Director Charles Ferguson
Narrator Matt Damon
Run time 1 hour 48 minutes
The last time I felt so angry coming out of a cinema was after a viewing of The Smartest Guys In the Room, the story of the Enron scandal. In the case of the Inside Job, it was not that I was given much by way of new facts, for I know the story it told only too well. Rather, I became angry simply by watching the grotesque drama which led to the present global financial disaster unravel from its beginnings; a story well flavoured with recordings of the main players in the catastrophe either showing their reckless disregard for society at large before the recession arrived or trying to justify their behaviour afterwards in the most contemptible and frequently risible fashion. (Watch out for Prof Frederick Miskin explaining why he resigned as Governor of the Federal Reserve Board when the going got tough. His reason? That he had to go back to his university to revise a textbook). To that was added the dismaying knowledge that nothing has really changed since Lehmann Bros went down in 2008, with the bankers who caused the financial disaster still pocketing vast amounts of money, most of it provided by taxpayers. There are some outrages which never cease to shock no matter how familiar they become. This is one of them.
Those who have seen The Smartest Guys in the Room will have a good idea of the approach and tenor of Inside Job. For those who have not, imagine a Michael Moore documentary without Michael Moore. There are no cheap tricks, no exhibitionist presenter; just mercifully jargon-free explanations of technical financial instruments and interviews quietly conducted by the director which allow the virtuous to express their outrage and the guilty to hang themselves with their own words and behaviour.
The film concentrates primarily on the American experience, but there is no harm in that because the USA is both an exemplar for what happened in much of the developed world and was arguably the prime driver of the global crash because of its globally dominant economy, although Thatcherite Britain needed no encouragement to tread the same criminally reckless path.
The film leads us through the story of the wilful creation of instability in the global financial system. Jimmy Carter began the process with the Deregulation and Monetary Control Act (1980) and Reagan followed it up with the Garn–St. Germain Depository Institutions Act (1982). These Acts allowed Savings and Loans associations (equivalent to British Building Societies) to behave like banks without being subject to the then tight regulations (the Glass-Steagall Act from the Depression) which divided investment banking from institutions taking deposits on a retail basis. This resulted in colossal losses in the late 1980s and early 1990s with a great deal of US taxpayers’ money being used to rescue to rescue the situation. This gave the green light to the unscrupulous who believed, broadly rightly, that if any financial institution was large enough, it would be bailed out by the US taxpayer.
The experience of the Savings and Loans scandal did produce legislation to regulate anew the homes loans industry with the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). That Act had one great flaw: it gave the two quasi-state mortgage granting bodies Freddie Mac and Fannie Mae a responsibility to support mortgages for low to moderate-income families. That drove the sub-prime lending.
The greatest breach in the regulatory wall occurred in 1999. In 1998 Citi Group was formed by the merger of the bank Citicorp and financial conglomerate Travelers Group . The only problem was that the merger was illegal under the remaining provisions of the Glass-Steagall Act which forbade any one institution from acting as any combination of an investment bank, a commercial bank and an insurance company. Citi Group did all three . But Citi Group were given a temporary waiver to allow them to dispose of their conflicting business in an orderly fashion. Happily for them and sadly for the rest of the world, they were never required to make the disposals because in 1999 the Gramm–Leach–Bliley Act (GLB ) repealed the parts of the Glass–Steagall Act of 1933 which regularised Citi Group’s position and opened the way for any other US financial institutions to follow suit.
The final nail in the economic coffin was the failure of the regulatory bodies such as the Securities and Exchange Commission (SEC) to take any meaningful action against the newly freed financial monsters .
The film does two other things well. It explains the complicated method by which deregulation was exploited by banks and their ilk and graphically shows the incestuous traffic between politics and finance and the way that academic economists have been all too willing to compromise their integrity by becoming hired pens for whoever is willing to pay them.
