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NARRATOR:
Iceland is a stable democracy

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00:01:10,804 --> 00:01:12,439
with a high standard of living,

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00:01:12,605 --> 00:01:14,740
and, until recently,

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00:01:14,240 --> 00:01:17,444
extremely low unemployment
and government debt.

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We had the complete infrastructure
of a modern society.

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Clean energy, food production.

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00:01:26,252 --> 00:01:28,688
Fisheries with a quota system
to manage them.

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Good healthcare, education,
clean air.

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Not much crime.

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It's a good place for families to live.

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We had almost
end-of-history status.

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But in 2000, Iceland's government
began a broad policy of deregulation

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that would have
disastrous consequences,

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00:01:50,430 --> 00:01:54,140
first for the environment
and then for the economy.

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00:01:54,180 --> 00:01:57,984
They started by allowing multinational
corporations like Alcoa

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00:01:58,151 --> 00:02:00,520
to build giant
aluminum-smelting plants

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00:02:00,687 --> 00:02:05,558
and exploit Iceland's geothermal
and hydroelectric energy sources.

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00:02:06,260 --> 00:02:08,928
Many of the most beautiful areas
in the highlands

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00:02:09,950 --> 00:02:13,633
with the most spectacular colors
are geothermal.

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So nothing comes
without consequence.

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NARRATOR:
At the same time,

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00:02:56,509 --> 00:03:00,180
the government privatized
Iceland's three largest banks.

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The result was one of
the purest experiments

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in financial deregulation
ever conducted.

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00:03:06,152 --> 00:03:08,154
(SPEAKING IN FOREIGN LANGUAGE)

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00:03:08,855 --> 00:03:10,857
(CROWDS SHOUTING IN FOREIGN LANGUAGE)

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We have had enough.
How could all of this happen?

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Finance took over and more
or less wrecked the place.

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In a five-year period,
these three tiny banks,

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which had never operated
outside of Iceland,

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borrowed 120 billion dollars,

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10 times the size
of Iceland's economy.

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The bankers showered money
on themselves,

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00:03:35,882 --> 00:03:37,784
each other, and their friends.

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00:03:37,951 --> 00:03:39,619
ZOEGA:
There was a massive bubble.

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Stock prices went up
by a factor of nine.

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House prices more than doubled.

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00:03:52,320 --> 00:03:56,803
He borrowed billions to buy up
high-end retail businesses in London.

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He also bought
a pinstriped private jet,

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a 40-million-dollar yacht

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and a Manhattan penthouse.

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00:04:03,576 --> 00:04:05,412
MAGNASON: Newspapers
always had the headline:

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00:04:05,578 --> 00:04:08,615
This millionaire bought
this company

45
00:04:08,782 --> 00:04:13,953
in the U.K. Or in Finland
or in France or wherever,

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instead of saying:

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00:04:15,588 --> 00:04:19,359
"This millionaire took
a billion-dollar loan

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00:04:19,526 --> 00:04:23,863
to buy this company,
and he took it from your local bank."

49
00:04:24,300 --> 00:04:25,999
ZOEGA: The banks set
up money market funds,

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00:04:26,166 --> 00:04:29,369
and the banks advised
deposit-holders to withdraw money

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00:04:29,536 --> 00:04:31,771
and put them
in the money market funds.

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00:04:31,938 --> 00:04:34,374
The Ponzi scheme needed
everything it could.

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00:04:34,541 --> 00:04:37,644
NARRATOR: American
accounting firms like KPMG

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00:04:37,811 --> 00:04:40,280
audited the Icelandic banks
and investment firms

55
00:04:40,447 --> 00:04:42,248
and found nothing wrong.

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00:04:42,415 --> 00:04:46,520
And American credit-rating agencies
said Iceland was wonderful.

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00:04:46,219 --> 00:04:48,655
In February 2007,

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00:04:48,822 --> 00:04:54,861
the rating agency upgraded the banks to
the highest possible rate, triple-A.

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00:04:55,280 --> 00:04:59,933
It went so far as the government here
traveling with the bankers

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00:05:00,100 --> 00:05:02,969
as a PR show.

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00:05:05,171 --> 00:05:08,775
When Iceland's banks collapsed
at the end of 2008,

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00:05:08,942 --> 00:05:12,245
unemployment tripled
in six months.

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00:05:15,315 --> 00:05:18,752
ZOEGA: There is nobody
unaffected in Iceland.

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00:05:24,424 --> 00:05:26,326
INTERVIEWER:
A lot of people lost their savings.

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00:05:26,493 --> 00:05:28,595
Yes, that's the case.

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00:05:28,762 --> 00:05:32,599
NARRATOR: Government regulators who
should've been protecting the citizens

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00:05:32,766 --> 00:05:34,601
had done nothing.

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00:05:35,602 --> 00:05:39,139
You have two lawyers from
the regulator going down to a bank

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00:05:39,305 --> 00:05:41,207
to talk about some issue.

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00:05:41,374 --> 00:05:43,900
When they approach the bank,

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they would see 19 SUVs
outside the bank.

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00:05:48,648 --> 00:05:49,816
You enter the bank,

73
00:05:49,983 --> 00:05:54,187
and you have the 19 lawyers
sitting in front of you, right,

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very well prepared,
ready to kill any argument you make.

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00:05:59,893 --> 00:06:02,996
And then, if you do really well,
they'll offer you a job.

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00:06:03,463 --> 00:06:06,466
One-third of Iceland's
financial regulators

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00:06:06,633 --> 00:06:09,350
went to work for the banks.

78
00:06:10,270 --> 00:06:12,272
But this is
a universal problem, huh?

79
00:06:12,439 --> 00:06:15,175
In New York,
you have the same problem, right?

80
00:06:15,809 --> 00:06:17,811
(PETER GABRIEL'S "BIG TIME" PLAYS)

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00:06:46,406 --> 00:06:49,209
INTERVIEWER: What do you think of
Wall Street incomes these days?

82
00:06:49,376 --> 00:06:50,877
Excessive.

83
00:06:53,179 --> 00:06:56,249
INTERVIEWER: I've been told it's
extremely difficult for the IMF

84
00:06:56,416 --> 00:06:58,451
to criticize the United States.

85
00:06:58,618 --> 00:06:59,753
I wouldn't say that.

86
00:07:06,559 --> 00:07:10,363
We deeply regret our breaches
of U.S. Law.

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00:07:14,670 --> 00:07:18,400
MAN: They're amazed at how much
cocaine these Wall Streeters can use

88
00:07:18,171 --> 00:07:20,340
and get up
and go to work the next day.

89
00:07:23,243 --> 00:07:27,280
I didn't know
what credit default swaps are.

90
00:07:27,447 --> 00:07:29,820
I'm a little bit old-fashioned.

91
00:07:34,454 --> 00:07:36,923
INTERVIEWER: Has Larry Summers
ever expressed remorse?

92
00:07:37,900 --> 00:07:38,892
I don't hear confessions.

93
00:07:53,573 --> 00:07:55,475
MAN: The government's
just writing checks.

94
00:07:55,642 --> 00:07:58,912
That's plan A, that's plan B
and that's plan C.

95
00:07:59,790 --> 00:08:02,949
INTERVIEWER: Would you support
legal controls on executive pay?

96
00:08:03,616 --> 00:08:04,818
I would not.

97
00:08:08,455 --> 00:08:10,323
INTERVIEWER: Are you
comfortable with the

98
00:08:10,357 --> 00:08:12,258
level of compensation
in financial services?

99
00:08:12,425 --> 00:08:13,893
If they've earned it,
yes, I am.

100
00:08:14,600 --> 00:08:16,129
Do you think they've earned it?
I think so.

101
00:08:19,566 --> 00:08:22,302
INTERVIEWER: And so you've helped
these people blow the world up?

102
00:08:22,469 --> 00:08:23,503
You could say that.

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00:08:33,790 --> 00:08:37,751
They were having massive
private gains at public loss.

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00:08:45,392 --> 00:08:48,495
MAN: When you think you can
create something out of nothing

105
00:08:48,661 --> 00:08:50,130
it's difficult to resist.

106
00:09:05,450 --> 00:09:08,181
WOMAN: I'm concerned people
want to go back to the old way,

107
00:09:08,348 --> 00:09:11,170
the way they were operating
prior to the crisis.

108
00:09:21,828 --> 00:09:25,198
I was getting a lot of anonymous
e-mails from bankers saying:

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00:09:25,365 --> 00:09:28,134
"You can't quote me,
but I'm really concerned."

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00:09:34,174 --> 00:09:35,875
INTERVIEWER:
Why do you think there isn't

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00:09:36,420 --> 00:09:38,745
a more systematic investigation
being undertaken?

112
00:09:38,912 --> 00:09:40,880
Because then
you'll find the culprits.

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00:09:44,217 --> 00:09:46,486
INTERVIEWER: You think
Columbia Business.

114
00:09:46,486 --> 00:09:48,755
School has any
conflict-of-interest problem?

115
00:09:49,155 --> 00:09:51,791
I don't see that we do.

116
00:10:00,133 --> 00:10:02,802
The regulators
didn't do their job.

117
00:10:02,969 --> 00:10:06,906
They had the power to do every case
that I made. They just didn't want to.

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00:10:25,125 --> 00:10:27,293
MAN: Lehman Brothers, one
of the most venerable

119
00:10:27,460 --> 00:10:30,830
and biggest investment banks,
was forced to declare itself bankrupt.

120
00:10:30,997 --> 00:10:34,670
Another, Merrill Lynch,
was forced to sell itself today.

121
00:10:34,267 --> 00:10:38,438
World financial markets are way down,
following dramatic developments.

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00:10:38,605 --> 00:10:40,573
(SPEAKING IN CHINESE)

123
00:10:42,809 --> 00:10:44,778
(MAN SPEAKING IN FRENCH)

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00:10:47,180 --> 00:10:48,748
NARRATOR:
In September 2008,

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00:10:48,948 --> 00:10:51,918
the bankruptcy of the U.S.
Investment bank Lehman Brothers

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00:10:52,118 --> 00:10:56,356
and the collapse of the world's
largest insurance company, AIG,

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00:10:56,523 --> 00:10:58,240
triggered a global crisis.

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00:10:58,224 --> 00:11:00,427
MAN 1:
Fears gripped markets overnight.

129
00:11:00,593 --> 00:11:02,620
MAN 2:
Stocks fell off a cliff.

130
00:11:02,262 --> 00:11:05,980
The largest single point drop
in history.

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00:11:05,265 --> 00:11:07,233
MAN 3:
Share prices continued to tumble

132
00:11:07,400 --> 00:11:10,603
in the aftermath
of the Lehman collapse.

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00:11:10,770 --> 00:11:12,639
(CROWD SHOUTING IN FOREIGN LANGUAGE)

134
00:11:12,806 --> 00:11:14,674
The result was a global recession,

135
00:11:14,841 --> 00:11:17,711
which cost the world
tens of trillions of dollars,

136
00:11:17,877 --> 00:11:20,113
rendered 30 million people
unemployed

137
00:11:20,280 --> 00:11:23,550
and doubled the national debt
of the United States.

138
00:11:23,717 --> 00:11:28,888
With the destruction
of equity and housing wealth,

139
00:11:29,550 --> 00:11:31,524
the destruction of income,
of jobs,

140
00:11:31,725 --> 00:11:37,163
50 million people globally could
end up below the poverty line again.

141
00:11:38,310 --> 00:11:41,868
This is just a hugely,
hugely expensive crisis.

142
00:11:42,736 --> 00:11:45,271
This crisis was not an accident.

143
00:11:45,472 --> 00:11:48,675
It was caused
by an out-of-control industry.

144
00:11:48,842 --> 00:11:50,430
Since the 1980s,

145
00:11:50,210 --> 00:11:53,279
the rise of the U.S. Financial sector
has led to a series

146
00:11:53,480 --> 00:11:56,549
of increasingly severe
financial crises.

147
00:11:56,816 --> 00:11:59,786
Each crisis has caused
more damage,

148
00:11:59,986 --> 00:12:03,823
while the industry has made
more and more money.

149
00:12:11,965 --> 00:12:13,466
NARRATOR:
After the Great Depression

150
00:12:13,666 --> 00:12:16,536
the United States had 40 years
of economic growth

151
00:12:16,703 --> 00:12:19,500
without a single financial crisis.

152
00:12:19,172 --> 00:12:22,420
The financial industry
was tightly regulated.

153
00:12:22,208 --> 00:12:24,577
Most regular banks
were local businesses

154
00:12:24,744 --> 00:12:26,846
prohibited from speculating

155
00:12:27,470 --> 00:12:28,948
with depositors' savings.

156
00:12:29,416 --> 00:12:32,385
Investment banks, which handled
stock and bond trading,

157
00:12:32,552 --> 00:12:35,255
were small, private partnerships.

158
00:12:35,555 --> 00:12:39,920
In the traditional
investment banking model,

159
00:12:39,292 --> 00:12:41,528
the partners put the money up,

160
00:12:41,695 --> 00:12:45,131
and they watch that money
very carefully.

161
00:12:45,298 --> 00:12:46,766
They wanted to live well,

162
00:12:46,933 --> 00:12:49,736
but they didn't want to bet the ranch
on anything.

163
00:12:50,300 --> 00:12:52,505
Paul Volcker served
in the Treasury Department

164
00:12:52,706 --> 00:12:57,610
and was chairman of the
Federal Reserve from 1979 to 1987.

165
00:12:57,777 --> 00:12:59,379
Before going into government,

166
00:12:59,579 --> 00:13:02,782
he was a financial economist
at Chase Manhattan Bank.

167
00:13:03,830 --> 00:13:08,555
When I left Chase
to go in the Treasury in 1969,

168
00:13:08,755 --> 00:13:11,624
my income was in the neighborhood
of $45,000 a year.

169
00:13:11,791 --> 00:13:13,727
INTERVIEWER:
Forty-five thousand dollars a year.

170
00:13:13,893 --> 00:13:17,630
Morgan Stanley, in 1972,

171
00:13:17,230 --> 00:13:21,835
had approximately
110 total personnel,

172
00:13:22,350 --> 00:13:26,439
one office,
and capital of 12 million dollars.

173
00:13:26,606 --> 00:13:31,440
Now Morgan Stanley
has 50,000 workers

174
00:13:31,244 --> 00:13:35,215
and has capital of several billion

175
00:13:35,415 --> 00:13:37,951
and has offices all over the world.

176
00:13:38,151 --> 00:13:41,588
In the 1980s,
the financial industry exploded.

177
00:13:41,755 --> 00:13:43,590
The investment banks
went public,

178
00:13:43,757 --> 00:13:47,600
giving them huge amounts
of stockholder money.

179
00:13:47,227 --> 00:13:50,563
People on Wall Street
started getting rich.

180
00:13:51,531 --> 00:13:54,501
I had a friend
who was a bond trader

181
00:13:54,668 --> 00:13:58,638
at Merrill Lynch in the 1970s.

