statement condemning Born and recommending legislation to keep derivatives unregulated. Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary. She was overruled, unfortunately. First by the Clinton administration and then by the Congress. In 2000, Senator Phil Gramm took a major role in getting a bill passed that pretty much exempted derivatives from regulation. They are unifying markets, reducing regulatory burden. I believe we need to do it. It is our very great hope that it will be possible to move this year on legislation that, in a suitable way goes to create legal certainty for OTC derivatives. I wish to associate myself with all the remarks of Secretary Summers. In December of 2000, Congress passed the Commodity Futures Modernization Act. Written with the help of financial-industry lobbyists, it banned the regulation of derivatives. After that, it was off to the races. Use of derivatives and financial innovation exploded dramatically after 2000. So help me God. So help me God. By the time George W. Bush took office in 2001, the U.S. Financial sector was vastly more profitable, concentrated and powerful than ever before. Dominating this industry were five investment banks, two financial conglomerates, three securities insurance companies and three rating agencies. And linking them all together was the securitization food chain. A new system which connected trillions of dollars in mortgages and other loans with investors all over the world. Thirty years ago, if you went to get a loan for a home, the person lending you the money expected you to pay him or her back. You got a loan from a lender who wanted to be paid back. We've since developed securitization, whereby people who make the loan are no longer at risk if they fail to repay. In the old system, when a homeowner paid their mortgage every month, the money went to their local lender. And since mortgages took decades to repay, lenders were careful. In the new system, lenders sold mortgages to investment banks. The banks combined thousands of mortgages and loans, including car loans, student loans, and credit card debt, to create complex derivatives called collateralized debt obligations, or CDOs. The investment banks then sold the CDOs to investors. Now when homeowners paid their mortgages, the money went to investors all over the world. The investment banks paid rating agencies to evaluate the CDOs, and many of them were given a triple-A rating, which is the highest possible investment grade. This made CDOs popular with retirement funds, which could only purchase highly rated securities. This system was a ticking time bomb. Lenders didn't care anymore about whether a borrower could repay, so they started making riskier loans. The investment banks didn't care either. The more CDOs they sold, the higher their profits. And the rating agencies, which were paid by the investment banks, had no liability if their ratings of CDOs proved wrong. You weren't gonna be on the hook, there weren't regulatory constraints. So it was a green light to just pump out more and more loans. Between 2000 and 2003, the number of mortgage loans made each year nearly quadrupled. Everybody in this securitization food chain, from the very beginning until the end, didn't care about the quality of the mortgage. They were caring about maximizing their volume and getting a fee out of it. In the early 2000s, there was a huge increase in the riskiest loans, called subprime. When thousands of subprime loans were combined to create CDOs, many of them still received triple-A ratings. Now, it would have been possible to create derivative products that don't have these risks, that carry the equivalent of deductibles, where there are limits on the risks that can be taken on, and so forth. They didn't do that, did they? They didn't. In retrospect, they should've done. So did these guys know they were doing something dangerous? I think they did. All the incentives financial institutions offered to their mortgage brokers were based on selling the most profitable products, which were predatory loans. If they make more money, that's where they'll put you. Suddenly, hundreds of billions of dollars a year were flowing through the securitization chain. Since anyone could get a mortgage, home purchases and housing prices skyrocketed. The result was the biggest financial bubble in history. Real estate is real. They can see their asset. They can live in their asset. They can rent out their asset. You had a huge boom in housing that made no sense at all. The financing appetites of the financial sector drove what everybody else did. Last time we had a housing bubble was in the late '80s. In that case, the increase in home price had been relatively minor. That housing bubble led to a relatively severe recession. From 1996 until 2006, real home prices effectively doubled. At $500 a ticket, they've come to hear how to buy their very own piece of the American dream. Goldman Sachs, Bear Stearns, Lehman Brothers, Merrill Lynch were all in on this. The subprime lending alone increased from 30 billion a year in funding to over 600 billion a year in 10 years. They knew what was happening. Countrywide Financial, the largest subprime lender, issued $97 billion worth of loans. It made over $ 11 billion in profits as a result. On Wall Street, annual cash bonuses spiked. Traders and CEOs became enormously wealthy during the bubble. Lehman Brothers was a top underwriter of subprime lending, and their CEO, Richard Fuld, took home $485 million. On Wall Street, this housing and credit bubble was leading to hundreds of billions of dollars of profits. You know, by 2006 about 40 percent of all profits of S&P 500 firms was coming from financial institutions. It wasn't real profits or income. It was money created by the system and booked as income. Two, three years down the road there's a default, it's all wiped out. I think it was, in fact, in retrospect, a great big national... And not just national, global Ponzi scheme. Through the Home Ownership and Equity Protection Act, the Federal Reserve board had broad authority to regulate the mortgage industry. But Fed chairman Alan Greenspan refused to use it. Alan Greenspan said, "No, that's regulation. I don't believe in it." For 20 years, Robert Gnaizda was the head of Greenlining, a powerful consumer advocacy group. He met with Greenspan on a regular basis. We gave him an example of Countrywide and 150 different complex adjustable-rate mortgages. He said, "If you had a doctorate in math" you wouldn't be able to understand them enough "to know which was good for you and which wasn't." So we thought he was gonna take action. But as the conversation continued, it was clear he was stuck with his ideology. We met again with Greenspan in '05. Often we met with him twice a year, and never less than once a year. And he wouldn't change his mind. In this world of global communications, the efficient movement of capital is helping to create the greatest prosperity in human history. A hundred and forty-six people were cut from the SEC Enforcement Division? Is that what you also testified to? Yes. Yeah, I think there has been a systematic gutting, or whatever you wanna call it, of the agency and it's capability through cutting back of staff. The SEC Office of Risk Management was reduced to a staff, did you say, of one? Yeah. When that gentleman would go home, he could turn the lights out. During the bubble, investment banks were borrowing heavily to buy more loans and create more CDOs. The ratio between borrowed money and the banks' own