Something Worth Fighting For
Inequality in wealth, in the United States, is now higher than in any other developed country. …
For the first time in history, average Americans have less education and are less prosperous than their parents. …
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 …
[They] tell us that we need them.
[That] what they do is too complicated for us to understand.
[That] it won't happen again.
They will spend billions fighting reform.
[That needs to change.]
It won't be easy.
But some things, are worth fighting for.
The Road (to Ruin)
Would you like to know more?
CHARLES FERGUSON (1955)
BA, Mathematics, University of California, Berkeley.
PhD, Political Science, Massachusetts Institute of Technology.
- Inside Job, Sony Pictures Classics, 2010.
Academy Award, Best Documentary Feature (2011).
[The] government privatized Iceland's three largest banks. …
In a five year period, these three tiny banks, which had never operated outside of Iceland, borrowed $120 billion, 10 times the size of Iceland's economy.
The bankers showered money on themselves, each other and their friends. …
Sigridur Benediktsdottir [Special Investigative Committee, Icelandic Parliament]:One third of Iceland's financial regulators went to work for the banks.
In February 2007, the rating agency decided to upgrade the banks to the highest possible rate, AAA.
Gylfizoega [Professor of Economics, University of Iceland]:In September 2008, the bankruptcy of US investment bank, Lehman Brothers, and the collapse of the world's largest insurance company, AIG, triggered a global financial crisis. …
[This] is a universal problem.
In New York you have the same problem, right? …
Has Larry Summers ever expressed remorse?
Barney Frank (1940) [Chairman, Financial Services Committee, US House of Representatives]:
I don't hear confessions. …
So you helped these people to blow the world up?
Satyajit Das [Derivatives Consultant]:
Oh, you could say that!
Lee Hsien Loong (1952) [Prime Minister, Singapore]:
When you start thinking you can create something out of nothing.
It's very difficult to resist.
Christine Lagarde (1956) [Finance Minister, France]:
I'm concerned that a lot of people want to go back to the old way.
They way they were operating prior to the crisis. …
Why don't you think a more systematic investigation has been undertaken?
Nouriel Roubini (1958) [Professor, NYU Business School]:
Because then you would find the culprits. …
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. …
15 million people could end up below the poverty line again.
Since the 1980's, the rise of the US financial sector has led to a series of increasingly severe financial crises.
Each crisis has caused more damage.
How We Got Here
After the Great Depression, the United States had 40 years of economic growth without a single financial crisis.
The financial industry was tightly regulated. …
Samuel Hayes [Professor Emeritus of Investment Banking, Harvard Business School]:In 1981, Ronald Reagan, choose as Treasury Secretary, the CEO of the investment bank Merrill Lynch, Donald Regan. …
Morgan Stanley in 1992 had approximately 110 total personnel.
One office, and capital of $12 million.
Now Morgan Stanley has 50,000 workers, and has capital of several billion, and has offices all over the world.
Donald Regan (1918 – 2003) [Treasury Secretary, 1981-1985]:The Reagan administration, supported by economists and financial lobbyists, started 30 year period of financial deregulation.
I've talked to many leaders of Wall Street.
They all say, we're behind the President, 100%.
In 1982 [they] deregulated Savings and Loan companies, allowing them to make risky investments with their depositors money.
By the end of the decade hundreds of Savings and Loan companies had failed.
This crisis cost tax payers $124 billion, and cost many people their life savings.
Thousands of Savings and Loan executives went to jail for looting their companies. …
During the Clinton administration, deregulation continued under [Federal Reserve chairman Alan Greenspan,] Treasury Secretary Robert Ruben (the former CEO of the investment bank Goldman Sacks) and Larry Summers, a Harvard economics professor.
Nouriel Roubini:By the late 1990's, the financial sector had consolidated into a few gigantic firms.
The financial sector … step by step, captured the political system.
Both on the Democratic and the Republican side.
Each of them so large, that their failure could threaten the whole system.
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 which prevented banks with consumer deposits from engaging in risky investment banking activities.
Robert Gnaizda (1936) [Former Director, Greenlining Institute]:In 1999 … Congress passed the Gramm-Leach-Bliley Act, known to some as 'the Citigroup Relief Act'.
It was illegal to acquire Travelers. …
The Federal Reserve [under Greenspan] gave them an exemption for a year.
And then they got the law passed.
It overturned Glass–Steagall and cleared the way for future mergers.
Robert Rubin would later make $126 million as Vice Chairman of Citigroup. …
[At] the end of the 90's [the] investment banks fueled a massive bubble in internet stocks.
