Recently, as I was involved in a term paper on the troubled banks that fell during the financial crisis, a team mate of mind introduced the group to a film called "Inside Job". Initially, I was thinking its not so feasible to request for the whole group to watch a movie but I was so wrong.
I went to watch it and I was blown away. Not only was it very relevant to the term paper that we had to write, it opened my eyes to the financial industry, to Wall Street in particular.
In this blog post, I'm going to talked about some pertinent points highlighted in the film. All my opinions are merely opinions and I hope no one will be offended by them. Thanks. Also, I wish to give credit to the writers and producers of "Inside Joy". They were really brave to approach the senior advisors and bankers.
Derivatives are weapons of mass destruction, as mentioned by Warren Buffet. Initially when I was studying derivatives, I thought to myself, wow these instruments are great invention. But after watching the movie, I do agree with Warren Buffet. You can bet on almost anything with derivatives. You can literally control the world with them.
In the 1990s, Borns who graduated first in her class at
Stanford Law School tried to regulate the derivatives market but was overruled
by the Clinton’s Adminstration, Congress and Larry Summers.
They were all not receptive of the idea of the regulation of
this industry.
When someone is so afraid, it means that regulation will
stop their game altogether, the game of endless streams of profits. They can no
longer make money and that is what they fear most. Hence, they must do whatever
it takes to stop the regulation, even it takes up to billions of dollars. I infer that the reason they are spending billions to stop regulation, simply means that they can make even more than that. In the banking industry, I think a simple philosophy is followed, so long as the benefits exceed cost, we go ahead with it.
Later, the market for CDOs had collapsed and that left investment
banks with hundreds of billions of dollars in loans, CDOs and real estate they
couldn’t sell. Then foreclosures start to increase at a rapid rate and of course many CDOs went on default.
What's horrifying to me is that even in 2008, people are still insisting that everything is
under control and that we will still continue to grow.
At the 1 hour 6th minute of the movie, it was mentioned that along with the collapsed of Lehman, the commerical paper market crashed as well. I surmised that this was because of the plummet in the level of consumer confident in the commerical papers. Commerical papers are essentially loans issued by corporations on a short term basis to borrow money from the public. They are generally highly rated and safe. However, with the collapse of one of the largest investment bank in the world (Lehman), it is not surprising that.
Another interesting point to note, many faculty professors do not rely on their
faculty salary alone. They serve as board of directors of big conglomerates as
well as consultants and advisors to the US government.
Glenn Hubbard mentioned that most academic economists aren’t
wealthy business people. But the reality is that he himself 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.
In 2004, at the height of the bubble, Glenn Hubbard
co-authored a widely read paper with William C. Dudley , the Chief Economist of
Goldman Sachs. In the paper, Hubbard praised credit derivatives and the
securitisation chain stating that they had improved capital allocation and were
enhancing financial stability. He cited lower financial volatility and stated
that recessions had become less frequent and milder. Credit derivatives were
protecting banks against losses and helping to distribute risk.
Laura Tyson is a professor at the University of California,
Berkeley. She was the chair of the Council of Economic Advisers and then
Director of the National Economic Council under Clinton. Shortly 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.
Many critics have said that the financial institutions have
made over $5 billion dollars to the political scene and as a result, they have
much influence over the government policy.
What this means is that they are fighting for more
deregulation in order to have it their way when it comes to setting policies
that actually benefit the financial industry. This will only fuel more bubbles in the future I believe.
When questioned about whether the financial institutions had too much political
influence over the government policies, many senior bankers said that they do
not think so.
Then came Obama who spoke about reform, changing of Wall
Street’s culture. HE mentioned that the irresponsibility of the Wall Street
people and the abundance of greed drove us to the financial crisis.
But even till mid 2010s, very little was done. How come? It’s
a Wall Street Government. That’s why.
At the end of the day, it appears that most of the people who have caused the subprime mortgage crisis are still serving as senior advisors to the U.S. government which is why critics are insisting that it's a Wall Street government. With them in place, they will be there to stop any constructive reform in the financial industry.
It appears that we have to get rid of them before we can even begin talking about reform.
Definitely an insightful movie and I encourage you all to watch it if you have the time. "Inside Job"
Credits -Inside Job