money was called leverage. The more the banks borrowed, the higher their leverage. In 2004, Henry Paulson, the CEO of Goldman Sachs, helped lobby the SEC to relax limits on leverage, allowing the banks to sharply increase their borrowing. The SEC somehow decided to let investment banks gamble a lot more. That was nuts. I don't know why they did that, but they did. We've said these are the big guys, and clearly that's true. But that means if anything goes wrong, it's going to be an awfully big mess. You are dealing with the most highly sophisticated financial institutions. These are the firms that do most of the derivative activity. We talked to some as to what their comfort level was. The firms actually thought that the number was appropriate. The commissioners vote to adopt the new rules as recommended. - Yes. - Yes. We do indeed. It's unanimous. And we are adjourned. The degree of leverage in the financial system became absolutely frightening. Investment banks leveraging up to the level of 33-to-1. Which means that a tiny 3-percent decrease in the value of their asset base would leave them insolvent. There was another ticking time bomb in the financial system. AIG, the world's largest insurance company, was selling huge quantities of derivatives called credit default swaps. For investors who owned CDOs, credit default swaps worked like an insurance policy. An investor who purchased a credit default swap paid AIG a quarterly premium. If the CDO went bad, AIG promised to pay the investor for their losses. But unlike regular insurance, speculators could also buy credit default swaps from AIG in order to bet against CDOs they didn't own. In insurance, you can only insure something you own. Let's say you and I own property. I own a house. I can only insure that house once. The derivatives universe essentially enables anybody to actually insure that house. You could insure that, somebody else could. So 50 people might insure my house. So what happens is, if my house burns down, the number of losses in the system becomes proportionately larger. Since credit default swaps were unregulated, AIG didn't have to put aside any money to cover potential losses. Instead, AIG paid it's employees huge cash bonuses as soon as contracts were signed. But if the CDOs later went bad, AIG would be on the hook. People were essentially being rewarded for taking massive risks. In good times, they generate short-term revenues and profits and, therefore, bonuses. But that's gonna lead to the firm to be bankrupt over time. That's a distorted system of compensation. AIG's Financial Products division in London issued $500 billion worth of credit default swaps during the bubble, many of them for CDOs backed by subprime mortgages. The 400 employees at AIGFP made $3.5 billion between 2000 and 2007. Joseph Cassano, the head of AIGFP, personally made $315 million. It's hard for us, and without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions. In 2007, AIG's auditors raised warnings. One of them, Joseph St. Denis, resigned in protest after Cassano repeatedly blocked him from investigating AIGFP's accounting. Let me tell you one person that didn't get a bonus while everybody else was getting bonuses. That was St. Denis. Mr. St. Denis tried to alert the two of you to the fact you were running into big problems. He quit in frustration, and he didn't get a bonus. In 2005, Raghuram Rajan, then the chief economist of the International Monetary Fund, delivered a paper at the Jackson Hole symposium, the most elite banking conference in the world. Who was in the audience? It was the central bankers of the world, ranging from Mr. Greenspan himself, Ben Bernanke Larry Summers. Tim Geithner was there. The title of the paper was essentially: "Is Financial Development Making the World Riskier?" And the conclusion was, it is. Rajan's paper focused on incentive structures that generated huge cash bonuses based on short-term profits, but which imposed no penalties for later losses. Rajan argued that these incentives encouraged bankers to take risks that might eventually destroy their own firms or even the entire financial system. It's very easy to generate performance by taking on more risk. So what you need to do is compensate for risk-adjusted performance. And that's where all the bodies are buried. Rajan, you know, hit the nail on the head. What he particularly said was: "You guys have claimed you've found a way" to make more profits with less risk. I say you've found a way to make more profits with more risk. "There's a big difference." Summers was vocal. He basically thought that I was criticizing the change in the financial world and was worried about, you know, regulation, which would reverse this change. Essentially he accused me of being a Luddite. He wanted to make sure that we didn't bring in a whole new set of regulations to constrain the financial sector. You're gonna make an extra $2 million a year, or $ 10 million a year, for putting your financial institution at risk. Someone else pays the bill, you don't. Would you make that bet? Most people on Wall Street said, "Sure, I'd make that bet." It never was enough. They don't wanna own one home, they wanna own five homes. And they wanna have an expensive penthouse on Park Avenue. And they wanna have their own private jet. You think this is an industry where high...? Very high compensation levels are justified? I think I would take caution, or take heed, or take exception to your word "very high." It's relative. You have a 14-million-dollar home in Florida. You have a summer home in Sun Valley, Idaho. An art collection filled with million-dollar paintings. Richard Fuld never appeared on the trading floor. There were art advisors there all the time. He had a private elevator. He wanted to be disconnected. His elevator, they hired technicians to program it so that his driver would call in in the morning and a security guard would hold it. There's only a three-second window where he actually has to see people. And he hops into this elevator and it goes straight to 31. Lehman owned corporate jets. You know about this? Yes. How many were there? Well, there were six, including the 767 s. They also had a helicopter. Isn't that kind of a lot of planes to have? We're dealing with type-A personalities. And type-A personalities know everything in the world. Banking became a pissing contest. "Mine's bigger than yours." That kind of stuff. It was all men that ran it, incidentally. Fifty-billion-dollar deals weren't large enough, so we'd do 100-billion deals. These people are risk-takers. They're impulsive. It's part of their behavior. It's part of their personality. And that manifests outside of work as well. It was quite typical for the guys to go out to go to strip bars, to use drugs. I see a lot of cocaine use, use of prostitution. Recently, neuroscientists have done experiments where they've taken individuals and put them into an MRI machine, and they have them play a game where the prize is money. And they noticed that when the subjects earn money, the part of the brain that gets stimulated is the same part that cocaine stimulates. A lot of people feel that they need to participate in that behavior to make it, to get promoted, get recognized. According to a Bloomberg article, business entertainment represents 5 percent of revenue for derivatives brokers and often includes strip clubs, prostitution and drugs. A New York broker filed a lawsuit in 2007 against his firm alleging he was required to retain prostitutes to entertain traders. There's just a blatant