182
00:13:58,838 --> 00:14:02,609
He had a job as a train conductor
at night

183
00:14:02,776 --> 00:14:06,212
because he had three kids
and couldn't support them

184
00:14:06,379 --> 00:14:07,781
on what a trader made.

185
00:14:07,947 --> 00:14:11,584
By 1986,
he was making millions of dollars

186
00:14:11,785 --> 00:14:14,454
and thought
it was because he was smart.

187
00:14:15,221 --> 00:14:17,791
The highest order of business
before the nation

188
00:14:17,991 --> 00:14:20,360
is to restore
our economic prosperity.

189
00:14:20,527 --> 00:14:24,998
NARRATOR: In 1981, President Ronald
Reagan chose as Treasury secretary

190
00:14:25,198 --> 00:14:28,668
the CEO of the investment bank
Merrill Lynch, Donald Regan.

191
00:14:28,868 --> 00:14:32,138
Wall Street and the president
see eye to eye.

192
00:14:32,839 --> 00:14:34,808
I've talked to leaders of Wall Street.

193
00:14:34,974 --> 00:14:37,711
They say, "We're behind
the president 100 percent."

194
00:14:37,877 --> 00:14:39,346
The Reagan administration,

195
00:14:39,512 --> 00:14:42,282
supported by economists
and financial lobbyists,

196
00:14:42,449 --> 00:14:46,386
started a 30-year period
of financial deregulation.

197
00:14:47,721 --> 00:14:50,256
In 1982,
the Reagan administration

198
00:14:50,457 --> 00:14:52,926
deregulated
savings-and-loan companies,

199
00:14:53,126 --> 00:14:56,663
allowing them to make risky
investments with depositors' money.

200
00:14:56,863 --> 00:14:58,298
By the end of the decade,

201
00:14:58,465 --> 00:15:01,534
hundreds of savings-and-loan
companies had failed.

202
00:15:01,735 --> 00:15:05,672
This crisis cost taxpayers
$ 124 billion

203
00:15:06,600 --> 00:15:08,808
and cost many people
their life savings.

204
00:15:08,975 --> 00:15:12,178
It may be the biggest bank heist
in our history.

205
00:15:12,379 --> 00:15:16,549
Thousands of executives went to jail
for looting their companies.

206
00:15:16,750 --> 00:15:19,319
One of the most extreme cases
was Charles Keating.

207
00:15:19,519 --> 00:15:20,854
MAN:
Mr. Keating, got a word?

208
00:15:21,210 --> 00:15:25,291
In 1985, when federal regulators
began investigating him,

209
00:15:25,458 --> 00:15:29,620
Keating hired an economist
named Alan Greenspan.

210
00:15:29,262 --> 00:15:30,897
In this letter to regulators,

211
00:15:31,970 --> 00:15:34,634
Greenspan praised Keating's
sound business plans and expertise

212
00:15:34,834 --> 00:15:39,639
and said he saw no risk in allowing
Keating to invest customers' money.

213
00:15:40,807 --> 00:15:44,944
Keating reportedly
paid Greenspan $40,000.

214
00:15:46,546 --> 00:15:49,150
Keating went to prison
shortly afterwards.

215
00:15:49,582 --> 00:15:50,817
As for Alan Greenspan,

216
00:15:51,685 --> 00:15:55,121
Reagan appointed him
chairman of America's central bank,

217
00:15:55,288 --> 00:15:56,823
the Federal Reserve.

218
00:15:57,230 --> 00:15:58,525
Greenspan was reappointed

219
00:15:58,725 --> 00:16:02,395
by presidents Clinton
and George W. Bush.

220
00:16:03,263 --> 00:16:05,165
During the Clinton administration,

221
00:16:05,331 --> 00:16:07,600
deregulation continued
under Greenspan

222
00:16:07,767 --> 00:16:10,303
and Treasury secretaries
Robert Rubin,

223
00:16:10,503 --> 00:16:13,873
the former CEO of the
investment bank Goldman Sachs,

224
00:16:14,400 --> 00:16:17,510
and Larry Summers,
a Harvard economics Professor.

225
00:16:17,711 --> 00:16:20,747
The financial sector,
Wall Street being powerful,

226
00:16:20,947 --> 00:16:22,916
having lobbies, lots of money,

227
00:16:23,830 --> 00:16:26,553
step by step,
captured the political system.

228
00:16:26,753 --> 00:16:29,689
Both on the Democratic
and the Republican side.

229
00:16:30,557 --> 00:16:34,940
NARRATOR: By the late 1990s, the
financial sector had consolidated

230
00:16:34,294 --> 00:16:37,764
into a few gigantic firms,
each of them so large

231
00:16:37,964 --> 00:16:40,967
that their failure could threaten
the whole system.

232
00:16:41,167 --> 00:16:44,738
And the Clinton administration
helped them grow even larger.

233
00:16:45,338 --> 00:16:48,708
In 1998,
Citicorp and Travelers merged

234
00:16:48,875 --> 00:16:50,243
to form Citigroup,

235
00:16:50,410 --> 00:16:53,279
the largest financial services
company in the world.

236
00:16:53,580 --> 00:16:56,160
The merger violated
the Glass-Steagall Act,

237
00:16:56,182 --> 00:16:58,518
a law passed
after the Great Depression,

238
00:16:58,685 --> 00:17:01,210
preventing banks
with consumer deposits

239
00:17:01,187 --> 00:17:04,391
from engaging in
risky investment-banking activities.

240
00:17:04,591 --> 00:17:07,427
It was illegal
to acquire Travelers.

241
00:17:07,594 --> 00:17:09,329
Greenspan said nothing.

242
00:17:09,529 --> 00:17:12,465
The Federal Reserve gave them
an exemption for a year,

243
00:17:12,632 --> 00:17:14,401
then they got the law passed.

244
00:17:14,734 --> 00:17:18,405
In 1999,
at the urging of Summers and Rubin,

245
00:17:18,605 --> 00:17:21,207
Congress passed
the Gramm-Leach-Bliley Act,

246
00:17:21,408 --> 00:17:24,411
known to some
as the Citigroup Relief Act.

247
00:17:24,611 --> 00:17:26,713
It overturned Glass-Steagall

248
00:17:26,913 --> 00:17:29,883
and cleared the way
for future mergers.

249
00:17:38,458 --> 00:17:39,659
Why do you have big banks?

250
00:17:39,859 --> 00:17:43,863
Because banks like monopoly power,
lobbying power.

251
00:17:44,640 --> 00:17:48,535
Because banks know
that when they're too big,

252
00:17:48,735 --> 00:17:49,969
they will be bailed.

253
00:17:50,170 --> 00:17:52,639
Markets are inherently unstable.

254
00:17:52,806 --> 00:17:55,241
Or at least potentially unstable.

255
00:17:55,408 --> 00:17:59,245
An appropriate metaphor
is the oil tankers.

256
00:17:59,412 --> 00:18:00,680
They are very big,

257
00:18:01,470 --> 00:18:03,717
and therefore,
you have to put in compartments

258
00:18:04,217 --> 00:18:07,387
to prevent
the sloshing around of oil

259
00:18:07,587 --> 00:18:09,389
from capsizing the boat.

260
00:18:09,589 --> 00:18:12,892
The design of the boat
has to take that into account.

261
00:18:13,930 --> 00:18:16,620
And after the Depression,

262
00:18:16,229 --> 00:18:21,901
the regulations actually introduced
these very watertight compartments.

263
00:18:22,569 --> 00:18:28,408
And deregulation has led
to the end of compartmentalization.

264
00:18:29,175 --> 00:18:31,411
NARRATOR: The next crisis
came at the end of the '90s.

265
00:18:32,412 --> 00:18:35,882
The investment banks fueled
a massive bubble in Internet stocks,

266
00:18:36,820 --> 00:18:38,752
which was followed by a crash
in 2001

267
00:18:38,952 --> 00:18:41,855
that caused $5 trillion
in investment losses.

268
00:18:42,422 --> 00:18:45,592
The Securities and Exchange
Commission, the federal agency

269
00:18:45,792 --> 00:18:49,229
created during the Depression
to regulate investment banking,

270
00:18:49,429 --> 00:18:51,640
had done nothing.

271
00:18:51,264 --> 00:18:54,868
In the absence of meaningful
federal action,

272
00:18:55,680 --> 00:18:57,570
and given the clear failure
of self-regulation,

273
00:18:57,771 --> 00:19:00,273
it's become necessary for others
to step in

274
00:19:00,473 --> 00:19:02,375
and adopt the protections needed.

275
00:19:02,542 --> 00:19:05,679
Eliot Spitzer's investigation
revealed the investment banks

276
00:19:05,879 --> 00:19:09,315
promoted Internet companies
they knew would fail.

277
00:19:09,482 --> 00:19:13,190
Analysts were being paid based on
how much business they brought in.

278
00:19:13,219 --> 00:19:17,524
What they said publicly was quite
different from what they said privately.

279
00:19:17,724 --> 00:19:20,193
WOMAN: Infospace, given the
highest possible rating,

280
00:19:20,360 --> 00:19:22,862
dismissed by an analyst
as a "piece of junk."

281
00:19:23,630 --> 00:19:27,100
Excite, also highly rated,
called "such a piece of crap."

282
00:19:27,300 --> 00:19:33,640
The defense that was proffered
by many of the investment banks

283
00:19:33,973 --> 00:19:36,509
was not "you're wrong,"

284
00:19:36,710 --> 00:19:40,146
it was, "Everybody's doing it,
everybody knows it's going on."

285
00:19:40,347 --> 00:19:42,449
Nobody should rely
on these analysts anyway."

286
00:19:42,949 --> 00:19:44,951
In December, 2002,

287
00:19:45,151 --> 00:19:49,656
10 investment banks settled
the case for a total of $ 1.4 billion

288
00:19:49,856 --> 00:19:52,559
and promised
to change their ways.

289
00:19:52,992 --> 00:19:56,830
Scott Talbott is the chief lobbyist for
the Financial Services Roundtable,

290
00:19:57,300 --> 00:19:59,399
one of Washington's
most powerful groups,

291
00:19:59,599 --> 00:20:03,436
which represents nearly all of the
world's largest financial companies.

292
00:20:03,636 --> 00:20:07,507
INTERVIEWER: Are you comfortable with the
fact that several of your member companies

293
00:20:07,707 --> 00:20:10,677
have engaged
in large-scale criminal activity?

294
00:20:10,877 --> 00:20:12,912
L... You'll have to be specific.
Okay.

295
00:20:13,113 --> 00:20:16,950
And first of all, criminal activity
shouldn't be accepted, period.

296
00:20:17,150 --> 00:20:19,486
(BACHMAN-TURNER OVERDRIVE'S
"TAKIN' CARE OF BUSINESS" PLAYS)

297
00:20:25,492 --> 00:20:28,795
NARRATOR: Since deregulation began,
the world's biggest financial firms

298
00:20:28,995 --> 00:20:32,165
have been caught laundering
money, defrauding customers

299
00:20:32,365 --> 00:20:36,302
and cooking their books
again and again and again.

300
00:20:45,945 --> 00:20:48,982
The bank was fined $536 million.

301
00:20:49,182 --> 00:20:53,119
Citibank helped funnel $ 100 million
of drug money out of Mexico.

302
00:20:53,286 --> 00:20:55,822
WOMAN: Did you comment
that she should, quote:

303
00:20:56,220 --> 00:20:58,825
"Lose any documents connected
with the account"?

304
00:20:59,250 --> 00:21:02,462
I said that in a kidding manner.
It was at the early stages of this.

305
00:21:02,662 --> 00:21:03,997
I did not mean it seriously.

306
00:21:06,366 --> 00:21:09,169
Between 1998 and 2003,

307
00:21:09,369 --> 00:21:12,672
Fannie Mae overstated it's earnings
by more than $ 10 billion.

308
00:21:12,872 --> 00:21:14,974
These accounting standards
are complex

309
00:21:15,175 --> 00:21:18,978
and require determinations
over which experts often disagree.

310
00:21:19,179 --> 00:21:23,316
CEO Franklin Raines, who used to be
President Clinton's budget director,

311
00:21:23,516 --> 00:21:26,486
received over $52 million
in bonuses.

312
00:21:31,257 --> 00:21:34,561
When UBS was caught helping
wealthy Americans evade taxes,

313
00:21:34,761 --> 00:21:37,263
they refused to cooperate
with the government.

314
00:21:37,464 --> 00:21:39,733
Would you be willing
to supply the names?

315
00:21:40,300 --> 00:21:43,370
If there's a treaty framework.
No treaty framework.

316
00:21:43,570 --> 00:21:45,638
You've agreed
you participated in a fraud.

317
00:21:45,839 --> 00:21:46,840
Hm.

318
00:21:57,283 --> 00:21:59,652
MAN: But while the companies
face unprecedented fines,

319
00:21:59,853 --> 00:22:03,690
the investment firms do not
have to admit any wrongdoing.

320
00:22:03,890 --> 00:22:08,610
When dealing with this many products,
this many customers, mistakes happen.

321
00:22:08,261 --> 00:22:10,663
INTERVIEWER: The financial
services industry

322
00:22:10,663 --> 00:22:13,660
seems to have a level
of criminality

323
00:22:13,266 --> 00:22:15,235
that is somewhat distinctive.

324
00:22:15,402 --> 00:22:19,720
You know, when was the last time
that Cisco

325
00:22:19,272 --> 00:22:23,376
or Intel or Google or Apple or IBM,
you know...?

326
00:22:23,576 --> 00:22:26,246
I agree about high-tech
versus financial services...

327
00:22:26,446 --> 00:22:29,816
So how come?
High-tech is a creative business

328
00:22:30,160 --> 00:22:31,885
where the value generation

329
00:22:32,850 --> 00:22:35,288
and income derives from
actually creating something new.

330
00:22:36,556 --> 00:22:37,957
NARRATOR:
Beginning in the 1990s,

331
00:22:38,158 --> 00:22:40,827
deregulation
and advances in technology

332
00:22:40,994 --> 00:22:45,165
led to an explosion of complex
financial products called derivatives.

333
00:22:45,331 --> 00:22:48,768
Economists and bankers
claimed they made markets safer.

334
00:22:48,935 --> 00:22:52,405
But instead,
they made them unstable.

335
00:22:52,572 --> 00:22:54,874
Since the end of the Cold War,

336
00:22:55,750 --> 00:22:58,440
a lot of former physicists,
mathematicians,

337
00:22:58,211 --> 00:23:00,380
decided to apply their skills,

338
00:23:00,547 --> 00:23:03,283
not on, you know,
Cold War technology,

339
00:23:03,450 --> 00:23:05,318
but on financial markets.

340
00:23:05,485 --> 00:23:07,620
And together
with investment bankers...

341
00:23:07,821 --> 00:23:09,890
INTERVIEWER:
Creating different weapons.

342
00:23:09,289 --> 00:23:10,290
Absolutely.

343
00:23:10,457 --> 00:23:13,426
You know, as Warren Buffett said,
weapons of mass destruction.

344
00:23:13,593 --> 00:23:16,930
Regulators, politicians,
business people

345
00:23:17,970 --> 00:23:20,700
did not take seriously
the threat of innovation

346
00:23:20,867 --> 00:23:23,570
on the stability
of the financial system.