[This] was followed by a crash in 2001 [causing] $5 trillion in investment losses. …
Since deregulation began, the world's biggest financial firms have been caught laundering money, defrauding customers and cooking the books again and again …
Beginning in the 1990's deregulation and advances in technology led to an explosion of complex financial products called derivatives.
Economics and bankers claimed they made markets safer, but instead they made them unstable. …
Using derivatives, bankers could gamble on virtually anything.
They could bet on the rise and fall of oil prices, the bankruptcy of a company, even the weather.
By the late 1990's, derivatives were a $50 trillion unregulated market. …
In May 1998 the [Commodity Trading Futures Commission] issued a proposal to regulate derivatives. …
Satyajit Das:… Greenspan, Rubin, and SEC chairman, Arthur Levitt, issued a joint statement condemning [the head of the CTFC] and recommending legislation to keep derivatives unregulated. …
The banks were now heavily reliant for earnings on these types activities.
This led to a titanic battle to prevent [these] instruments from being regulated.
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.
Frank Partnoy [Professor of Law and Finance, University of California, San Diego]:[By 2001] the US financial sector was vastly more powerful, concentrated and powerful than ever before.
Once that was done, it was off to the races.
[The] use of derivatives … exploded dramatically after 2000.
Dominating this industry were:
Five investment banks;And linking them all together was the securitization food chain.
- Goldman Sachs
- Morgan Stanley
- Lehman Brothers
- Merrill Lynch
- Bear Stearns
- Standard & Poor's
A new system which connected trillions of dollars of mortgages and other loans with investors all over the world.
Barney Frank:In the new system, lenders sold the mortgages to investment banks.
30 years ago, if you went to get a loan for a home, the person lending you the money expected you to pay [them] back. …
We've since developed securitization, whereby the people who make the loan are no longer at risk if there is a failure to repay. …
The investment banks combined thousands of investments and other loans (including car loans, student loans and credit car debt) to create [Collateralized Debt Obligations which they then sold to investors.] …
The investment banks paid rating agencies to evaluate the CDOs, and many [were given] the highest possible investment grade [— AAA, as safe as government securities].
This made CDOs popular with retirement funds, which could only purchase highly rated securities. …
Lenders [no longer cared] 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 … had no liability if their ratings proved wrong. …
The investment banks … preferred subprime loans because they carried high interest rates.
All the incentives the financial institutions offered to their mortgage brokers were based on selling the most profitable products which were predatory loans.
Eric Halperin [Director, Center for Responsible Lending]:
[If the] banker makes more profit [by putting] you in a subprime loan; that's where they're going to put you.
The result, was the biggest financial bubble in history.
Robert Gnaizda:Countrywide Financial, the largest subprime lender, issued $97 billion worth of loans [and] made over $11 billion in profits …
Goldman Sachs, Bear Stearns, Lehman Brothers, Merrill Lynch, were all in on this.
The subprime lending alone increased from $30 … to $600 billion in 10 years. …
Lehman Brothers was a top underwriter of subprime lending.
And their CEO, Richard Fuld, took home $485 million. …
Nouriel Roubini:During the bubble, the investment banks were borrowing heavily to buy more loans and create more CDOs. …
By 2006, about 40% of all profits of S&P 500 firms was coming from financial institutions.
Martin Wolf [Chief Economics Commentator, The Financial Times]:
It wasn't real profits.
It wasn't real income.
It was just money being created by the system, and booked as income.
Two, three years down the road, there's a default and it's all wiped out.
[It was] a global Ponzi scheme. …
Christopher Cox [SEC Chairman]:
[The] free and efficient movement of capital is helping to create the greatest prosperity in human history.
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. …
Daniel Alpert [Managing Director, Westwood Capital]:AIG, the world's largest insurance company … was selling huge quantities of [Credit Default Swaps].
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% decrease in the value of their asset base would leave them insolvent.
For investors who owned CDOs, CDFs worked like an insurance policy. …
If the CDO went bad, AIG promised to pay the investor for their losses.
But … speculators could also buy CDFs from AIG in order to bet against CDOs they didn't own. …
Satyajit Das:Since CDFs were unregulated, AIG didn't have to put aside any money to cover potential losses.
Let's say … I own a house.
I can only insure that property once.
The derivatives universe [enables anybody to] insure that house …
50 people might insure my house. …
[If] my house burns down, the losses in the system becomes proportionately larger!
Instead, AIG paid its employees huge cash bonuses …
Nouriel Roubini:[AIG Financial Services] made $3.5 billion between 2005 and 2007.