disregard for the impact that their actions might have on society, on family. They have no problem using a prostitute and going home to their wife. How many customers? About 10,000 at that point in time. What fraction were from Wall Street? Of the higher-end clients, probably 40 to 50 percent. Were all the major Wall Street firms represented? Goldman Sachs? Lehman Brothers. They're all in there. Morgan Stanley was a little less of that. I think Goldman was pretty, pretty big with that. Clients would call and say: "Can you get me a Lamborghini for the girl?" These guys were spending corporate money. I had many black cards from, you know, the various financial firms. What's happening is services are being charged to computer repair. Trading research, you know, consulting for market compliance. Just gave them letterhead and said, "Make your own invoice." This behavior extends to the senior management of the firm? Absolutely does. Yeah. I know for a fact that it does. It extends to the very top. A friend of mine in a company that has a big financial presence said: "It's about time you learned about subprime mortgages." So he set up a session with his trading desk and me. And the techie who did all this gets very excited, runs to his computer, pulls up in about three seconds this Goldman Sachs issue of securities. It was a complete disaster. Borrowers had borrowed, on average, 99.3 percent of the price of the house. They have no money in the house. If anything goes wrong, they walk away from the mortgage. This is not a loan you'd really make, right? You've gotta be crazy. But somehow, you took 8000 of these loans, and by the time the guys were done at Goldman Sachs and the rating agencies, two-thirds of the loans were rated triple-A. They were rated as safe as government securities. It's utterly mad. Goldman Sachs sold at least $3. 1 billion worth of these toxic CDOs in the first half of 2006. The CEO of Goldman Sachs at this time was Henry Paulson, the highest paid CEO on Wall Street. Good morning. I'm pleased to announce that I will nominate Henry Paulson to be the Secretary of the Treasury. He has a lifetime of experience. He has knowledge of financial markets. He's earned a reputation for candor and integrity. You might think it would be hard to adjust to a meager government salary. But taking the job as Treasury secretary was the best financial decision of his life. Paulson had to sell his $485 million of Goldman stock when he went to work for the government. But because of a law passed by the first President Bush, he didn't have to pay any taxes on it. It saved him $50 million. The article came out in October of 2007. Already, a third of the mortgages defaulted. Now most of them are going. One group that had purchased these now worthless securities was the Public Employees' Retirement System of Mississippi, which provides monthly benefits to over 80,000 retirees. They lost millions of dollars and are now suing Goldman Sachs. By late 2006, Goldman had taken things a step further. It didn't just sell toxic CDOs, it started betting against them at the same time it was telling customers that they were high-quality investments. By purchasing credit default swaps from AIG, Goldman could bet against CDOs it didn't own and get paid when the CDOs failed. I asked if anybody called the customers and said: "We don't really like this kind of mortgage anymore, and we thought you ought to know." They didn't say anything, but you could feel the laughter over the phone. Goldman Sachs bought at least $22 billion of credit default swaps from AIG. It was so much that Goldman realized that AIG itself might go bankrupt. So they spent $ 150 million insuring themselves against AIG's potential collapse. Then in 2007, Goldman went even further. They started selling CDOs specifically designed so that the more money their customers lost, the more money Goldman Sachs made. Six hundred million dollars of Timberwolf securities is what you sold. Before you sold them, this is what your sales team were telling to each other: "Boy, that Timberwolf was one shitty deal." This was an e-mail to me in late June, after the transaction. No, no. You sold Timberwolf after as well. We did trades after that. Yeah. Okay. The next e-mail... Take a look. July 1, '07. Tells the sales force, "The top priority is Timberwolf." Your top priority to sell is that shitty deal. If you have an adverse interest to your client, do you have the duty to disclose it? To tell that client of your adverse interest? That's my question. I'm trying to understand... I think you understand. You don't wanna answer. Do you believe you have a duty to act in your clients' best interest? I repeat, we have a duty to serve our clients by showing prices on transactions that they ask us to show prices for. What do you think about selling securities which your own people think are crap? Does that bother you? I think they would. - As a hypothetical? - No, this is real. - Well, then I don't know... - We heard it today. We heard it today. "This is a shitty deal." "This is crap." I heard nothing today that makes me think anything went wrong. Is there not a conflict when you sell something to somebody and then are determined to bet against that same security, and you don't disclose that to the person you're selling it to? You see a problem? In the context of market making, that is not a conflict. When you heard your employees in e-mails said, "What a shitty deal," "What a piece of crap," did you feel anything? That's very unfortunate to have on e-mail. Are you embar...? And very unfortunate... I don't... I don't... "On e-mail"? How about feeling that way? It's very unfortunate for anyone to have said that in any form. Are your competitors engaged in similar activities? Yes, and to a greater extent than us in most cases. Hedge fund manager John Paulson made $ 12 billion betting against the mortgage market. When Paulson ran out of mortgage securities to bet against, he worked with Goldman Sachs and Deutsche Bank to create more. Morgan Stanley was also selling mortgage securities it was betting against, and it's now being sued by the Government Employees' Retirement Fund of the Virgin Islands for fraud. The lawsuit alleges that Morgan Stanley knew that the CDOs were junk. Although they were rated triple-A, Morgan Stanley was betting they would fail. A year later, Morgan Stanley had made hundreds of millions of dollars, while the investors had lost almost all of their money. You would have thought pension funds would have said: "Those are subprime. Why am I buying them?" They had these guys at Moody's and Standard & Poor's who said, "That's a triple-A." No securities got issued without the seal of approval of the rating agencies. The three rating agencies, Moody's, S&P and Fitch, made billions of dollars giving high ratings to risky securities. Moody's, the largest rating agency, quadrupled it's profits between 2000 and 2007. Moody's and S&P get compensated based on putting out ratings reports. And the more structured securities they gave a triple-A rating to, the higher their earnings were. Imagine going to The Times saying: "Write a positive story, I'll pay you $500,000. If you don't, I'll give you nothing." Rating agencies could have stopped the party and said: "Sorry. We're gonna tighten our standards," and immediately cut off the funding to risky borrowers. Triple-A-rated instruments mushroomed from just a handful to thousands and thousands. Hundreds of billions of dollars were being rated, you know, and... Per year? Per year. Oh, yeah. I've