347
00:23:24,204 --> 00:23:25,472
Using derivatives,

348
00:23:25,638 --> 00:23:28,441
bankers could gamble
on virtually anything.

349
00:23:28,608 --> 00:23:31,277
They could bet on the rise or fall
of oil prices,

350
00:23:31,478 --> 00:23:34,314
the bankruptcy of a company,
even the weather.

351
00:23:35,480 --> 00:23:36,750
By the late 1990s,

352
00:23:36,950 --> 00:23:41,921
derivatives were a 50-trillion-dollar
unregulated market.

353
00:23:42,255 --> 00:23:46,826
In 1998,
someone tried to regulate them.

354
00:23:46,993 --> 00:23:50,897
Brooksley Born graduated first
in her class at Stanford Law School

355
00:23:51,640 --> 00:23:54,401
and was the first woman
to edit a major law review.

356
00:23:54,601 --> 00:23:57,704
After running the derivatives practice
at Arnold & Porter,

357
00:23:57,871 --> 00:23:59,739
Born was appointed by Clinton

358
00:23:59,906 --> 00:24:02,776
to chair the Commodity Futures
Trading Commission,

359
00:24:02,942 --> 00:24:05,545
which oversaw
the derivatives market.

360
00:24:05,712 --> 00:24:09,282
GREENBERGER: Brooksley Born asked
me if I would come work with her.

361
00:24:09,883 --> 00:24:13,620
We decided that this was a serious,

362
00:24:13,787 --> 00:24:17,123
potentially destabilizing market.

363
00:24:17,290 --> 00:24:22,729
In May of 1998, the CFTC issued
a proposal to regulate derivatives.

364
00:24:22,896 --> 00:24:26,990
Clinton's Treasury Department
had an immediate response.

365
00:24:26,266 --> 00:24:30,837
I happened to go
into Brooksley's office,

366
00:24:31,400 --> 00:24:35,410
and she was just putting down
the receiver on her telephone,

367
00:24:35,208 --> 00:24:38,945
and the blood had drained
from her face.

368
00:24:39,112 --> 00:24:42,482
And she looked at me and said,
"That was Larry Summers."

369
00:24:42,649 --> 00:24:45,852
He had 13 bankers in his office.

370
00:24:46,252 --> 00:24:50,230
He conveyed it
in a very bullying fashion,

371
00:24:50,190 --> 00:24:53,460
sort of directing her to stop.

372
00:24:53,893 --> 00:24:57,397
Banks were now reliant for earnings
on these activities.

373
00:24:57,597 --> 00:25:03,937
And that led to a Titanic battle
to prevent this from being regulated.

374
00:25:04,104 --> 00:25:06,473
Shortly after the phone call
from Summers,

375
00:25:06,639 --> 00:25:10,877
Greenspan, Rubin,
and SEC chairman Arthur Levitt

376
00:25:11,440 --> 00:25:13,446
issued a joint statement
condemning Born

377
00:25:13,613 --> 00:25:18,218
and recommending legislation
to keep derivatives unregulated.

378
00:25:18,651 --> 00:25:21,554
Regulation of
derivatives transactions

379
00:25:21,721 --> 00:25:26,593
that are privately negotiated
by professionals is unnecessary.

380
00:25:26,760 --> 00:25:31,364
She was overruled, unfortunately.
First by the Clinton administration

381
00:25:31,531 --> 00:25:33,199
and then by the Congress.

382
00:25:33,366 --> 00:25:37,404
In 2000, Senator Phil Gramm took
a major role in getting a bill passed

383
00:25:37,570 --> 00:25:40,640
that pretty much exempted
derivatives from regulation.

384
00:25:40,807 --> 00:25:44,511
They are unifying markets,
reducing regulatory burden.

385
00:25:44,678 --> 00:25:46,479
I believe we need to do it.

386
00:25:53,920 --> 00:25:56,890
It is our very great hope

387
00:25:57,570 --> 00:26:00,493
that it will be possible
to move this year

388
00:26:00,660 --> 00:26:03,763
on legislation that,
in a suitable way

389
00:26:03,930 --> 00:26:10,270
goes to create legal certainty
for OTC derivatives.

390
00:26:16,910 --> 00:26:18,712
I wish to associate myself

391
00:26:18,878 --> 00:26:22,148
with all the remarks
of Secretary Summers.

392
00:26:22,549 --> 00:26:25,385
NARRATOR: In December of
two thousand, Congress passed

393
00:26:25,552 --> 00:26:28,355
the Commodity Futures
Modernization Act.

394
00:26:28,521 --> 00:26:31,458
Written with the help
of financial-industry lobbyists,

395
00:26:31,624 --> 00:26:34,694
it banned the regulation
of derivatives.

396
00:26:35,628 --> 00:26:38,732
After that, it was off to the races.

397
00:26:39,299 --> 00:26:42,435
Use of derivatives
and financial innovation

398
00:26:42,602 --> 00:26:44,971
exploded dramatically after 2000.

399
00:26:45,138 --> 00:26:47,640
MAN: So help me God.
So help me God.

400
00:26:47,807 --> 00:26:51,511
By the time George W. Bush
took office in 2001,

401
00:26:51,678 --> 00:26:54,714
the U.S. Financial sector
was vastly more profitable,

402
00:26:54,881 --> 00:26:58,685
concentrated and powerful
than ever before.

403
00:26:58,918 --> 00:27:02,722
Dominating this industry
were five investment banks,

404
00:27:02,889 --> 00:27:05,158
two financial conglomerates,

405
00:27:05,325 --> 00:27:07,994
three securities insurance
companies

406
00:27:08,161 --> 00:27:10,463
and three rating agencies.

407
00:27:11,197 --> 00:27:14,567
And linking them all together
was the securitization food chain.

408
00:27:14,734 --> 00:27:17,604
A new system
which connected trillions of dollars

409
00:27:17,771 --> 00:27:22,275
in mortgages and other loans
with investors all over the world.

410
00:27:22,442 --> 00:27:25,111
Thirty years ago, if you went
to get a loan for a home,

411
00:27:25,278 --> 00:27:28,982
the person lending you the money
expected you to pay him or her back.

412
00:27:29,149 --> 00:27:32,850
You got a loan from a lender
who wanted to be paid back.

413
00:27:32,252 --> 00:27:36,890
We've since developed securitization,
whereby people who make the loan

414
00:27:36,256 --> 00:27:38,692
are no longer at risk
if they fail to repay.

415
00:27:39,159 --> 00:27:43,630
In the old system, when a homeowner
paid their mortgage every month,

416
00:27:43,229 --> 00:27:45,699
the money went
to their local lender.

417
00:27:45,865 --> 00:27:50,870
And since mortgages took decades
to repay, lenders were careful.

418
00:27:51,204 --> 00:27:55,709
In the new system, lenders sold
mortgages to investment banks.

419
00:27:55,875 --> 00:27:59,245
The banks combined
thousands of mortgages and loans,

420
00:27:59,412 --> 00:28:03,483
including car loans, student loans,
and credit card debt,

421
00:28:03,650 --> 00:28:07,821
to create complex derivatives called
collateralized debt obligations,

422
00:28:07,987 --> 00:28:09,723
or CDOs.

423
00:28:09,889 --> 00:28:14,761
The investment banks then sold
the CDOs to investors.

424
00:28:14,928 --> 00:28:17,230
Now when homeowners paid
their mortgages,

425
00:28:17,397 --> 00:28:20,500
the money went to investors
all over the world.

426
00:28:20,767 --> 00:28:23,236
The investment banks
paid rating agencies

427
00:28:23,403 --> 00:28:25,105
to evaluate the CDOs,

428
00:28:25,271 --> 00:28:27,941
and many of them
were given a triple-A rating,

429
00:28:28,108 --> 00:28:30,744
which is the highest possible
investment grade.

430
00:28:30,910 --> 00:28:33,947
This made CDOs popular
with retirement funds,

431
00:28:34,114 --> 00:28:37,884
which could only purchase
highly rated securities.

432
00:28:39,552 --> 00:28:42,389
This system
was a ticking time bomb.

433
00:28:42,555 --> 00:28:46,226
Lenders didn't care anymore about
whether a borrower could repay,

434
00:28:46,393 --> 00:28:49,950
so they started making
riskier loans.

435
00:28:49,262 --> 00:28:51,431
The investment banks
didn't care either.

436
00:28:51,598 --> 00:28:55,335
The more CDOs they sold,
the higher their profits.

437
00:28:55,502 --> 00:28:59,720
And the rating agencies, which
were paid by the investment banks,

438
00:28:59,239 --> 00:29:03,710
had no liability if their ratings
of CDOs proved wrong.

439
00:29:04,844 --> 00:29:09,820
You weren't gonna be on the hook,
there weren't regulatory constraints.

440
00:29:09,249 --> 00:29:12,452
So it was a green light to just
pump out more and more loans.

441
00:29:12,919 --> 00:29:15,755
NARRATOR:
Between 2000 and 2003,

442
00:29:15,922 --> 00:29:20,694
the number of mortgage loans
made each year nearly quadrupled.

443
00:29:20,860 --> 00:29:23,797
Everybody in this
securitization food chain,

444
00:29:23,963 --> 00:29:26,466
from the very beginning
until the end,

445
00:29:26,633 --> 00:29:28,968
didn't care about
the quality of the mortgage.

446
00:29:29,135 --> 00:29:31,671
They were caring
about maximizing their volume

447
00:29:31,838 --> 00:29:33,606
and getting a fee out of it.

448
00:29:33,773 --> 00:29:35,275
In the early 2000s,

449
00:29:35,442 --> 00:29:40,180
there was a huge increase in the
riskiest loans, called subprime.

450
00:29:40,347 --> 00:29:44,918
When thousands of subprime loans
were combined to create CDOs,

451
00:29:45,850 --> 00:29:48,722
many of them still received
triple-A ratings.

452
00:29:50,924 --> 00:29:55,428
INTERVIEWER: Now, it would have been
possible to create derivative products

453
00:29:55,595 --> 00:29:57,831
that don't have these risks,

454
00:29:57,997 --> 00:30:00,400
that carry the equivalent
of deductibles,

455
00:30:00,567 --> 00:30:05,372
where there are limits on the risks
that can be taken on, and so forth.

456
00:30:05,538 --> 00:30:07,974
They didn't do that, did they?
They didn't.

457
00:30:08,141 --> 00:30:10,100
In retrospect,
they should've done.

458
00:30:10,176 --> 00:30:13,113
INTERVIEWER: So did these guys know
they were doing something dangerous?

459
00:30:13,113 --> 00:30:14,414
I think they did.

460
00:30:32,232 --> 00:30:37,203
All the incentives financial institutions
offered to their mortgage brokers

461
00:30:37,370 --> 00:30:40,974
were based on selling
the most profitable products,

462
00:30:41,141 --> 00:30:42,776
which were predatory loans.

463
00:30:43,109 --> 00:30:47,280
If they make more money,
that's where they'll put you.

464
00:30:53,119 --> 00:30:56,122
NARRATOR: Suddenly, hundreds
of billions of dollars a year

465
00:30:56,289 --> 00:30:59,920
were flowing through
the securitization chain.

466
00:30:59,259 --> 00:31:01,127
Since anyone could get
a mortgage,

467
00:31:01,294 --> 00:31:04,330
home purchases
and housing prices skyrocketed.

468
00:31:04,497 --> 00:31:08,968
The result was the biggest
financial bubble in history.

469
00:31:09,135 --> 00:31:11,571
Real estate is real.
They can see their asset.

470
00:31:11,738 --> 00:31:14,874
They can live in their asset.
They can rent out their asset.

471
00:31:15,410 --> 00:31:18,278
You had a huge boom in housing
that made no sense at all.

472
00:31:18,645 --> 00:31:24,984
The financing appetites
of the financial sector

473
00:31:25,318 --> 00:31:28,254
drove what everybody else did.

474
00:31:28,421 --> 00:31:32,292
Last time we had a housing bubble
was in the late '80s.

475
00:31:33,426 --> 00:31:37,564
In that case, the increase in home
price had been relatively minor.

476
00:31:37,931 --> 00:31:42,669
That housing bubble led
to a relatively severe recession.

477
00:31:42,836 --> 00:31:46,906
From 1996 until 2006,

478
00:31:47,730 --> 00:31:49,909
real home prices
effectively doubled.

479
00:31:54,848 --> 00:31:59,319
MAN: At $500 a ticket, they've come to
hear how to buy their very own piece

480
00:31:59,486 --> 00:32:01,688
of the American dream.

481
00:32:01,855 --> 00:32:06,260
Goldman Sachs, Bear Stearns,
Lehman Brothers,

482
00:32:06,192 --> 00:32:08,995
Merrill Lynch were all in on this.

483
00:32:09,162 --> 00:32:15,350
The subprime lending alone increased
from 30 billion a year in funding

484
00:32:15,201 --> 00:32:19,139
to over 600 billion a year
in 10 years.

485
00:32:19,305 --> 00:32:20,840
They knew what was happening.

486
00:32:21,207 --> 00:32:24,577
NARRATOR: Countrywide Financial,
the largest subprime lender,

487
00:32:24,744 --> 00:32:28,782
issued $97 billion worth of loans.

488
00:32:28,948 --> 00:32:33,520
It made over $ 11 billion in profits
as a result.

489
00:32:34,254 --> 00:32:37,590
On Wall Street,
annual cash bonuses spiked.

490
00:32:37,757 --> 00:32:39,259
Traders and CEOs

491
00:32:39,426 --> 00:32:42,128
became enormously wealthy
during the bubble.

492
00:32:42,295 --> 00:32:46,266
Lehman Brothers was a top
underwriter of subprime lending,

493
00:32:46,433 --> 00:32:48,668
and their CEO, Richard Fuld,

494
00:32:49,200 --> 00:32:52,739
took home $485 million.

495
00:32:52,906 --> 00:32:56,176
On Wall Street,
this housing and credit bubble

496
00:32:56,343 --> 00:32:59,879
was leading to hundreds
of billions of dollars of profits.

497
00:33:00,460 --> 00:33:03,483
You know, by 2006
about 40 percent of all profits

498
00:33:03,650 --> 00:33:07,754
of S&P 500 firms was coming
from financial institutions.

499
00:33:07,921 --> 00:33:10,900
It wasn't real profits or income.

500
00:33:10,256 --> 00:33:15,128
It was money created by the system
and booked as income.

501
00:33:15,295 --> 00:33:18,898
Two, three years down the road
there's a default, it's all wiped out.

502
00:33:19,650 --> 00:33:23,360
I think it was, in fact, in retrospect,
a great big national...

503
00:33:23,203 --> 00:33:25,872
And not just national,
global Ponzi scheme.

504
00:33:26,606 --> 00:33:29,476
Through the Home Ownership
and Equity Protection Act,

505
00:33:29,642 --> 00:33:32,312
the Federal Reserve board
had broad authority

506
00:33:32,479 --> 00:33:34,447
to regulate the mortgage industry.