People were essentially being rewarded for taking massive risks in good times, to generate … bonuses, but that's going to lead to the firm to be bankrupt over time.
That's a totally distorted system of compensation. …
The single most disastrous business implicated in the derivatives trade was AIG Financial Services in London.
This small office was largely responsible for the collapse of its parent, AIG, which required $152 billion to bail it out.
After the AIG bailout, the 400 employees of the London branch received on average a bonus of $1 million each.
Its head, Joseph Cassano, who had done more than anyone else to destroy AIG, received an initial golden handshake of $34 million and was put on a consultation contract of $1 million a month.
Goldman Sachs received some $13 billion of the money given by US taxpayers to AIG [at the insistence of Treasury Secretary and former CEO of Goldman, Hank Paulson.]
In July 2009, it laid aside for its employees a bonus fund of $20 billion.
And in early November, it was revealed that while in 2006 and 2007 Goldman Sachs was spruiking $40 billion worth of AAA-rated sub-prime mortgage bonds to institutional investors, secretly and almost certainly illegally it was placing massive bets on the likely future failure of this very category of bonds.
(Goodbye to All That? 2010, pp 31-2)
Joseph Cassano, the head of AIG FP … made $315 million.
Joseph Cassano [conference call with investors, August 2007]:[Raghuram Rajan delivered a paper (Has Financial Development Made the World Riskier) at "the most elite banking conference in the world" in 2005 which] focused on incentive structures that generated huge cash bonuses based on short term profits but which imposed no penalties for later loses.
It's hard for us … to see a scenario, within in any kind of realm of reason, that would see us losing $1 in any of [those Credit Default Swap] transactions. …
[It] argued, that these incentives encouraged bankers to take risks that might eventually destroy their own firms, or even the entire financial system.
- Raghuram Rajan [Chief Economist (2003-2007), IMF]:
It's very easy to generate performance by taking on more risk.
And so what you need to do is compensate for risk adjusted performance.
And that's where all the bodies are buried. …
- [Larry Summers] wanted to make sure that we didn't bring in … regulations to constrain the financial sector …
You're going to make an extra [$2-10 million] a year for putting your financial institution at risk.
Someone else pays the bill …
Would you make that bet?
Most people who worked on Wall Street said sure.
I'd make that bet. …
Do you think that this is an industry where very high compensation levels are justified?
- Scott Talbott [Chief Lobbyist, Financial Services Roundtable]:
[I] take exception to your word "very high", it's all relative. …
Willem Buiter (1949) [Chief Economist, Citigroup]:
Banking became a pissing contest.
Mine's bigger than your's, that kind of stuff. …
Goldman Sachs sold at least $3.1 billion worth of … toxic CDOs in the first half of 2006.
[The CEO] was Henry Paulson, the highest paid CEO on Wall Street.
George W Bush:Paulson had to sell his $485 million of Goldman stock when he went to work for the government.
… I will nominate Henry Paulson to be the Secretary of the Treasury. …
He has earned a reputation for candor and integrity. …
(30 May 2006)
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.
… Allan Sloan published an article [in Fortune magazine] about the CDOs issued during Paulson's last months as CEO.
Allan Sloan: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.
The article came out in October 2007.
Already a third of the mortgages [had] defaulted.
Now most of them were going.
They lost millions of dollars, and are now suing Goldman Sachs. …
Average annual retirement benefits for a Mississippi public employee $18,750 Average annual compensation of a Goldman Sachs employee $600,000 Hank Paulson's compensation in 2005 $31,000,000
By late 2006, Goldman [had] started actively betting against [the toxic CDOs it was selling while at the same time telling its] customers that they were high quality investments. …
Goldman Sachs bought at least $22 billion worth of CDFs 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 collapse.
[In] 2007, Goldman … started selling CDOs specifically designed so that the more money their customers lost, the more money Goldman Sachs made.
- Susan Collins [Ranking Member, Homeland Security & Government Affairs Committee]:
Do you believe you have a duty to act in the best interests of your clients? …
- Fabrice Tourre [Executive Director, Structured Products Group Trading, Goldman Sachs]:
We have a duty to serve our clients by showing prices on transactions that they ask us to show prices for. …
Carl Levin (1934) [Chairman, Government Affairs Subcommittee on Investigations]:
Is there not a conflict when you sell something to somebody and then … bet against that same security and you don't disclose that to the person you're selling it to? …
- Lloyd Blankfein [Chairman & CEO, Goldman Sachs]:
In the context of market making, that is not a conflict.