now testified before both houses of Congress on the credit rating agency issue, and both times they trot out very prominent First Amendment lawyers and argue that, "When we say something is rated triple-A", that is merely our 'opinion.' You shouldn't rely on it." S&P's ratings express our opinion. Our ratings are our opinions. They're opinions. Opinions. And they are just opinions. I think we are emphasizing the fact that our ratings are opinions. They do not speak to the market value of a security, the volatility of it's price, or it's suitability as an investment. We have many economists saying: "Oh. This is a bubble, it's going to burst. This is going to be an issue for the economy." Some say it could even 'cause a recession at some point. What is the worst-case scenario if, in fact, we were to see prices come down substantially across the country? I don't buy your premise. It's an unlikely possibility. We've never had a decline in house prices on a nationwide basis. Ben Bernanke became chairman of the Federal Reserve in February 2006, the top year for subprime lending. But despite numerous warnings, Bernanke and the Federal Reserve Board did nothing. Robert Gnaizda met with Bernanke and the Federal Reserve Board three times after Bernanke became chairman. Only at the last meeting did he suggest that there was a problem and that the government ought to look into it. When? When was that? What year? It's 2009, March 11 th, in D.C. This year? This year we met, yes. And so for the two previous years you met him. Even in 2008? Yes. One of the six Federal Reserve Board governors serving under Bernanke was Frederic Mishkin, who was appointed by President Bush in 2006. Did you participate in the meetings Robert Gnaizda and Greenlining had with the Federal Reserve Board? Yes, I did. I was on the committee that was involved with the Consumer Community Affairs Committee. He warned, in an extremely explicit manner, about what was going on. He came to the Federal Reserve Board with loan documentation of the kind of loans that were frequently being made. And he was listened to politely, and nothing was done. So again, I don't know the details in terms of, um... In fact, I just don't... l... Whatever information he provided, I'm not sure exactly. To be honest with you, I can't remember this kind of discussion, but certainly there were issues that were coming up. The question is, how pervasive are they? Why didn't you try looking? I think that people did. We had people looking at... Excuse me. You can't be serious. You would have found things. That's very easy to always say that you can always find it. As early as 2004, the FBI was already warning about an epidemic of mortgage fraud. They reported inflated appraisals, doctored loan documentation and other fraudulent activity. In 2005, the IMF's chief economist, Raghuram Rajan, warned that dangerous incentives could lead to a crisis. Then came Nouriel Roubini's warnings in 2006, Allan Sloan's articles in Fortune magazine and The Washington Post in 2007, and repeated warnings from the IMF. I said, and on behalf of the institution, the crisis in front of us is a huge crisis. Who did you talk to? The government, Treasury, Fed, everybody. In May of 2007, hedge fund manager Bill Ackman circulated a presentation, "Who is Holding the Bag?" Which described how the bubble would unravel. And in early 2008, Charles Morris published his book about the impending crisis. You're not sure. What do you do? You might have some suspicions that underwriting standards are weakened. But then the question is, should you do anything about it? By 2008, home foreclosures were skyrocketing and the securitization food chain imploded. Lenders could no longer sell their loans to the investment banks. And as the loans went bad, dozens of lenders failed. Chuck Prince of Citibank famously said that we have to dance until the music stops. Actually, the music had stopped already when he said that. The market for CDOs collapsed, leaving investment banks holding hundreds of billions of dollars in loans, CDOs, and real estate they couldn't sell. When the crisis started, both the Bush administration and the Federal Reserve were totally behind the curve. They did not understand the extent of it. At what point do you remember thinking for the first time: "This is dangerous, this is bad"? I remember very well one... I think it was a G 7 meeting of February, 2008. And I remember discussing the issue with Hank Paulson. And I clearly remember telling Hank: "We are watching this Tsunami coming," and you're just proposing that we ask "which swimming costume we're going to put on." What was his response? What was his feeling? "Things are under control." Yes, we are looking at this situation carefully, "and, yeah, it's under control." We're gonna keep growing. Okay? And, obviously, I'll say it: If you're growing, you're not in recession, right? I mean, we all know that. One of the pillars of Wall Street... In March 2008, the investment bank Bear Stearns ran out of cash and was acquired for $2 a share by JPMorgan Chase. The deal was backed by $30 billion in emergency guarantees from the Federal Reserve. That was when the administration could have come in and put in place various measures to reduce system risk. The information I'm receiving is the end is not here, that there are other shoes to fall. Well, I've seen those investment banks, working with the Fed and the SEC, strengthen their liquidity, strengthen their capital positions. I get reports all the time. Our regulators are very vigilant. On September 7 th, 2008, Henry Paulson announced the federal takeover of Fannie Mae and Freddie Mac, giant lenders on the brink of collapse. Nothing about our actions today reflects a changed view of the housing correction or the strength of other U.S. Financial institutions. Two days later, Lehman Brothers announced record losses of $3.2 billion, and it's stock collapsed. The effects of Lehman and AIG in September still came as a surprise. I mean, this is even after July and Fannie and Freddie. So clearly there was stuff that, as of September, major stuff, that nobody knew about. I think that's... I think that's fair. Bear Stearns was rated triple-A like a month before it went bankrupt? More likely A2. A2? Yeah. Okay. A2 is still not bankrupt. No, that's a high investment grade. Solid investment grade rating. Lehman Brothers, A2 within days of failing. AIG, double-A within days of being bailed out. Fannie Mae and Freddie Macwere triple-A when they were rescued. Citigroup, Merrill, all of them had investment-grade ratings. How can that be? Well, that's a good question. That's a great question. At no point did the administration ever go to all the major institutions and say: "This is serious. Tell us what your positions are. You know, no bullshit. Where are you?" Well, first, that's what the regulators... That's their job, right? Their job is to understand the exposure across these institutions. And they have a very refined understanding that I think became more respon... More refined as the crisis proceeded. So... Forgive me, but that's clearly not true. What do you mean, that's not true? In August of 2008, were you aware of the credit ratings held by Lehman Brothers, Merrill Lynch, AIG, and did you think that they were accurate? Well, certainly by that time, it was clear earlier credit ratings weren't accurate. - They had been downgraded. - No, they hadn't. There was downgrading in terms of the industry and concerns of the... All those firms were rated at least A2 until a couple of