507
00:33:34,614 --> 00:33:38,251
But Fed chairman Alan Greenspan
refused to use it.

508
00:33:38,418 --> 00:33:40,954
Alan Greenspan said,
"No, that's regulation.

509
00:33:41,121 --> 00:33:42,455
I don't believe in it."

510
00:33:42,622 --> 00:33:46,459
For 20 years, Robert Gnaizda
was the head of Greenlining,

511
00:33:46,626 --> 00:33:49,620
a powerful consumer
advocacy group.

512
00:33:49,229 --> 00:33:51,998
He met with Greenspan
on a regular basis.

513
00:33:52,165 --> 00:33:54,634
We gave him an example
of Countrywide

514
00:33:54,801 --> 00:33:59,873
and 150 different complex
adjustable-rate mortgages.

515
00:34:00,400 --> 00:34:02,876
He said,
"If you had a doctorate in math"

516
00:34:03,430 --> 00:34:05,745
you wouldn't be able
to understand them enough

517
00:34:05,912 --> 00:34:09,249
"to know which was good for you
and which wasn't."

518
00:34:09,649 --> 00:34:12,485
So we thought
he was gonna take action.

519
00:34:12,652 --> 00:34:14,888
But as the conversation continued,

520
00:34:15,550 --> 00:34:17,891
it was clear he was stuck
with his ideology.

521
00:34:18,580 --> 00:34:21,161
We met again
with Greenspan in '05.

522
00:34:21,327 --> 00:34:25,231
Often we met with him twice a year,
and never less than once a year.

523
00:34:25,398 --> 00:34:27,567
And he wouldn't change his mind.

524
00:34:32,639 --> 00:34:36,343
In this world
of global communications,

525
00:34:36,509 --> 00:34:38,545
the efficient movement
of capital

526
00:34:38,712 --> 00:34:42,415
is helping to create the greatest
prosperity in human history.

527
00:34:48,788 --> 00:34:52,659
A hundred and forty-six people were cut
from the SEC Enforcement Division?

528
00:34:52,826 --> 00:34:54,761
Is that what you also testified to?

529
00:34:54,928 --> 00:34:56,229
Yes.

530
00:34:56,396 --> 00:35:01,735
Yeah, I think there has been
a systematic gutting,

531
00:35:01,901 --> 00:35:04,504
or whatever you wanna call it,
of the agency

532
00:35:04,671 --> 00:35:07,774
and it's capability
through cutting back of staff.

533
00:35:07,941 --> 00:35:10,677
WELCH: The SEC Office
of Risk Management

534
00:35:10,844 --> 00:35:14,814
was reduced to a staff,
did you say, of one?

535
00:35:14,981 --> 00:35:19,119
TURNER: Yeah. When that gentleman would
go home, he could turn the lights out.

536
00:35:21,870 --> 00:35:24,290
NARRATOR: During the bubble, investment
banks were borrowing heavily

537
00:35:24,457 --> 00:35:28,261
to buy more loans
and create more CDOs.

538
00:35:29,620 --> 00:35:32,198
The ratio between borrowed money
and the banks' own money

539
00:35:32,365 --> 00:35:34,234
was called leverage.

540
00:35:34,401 --> 00:35:38,571
The more the banks borrowed,
the higher their leverage.

541
00:35:39,806 --> 00:35:44,310
In 2004, Henry Paulson,
the CEO of Goldman Sachs,

542
00:35:44,477 --> 00:35:48,748
helped lobby the SEC
to relax limits on leverage,

543
00:35:49,182 --> 00:35:53,190
allowing the banks
to sharply increase their borrowing.

544
00:35:53,186 --> 00:35:55,722
The SEC somehow decided

545
00:35:55,889 --> 00:35:59,259
to let investment banks
gamble a lot more.

546
00:35:59,426 --> 00:36:02,562
That was nuts. I don't know why
they did that, but they did.

547
00:36:09,269 --> 00:36:12,672
(GOLDSCHMID ON RECORDING) We've said these
are the big guys, and clearly that's true.

548
00:36:12,672 --> 00:36:18,345
But that means if anything goes wrong,
it's going to be an awfully big mess.

549
00:36:19,479 --> 00:36:22,248
NAZARETH: You are
dealing with the most

550
00:36:22,282 --> 00:36:25,510
highly sophisticated
financial institutions.

551
00:36:25,218 --> 00:36:29,220
CAMPOS: These are the firms that do
most of the derivative activity.

552
00:36:29,189 --> 00:36:32,625
We talked to some
as to what their comfort level was.

553
00:36:32,792 --> 00:36:37,797
NAZARETH: The firms actually thought
that the number was appropriate.

554
00:36:37,964 --> 00:36:42,268
DONALDSON: The commissioners vote to
adopt the new rules as recommended.

555
00:36:42,435 --> 00:36:43,636
MAN: Yes.
WOMAN: Yes.

556
00:36:44,370 --> 00:36:47,807
DONALDSON: We do indeed. It's unanimous.
And we are adjourned.

557
00:36:50,643 --> 00:36:53,880
MAN: The degree of leverage
in the financial system

558
00:36:54,470 --> 00:36:56,583
became absolutely frightening.

559
00:36:56,750 --> 00:37:01,221
Investment banks leveraging
up to the level of 33-to-1.

560
00:37:01,388 --> 00:37:04,900
Which means that
a tiny 3-percent decrease

561
00:37:04,257 --> 00:37:07,594
in the value of their asset base
would leave them insolvent.

562
00:37:09,896 --> 00:37:13,166
NARRATOR: There was another ticking
time bomb in the financial system.

563
00:37:13,333 --> 00:37:16,603
AIG, the world's largest
insurance company,

564
00:37:16,770 --> 00:37:19,272
was selling huge quantities
of derivatives

565
00:37:19,439 --> 00:37:21,274
called credit default swaps.

566
00:37:23,209 --> 00:37:25,412
For investors who owned CDOs,

567
00:37:25,578 --> 00:37:29,115
credit default swaps worked
like an insurance policy.

568
00:37:29,282 --> 00:37:31,918
An investor who purchased
a credit default swap

569
00:37:32,850 --> 00:37:35,880
paid AIG a quarterly premium.

570
00:37:35,255 --> 00:37:37,230
If the CDO went bad,

571
00:37:37,190 --> 00:37:41,327
AIG promised to pay the investor
for their losses.

572
00:37:42,362 --> 00:37:44,297
But unlike regular insurance,

573
00:37:44,464 --> 00:37:48,680
speculators could also buy
credit default swaps from AIG

574
00:37:48,234 --> 00:37:51,838
in order to bet against CDOs
they didn't own.

575
00:37:52,305 --> 00:37:55,408
In insurance, you can only
insure something you own.

576
00:37:55,575 --> 00:37:58,645
Let's say you and I own property.
I own a house.

577
00:37:58,812 --> 00:38:01,181
I can only insure that house once.

578
00:38:01,348 --> 00:38:04,284
The derivatives universe
essentially enables anybody

579
00:38:04,451 --> 00:38:06,419
to actually insure that house.

580
00:38:06,586 --> 00:38:08,922
You could insure that,
somebody else could.

581
00:38:09,890 --> 00:38:11,157
So 50 people might insure
my house.

582
00:38:11,324 --> 00:38:14,600
So what happens is,
if my house burns down,

583
00:38:14,227 --> 00:38:18,640
the number of losses in the system
becomes proportionately larger.

584
00:38:18,631 --> 00:38:21,401
Since credit default swaps
were unregulated,

585
00:38:21,568 --> 00:38:25,905
AIG didn't have to put aside
any money to cover potential losses.

586
00:38:26,720 --> 00:38:30,143
Instead, AIG paid it's employees
huge cash bonuses

587
00:38:30,310 --> 00:38:32,679
as soon as contracts
were signed.

588
00:38:32,846 --> 00:38:35,315
But if the CDOs later went bad,

589
00:38:35,482 --> 00:38:38,118
AIG would be on the hook.

590
00:38:38,284 --> 00:38:42,455
People were essentially being
rewarded for taking massive risks.

591
00:38:42,622 --> 00:38:46,459
In good times, they generate
short-term revenues and profits

592
00:38:46,626 --> 00:38:48,610
and, therefore, bonuses.

593
00:38:48,228 --> 00:38:51,598
But that's gonna lead to the firm
to be bankrupt over time.

594
00:38:51,765 --> 00:38:54,267
That's a distorted system
of compensation.

595
00:38:55,100 --> 00:38:58,380
AIG's Financial Products division
in London

596
00:38:58,204 --> 00:39:02,575
issued $500 billion worth of credit
default swaps during the bubble,

597
00:39:03,276 --> 00:39:07,747
many of them for CDOs
backed by subprime mortgages.

598
00:39:07,914 --> 00:39:10,350
The 400 employees at AIGFP

599
00:39:10,517 --> 00:39:14,554
made $3.5 billion
between 2000 and 2007.

600
00:39:15,321 --> 00:39:18,580
Joseph Cassano,
the head of AIGFP,

601
00:39:18,224 --> 00:39:21,428
personally made $315 million.

602
00:39:21,594 --> 00:39:23,163
(CASSANO ON RECORDING)
It's hard for us,

603
00:39:23,163 --> 00:39:27,834
and without being flippant,
to even see a scenario

604
00:39:28,100 --> 00:39:30,303
within any kind of realm of reason

605
00:39:30,470 --> 00:39:35,375
that would see us losing one dollar
in any of those transactions.

606
00:39:35,709 --> 00:39:39,879
NARRATOR: In 2007, AIG's
auditors raised warnings.

607
00:39:40,460 --> 00:39:42,148
One of them, Joseph St. Denis,

608
00:39:42,315 --> 00:39:45,952
resigned in protest after
Cassano repeatedly blocked him

609
00:39:46,119 --> 00:39:49,550
from investigating
AIGFP's accounting.

610
00:39:49,222 --> 00:39:51,191
Let me tell you one
person that didn't get a

611
00:39:51,191 --> 00:39:53,159
bonus while everybody
else was getting bonuses.

612
00:39:53,326 --> 00:39:57,330
That was St. Denis. Mr. St. Denis
tried to alert the two of you

613
00:39:57,497 --> 00:40:00,166
to the fact you were running
into big problems.

614
00:40:00,700 --> 00:40:03,970
He quit in frustration,
and he didn't get a bonus.

615
00:40:04,337 --> 00:40:07,107
In 2005, Raghuram Rajan,

616
00:40:07,273 --> 00:40:10,777
then the chief economist
of the International Monetary Fund,

617
00:40:10,944 --> 00:40:13,580
delivered a paper
at the Jackson Hole symposium,

618
00:40:13,747 --> 00:40:16,416
the most elite banking conference
in the world.

619
00:40:16,583 --> 00:40:18,840
INTERVIEWER:
Who was in the audience?

620
00:40:18,251 --> 00:40:23,890
It was the central bankers
of the world,

621
00:40:23,256 --> 00:40:26,626
ranging from
Mr. Greenspan himself,

622
00:40:26,793 --> 00:40:27,994
Ben Bernanke

623
00:40:28,161 --> 00:40:29,295
Larry Summers.

624
00:40:29,562 --> 00:40:31,431
Tim Geithner was there.

625
00:40:31,598 --> 00:40:33,566
The title of the paper
was essentially:

626
00:40:33,867 --> 00:40:37,470
"Is Financial Development
Making the World Riskier?"

627
00:40:37,637 --> 00:40:41,700
And the conclusion was, it is.

628
00:40:43,430 --> 00:40:45,779
Rajan's paper focused
on incentive structures

629
00:40:45,945 --> 00:40:50,183
that generated huge cash bonuses
based on short-term profits,

630
00:40:50,350 --> 00:40:53,620
but which imposed no penalties
for later losses.

631
00:40:53,787 --> 00:40:56,723
Rajan argued that these incentives
encouraged bankers

632
00:40:56,890 --> 00:41:00,493
to take risks that might eventually
destroy their own firms

633
00:41:00,660 --> 00:41:03,897
or even the entire
financial system.

634
00:41:06,466 --> 00:41:10,704
It's very easy to generate
performance by taking on more risk.

635
00:41:10,870 --> 00:41:15,408
So what you need to do is compensate
for risk-adjusted performance.

636
00:41:15,575 --> 00:41:17,844
And that's where
all the bodies are buried.

637
00:41:18,110 --> 00:41:21,147
Rajan, you know,
hit the nail on the head.

638
00:41:21,314 --> 00:41:23,316
What he particularly said was:

639
00:41:23,483 --> 00:41:25,885
"You guys have claimed
you've found a way"

640
00:41:26,520 --> 00:41:28,521
to make more profits
with less risk.

641
00:41:28,688 --> 00:41:31,891
I say you've found a way
to make more profits with more risk.

642
00:41:32,580 --> 00:41:33,426
"There's a big difference."

643
00:41:33,593 --> 00:41:36,196
Summers was vocal.

644
00:41:36,529 --> 00:41:38,732
He basically thought

645
00:41:38,898 --> 00:41:44,170
that I was criticizing the change
in the financial world

646
00:41:44,337 --> 00:41:47,640
and was worried about,
you know, regulation,

647
00:41:47,807 --> 00:41:49,843
which would reverse
this change.

648
00:41:50,100 --> 00:41:52,412
Essentially he accused me
of being a Luddite.

649
00:41:53,480 --> 00:41:57,500
He wanted to make sure
that we didn't bring in

650
00:41:57,217 --> 00:41:59,190
a whole new set of regulations

651
00:41:59,185 --> 00:42:01,688
to constrain the financial sector.

652
00:42:05,792 --> 00:42:09,929
You're gonna make an extra $2 million
a year, or $ 10 million a year,

653
00:42:10,960 --> 00:42:12,699
for putting your financial institution
at risk.

654
00:42:12,866 --> 00:42:15,100
Someone else pays the bill,
you don't.

655
00:42:15,168 --> 00:42:16,603
Would you make that bet?

656
00:42:16,770 --> 00:42:20,730
Most people on Wall Street said,
"Sure, I'd make that bet."

657
00:42:20,106 --> 00:42:22,108
(ACE FREHLE Y'S "NEW YORK GROOVE" PLAYS)

658
00:43:03,350 --> 00:43:04,851
GNAIZDA:
It never was enough.

659
00:43:05,180 --> 00:43:08,288
They don't wanna own one home,
they wanna own five homes.

660
00:43:08,455 --> 00:43:11,257
And they wanna have
an expensive penthouse

661
00:43:11,424 --> 00:43:13,560
on Park Avenue.

662
00:43:14,127 --> 00:43:16,996
And they wanna have
their own private jet.

663
00:43:17,163 --> 00:43:20,330
INTERVIEWER: You think this
is an industry where high...?

664
00:43:20,200 --> 00:43:22,435
Very high compensation levels
are justified?

665
00:43:22,602 --> 00:43:25,305
I think I would take caution,
or take heed,

666
00:43:25,472 --> 00:43:28,675
or take exception to your word
"very high." It's relative.

667
00:43:28,842 --> 00:43:31,211
You have a 14-million-dollar home
in Florida.