How did sub-prime lending and the general derivative mania become so rampant? Well, there was the boost given by the Recovery and Enforcement Act of 1989 mentioned above, but that could not cause the reckless lending to spiral completely out of control. That required the Gramm–Leach–Bliley Act. After that anything went. Dealers could create derivatives to effectively make a bet on anything.
Most devastating to economies was the creation of Collateral Default Obligations (CDOs) and Credit Default Swaps (CDSs). The beauty of these for financiers was that they effectively allowed a seemingly unending shuffling of responsibility and risk to someone else. With CDOs the relationship between borrower and lender changed dramatically. In the old days the borrower obtained a loan and paid it back to the person who made the loan. With CDOs the lender sold on the debt to a third party who bundled up various loans – be it a mortgage, credit card spending or some other loan – with of widely varying quality and called it a CDO. This CDO could be sold on to investors, frequently with an AAA rating by one of the main credit ratings agency who were paid by – yes you have guessed it – the people selling the CDOs to investors. To make the business even more opaque, CDSs were created to insure against losses arising from defaulting CDOs, effectively a form of reinsurance. The final act in this fantasy world was institutions insuring CDOs they thought were junk with CDSs. This meant they were compensated when the CDOs failed while the buyer of the CDOs lost.
Eventually the game of financial musical chairs had to stop and Lehman Bros came crashing down to signal the advent of the worst global recession since the 1930s. An interesting claim in the film is that Lehman’s was allowed by the US government to fail because the financial officers of the Bush Government did not understand the international implications of Lehman’s failure, most notably in Britain where the administration rules are radically different from those in the USA and resulted in Lehman’s London offices being immediately closed. .
As for the nexus of vested influence, this includes politicians, bankers, lobbyists, academics and credit rating agencies. One of the most telling sequences in the film is battery of senior personnel from the three largest credit rating agencies Standard and Poor, Moody’s and Fitches – who consistently valued worthless or near to worthless derivatives as AAA – testifying before Congress that their ratings are “only opinions”. Closely running them up for dissimulation, is Scott Talbott, leading lobbyist for the Financial Services Roundtable, a man sharing with Dr Pangloss a belief that everything is for the best in the best of all possible worlds. Particularly striking is the predominance of ex-Goldman Sachs employees in US government posts, men such as Henry Paulson, Larry Summers and Robert Reubin. It is worth wondering what the US government’s response would have been if Goldman’s not Lehman Bros had been the first US banking bottle to fall off the wall.
If you think Obama has made a difference, think again. He has employed a host of people from the financial world with hands still dirty from their involvement in the genesis of the financial mess, many of whom have served in the previous administrations which presided over deregulation. This went right to the top of his financial administration. He chose as his Secretary to the Treasury Timothy Geithner , a protégé of George W Bush’s Secretary of the Treasury Hank Paulson, a man who was up to his armpits in the ideological swamp of deregulation, while the current director of the White House National Economic Council is Larry Summers who was Clinton’s Secretary of the Treasury when the Gramm-Leach-Bliley Act was passed – Summers greeted the Act by saying “This historic legislation will better enable American companies to compete in the new economy.” In addition, Obama successfully nominated Bush’s choice for Chairman of the Federal Ben Bernanke for a second term as Chairman. Plus ca change….
The most contemptible excuse given by politicians around the developed world for the present financial debacle is that no one saw it coming. This is a blatant lie. The film parades a baker’s dozen of people in positions prominent enough to have their voice heard by those in power who did warn of what was coming; people like Nouriel Roubini (Professor of Economics at the Stern School of Business), Raghuran Rajan (when he was chief economist of the IMF) and Christine Lagrade (French Minister of Economy, Finance, Industry and Employment).
The coda to the film is the stark fact that none of the people chiefly responsible for the financial meltdown have either faced criminal charges or had the vast fortunes they made during the period removed. That applies not only in the USA but Britain, where provision exists to remove limited liability from company directors where they have failed to behave responsibly. The only people who have lost are as usual the less well off.