days before they were rescued. The answer is I don't know enough to answer your question on this issue. Governor Fred Mishkin is resigning, effective August 31. He plans to return to Columbia's Graduate School of Business. Why did you leave the Federal Reserve in August of 2008 in the middle of the worst financial crisis? So that... I had to revise a textbook. His departure leaves the board with three of it's seven seats vacant just when the economy needs it most. I'm sure your textbook is important and widely read, but in August 2008, some more important things were going on in the world, don't you think? By Friday, September 12th, Lehman Brothers had run out of cash and the entire investment-banking industry was sinking fast. The stability of the global financial system was in jeopardy. That weekend, Henry Paulson and Timothy Geithner president of the New York Federal Reserve, called an emergency meeting with the CEOs of the major banks in an effort to rescue Lehman. But Lehman wasn't alone. Merrill Lynch was also on the brink of failure. And that Sunday, it was acquired by Bank of America. The only bank interested in buying Lehman was the British firm Barclays. But British regulators demanded a financial guarantee from the U.S. Paulson refused. We got in a cab and went to the Federal Reserve Bank. They wanted the bankruptcy case commenced before midnight of September 14. We kept pressing that this would be a terrible event, and at some point I used the word Armageddon, and they consider the consequences of what they were proposing. The effect on the market would be extraordinary. You said this? Yes. They just said they had considered all of the comments we had made, and they were still of the belief that in order to calm the markets and move forward, it was necessary for Lehman to go into bankruptcy. "Calm the markets"? Yes. When were you first told that Lehman, in fact, was going to go bankrupt? After the fact. After the fact? Wow. Okay. Um... And what was your reaction when you learned of it? "Holy cow." Paulson and Bernanke had not consulted with other governments and didn't know the consequences of foreign bankruptcy laws. Lehman Brothers London continue to empty their desks. Under British law, Lehman's London office had to be closed immediately. All transactions came to a halt, and there are thousands of transactions. The hedge funds who had had assets with Lehman in London discovered overnight, to their complete horror, they couldn't get those assets back. One of the points of the hub failed. And that had huge knock-on effects around the system. The oldest money market fund in the nation wrote off three-quarters of a billion dollars in bad debt issued by now-bankrupt Lehman Brothers. Lehman's failure caused a collapse in the commercial paper market, which many companies depend on to pay for expenses such as payroll. That means they have to lay off employees, they can't buy parts. It stops business in it's tracks. People stood and said, "Listen, what can we believe in? There's nothing we can trust anymore." That same week, AIG owed $ 13 billion to holders of credit default swaps, and it didn't have the money. AIG was another hub. If AIG had stopped, you know, all planes may have to stop flying. On September 17 th, AIG is taken over by the government. One day later, Paulson and Bernanke ask Congress for $700 billion to bail out the banks. We're coming together. They warned that the alternative would be a catastrophic collapse. It was scary. You know, the entire system froze up. Every part of the financial system, every part of the credit system. Nobody could borrow money. It was like a cardiac arrest of the global financial system. I'm playing the hand dealt me. A lot of what I'm dealing with... I'm dealing with the consequences of things that were done years ago. Secretary Paulson spoke through the fall. All the potential root causes of this, and there are plenty, he called them. I'm not sure... You're not being serious about that. I am being serious. What would you have expected? What were you looking for that you didn't see? He was the senior advocate for prohibiting the regulation of credit default swaps and also lifting the leverage limits on the investment banks. So again, what...? He mentioned those things? I never heard him mention those things. Could we turn this off for a second? When AIG was bailed out, the owners of it's credit default swaps, the most prominent of which was Goldman Sachs, were paid $61 billion the next day. Paulson, Bernanke and Tim Geithner forced AIG to pay 100 cents on the dollar rather than negotiate lower prices. Eventually, the AIG bailout cost taxpayers over $ 150 billion. A hundred and sixty billion dollars went through AIG. Fourteen billion went to Goldman Sachs. At the same time, Paulson and Geithner forced AIG to surrender it's right to sue Goldman and the other banks for fraud. Isn't there a problem when the person in charge of dealing with this crisis is the former CEO of Goldman Sachs? Someone who had a major role in causing it. It's fair to say that the financial markets today are incredibly complicated. And supply urgently needed money. On October 4th, 2008, President Bush signs a 700-billion-dollar bailout bill. But world stock markets continue to fall amid fears that a global recession is now underway. The bailout legislation does nothing to stem the tide of layoffs and foreclosures. Unemployment in the United States and Europe rises to 10 percent. The recession accelerates and spreads globally. I began to get really scared because I hadn't foreseen the whole world going down at the same rate at the same time. By December of 2008, General Motors and Chrysler are facing bankruptcy. And as U.S. Consumers cut back on spending, Chinese manufacturers see sales plummet. Over 10 million migrant workers in China lose their jobs. At the end of the day, the poorest, as always, pay the most. Here, you can earn a lot of money. Like 70, 80 U.S. Dollars per month. As a farmer in the countryside, you cannot earn as much money. The workers, they just wire their salary to their hometown to give to their families. The crisis started in America. We all know it will be coming to China. Some of the factories try to cut off some workers. And some people will get poor because they'll lose their jobs. Life gets harder. We were growing at about 20 percent. It was a super year. Then we suddenly went to minus-nine this quarter. Exports collapsed, and we're talking like 30 percent. So we just took a hit, you know. Fell off a cliff. Boomp. Even as the crisis unfolded, we didn't know how wide it was going to spread or how severe it was going to be. We were still hoping that there would be some way for us to have a shelter and be less battered by the storm. But it's not possible. It's a very globalized world. The economies are all linked together. Every time a home goes into foreclosure, it affects everyone who lives around that house. When that house goes on the market, it'll be sold at a lower price. Maybe before it goes on the market, it won't be well-maintained. We estimate another 9 million homeowners will lose their homes. We went out on a weekend to see what houses were for sale. We saw one we liked. The payment was going to be $3200. Everything was beautiful, the house was very pretty. The payment low. Everything was... We won the lottery. But the reality was when the first payment arrived. I felt very bad for my husband because he works too much. And we have three children. The majority I've seen are people hurt by the economy. They