668
00:43:31,378 --> 00:43:34,280
You have a summer home
in Sun Valley, Idaho.

669
00:43:34,447 --> 00:43:37,884
An art collection filled
with million-dollar paintings.

670
00:43:38,510 --> 00:43:40,687
MAN: Richard Fuld never
appeared on the trading floor.

671
00:43:40,854 --> 00:43:43,156
There were art advisors there
all the time.

672
00:43:43,323 --> 00:43:44,924
He had a private elevator.

673
00:43:45,910 --> 00:43:47,660
He wanted to be disconnected.

674
00:43:47,827 --> 00:43:50,663
His elevator,
they hired technicians to program it

675
00:43:50,830 --> 00:43:53,600
so that his driver would call in
in the morning

676
00:43:53,767 --> 00:43:55,902
and a security guard
would hold it.

677
00:43:56,690 --> 00:44:00,540
There's only a three-second window
where he actually has to see people.

678
00:44:00,707 --> 00:44:03,743
And he hops into this elevator
and it goes straight to 31.

679
00:44:03,910 --> 00:44:06,212
INTERVIEWER:
Lehman owned corporate jets.

680
00:44:06,379 --> 00:44:08,415
You know about this?
Yes.

681
00:44:08,581 --> 00:44:09,883
INTERVIEWER:
How many were there?

682
00:44:09,916 --> 00:44:12,585
MILLER: Well, there were
six, including the 767 s.

683
00:44:12,852 --> 00:44:14,521
They also had a helicopter.

684
00:44:14,688 --> 00:44:17,190
INTERVIEWER: Isn't that kind
of a lot of planes to have?

685
00:44:20,600 --> 00:44:22,280
We're dealing with
type-A personalities.

686
00:44:22,228 --> 00:44:24,464
And type-A personalities know
everything in the world.

687
00:44:24,631 --> 00:44:26,966
Banking became a pissing contest.

688
00:44:27,133 --> 00:44:29,402
"Mine's bigger than yours."
That kind of stuff.

689
00:44:29,569 --> 00:44:31,738
It was all men that ran it,
incidentally.

690
00:44:31,905 --> 00:44:35,909
Fifty-billion-dollar deals weren't large
enough, so we'd do 100-billion deals.

691
00:44:36,760 --> 00:44:38,912
These people are risk-takers.
They're impulsive.

692
00:44:44,384 --> 00:44:47,520
It's part of their behavior.
It's part of their personality.

693
00:44:47,687 --> 00:44:50,757
And that manifests
outside of work as well.

694
00:44:50,924 --> 00:44:53,460
It was quite typical
for the guys to go out

695
00:44:53,626 --> 00:44:55,628
to go to strip bars, to use drugs.

696
00:44:55,795 --> 00:44:58,598
I see a lot of cocaine use,
use of prostitution.

697
00:45:05,705 --> 00:45:08,410
Recently, neuroscientists
have done experiments

698
00:45:08,208 --> 00:45:13,179
where they've taken individuals
and put them into an MRI machine,

699
00:45:13,346 --> 00:45:17,617
and they have them play a game
where the prize is money.

700
00:45:17,784 --> 00:45:21,388
And they noticed that when
the subjects earn money,

701
00:45:21,554 --> 00:45:23,857
the part of the brain
that gets stimulated

702
00:45:24,240 --> 00:45:26,393
is the same part
that cocaine stimulates.

703
00:45:26,559 --> 00:45:30,230
JONATHAN: A lot of people feel that they
need to participate in that behavior

704
00:45:30,397 --> 00:45:32,832
to make it, to get promoted,
get recognized.

705
00:45:32,999 --> 00:45:36,690
NARRATOR: According to a Bloomberg
article, business entertainment

706
00:45:36,236 --> 00:45:39,572
represents 5 percent of revenue
for derivatives brokers

707
00:45:39,739 --> 00:45:44,770
and often includes strip clubs,
prostitution and drugs.

708
00:45:44,244 --> 00:45:47,914
A New York broker filed a lawsuit
in 2007 against his firm

709
00:45:48,481 --> 00:45:53,286
alleging he was required to retain
prostitutes to entertain traders.

710
00:45:53,453 --> 00:45:55,321
There's just a blatant disregard

711
00:45:55,488 --> 00:46:00,160
for the impact that their actions
might have on society, on family.

712
00:46:00,326 --> 00:46:03,563
They have no problem
using a prostitute

713
00:46:05,265 --> 00:46:08,435
INTERVIEWER: This behavior extends to
the senior management of the firm?

714
00:46:08,601 --> 00:46:10,236
Absolutely does. Yeah.

715
00:46:10,403 --> 00:46:12,505
I know for a fact that it does.

716
00:46:12,672 --> 00:46:15,442
It extends to the very top.

717
00:46:18,912 --> 00:46:23,830
A friend of mine in a company that
has a big financial presence said:

718
00:46:23,249 --> 00:46:27,220
"It's about time you learned
about subprime mortgages."

719
00:46:27,387 --> 00:46:31,157
So he set up a session
with his trading desk and me.

720
00:46:31,558 --> 00:46:35,195
And the techie who did all this
gets very excited,

721
00:46:35,362 --> 00:46:38,865
runs to his computer,
pulls up in about three seconds

722
00:46:39,320 --> 00:46:42,680
this Goldman Sachs
issue of securities.

723
00:46:42,235 --> 00:46:43,670
It was a complete disaster.

724
00:46:44,370 --> 00:46:49,409
Borrowers had borrowed, on average,
99.3 percent of the price of the house.

725
00:46:49,576 --> 00:46:51,478
They have no money
in the house.

726
00:46:51,644 --> 00:46:54,881
If anything goes wrong,
they walk away from the mortgage.

727
00:46:55,480 --> 00:46:57,817
This is not a loan
you'd really make, right?

728
00:46:57,984 --> 00:46:59,419
You've gotta be crazy.

729
00:46:59,586 --> 00:47:02,722
But somehow,
you took 8000 of these loans,

730
00:47:02,889 --> 00:47:05,910
and by the time
the guys were done

731
00:47:05,258 --> 00:47:08,610
at Goldman Sachs
and the rating agencies,

732
00:47:08,228 --> 00:47:10,663
two-thirds of the loans
were rated triple-A.

733
00:47:10,830 --> 00:47:13,700
They were rated as safe
as government securities.

734
00:47:13,867 --> 00:47:15,402
It's utterly mad.

735
00:47:16,269 --> 00:47:19,839
NARRATOR: Goldman Sachs sold at least $3.
1 billion worth

736
00:47:20,600 --> 00:47:23,777
of these toxic CDOs
in the first half of 2006.

737
00:47:24,177 --> 00:47:28,114
The CEO of Goldman Sachs
at this time was Henry Paulson,

738
00:47:28,281 --> 00:47:30,784
the highest paid CEO
on Wall Street.

739
00:47:33,453 --> 00:47:35,689
Good morning.
I'm pleased to announce

740
00:47:35,855 --> 00:47:39,726
that I will nominate Henry Paulson
to be the Secretary of the Treasury.

741
00:47:39,893 --> 00:47:41,628
He has a lifetime of experience.

742
00:47:41,795 --> 00:47:43,963
He has knowledge
of financial markets.

743
00:47:44,130 --> 00:47:47,330
He's earned a reputation
for candor and integrity.

744
00:47:47,534 --> 00:47:49,402
NARRATOR:
You might think it would be hard

745
00:47:49,569 --> 00:47:52,138
to adjust to a meager
government salary.

746
00:47:52,305 --> 00:47:54,541
But taking the job
as Treasury secretary

747
00:47:54,708 --> 00:47:57,711
was the best
financial decision of his life.

748
00:47:57,877 --> 00:48:02,215
Paulson had to sell his $485 million
of Goldman stock

749
00:48:02,382 --> 00:48:04,551
when he went to work
for the government.

750
00:48:04,718 --> 00:48:07,754
But because of a law passed
by the first President Bush,

751
00:48:07,921 --> 00:48:10,900
he didn't have to pay
any taxes on it.

752
00:48:10,256 --> 00:48:13,293
It saved him $50 million.

753
00:48:20,660 --> 00:48:23,703
SLOAN: The article came
out in October of 2007.

754
00:48:24,370 --> 00:48:27,574
Already, a third of
the mortgages defaulted.

755
00:48:27,741 --> 00:48:30,176
Now most of them are going.

756
00:48:32,412 --> 00:48:35,648
One group that had purchased
these now worthless securities

757
00:48:35,815 --> 00:48:39,319
was the Public Employees'
Retirement System of Mississippi,

758
00:48:39,486 --> 00:48:43,230
which provides monthly benefits
to over 80,000 retirees.

759
00:48:43,957 --> 00:48:48,762
They lost millions of dollars
and are now suing Goldman Sachs.

760
00:49:02,742 --> 00:49:07,800
By late 2006, Goldman had
taken things a step further.

761
00:49:07,247 --> 00:49:09,749
It didn't just sell toxic CDOs,

762
00:49:09,916 --> 00:49:14,870
it started betting against them at the
same time it was telling customers

763
00:49:14,254 --> 00:49:16,990
that they were
high-quality investments.

764
00:49:17,891 --> 00:49:21,161
By purchasing credit default swaps
from AIG,

765
00:49:21,327 --> 00:49:24,297
Goldman could bet against
CDOs it didn't own

766
00:49:24,464 --> 00:49:27,701
and get paid
when the CDOs failed.

767
00:49:28,668 --> 00:49:32,872
I asked if anybody
called the customers and said:

768
00:49:33,390 --> 00:49:35,842
"We don't really like this kind
of mortgage anymore,

769
00:49:36,900 --> 00:49:38,178
and we thought
you ought to know."

770
00:49:38,345 --> 00:49:42,882
They didn't say anything, but you could
feel the laughter over the phone.

771
00:49:44,150 --> 00:49:47,200
Goldman Sachs bought
at least $22 billion

772
00:49:47,187 --> 00:49:49,789
of credit default swaps from AIG.

773
00:49:49,956 --> 00:49:54,861
It was so much that Goldman realized
that AIG itself might go bankrupt.

774
00:49:55,280 --> 00:49:57,997
So they spent $ 150 million
insuring themselves

775
00:49:58,164 --> 00:50:00,967
against AIG's potential collapse.

776
00:50:01,134 --> 00:50:04,738
Then in 2007,
Goldman went even further.

777
00:50:04,904 --> 00:50:07,607
They started selling CDOs
specifically designed

778
00:50:07,774 --> 00:50:10,310
so that the more money
their customers lost,

779
00:50:10,477 --> 00:50:12,879
the more money
Goldman Sachs made.

780
00:50:19,285 --> 00:50:24,324
Six hundred million dollars of
Timberwolf securities is what you sold.

781
00:50:24,491 --> 00:50:27,127
Before you sold them,

782
00:50:27,293 --> 00:50:30,630
this is what your sales team
were telling to each other:

783
00:50:31,431 --> 00:50:35,135
"Boy, that Timberwolf
was one shitty deal."

784
00:50:35,301 --> 00:50:40,407
This was an e-mail to me in late
June, after the transaction.

785
00:50:40,573 --> 00:50:43,877
No, no. You sold Timberwolf
after as well.

786
00:50:44,440 --> 00:50:46,279
SPARKS: We did trades after that.
Yeah. Okay.

787
00:50:46,546 --> 00:50:49,783
The next e-mail...
Take a look. July 1, '07.

788
00:50:49,949 --> 00:50:53,119
- Tells the sales force,
"The top priority is Timberwolf."

789
00:50:53,386 --> 00:50:56,723
Your top priority to sell
is that shitty deal.

790
00:50:56,890 --> 00:50:59,159
If you have an adverse interest
to your client,

791
00:50:59,325 --> 00:51:01,161
do you have the duty
to disclose it?

792
00:51:01,327 --> 00:51:03,663
To tell that client
of your adverse interest?

793
00:51:03,830 --> 00:51:06,332
That's my question.
I'm trying to understand...

794
00:51:06,499 --> 00:51:09,200
LEVIN: I think you understand.
You don't wanna answer.

795
00:51:09,169 --> 00:51:11,471
Do you believe you have a duty

796
00:51:11,638 --> 00:51:15,408
to act in your clients'
best interest?

797
00:51:16,776 --> 00:51:21,648
I repeat, we have a duty
to serve our clients

798
00:51:21,815 --> 00:51:26,286
by showing prices on transactions
that they ask us to show prices for.

799
00:51:26,453 --> 00:51:29,222
What do you think
about selling securities

800
00:51:29,389 --> 00:51:32,525
which your own people think
are crap?

801
00:51:32,692 --> 00:51:34,461
Does that bother you?

802
00:51:34,627 --> 00:51:36,896
BLANKFEIN:
I think they would.

803
00:51:37,970 --> 00:51:39,866
As a hypothetical?
LEVIN: No, this is real.

804
00:51:40,330 --> 00:51:42,435
Well, then I don't know...
LEVIN: We heard it today.

805
00:51:42,602 --> 00:51:45,672
We heard it today. "This is a
shitty deal." "This is crap."

806
00:51:45,839 --> 00:51:47,874
I heard nothing today

807
00:51:48,410 --> 00:51:51,811
that makes me think
anything went wrong.

808
00:51:51,978 --> 00:51:56,490
Is there not a conflict when you
sell something to somebody

809
00:51:56,216 --> 00:52:01,621
and then are determined
to bet against that same security,

810
00:52:01,788 --> 00:52:05,392
and you don't disclose that
to the person you're selling it to?

811
00:52:05,558 --> 00:52:06,593
You see a problem?

812
00:52:06,760 --> 00:52:09,863
In the context of market making,
that is not a conflict.

813
00:52:10,300 --> 00:52:13,133
LEVIN: When you heard your
employees in e-mails said,

814
00:52:13,299 --> 00:52:16,870
"What a shitty deal,"
"What a piece of crap,"

815
00:52:17,370 --> 00:52:18,405
did you feel anything?

816
00:52:18,571 --> 00:52:20,740
That's very unfortunate
to have on e-mail.

817
00:52:20,907 --> 00:52:21,941
LEVIN:
Are you embar...?

818
00:52:22,108 --> 00:52:23,443
(PEOPLE LAUGH AND GROAN)

819
00:52:23,610 --> 00:52:25,412
And very unfortunate...
I don't... I don't...

820
00:52:25,578 --> 00:52:28,314
LEVIN: "On e-mail"? How
about feeling that way?

821
00:52:28,481 --> 00:52:31,885
It's very unfortunate for anyone
to have said that in any form.

822
00:52:32,520 --> 00:52:36,656
Are your competitors engaged
in similar activities?

823
00:52:36,823 --> 00:52:41,610
Yes, and to a greater extent
than us in most cases.

824
00:52:41,428 --> 00:52:44,864
NARRATOR: Hedge fund manager
John Paulson made $ 12 billion

825
00:52:45,650 --> 00:52:47,100
betting against
the mortgage market.

826
00:52:47,267 --> 00:52:50,470
When Paulson ran out of
mortgage securities to bet against,

827
00:52:50,637 --> 00:52:55,108
he worked with Goldman Sachs
and Deutsche Bank to create more.