[Clearly market making is an ethics free zone.]
When you heard, that your employees in these emails said 'God what a shitty deal!' …
Do you feel anything?
- David Viniar (1955) [Executive VP and CFO, Goldman Sachs]:
… I think that's very unfortunate for anyone to have said that in any form.
[Morgan Stanley] is being sued by the government employee's retirement fund of the Virgin Islands for fraud.
The law suit alleges that Morgan Stanley knew that the CDOs were junk.
Although they were rated AAA, 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. …
The Hedge funds Tricadia and Magnetar made billions betting aginst CDOs they had designed with Merrill Lynch, JP Morgan, and Lehman Brothers. …
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 its profits between 2000 and 2007.
Deven Sharma (1956) [Standard & Poor's Rating Agency]:
S&P's ratings express our opinion. …
They do not speak to
- the market value of a security,
- the volatility of its price, or
- its suitability as an investment.
Ben Bernanke (1953) [Chairman, Federal Reserve Board, 2006-2014]:By 2008, home foreclosures were skyrocketing, and the securitization food chain imploded.
We've never had a decline in house prices on a nationwide basis.
Lenders could no longer sell their loans to the investment banks.
And as the loans went bad, dozens of lenders failed. …
The market for CDOs collapsed leaving the investment banks holding hundreds of billions of dollars in loans, CDOs and real estate they couldn't sell. …
In March of 2008 … Bear Stearns ran out of cash … and was acquired by J.P. Morgan Chase. …
On September 7, 2008, Henry Paulson announced the federal takeover of Fannie Mae and Freddie Mac, two giant mortgage lenders on the brink of collapse. …
Two days later, Lehman Brothers announced record losses of $3.2 billion and its stock collapsed. …
Bear Stearns was rated AAA a month before it went bankrupt?
Jerome Fons [Former Managing Director, Moody's Rating Agency]:
More likely, A2 [— still] a solid investment grade rating. …
Lehman Brothers, A2 within days of failing.
AIG, AA within days of being bailed out.
Fannie Mae and Freddie Mac were AAA, when they were rescued.
Citigroup, Merrill … all of them had investment grade ratings. …
By Friday, September 12th, Lehman Brothers had run out of cash, and the entire investment banking industry was sinking fast. …
[Merrill Lynch] was also on the brink of failure, and on that Sunday, it was acquired by Bank of America.
The only bank interested in buying Lehman was … Barclays.
But British regulators demanded a financial guarantee from the US government, Paulson refused. …
Paulson and Bernanke had not consulted with other governments, and didn't understand the consequences of foreign bankruptcy laws.
Under British law, Lehman's London office had to be closed immediately.
Harvey Miller (1933 – 2015) [Lehman Brother's Bankruptcy Lawyer]:Lehman's failure also caused a collapse in the commercial paper market which many companies depend on to pay for operating expenses such as payroll. …
All transactions came to a halt.
And there were thousand and thousands … of transactions.
Gillian Tett (1967) [US Managing Editor, The Financial Times]:
The hedge funds who had had assets with Lehman in London discovered overnight, to their complete horror, that 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.
That same week, AIG owed $13 billion to holders of CDFs and it didn't have the money.
Andrew Sheng (1946) [Chief Advisor, China Banking Regulatory Commission]:On September 17, AIG is taken over by the government.
AIG was another hub.
If AIG had stopped, all planes may have [had] to stop flying.
And one day later, Paulson and Benanke ask congress for $700 billion to bail out the banks.
They warn that the alternative would be a catastrophic financial collapse. …
When AIG was bailed out, the owners of its CDFs, the most prominent of which was Goldman Sachs, was paid $61 billion the next day.
Paulson, Bernanke and Tim Geitner forced AIG to pay 100 cents on the dollar rather than negotiate lower prices.
Michael Greenberger [Deputy Director (1997-2000), CFTC]:At the same time, Paulson and Geitner forced AIG to surrender its right to sue Goldman and the other banks for fraud. …
$160 billion [of taxpayers money] went through AIG, $14 billion went to Goldman Sachs.
On October 4th 2008, President Bush signs a $700 billion bailout bill. …
[This] does nothing to stem the tide of layoffs and foreclosures.
Unemployment in the United States and Europe quickly rises to 10%. …
By December of 2008, General Motors and Chrysler are facing bankruptcy. …
Over 10 million migrant workers in China lose their jobs.
Dominque Strauss-Kahn (1949) [Managing Director, IMF]:Foreclosures in the United Staes reached 6 million by early 2010.