were living day to day, paycheck to paycheck, and that ran out. Unemployment won't pay a mortgage. It won't pay a car bill. I was a log truck driver. They shut down the logging systems, shut down the sawmills. So I moved down here on a construction job. And the construction jobs got shut down too, so... Things are so tough. There's a lot of people out there. Soon you're gonna be seeing more camps like this because there's just no jobs right now. When the company did well, we did well. When the company did not do well, sir, we did not do well. The men who destroyed their own companies and plunged the world into crisis walked away from the wreckage with their fortunes intact. The top five executives at Lehman Brothers made over a billion dollars between 2000 and 2007. And when the firm went bankrupt, they got to keep all the money. The system worked. It doesn't make sense to make a failing loan because we lose. The borrower loses, the community loses and we lose. Countrywide's CEO, Angelo Mozilo, made $470 million between 2003 and 2008. One hundred forty million came from dumping his Countrywide stock in the 12 months before the company collapsed. I hold the board accountable when a business fails. They're responsible for hiring and firing the CEO and overseeing big strategic decisions. The problem with boards in America is the way boards are elected. You know, the boards are pretty much, in many cases, picked by the CEO. The board of directors and compensation committees are the two bodies best situated to determine pay for executives. How do you think they've done over the past 10 years? Well, I think that if you look at those... I would give about a B, because... A B? A B, yes. Not an F? Not an F, not an F. Stan O'neal, the CEO of Merrill Lynch, received $90 million in 2006 and 2007 alone. After driving his firm into the ground, the board of directors allowed him to resign, and he collected $ 161 million in severance. Instead of being fired, Stan O'neal is allowed to resign and takes away $ 151 million. That's a decision that that board of directors made. What grade do you give that decision? That's a tougher one. I don't know if I'd give it a B as well. O'neal's successor, John Thain, was paid $87 million in 2007. And in December of 2008, two months after Merrill was bailed out by U.S. Taxpayers, Thain and Merrill's board handed out billions in bonuses. In March of 2008, AIG's Financial Products division lost $ 11 billion. Instead of being fired, Joseph Cassano, head of AIGFP, was kept on as a consultant for a million dollars a month. You wanna make sure key players and key employees within AIGFP, we retain that intellectual knowledge. I attended a very interesting dinner organized by Hank Paulson a little more than one year ago with some officials and a couple of CEOs from the biggest banks in the U.S. And surprisingly enough, all these gentlemen were arguing: "We were too greedy, so we have part of the responsibility." Fine. Then they were turning to the treasurer, Secretary of the Treasury, and saying: "You should regulate more. We're too greedy, we can't avoid it. The only way to avoid this is to have more regulation." I have spoken to many bankers about this question, including very senior ones. And this is the first time that I've ever heard anybody say they wanted their compensation to be regulated in any way. Yeah, because it was at the moment where they were afraid. And after, when solution to the crisis began to appear, then probably they changed their mind. In the U.S., the banks are now bigger, more powerful and more concentrated than ever before. There are fewer competitors. A lot of smaller banks have been taken over by big ones. J.P. Morgan is even bigger than it was before. J.P. Morgan took over first Bear Stearns and then WaMu. Bank of America took over Countrywide and Merrill Lynch. Wells Fargo took over Wachovia. After the crisis, the financial industry, including the Financial Services Roundtable, worked harder than ever to fight reform. The financial sector employs 3000 lobbyists, more than five for each member of Congress. You think the financial services industry has excessive political influence in the United States? No. I think that every person in the country is represented here in Washington. And you think that all segments of American society have equal and fair access to the system? That you can walk into any hearing room that you would like. Yes, I do. One can walk into any hearing room. One cannot necessarily write the lobbying checks that your industry writes or engage in the level of political contributions your industry engages in. Between 1998 and 2008, the financial industry spent over $5 billion on lobbying and campaign contributions. And since the crisis, they're spending even more money. The financial industry also exerts it's influence in a more subtle way, one that most Americans don't know about. It has corrupted the study of economics itself. Deregulation had tremendous financial and intellectual support because people argued it for their own benefit. The economics profession was the main source of that illusion. Since the 1980s, academic economists have been major advocates of deregulation and played powerful roles in shaping U.S. Government policy. Very few of these economic experts warned about the crisis. And even after the crisis, many of them opposed reform. The guys who taught these things tended to get paid a lot of money being consultants. Business school professors don't live on a faculty salary. They do very, very well. Over the last decade, the financial services industries made about $5 billion worth of political contributions in the U.S. That's kind of a lot of money. That doesn't bother you? No. Martin Feldstein is a Professor at Harvard and one of the world's most prominent economists. As President Reagan's chief economic advisor, he was a major architect of deregulation. And from 1988 until 2009, he was on the board of directors of both AIG and AIG Financial Products, which paid him millions of dollars. You have any regrets about having been on AIG's board? I have no comments. No, I have no regrets about being on AIG's board. None? That I can say. Absolutely none. Okay. You have any regrets about AIG's decisions? I cannot say anything more about AIG. I've taught at Northwestern in Chicago, Harvard and Columbia. Glenn Hubbard is the Dean of Columbia Business School and was chairman of the Council of Economic Advisers under George W. Bush. Do you think the financial services industry has too much political power in the United States? I don't think so. No. You certainly wouldn't get that impression by the drubbing that they regularly get in Washington. Many prominent academics quietly make fortunes helping the financial industry shape public debate and government policy. The Analysis Group, Charles River Associates, Compass Lexecon and the Law and Economics Consulting Group manage a multibillion-dollar industry that provides academic experts for hire. Two bankers who used these services were Ralph Cioffi and Matthew Tannin, Bear Stearns hedge fund managers prosecuted for securities fraud. After hiring the Analysis Group, both were acquitted. Glenn Hubbard was paid $ 100,000 to testify in their defense. Do you think the economics discipline has a conflict-of-interest problem? I'm not sure I know what you mean. Do you think a significant fraction of the economics discipline, economists, have financial conflicts of interest that might call into question or color...? I see what you're saying. I doubt