828
00:52:55,508 --> 00:52:57,110
Morgan Stanley was also selling

829
00:52:57,277 --> 00:53:01,140
mortgage securities it was betting
against, and it's now being sued by

830
00:53:01,181 --> 00:53:04,684
the Government Employees' Retirement
Fund of the Virgin Islands

831
00:53:04,851 --> 00:53:06,860
for fraud.

832
00:53:06,252 --> 00:53:08,688
The lawsuit alleges
that Morgan Stanley knew

833
00:53:08,855 --> 00:53:10,490
that the CDOs were junk.

834
00:53:10,657 --> 00:53:12,592
Although they were rated triple-A,

835
00:53:12,759 --> 00:53:15,395
Morgan Stanley
was betting they would fail.

836
00:53:15,562 --> 00:53:19,766
A year later, Morgan Stanley had made
hundreds of millions of dollars,

837
00:53:19,933 --> 00:53:23,870
while the investors
had lost almost all of their money.

838
00:53:39,886 --> 00:53:42,655
You would have thought
pension funds would have said:

839
00:53:42,822 --> 00:53:46,359
"Those are subprime.
Why am I buying them?"

840
00:53:47,600 --> 00:53:50,630
They had these guys at Moody's
and Standard & Poor's

841
00:53:50,230 --> 00:53:51,965
who said, "That's a triple-A."

842
00:53:52,132 --> 00:53:58,171
No securities got issued without the
seal of approval of the rating agencies.

843
00:53:58,338 --> 00:54:03,760
The three rating agencies,
Moody's, S&P and Fitch,

844
00:54:03,243 --> 00:54:06,913
made billions of dollars giving
high ratings to risky securities.

845
00:54:07,714 --> 00:54:11,551
Moody's, the largest rating agency,
quadrupled it's profits

846
00:54:11,718 --> 00:54:14,988
between 2000 and 2007.

847
00:54:15,388 --> 00:54:18,992
Moody's and S&P get compensated
based on putting out ratings reports.

848
00:54:19,159 --> 00:54:22,796
And the more structured securities
they gave a triple-A rating to,

849
00:54:22,962 --> 00:54:24,764
the higher their earnings were.

850
00:54:24,931 --> 00:54:26,733
Imagine going to
The Times saying:

851
00:54:26,900 --> 00:54:29,335
"Write a positive story,
I'll pay you $500,000.

852
00:54:29,502 --> 00:54:31,471
If you don't,
I'll give you nothing."

853
00:54:31,638 --> 00:54:33,473
Rating agencies could have
stopped the party and said:

854
00:54:33,640 --> 00:54:37,770
"Sorry. We're gonna tighten
our standards,"

855
00:54:37,243 --> 00:54:42,382
and immediately cut off
the funding to risky borrowers.

856
00:54:42,549 --> 00:54:44,951
Triple-A-rated instruments

857
00:54:45,685 --> 00:54:52,250
mushroomed from just a handful
to thousands and thousands.

858
00:54:52,559 --> 00:54:56,996
Hundreds of billions of dollars
were being rated, you know, and...

859
00:54:57,163 --> 00:54:59,320
INTERVIEWER: Per year?
Per year. Oh, yeah.

860
00:54:59,199 --> 00:55:02,235
I've now testified before
both houses of Congress

861
00:55:02,435 --> 00:55:05,705
on the credit rating agency issue,

862
00:55:05,872 --> 00:55:10,310
and both times they trot out very
prominent First Amendment lawyers

863
00:55:10,510 --> 00:55:14,681
and argue that, "When we say
something is rated triple-A",

864
00:55:14,848 --> 00:55:18,485
that is merely our 'opinion.'
You shouldn't rely on it."

865
00:55:18,651 --> 00:55:20,820
S&P's ratings express our opinion.

866
00:55:20,987 --> 00:55:24,224
Our ratings are our opinions.
They're opinions.

867
00:55:24,457 --> 00:55:26,659
Opinions.
And they are just opinions.

868
00:55:26,826 --> 00:55:31,264
I think we are emphasizing the fact
that our ratings are opinions.

869
00:55:37,570 --> 00:55:40,373
They do not speak
to the market value of a security,

870
00:55:40,540 --> 00:55:45,178
the volatility of it's price,
or it's suitability as an investment.

871
00:56:03,663 --> 00:56:06,166
We have many
economists saying:

872
00:56:06,366 --> 00:56:08,635
"Oh. This is a bubble,
it's going to burst.

873
00:56:08,802 --> 00:56:11,204
This is going to be
an issue for the economy."

874
00:56:11,371 --> 00:56:14,240
Some say it could even 'cause
a recession at some point.

875
00:56:14,407 --> 00:56:18,345
What is the worst-case scenario
if, in fact, we were to see prices

876
00:56:18,511 --> 00:56:21,281
come down substantially
across the country?

877
00:56:21,448 --> 00:56:24,584
I don't buy your premise.
It's an unlikely possibility.

878
00:56:24,751 --> 00:56:29,122
We've never had a decline in house
prices on a nationwide basis.

879
00:56:29,289 --> 00:56:31,725
NARRATOR: Ben Bernanke became
chairman of the Federal Reserve

880
00:56:31,758 --> 00:56:33,760
in February 2006,

881
00:56:33,960 --> 00:56:36,863
the top year for subprime lending.

882
00:56:37,297 --> 00:56:39,466
But despite numerous warnings,

883
00:56:39,632 --> 00:56:42,769
Bernanke and the
Federal Reserve Board did nothing.

884
00:56:47,340 --> 00:56:50,710
Robert Gnaizda met with Bernanke
and the Federal Reserve Board

885
00:56:50,877 --> 00:56:54,140
three times after
Bernanke became chairman.

886
00:56:54,180 --> 00:56:59,119
Only at the last meeting did he
suggest that there was a problem

887
00:56:59,319 --> 00:57:01,621
and that the government
ought to look into it.

888
00:57:01,788 --> 00:57:03,590
INTERVIEWER:
When? When was that? What year?

889
00:57:03,757 --> 00:57:06,893
It's 2009, March 11 th, in D.C.

890
00:57:07,600 --> 00:57:08,862
This year?
This year we met, yes.

891
00:57:09,290 --> 00:57:11,531
And so for the two previous years
you met him.

892
00:57:11,731 --> 00:57:14,367
Even in 2008?
Yes.

893
00:57:14,534 --> 00:57:18,371
One of the six Federal Reserve Board
governors serving under Bernanke

894
00:57:18,538 --> 00:57:19,973
was Frederic Mishkin,

895
00:57:20,140 --> 00:57:23,576
who was appointed
by President Bush in 2006.

896
00:57:23,743 --> 00:57:27,847
INTERVIEWER: Did you participate
in the meetings Robert Gnaizda

897
00:57:28,140 --> 00:57:30,817
and Greenlining had
with the Federal Reserve Board?

898
00:57:30,984 --> 00:57:33,853
Yes, I did. I was on the
committee that was involved

899
00:57:34,200 --> 00:57:36,556
with the Consumer Community
Affairs Committee.

900
00:57:36,756 --> 00:57:40,593
INTERVIEWER: He warned, in an extremely
explicit manner, about what was going on.

901
00:57:40,760 --> 00:57:44,640
He came to the Federal Reserve
Board with loan documentation

902
00:57:44,230 --> 00:57:47,167
of the kind of loans
that were frequently being made.

903
00:57:47,333 --> 00:57:50,136
And he was listened to politely,
and nothing was done.

904
00:57:50,303 --> 00:57:55,842
So again, I don't know the details
in terms of, um...

905
00:57:56,309 --> 00:57:59,120
In fact, I just don't... l...

906
00:57:59,179 --> 00:58:02,916
Whatever information he provided,
I'm not sure exactly.

907
00:58:03,283 --> 00:58:06,720
To be honest with you, I can't
remember this kind of discussion,

908
00:58:06,920 --> 00:58:11,758
but certainly there were issues
that were coming up.

909
00:58:11,925 --> 00:58:14,227
The question is,
how pervasive are they?

910
00:58:14,394 --> 00:58:15,729
INTERVIEWER:
Why didn't you try looking?

911
00:58:15,895 --> 00:58:17,530
I think that people did.

912
00:58:17,697 --> 00:58:19,232
We had people looking at...

913
00:58:19,432 --> 00:58:22,669
INTERVIEWER: Excuse me. You can't be
serious. You would have found things.

914
00:58:22,836 --> 00:58:27,207
That's very easy to always say
that you can always find it.

915
00:58:27,374 --> 00:58:29,750
NARRATOR:
As early as 2004,

916
00:58:29,242 --> 00:58:33,546
the FBI was already warning about
an epidemic of mortgage fraud.

917
00:58:33,713 --> 00:58:35,982
They reported inflated appraisals,

918
00:58:36,149 --> 00:58:39,786
doctored loan documentation
and other fraudulent activity.

919
00:58:40,920 --> 00:58:45,158
In 2005, the IMF's chief economist,
Raghuram Rajan,

920
00:58:45,325 --> 00:58:48,928
warned that dangerous incentives
could lead to a crisis.

921
00:58:49,496 --> 00:58:53,330
Then came Nouriel Roubini's
warnings in 2006,

922
00:58:53,233 --> 00:58:55,702
Allan Sloan's articles
in Fortune magazine

923
00:58:55,902 --> 00:58:57,937
and The Washington Post
in 2007,

924
00:58:58,505 --> 00:59:00,940
and repeated warnings
from the IMF.

925
00:59:01,107 --> 00:59:03,309
I said,
and on behalf of the institution,

926
00:59:03,476 --> 00:59:06,880
the crisis in front of us
is a huge crisis.

927
00:59:07,470 --> 00:59:08,810
INTERVIEWER:
Who did you talk to?

928
00:59:08,281 --> 00:59:10,450
The government, Treasury,
Fed, everybody.

929
00:59:10,617 --> 00:59:16,456
In May of 2007, hedge fund manager
Bill Ackman circulated a presentation,

930
00:59:16,623 --> 00:59:18,224
"Who is Holding the Bag?"

931
00:59:18,425 --> 00:59:21,261
Which described
how the bubble would unravel.

932
00:59:21,795 --> 00:59:25,650
And in early 2008,
Charles Morris published his book

933
00:59:25,231 --> 00:59:27,534
about the impending crisis.

934
00:59:29,636 --> 00:59:31,871
You're not sure. What do you do?

935
00:59:32,380 --> 00:59:36,209
You might have some suspicions that
underwriting standards are weakened.

936
00:59:36,376 --> 00:59:39,813
But then the question is,
should you do anything about it?

937
00:59:41,281 --> 00:59:44,918
By 2008, home foreclosures
were skyrocketing

938
00:59:45,118 --> 00:59:48,254
and the securitization food chain
imploded.

939
00:59:48,455 --> 00:59:51,891
Lenders could no longer sell
their loans to the investment banks.

940
00:59:52,580 --> 00:59:56,296
And as the loans went bad,
dozens of lenders failed.

941
00:59:56,930 --> 01:00:01,668
Chuck Prince of Citibank
famously said

942
01:00:02,836 --> 01:00:05,739
that we have to dance
until the music stops.

943
01:00:05,905 --> 01:00:09,209
Actually, the music had stopped
already when he said that.

944
01:00:09,376 --> 01:00:11,845
The market for CDOs collapsed,

945
01:00:12,120 --> 01:00:15,348
leaving investment banks holding
hundreds of billions of dollars

946
01:00:15,515 --> 01:00:19,719
in loans, CDOs, and real estate
they couldn't sell.

947
01:00:19,886 --> 01:00:23,423
When the crisis started,
both the Bush administration

948
01:00:23,623 --> 01:00:27,994
and the Federal Reserve
were totally behind the curve.

949
01:00:28,161 --> 01:00:30,497
They did not understand
the extent of it.

950
01:00:30,730 --> 01:00:34,701
INTERVIEWER: At what point do you
remember thinking for the first time:

951
01:00:34,901 --> 01:00:37,237
"This is dangerous, this is bad"?

952
01:00:37,404 --> 01:00:41,541
I remember very well one...
I think it was a G 7 meeting

953
01:00:41,741 --> 01:00:43,710
of February, 2008.

954
01:00:43,910 --> 01:00:47,814
And I remember discussing
the issue with Hank Paulson.

955
01:00:47,981 --> 01:00:51,170
And I clearly remember
telling Hank:

956
01:00:51,217 --> 01:00:54,187
"We are watching
this Tsunami coming,"

957
01:00:54,387 --> 01:00:58,124
and you're just proposing
that we ask

958
01:00:58,291 --> 01:01:00,860
"which swimming costume
we're going to put on."

959
01:01:01,610 --> 01:01:03,396
INTERVIEWER: What was his response?
What was his feeling?

960
01:01:03,563 --> 01:01:04,964
"Things are under control."

961
01:01:05,131 --> 01:01:09,690
Yes, we are looking
at this situation carefully,

962
01:01:09,269 --> 01:01:12,706
"and, yeah, it's under control."

963
01:01:13,406 --> 01:01:17,911
We're gonna keep growing. Okay?
And, obviously, I'll say it:

964
01:01:18,111 --> 01:01:20,680
If you're growing,
you're not in recession, right?

965
01:01:20,880 --> 01:01:22,849
I mean, we all know that.

966
01:01:28,880 --> 01:01:30,900
WOMAN:
One of the pillars of Wall Street...

967
01:01:30,290 --> 01:01:34,561
NARRATOR: In March 2008, the investment
bank Bear Stearns ran out of cash

968
01:01:35,195 --> 01:01:38,898
and was acquired for $2 a share
by JPMorgan Chase.

969
01:01:39,990 --> 01:01:42,736
The deal was backed by $30 billion
in emergency guarantees

970
01:01:42,936 --> 01:01:44,404
from the Federal Reserve.

971
01:01:45,939 --> 01:01:48,875
That was when the administration
could have come in

972
01:01:49,420 --> 01:01:54,614
and put in place various measures
to reduce system risk.

973
01:01:54,814 --> 01:01:59,686
The information I'm receiving
is the end is not here,

974
01:01:59,853 --> 01:02:02,220
that there are other shoes to fall.

975
01:02:02,222 --> 01:02:04,724
Well, I've seen
those investment banks,

976
01:02:04,924 --> 01:02:08,495
working with the Fed
and the SEC,

977
01:02:08,695 --> 01:02:14,734
strengthen their liquidity,
strengthen their capital positions.

978
01:02:14,934 --> 01:02:18,972
I get reports all the time.
Our regulators are very vigilant.

979
01:02:19,673 --> 01:02:21,574
On September 7 th, 2008,

980
01:02:21,741 --> 01:02:24,310
Henry Paulson announced
the federal takeover

981
01:02:24,511 --> 01:02:29,490
of Fannie Mae and Freddie Mac, giant
lenders on the brink of collapse.

982
01:02:29,249 --> 01:02:33,453
Nothing about our actions today
reflects a changed view

983
01:02:33,653 --> 01:02:35,255
of the housing correction

984
01:02:35,455 --> 01:02:38,458
or the strength
of other U.S. Financial institutions.