At the end of the day the poorest, as always, pay the most. …
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 Brother's made over a billion dollars between 2000 and 2007. …
Countrywide CEO, Angelo Mozilo, made $470 million between 2003 and 2008.
$140 million came from dumping his Countrywide stock in the 12 months before the company collapsed. …
Stan O'Neal, the CEO of Merrill Lynch, received $90 million in 2006 and 2007 alone.
After driving his firm into the ground, Merrill Lynch's board of directors allowed him to resign.
He collected $161 million in severance. …
O'Neal's successor, John Thain, was paid $87 million in 2007.
And, in December of 2008, 2 months after Meryll was bailed out by US tax payers, Thain and Merrill's board handed out [$3.6 billion] in bonuses.
Net IncomeBonuses TARP (billion) Total (billion) $1 million $10 million (billion) Bank of America $4.0 $3.3 172 4 $45 Citigroup -$27.7 $5.3 738 3 $45 Goldman Sachs $2.3 $4.8 953 6 $10 JP Morgan Chase $5.6 $8.7 1,626 10 $45 Merrill Lynch -$27.6 $3.6 696 14 $10 Morgan Stanley $1.7 $4.5 428 10 $10
In March 2008, AIG's financial products division lost $11 billion.
Instead of being fired, Joseph Cassano, the head of AIG FP was kept on a consultant for a million dollars a month. …
After the crisis the financial industry, including the Financial Services Roundtable, worked harder than ever to fight reform.
The financial sector employs 3,000 lobbyists, more than 5 for each member of congress. …
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. …
Charles Ferguson:[The financial industry] has corrupted the study of economics itself. …
[Do you] think that all segments of American society have equal and fair access to the system [of government?]
You can walk into any hearing room that you'd like.
Yes I do.
Since the 1980's academic economists have been major advocates of deregulation and played powerful roles in shaping US government policy.
Very few … warned about the crisis.
And after the crisis, many of them opposed reform. …
Many prominent academics quietly make fortunes, while helping the financial industry shape public debate and government policy.
The Analysis Group, Charles River Associates, Compass Lexicon and the Law and Economics Consulting Group manage a multi-billion 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 [Dean, Columbia Business School] was paid $100 thousand to testify in their defense.
Where We Are Now
Meanwhile, American tax policy shifted to favor the wealthy.
The most dramatic change was a series of tax cuts designed by Glen Hubbard [(Chief Economic Advisor, Bush Administration), which] sharply decreased taxes on investment gains, stock dividends, and eliminated the estate tax.
George W Bush:Most of the benefits of these tax cuts went to the wealthiest 1% of Americans. …
When I first came to office, I thought taxes were too high, and they were. …
We had a comprehensive plan [that] left more than $1.1 trillion in the hands of American workers, families, investors and small business owners. …
It was the cornerstone of our economic recovery policy. …
You don't have to have a lousy home.
The low income home buyer can have just as nice a home as anyone else. …
[Just not for very long.]
American families responded to these changes by … working longer hours and by going into debt. …
[Before] the 2008 election, Barack Obama pointed to Wall Street greed and regulatory failures, as examples for the need for change in America. …
[When] finally enacted in mid-2010, the [Obama] administration's financial reforms were weak.
And in some critical areas, including the rating agencies, lobbying and compensation, nothing significant was even proposed. …
Robert Gnaizda:The new president of the New York [Federal Reserve], is William C. Dudley, former chief economist at Goldman Sachs …
There's very little reform. …
It's a Wall Street government.
[Treasury Secretary] Geithner's chief of staff is Mark Patterson, a former lobbyist for Goldman …
And one of the senior [treasury] advisors is Lewis Sachs, who oversaw Tricadia, a company heavily involved in betting against the mortgage securities it was selling.
To head the [CFTC], Obama picked Garry Gensler, former Goldman Sach's executive, who had helped ban the regulation of derivatives.
To run the [SEC], Obama chose Mary Shapiro, the former CEO of FINRA, the investment banking industry's self-regulation body. …
And Obama's chief economic advisor is Larry Summers. …
Willem Buiter:In September of 2009, Christine Lagarde, and the finance ministers of Sweden, The Netherlands, Luxembourg, Italy, Spain, and Germany called for the [imposition of] strict regulations on bank compensation.
When it was clear that Summers and Geithner , were going to play major roles as advisors [to Obama].
I knew this was going to be status quo. …
And in July 2010 the European Parliament enacted those very regulations. …
[The financial industry is one] in which drug use, prostitution and the fraudulent billing of prostitutes (as a business expense) occur on an industrial scale.