it. Most academic economists aren't wealthy business people. Hubbard makes $250,000 a year as a board member of MetLife and was formerly on the board of Capmark, a major commercial mortgage lender during the bubble, which went bankrupt in 2009. He has also advised Nomura Securities, KKR Financial Corporation and many other financial firms. Laura Tyson, who declined to be interviewed for this film, is a Professor at the University of California, Berkeley. She was the chair of the Council of Economic Advisers, then director of the National Economic Council under Clinton. After leaving government, she joined the board of Morgan Stanley, which pays her $350,000 a year. Ruth Simmons, president of Brown University, makes over $300,000 a year on the board of Goldman Sachs. Larry Summers, who, as Treasury secretary, played a role in the deregulation of derivatives, became president of Harvard in 2001. While at Harvard, he made millions consulting to hedge funds and millions more in speaking fees, much of it from investment banks. According to his federal disclosure report, Summers' net worth is between $ 16.5 million and $39.5 million. Frederic Mishkin, who returned to Columbia Business School after leaving the Federal Reserve, reported on his disclosure report that his net worth was between $6 million and $ 17 million. In 2006, you coauthored a study of Iceland's financial system. "Iceland is an advanced country" with excellent institutions, low corruption, rule of law. The economy has adjusted to financial liberalization "while prudential regulation and supervision is generally quite strong." And that was the mistake, that it turns out prudential regulation and supervision was not strong in Iceland during this period... What led you to think it was? You're going with the information you had and generally, the view was that Iceland had very good institutions. It was an advanced country... Who told you that? What research did you do? You talk to people. You have faith in the central bank, which actually did fall down on the job. That clearly it... This... Why have faith in a central bank? Well, that faith... You try... Because you go with the information you have. How much were you paid to write it? I was paid... I think the number... It's public information. On your CV, the title of this report has been changed from "Financial Stability in Iceland" to "Financial Instability in Iceland." Well, I don't know. Whatever it is... If there's a typo, there's a typo. What should be publicly available is whenever anybody does research on a topic that they disclose if they have any financial conflict with that research. But if I recall, there is no policy to that effect. I can't imagine anybody not doing that in terms of putting it in a paper. You... There would be significant professional sanction for failure to do that. I didn't see any place in the study where you indicated you'd been paid by the Icelandic Chamber of Commerce to produce it. No, I don't... You know. Okay. Richard Portes, the most famous economist in Britain and a Professor at London Business School, was also commissioned by the Icelandic Chamber of Commerce to write a report which praised the Icelandic financial sector. The banks themselves are highly liquid. They've made money on the fall of the Icelandic krona. These are strong banks. Their market funding is assured for the coming year. - These are well-run banks. - Thank you. Like Mishkin, Portes' report didn't disclose his payment from the Icelandic Chamber of Commerce. Does Harvard require disclosures of financial conflict of interest? Not to my knowledge. Do you require people to report the compensation received from outside activities? No. Don't you think that's a problem? I don't see why. Martin Feldstein being on the board of AIG, Laura Tyson at Morgan Stanley, Larry Summers making $ 10 million consulting to financial services firms. Irrelevant? Hm. Yeah. Yeah. Basically irrelevant. You've written many articles about a wide array of subjects. You never saw fit to investigate the risks of unregulated credit default swaps? I never did. Same question with regard to executive compensation? The regulation of corporate governance? The effect of political contributions? I don't know that I would have anything to add to those discussions. I'm looking at your resume now. It looks to me as if the majority of your outside activities are consulting and directorship arrangements with the financial services industry. Would you not agree with that characterization? To my knowledge, I don't think my consulting clients are on my CV. So I wouldn't know. Who are your consulting clients? I don't believe I have to discuss that with you. Okay. In fact, you have a few more minutes and the interview's over. Do you consult for any financial services firms? The answer is I do. And? And... But I do not wanna go into details about that. Do they include other financial services firms? Possibly. You don't remember? This isn't a deposition, sir. I was polite enough to give you time. Foolishly, I now see. But you have three more minutes. Give it your best shot. In 2004, at the height of the bubble, Glenn Hubbard coauthored a widely read paper with William C. Dudley, the chief economist of Goldman Sachs. In the paper, Hubbard praised credit derivatives and the securitization chain, stating they had improved allocation of capital and were enhancing financial stability. He cited reduced volatility in the economy and stated that recessions had become less frequent and milder. Credit derivatives were protecting banks against losses and helping to distribute risk. A medical researcher writes an article, saying: "To treat this disease, you should prescribe this drug." Turns out doctor makes 80 percent of personal income from manufacture of this drug. Does not bother you? I think it's certainly important to disclose the, um... The, um... Well, I think that's also a little different from cases that we're talking about here because, um... So, what do you think this says about the economics discipline? Well, I mean, it has no relevance to anything, really. And, indeed, I think it's a part of the... It's an important part of the problem. The rising power of the U.S. Financial sector was part of a wider change in America. Since the 1980s, the United States has become a more unequal society, and it's economic dominance has declined. Companies like General Motors, Chrysler and U.S. Steel, formerly the core of the U.S. Economy, were poorly managed and falling behind their foreign competitors. And as countries like China opened their economies, American companies sent jobs overseas to save money. For many, many years, the 660 million people in the developed world were sheltered from all of this additional labor that existed on the planet. Suddenly the Bamboo Curtain and the Iron Curtain are lifted and you have 2.5 billion additional people. American factory workers were laid off by the tens of thousands. Our manufacturing base was destroyed, literally, over a few years. As manufacturing declined, other industries rose. The United States leads the world in information technology, where high-paying jobs are easy to find. But those jobs require an education. And for average Americans, college is increasingly out of reach. While universities like Harvard have billions of dollars in endowments, funding for public universities is shrinking and tuition is rising. Tuition for California's public universities rose from $650 in the 1970s to over $ 10,000 in 2010. The most important determinant of whether Americans