985
01:02:38,725 --> 01:02:39,726
Two days later,

986
01:02:39,926 --> 01:02:43,563
Lehman Brothers announced
record losses of $3.2 billion,

987
01:02:43,763 --> 01:02:46,660
and it's stock collapsed.

988
01:02:46,866 --> 01:02:51,304
INTERVIEWER: The effects of Lehman and AIG
in September still came as a surprise.

989
01:02:51,471 --> 01:02:54,908
I mean, this is even after July
and Fannie and Freddie.

990
01:02:55,750 --> 01:02:59,946
So clearly there was stuff that,
as of September,

991
01:03:00,113 --> 01:03:04,170
major stuff,
that nobody knew about.

992
01:03:04,184 --> 01:03:06,353
I think that's... I think that's fair.

993
01:03:06,553 --> 01:03:08,421
INTERVIEWER: Bear Stearns
was rated triple-A

994
01:03:08,421 --> 01:03:10,323
like a month before
it went bankrupt?

995
01:03:10,490 --> 01:03:13,126
More likely A2.
A2?

996
01:03:13,326 --> 01:03:14,394
Yeah.
Okay.

997
01:03:14,594 --> 01:03:16,329
A2 is still not bankrupt.

998
01:03:16,529 --> 01:03:19,999
No, that's a high investment grade.
Solid investment grade rating.

999
01:03:20,200 --> 01:03:23,236
Lehman Brothers,
A2 within days of failing.

1000
01:03:23,436 --> 01:03:28,241
AIG, double-A
within days of being bailed out.

1001
01:03:29,109 --> 01:03:33,460
Fannie Mae and Freddie Macwere
triple-A when they were rescued.

1002
01:03:33,213 --> 01:03:37,150
Citigroup, Merrill, all of them
had investment-grade ratings.

1003
01:03:37,317 --> 01:03:39,853
How can that be?
Well, that's a good question.

1004
01:03:40,530 --> 01:03:41,755
(LAUGHING)

1005
01:03:41,955 --> 01:03:43,189
That's a great question.

1006
01:03:43,390 --> 01:03:44,724
INTERVIEWER:
At no point did the administration

1007
01:03:44,891 --> 01:03:48,294
ever go to
all the major institutions and say:

1008
01:03:48,461 --> 01:03:51,364
"This is serious.
Tell us what your positions are.

1009
01:03:51,531 --> 01:03:55,402
You know, no bullshit.
Where are you?"

1010
01:03:55,869 --> 01:03:59,572
Well, first, that's what the regulators...
That's their job, right?

1011
01:03:59,773 --> 01:04:03,843
Their job is to understand the
exposure across these institutions.

1012
01:04:04,440 --> 01:04:06,946
And they have
a very refined understanding

1013
01:04:07,113 --> 01:04:11,518
that I think became more respon... More
refined as the crisis proceeded. So...

1014
01:04:11,685 --> 01:04:14,320
INTERVIEWER: Forgive me, but
that's clearly not true.

1015
01:04:14,521 --> 01:04:16,389
What do you mean, that's not true?

1016
01:04:16,556 --> 01:04:17,991
INTERVIEWER:
In August of 2008,

1017
01:04:18,158 --> 01:04:23,630
were you aware of the credit ratings
held by Lehman Brothers,

1018
01:04:23,830 --> 01:04:25,498
Merrill Lynch, AIG,

1019
01:04:25,699 --> 01:04:28,168
and did you think
that they were accurate?

1020
01:04:28,334 --> 01:04:31,304
Well, certainly by that time,

1021
01:04:31,504 --> 01:04:34,407
it was clear earlier credit ratings
weren't accurate.

1022
01:04:34,574 --> 01:04:37,210
They had been downgraded.
INTERVIEWER: No, they hadn't.

1023
01:04:37,410 --> 01:04:41,481
There was downgrading in terms
of the industry and concerns of the...

1024
01:04:41,681 --> 01:04:44,500
All those firms were rated
at least A2

1025
01:04:44,217 --> 01:04:46,953
until a couple of days
before they were rescued.

1026
01:04:47,153 --> 01:04:51,725
The answer is I don't know enough to
answer your question on this issue.

1027
01:04:51,925 --> 01:04:55,295
Governor Fred Mishkin is resigning,
effective August 31.

1028
01:04:55,462 --> 01:04:59,399
He plans to return to Columbia's
Graduate School of Business.

1029
01:04:59,566 --> 01:05:02,569
INTERVIEWER: Why did you leave the
Federal Reserve in August of 2008

1030
01:05:02,769 --> 01:05:05,505
in the middle
of the worst financial crisis?

1031
01:05:05,705 --> 01:05:09,809
So that...
I had to revise a textbook.

1032
01:05:10,100 --> 01:05:13,747
His departure leaves the board
with three of it's seven seats vacant

1033
01:05:13,947 --> 01:05:16,820
just when the economy
needs it most.

1034
01:05:16,282 --> 01:05:18,184
INTERVIEWER: I'm sure
your textbook is

1035
01:05:18,218 --> 01:05:20,153
important and widely read,
but in August 2008,

1036
01:05:20,320 --> 01:05:24,391
some more important things were going
on in the world, don't you think?

1037
01:05:24,958 --> 01:05:26,926
NARRATOR:
By Friday, September 12th,

1038
01:05:27,930 --> 01:05:29,195
Lehman Brothers had
run out of cash

1039
01:05:29,396 --> 01:05:33,660
and the entire investment-banking
industry was sinking fast.

1040
01:05:33,266 --> 01:05:36,903
The stability of the global
financial system was in jeopardy.

1041
01:05:38,138 --> 01:05:40,907
That weekend, Henry Paulson
and Timothy Geithner

1042
01:05:41,107 --> 01:05:43,543
president of
the New York Federal Reserve,

1043
01:05:43,710 --> 01:05:47,147
called an emergency meeting
with the CEOs of the major banks

1044
01:05:47,347 --> 01:05:48,848
in an effort to rescue Lehman.

1045
01:05:49,683 --> 01:05:51,184
But Lehman wasn't alone.

1046
01:05:51,618 --> 01:05:56,389
Merrill Lynch was also
on the brink of failure.

1047
01:05:56,589 --> 01:06:00,360
And that Sunday,
it was acquired by Bank of America.

1048
01:06:00,560 --> 01:06:05,598
The only bank interested in buying
Lehman was the British firm Barclays.

1049
01:06:05,799 --> 01:06:09,669
But British regulators demanded
a financial guarantee from the U.S.

1050
01:06:10,203 --> 01:06:12,205
Paulson refused.

1051
01:06:16,776 --> 01:06:22,150
We got in a cab and went
to the Federal Reserve Bank.

1052
01:06:23,783 --> 01:06:27,530
They wanted the bankruptcy case
commenced before midnight

1053
01:06:27,253 --> 01:06:29,222
of September 14.

1054
01:06:29,422 --> 01:06:35,662
We kept pressing
that this would be a terrible event,

1055
01:06:35,862 --> 01:06:38,431
and at some point
I used the word Armageddon,

1056
01:06:38,631 --> 01:06:43,236
and they consider the consequences
of what they were proposing.

1057
01:06:43,436 --> 01:06:45,939
The effect on the market
would be extraordinary.

1058
01:06:46,139 --> 01:06:47,907
INTERVIEWER: You said this?
Yes.

1059
01:06:48,108 --> 01:06:53,179
They just said they had considered
all of the comments we had made,

1060
01:06:53,380 --> 01:06:58,818
and they were still of the belief
that in order to calm the markets

1061
01:06:58,985 --> 01:07:02,689
and move forward, it was necessary
for Lehman to go into bankruptcy.

1062
01:07:02,889 --> 01:07:04,324
INTERVIEWER: "Calm the markets"?
Yes.

1063
01:07:04,657 --> 01:07:08,995
INTERVIEWER: When were you first told that
Lehman, in fact, was going to go bankrupt?

1064
01:07:09,829 --> 01:07:12,899
After the fact.
After the fact?

1065
01:07:14,340 --> 01:07:17,270
Wow. Okay. Um...

1066
01:07:17,470 --> 01:07:22,475
And what was your reaction
when you learned of it?

1067
01:07:23,109 --> 01:07:24,878
"Holy cow."

1068
01:07:24,911 --> 01:07:28,214
NARRATOR: Paulson and Bernanke had
not consulted with other governments

1069
01:07:28,415 --> 01:07:31,384
and didn't know the consequences
of foreign bankruptcy laws.

1070
01:07:31,551 --> 01:07:34,521
MAN: - Lehman Brothers
London empty their desks.

1071
01:07:34,688 --> 01:07:35,889
NARRATOR:
Under British law,

1072
01:07:36,890 --> 01:07:39,392
Lehman's London office
had to be closed immediately.

1073
01:07:39,592 --> 01:07:43,763
All transactions came to a halt, and
there are thousands of transactions.

1074
01:07:43,963 --> 01:07:47,300
The hedge funds who had had
assets with Lehman in London

1075
01:07:47,500 --> 01:07:50,270
discovered overnight,
to their complete horror,

1076
01:07:50,470 --> 01:07:52,539
they couldn't get
those assets back.

1077
01:07:52,739 --> 01:07:55,475
One of the points of the hub failed.

1078
01:07:55,675 --> 01:07:58,778
And that had huge knock-on effects
around the system.

1079
01:07:58,978 --> 01:08:00,947
The oldest money market fund
in the nation

1080
01:08:01,147 --> 01:08:05,251
wrote off three-quarters
of a billion dollars in bad debt

1081
01:08:05,452 --> 01:08:07,420
issued by now-bankrupt
Lehman Brothers.

1082
01:08:07,620 --> 01:08:11,191
NARRATOR: Lehman's failure caused a
collapse in the commercial paper market,

1083
01:08:11,391 --> 01:08:14,661
which many companies depend on
to pay for expenses

1084
01:08:14,861 --> 01:08:16,162
such as payroll.

1085
01:08:16,363 --> 01:08:19,332
That means they have to lay off
employees, they can't buy parts.

1086
01:08:19,499 --> 01:08:21,267
It stops business in it's tracks.

1087
01:08:21,468 --> 01:08:24,304
People stood and said,
"Listen, what can we believe in?

1088
01:08:24,504 --> 01:08:26,473
There's nothing
we can trust anymore."

1089
01:08:26,639 --> 01:08:30,176
That same week,
AIG owed $ 13 billion

1090
01:08:30,377 --> 01:08:34,214
to holders of credit default swaps,
and it didn't have the money.

1091
01:08:34,414 --> 01:08:36,383
SHENG:
AIG was another hub.

1092
01:08:36,549 --> 01:08:40,620
If AIG had stopped, you know,
all planes may have to stop flying.

1093
01:08:40,820 --> 01:08:44,190
On September 17 th, AIG is
taken over by the government.

1094
01:08:44,891 --> 01:08:48,294
One day later, Paulson
and Bernanke ask Congress

1095
01:08:48,495 --> 01:08:50,897
for $700 billion
to bail out the banks.

1096
01:08:51,970 --> 01:08:52,399
We're coming together.

1097
01:08:52,599 --> 01:08:56,970
NARRATOR: They warned that the alternative
would be a catastrophic collapse.

1098
01:08:57,170 --> 01:08:59,806
It was scary. You know,
the entire system froze up.

1099
01:09:00,600 --> 01:09:03,743
Every part of the financial system,
every part of the credit system.

1100
01:09:03,910 --> 01:09:05,645
Nobody could borrow money.

1101
01:09:05,845 --> 01:09:08,982
It was like a cardiac arrest
of the global financial system.

1102
01:09:09,182 --> 01:09:11,840
I'm playing the hand dealt me.

1103
01:09:11,284 --> 01:09:13,687
A lot of what I'm dealing with...

1104
01:09:13,887 --> 01:09:18,291
I'm dealing with the consequences
of things that were done years ago.

1105
01:09:18,491 --> 01:09:20,493
MCCORMICK: Secretary Paulson
spoke through the fall.

1106
01:09:20,527 --> 01:09:23,530
All the potential root causes of this,
and there are plenty,

1107
01:09:23,730 --> 01:09:25,765
he called them. I'm not sure...

1108
01:09:25,932 --> 01:09:27,333
INTERVIEWER:
You're not being serious about that.

1109
01:09:27,534 --> 01:09:30,203
I am being serious.
What would you have expected?

1110
01:09:30,403 --> 01:09:32,772
What were you looking for
that you didn't see?

1111
01:09:32,939 --> 01:09:35,742
INTERVIEWER:
He was the senior advocate

1112
01:09:35,942 --> 01:09:40,280
for prohibiting the regulation
of credit default swaps

1113
01:09:40,480 --> 01:09:44,500
and also lifting the leverage limits
on the investment banks.

1114
01:09:44,217 --> 01:09:45,251
So again, what...?

1115
01:09:45,418 --> 01:09:48,888
He mentioned those things? I never
heard him mention those things.

1116
01:09:49,550 --> 01:09:51,758
Could we turn this off for a second?

1117
01:09:56,596 --> 01:09:58,198
NARRATOR:
When AIG was bailed out,

1118
01:09:58,398 --> 01:10:00,333
the owners of
it's credit default swaps,

1119
01:10:00,533 --> 01:10:03,169
the most prominent of which
was Goldman Sachs,

1120
01:10:03,336 --> 01:10:06,906
were paid $61 billion
the next day.

1121
01:10:07,730 --> 01:10:09,209
Paulson, Bernanke
and Tim Geithner

1122
01:10:09,409 --> 01:10:12,579
forced AIG to pay 100 cents
on the dollar

1123
01:10:12,746 --> 01:10:15,515
rather than negotiate
lower prices.

1124
01:10:15,682 --> 01:10:21,855
Eventually, the AIG bailout
cost taxpayers over $ 150 billion.

1125
01:10:22,220 --> 01:10:25,425
A hundred and sixty billion dollars
went through AIG.

1126
01:10:25,592 --> 01:10:28,395
Fourteen billion went
to Goldman Sachs.

1127
01:10:28,561 --> 01:10:31,765
At the same time,
Paulson and Geithner forced AIG

1128
01:10:31,931 --> 01:10:35,835
to surrender it's right to sue Goldman
and the other banks for fraud.

1129
01:10:36,200 --> 01:10:38,538
INTERVIEWER: Isn't there
a problem when the

1130
01:10:38,571 --> 01:10:41,107
person in charge of
dealing with this crisis

1131
01:10:41,274 --> 01:10:43,443
is the former CEO
of Goldman Sachs?

1132
01:10:43,610 --> 01:10:47,180
Someone who had a major role
in causing it.

1133
01:10:47,347 --> 01:10:50,830
It's fair to say
that the financial markets today

1134
01:10:50,250 --> 01:10:52,520
are incredibly complicated.

1135
01:10:52,218 --> 01:10:53,953
- And supply
urgently needed money.

1136
01:10:54,120 --> 01:10:56,356
On October 4th, 2008,

1137
01:10:56,523 --> 01:11:00,560
President Bush signs
a 700-billion-dollar bailout bill.