go to college is whether they can find the money to pay for it. Meanwhile, American tax policy shifted to favor the wealthy. When I first came to office, I thought taxes were too high, and they were. The most dramatic change was a series of tax cuts designed by Glenn Hubbard, who was serving as President Bush's chief economic advisor. The Bush administration sharply reduced taxes on investment gains, stock dividends, and eliminated the estate tax. We had a comprehensive plan that when acted has left nearly $ 1.1 trillion in the hands of American workers, families, investors and small-business owners. Most benefits of these cuts went to the wealthiest 1 percent of Americans. And by the way, it was the cornerstone in many ways, of our economic recovery policy. Inequality of wealth in the United States is now higher than in any other developed country. American families responded to these changes in two ways: By working longer hours and by going into debt. As the middle class falls further and further behind, there is a political urge to respond by making it easier to get credit. You don't have to have a lousy home. The low-income home buyer can have just as nice a house as anybody else. American families borrowed to finance their homes, their cars, their healthcare, and their children's educations. People in the bottom 90 percent lost ground between 1980 and 2007. It all went to the top 1 percent. For the first time in history, average Americans have less education and are less prosperous than their parents. The era of greed and irresponsibility on Wall Street and in Washington has led us to a financial crisis as serious as any that we've faced since the Great Depression. When the financial crisis struck before the 2008 election, Barack Obama pointed to Wall Street greed and regulatory failures as examples of the need for change in America. A lack of oversight in Washington and on Wall Street is exactly what got us into this mess. After taking office, Obama spoke of the need to reform the industry. We want a risk regulator, increased capital requirements. We need a consumer financial protection agency. We need to change Wall Street's culture. But when finally enacted in mid-2010, the administration's financial reforms were weak. And in some critical areas, including the rating agencies, lobbying and compensation, nothing significant was even proposed. Addressing Obama and, quote, "regulatory reform," my response, if it was one word, would be "ha." There's very little reform. How come? It's a Wall Street government. Obama chose Timothy Geithner as Treasury secretary. Geithner was president of the New York Federal Reserve during the crisis, and a key player in the decision to pay Goldman Sachs 100 cents on the dollar for it's bets against mortgages. When Tim Geithner was testifying to be confirmed as Treasury secretary he said, "I have never been a regulator." That said to me he did not understand his job as President of the New York Fed. The new President of the New York Fed is William C. Dudley, the former chief economist of Goldman Sachs whose paper with Glenn Hubbard praised derivatives. Geithner's chief of staff is Mark Patterson, a former lobbyist for Goldman. And one of the senior advisors is Lewis Sachs, who oversaw Tricadia, a company heavily involved in betting against the mortgage securities it was selling. To head the Commodity Futures Trading Commission, Obama picked Gary Gensler, a former Goldman Sachs executive who had helped ban the regulation of derivatives. To run the Securities and Exchange Commission, Obama picked Mary Schapiro, the former CEO of FINRA, the investment banking industry's self-regulation body. Obama's chief of staff, Rahm Emanuel, made $320,000 serving on the board of Freddie Mac. Both Martin Feldstein and Laura Tyson are members of Obama's Economic Recovery Advisory Board. And Obama's chief economic advisor is Larry Summers. The most senior economic advisors are the ones who were there, who built the structure. When it was clear that Summers and Geithner were going to play major roles as advisors, I knew this was going to be status quo. The Obama administration resisted regulation of bank compensation even as foreign leaders took action. The financial industry is a service industry. It should serve others before it serves itself. In September of 2009, Christine Lagarde and the finance ministers of Sweden, the Netherlands, Luxembourg, Italy, Spain and Germany called for the G20 nations, including the United States, to impose strict regulations on bank compensation. And in July of 2010, the European Parliament enacted those very regulations. The Obama administration had no response. Their view is it's a temporary blip and things will go back to normal. That is why I am reappointing him as chairman of the Federal Reserve. Thank you, Ben. In 2009, Barack Obama reappointed Ben Bernanke. Thank you, Mr. President. As of mid-2010, not a single senior financial executive had been criminally prosecuted, or even arrested. No special prosecutor had been appointed. Not a single firm had been prosecuted criminally for securities fraud or accounting fraud. The Obama administration has made no attempt to recover any compensation given to financial executives during the bubble. I certainly would think of criminal action against some of Countrywide's top leaders, like Mozilo. I'd certainly look at Bear Stearns, Goldman Sachs and Lehman Brothers and Merrill Lynch. For criminal prosecutions? Yes. In regard to... Yes. They'd be very hard to win, but I think they could do it if they got enough underlings to tell the truth. In an industry in which drug use, prostitution and billing of prostitutes as a business expense occur on an industrial scale, it wouldn't be hard to make people talk if you really wanted to. They gave me a plea bargain and I took it. They were not interested in my records. They weren't interested in anything. Not interested in your records? That's correct. Correct. There's a sensibility that you don't use people's personal vices in the context of Wall Street cases, necessarily, to get them to flip. Maybe after the cataclysms that we've been through, people will reevaluate. I'm not the one to pass judgment on that right now. You come to us today telling us, "We're sorry, we didn't mean it." We won't do it again. Trust us." Well, I have some people in my constituency that actually robbed some of your banks. And they say the same thing. They're sorry. They didn't mean it. They won't do it again. In 2009, as unemployment hit it's highest level in 17 years, Morgan Stanley paid it's employees over $ 14 billion, and Goldman Sachs paid out over $ 16 billion. In 2010, bonuses were even higher. Why should a financial engineer be paid four times to 100 times more than a real engineer? A real engineer build Bridges. A financial engineer build dreams. And, you know, when those dreams turn out to be nightmares, other people pay for it. For decades, the American financial system was stable and safe. But then something changed. The financial industry turned it's back on society, corrupted our political system and plunged the world economy into crisis. At enormous cost, we've avoided disaster and are recovering. But the men and institutions that caused the crisis are still in power, and that needs to change. They will tell us that we need them, and that what they do is too complicated for us to understand. They will tell us it won't happen again. They will spend billions fighting reform. It won't be easy. But some things are worth fighting for.