1138
01:11:00,727 --> 01:11:03,630
But world stock markets
continue to fall

1139
01:11:03,229 --> 01:11:06,990
amid fears that a global recession
is now underway.

1140
01:11:11,404 --> 01:11:14,708
The bailout legislation does nothing
to stem the tide of layoffs

1141
01:11:14,874 --> 01:11:16,676
and foreclosures.

1142
01:11:16,843 --> 01:11:21,948
Unemployment in the United States
and Europe rises to 10 percent.

1143
01:11:22,115 --> 01:11:25,452
The recession accelerates
and spreads globally.

1144
01:11:29,255 --> 01:11:33,526
I began to get really scared
because I hadn't foreseen

1145
01:11:33,693 --> 01:11:38,264
the whole world going down
at the same rate at the same time.

1146
01:11:38,965 --> 01:11:40,800
By December of 2008,

1147
01:11:40,967 --> 01:11:44,471
General Motors and Chrysler
are facing bankruptcy.

1148
01:11:44,804 --> 01:11:47,540
And as U.S. Consumers cut back
on spending,

1149
01:11:47,707 --> 01:11:51,244
Chinese manufacturers
see sales plummet.

1150
01:11:52,312 --> 01:11:56,783
Over 10 million migrant workers
in China lose their jobs.

1151
01:11:57,250 --> 01:12:01,821
At the end of the day, the
poorest, as always, pay the most.

1152
01:12:07,293 --> 01:12:09,295
WOMAN:
Here, you can earn a lot of money.

1153
01:12:09,462 --> 01:12:15,435
Like 70, 80 U.S. Dollars per month.

1154
01:12:16,636 --> 01:12:21,508
As a farmer in the countryside,
you cannot earn as much money.

1155
01:12:21,675 --> 01:12:25,745
The workers, they just wire
their salary to their hometown

1156
01:12:25,912 --> 01:12:28,648
to give to their families.

1157
01:12:29,490 --> 01:12:31,918
The crisis started in America.

1158
01:12:32,850 --> 01:12:35,822
We all know it will be coming
to China.

1159
01:12:40,260 --> 01:12:43,329
Some of the factories try
to cut off some workers.

1160
01:12:44,831 --> 01:12:48,101
And some people will get poor
because they'll lose their jobs.

1161
01:12:48,268 --> 01:12:49,302
(SPEAKS INDISTINCTLY)

1162
01:12:49,469 --> 01:12:50,904
Life gets harder.

1163
01:12:59,446 --> 01:13:02,150
MAN: We were growing
at about 20 percent.

1164
01:13:02,782 --> 01:13:05,185
It was a super year.

1165
01:13:05,352 --> 01:13:09,255
Then we suddenly went
to minus-nine this quarter.

1166
01:13:09,422 --> 01:13:14,160
Exports collapsed,
and we're talking like 30 percent.

1167
01:13:14,961 --> 01:13:18,598
So we just took a hit, you know.
Fell off a cliff. Boomp.

1168
01:13:18,765 --> 01:13:22,869
Even as the crisis unfolded, we didn't
know how wide it was going to spread

1169
01:13:23,360 --> 01:13:24,904
or how severe it was going to be.

1170
01:13:25,710 --> 01:13:27,674
We were still hoping
that there would be some way

1171
01:13:27,841 --> 01:13:32,846
for us to have a shelter
and be less battered by the storm.

1172
01:13:33,130 --> 01:13:34,214
But it's not possible.

1173
01:13:34,681 --> 01:13:36,416
It's a very globalized world.

1174
01:13:36,583 --> 01:13:39,386
The economies
are all linked together.

1175
01:14:10,984 --> 01:14:13,420
Every time a home
goes into foreclosure,

1176
01:14:13,586 --> 01:14:15,922
it affects everyone
who lives around that house.

1177
01:14:16,890 --> 01:14:19,259
When that house goes on the market,
it'll be sold at a lower price.

1178
01:14:19,426 --> 01:14:22,762
Maybe before it goes on the market,
it won't be well-maintained.

1179
01:14:22,929 --> 01:14:26,266
We estimate another 9 million
homeowners will lose their homes.

1180
01:14:32,872 --> 01:14:37,911
(IN SPANISH) We went out on a weekend
to see what houses were for sale.

1181
01:14:38,780 --> 01:14:39,646
We saw one we liked.

1182
01:14:39,813 --> 01:14:43,490
The payment
was going to be $3200.

1183
01:14:54,627 --> 01:14:57,297
Everything was beautiful,
the house was very pretty.

1184
01:14:57,464 --> 01:14:59,532
The payment low.
Everything was...

1185
01:14:59,699 --> 01:15:01,401
We won the lottery.

1186
01:15:01,568 --> 01:15:04,471
But the reality was when
the first payment arrived.

1187
01:15:09,242 --> 01:15:13,947
I felt very bad
for my husband

1188
01:15:15,480 --> 01:15:21,354
because he works too much.
And we have three children.

1189
01:15:30,864 --> 01:15:34,701
The majority I've seen are
people hurt by the economy.

1190
01:15:34,868 --> 01:15:37,871
They were living day to day,
paycheck to paycheck,

1191
01:15:38,380 --> 01:15:39,272
and that ran out.

1192
01:15:39,439 --> 01:15:42,776
Unemployment won't pay a mortgage.
It won't pay a car bill.

1193
01:15:43,376 --> 01:15:45,111
STEPHEN:
I was a log truck driver.

1194
01:15:45,278 --> 01:15:50,116
They shut down the logging systems,
shut down the sawmills.

1195
01:15:50,283 --> 01:15:52,752
So I moved down here
on a construction job.

1196
01:15:52,919 --> 01:15:55,789
And the construction jobs
got shut down too, so...

1197
01:15:55,955 --> 01:15:58,491
Things are so tough.
There's a lot of people out there.

1198
01:15:58,658 --> 01:16:01,610
Soon you're gonna be seeing
more camps like this

1199
01:16:01,227 --> 01:16:03,396
because there's just no jobs
right now.

1200
01:16:09,703 --> 01:16:14,307
When the company did well,
we did well.

1201
01:16:14,474 --> 01:16:18,278
When the company did not do well,
sir, we did not do well.

1202
01:16:18,678 --> 01:16:20,714
NARRATOR: The men who
destroyed their own companies

1203
01:16:20,880 --> 01:16:22,649
and plunged the world
into crisis

1204
01:16:22,816 --> 01:16:26,152
walked away from the wreckage
with their fortunes intact.

1205
01:16:26,319 --> 01:16:29,923
The top five executives at Lehman
Brothers made over a billion dollars

1206
01:16:30,900 --> 01:16:32,826
between 2000 and 2007.

1207
01:16:32,992 --> 01:16:36,796
And when the firm went bankrupt,
they got to keep all the money.

1208
01:16:36,963 --> 01:16:38,565
The system worked.

1209
01:16:38,732 --> 01:16:41,668
It doesn't make sense to make
a failing loan because we lose.

1210
01:16:41,835 --> 01:16:45,739
The borrower loses, the
community loses and we lose.

1211
01:16:45,905 --> 01:16:48,241
Countrywide's CEO,
Angelo Mozilo,

1212
01:16:48,408 --> 01:16:52,779
made $470 million
between 2003 and 2008.

1213
01:16:53,146 --> 01:16:56,783
One hundred forty million came from
dumping his Countrywide stock

1214
01:16:56,950 --> 01:16:59,686
in the 12 months
before the company collapsed.

1215
01:16:59,853 --> 01:17:02,522
I hold the board accountable
when a business fails.

1216
01:17:02,689 --> 01:17:05,392
They're responsible
for hiring and firing the CEO

1217
01:17:05,558 --> 01:17:07,727
and overseeing
big strategic decisions.

1218
01:17:07,894 --> 01:17:10,897
The problem with boards in America
is the way boards are elected.

1219
01:17:11,640 --> 01:17:14,601
You know, the boards are pretty much,
in many cases, picked by the CEO.

1220
01:17:14,768 --> 01:17:17,270
The board of directors
and compensation committees

1221
01:17:17,437 --> 01:17:22,542
are the two bodies best situated
to determine pay for executives.

1222
01:17:22,709 --> 01:17:25,345
INTERVIEWER: How do you think they've
done over the past 10 years?

1223
01:17:25,345 --> 01:17:30,717
Well, I think that if you look at those...
I would give about a B, because...

1224
01:17:30,884 --> 01:17:31,918
A B?
A B, yes.

1225
01:17:32,850 --> 01:17:33,820
Not an F?
Not an F, not an F.

1226
01:17:34,120 --> 01:17:36,823
NARRATOR: Stan O'neal, the
CEO of Merrill Lynch,

1227
01:17:36,990 --> 01:17:41,428
received $90 million
in 2006 and 2007 alone.

1228
01:17:41,594 --> 01:17:43,763
After driving his firm
into the ground,

1229
01:17:43,930 --> 01:17:46,533
the board of directors
allowed him to resign,

1230
01:17:46,700 --> 01:17:50,670
and he collected $ 161 million
in severance.

1231
01:17:51,400 --> 01:17:55,410
INTERVIEWER: Instead of being fired,
Stan O'neal is allowed to resign

1232
01:17:55,208 --> 01:17:58,411
and takes away $ 151 million.

1233
01:17:58,578 --> 01:18:01,470
That's a decision that
that board of directors made.

1234
01:18:01,214 --> 01:18:03,490
What grade
do you give that decision?

1235
01:18:03,216 --> 01:18:06,860
That's a tougher one. I don't
know if I'd give it a B as well.

1236
01:18:06,619 --> 01:18:12,692
O'neal's successor, John Thain,
was paid $87 million in 2007.

1237
01:18:12,859 --> 01:18:14,461
And in December of 2008,

1238
01:18:14,627 --> 01:18:18,331
two months after Merrill
was bailed out by U.S. Taxpayers,

1239
01:18:18,498 --> 01:18:22,736
Thain and Merrill's board
handed out billions in bonuses.

1240
01:18:23,470 --> 01:18:27,474
In March of 2008,
AIG's Financial Products division

1241
01:18:27,640 --> 01:18:29,943
lost $ 11 billion.

1242
01:18:30,110 --> 01:18:34,414
Instead of being fired,
Joseph Cassano, head of AIGFP,

1243
01:18:34,781 --> 01:18:38,685
was kept on as a consultant
for a million dollars a month.

1244
01:18:38,852 --> 01:18:44,357
You wanna make sure key players
and key employees within AIGFP,

1245
01:18:44,524 --> 01:18:46,693
we retain
that intellectual knowledge.

1246
01:18:46,860 --> 01:18:48,828
I attended
a very interesting dinner

1247
01:18:48,995 --> 01:18:52,665
organized by Hank Paulson
a little more than one year ago

1248
01:18:52,832 --> 01:18:55,468
with some officials
and a couple of CEOs

1249
01:18:55,635 --> 01:18:57,904
from the biggest banks
in the U.S.

1250
01:18:58,710 --> 01:19:02,375
And surprisingly enough,
all these gentlemen were arguing:

1251
01:19:02,542 --> 01:19:06,846
"We were too greedy, so we have
part of the responsibility." Fine.

1252
01:19:07,130 --> 01:19:08,648
Then they were turning
to the treasurer,

1253
01:19:08,815 --> 01:19:10,517
Secretary of the Treasury,
and saying:

1254
01:19:10,684 --> 01:19:13,853
"You should regulate more. We're
too greedy, we can't avoid it.

1255
01:19:14,200 --> 01:19:16,990
The only way to avoid this
is to have more regulation."

1256
01:19:17,157 --> 01:19:20,600
INTERVIEWER: I have spoken to
many bankers about this question,

1257
01:19:20,226 --> 01:19:22,162
including very senior ones.

1258
01:19:22,328 --> 01:19:27,133
And this is the first time
that I've ever heard anybody say

1259
01:19:27,300 --> 01:19:30,336
they wanted their compensation
to be regulated in any way.

1260
01:19:30,503 --> 01:19:33,707
Yeah, because it was at the
moment where they were afraid.

1261
01:19:33,873 --> 01:19:38,178
And after, when solution
to the crisis began to appear,

1262
01:19:38,345 --> 01:19:40,613
then probably
they changed their mind.

1263
01:19:43,160 --> 01:19:46,853
NARRATOR: In the U.S., the banks
are now bigger, more powerful

1264
01:19:47,200 --> 01:19:50,900
and more concentrated
than ever before.

1265
01:19:50,256 --> 01:19:52,125
There are fewer competitors.

1266
01:19:52,292 --> 01:19:56,262
A lot of smaller banks have been
taken over by big ones.

1267
01:19:56,429 --> 01:19:58,865
J.P. Morgan is even bigger
than it was before.

1268
01:19:59,320 --> 01:20:03,200
J.P. Morgan took over first
Bear Stearns and then WaMu.

1269
01:20:03,169 --> 01:20:07,700
Bank of America took over
Countrywide and Merrill Lynch.

1270
01:20:07,173 --> 01:20:09,676
Wells Fargo took over Wachovia.

1271
01:20:09,843 --> 01:20:12,145
After the crisis,
the financial industry,

1272
01:20:12,312 --> 01:20:15,115
including the
Financial Services Roundtable,

1273
01:20:15,281 --> 01:20:17,817
worked harder than ever
to fight reform.

1274
01:20:17,984 --> 01:20:20,653
The financial sector
employs 3000 lobbyists,

1275
01:20:21,187 --> 01:20:24,624
more than five
for each member of Congress.

1276
01:20:25,125 --> 01:20:27,293
INTERVIEWER: You think the
financial services industry

1277
01:20:27,293 --> 01:20:29,963
has excessive political influence
in the United States?

1278
01:20:30,130 --> 01:20:34,567
No. I think that every
person in the country

1279
01:20:34,734 --> 01:20:36,536
is represented
here in Washington.

1280
01:20:36,703 --> 01:20:40,440
INTERVIEWER: And you think that
all segments of American society

1281
01:20:40,607 --> 01:20:43,943
have equal and fair access
to the system?

1282
01:20:44,110 --> 01:20:48,982
That you can walk into any hearing
room that you would like. Yes, I do.

1283
01:20:49,249 --> 01:20:52,452
INTERVIEWER: One can walk into any
hearing room. One cannot necessarily

1284
01:20:52,619 --> 01:20:55,455
write the lobbying checks
that your industry writes

1285
01:20:55,622 --> 01:20:59,526
or engage in the level of political
contributions your industry engages in.

1286
01:20:59,726 --> 01:21:02,595
NARRATOR:
Between 1998 and 2008,

1287
01:21:02,762 --> 01:21:05,699
the financial industry
spent over $5 billion

1288
01:21:05,865 --> 01:21:08,368
on lobbying
and campaign contributions.

1289
01:21:08,535 --> 01:21:11,404
And since the crisis,
they're spending even more money.

1290
01:21:13,139 --> 01:21:15,608
The financial industry
also exerts it's influence

1291
01:21:15,775 --> 01:21:19,713
in a more subtle way, one that
most Americans don't know about.

1292
01:21:21,314 --> 01:21:24,918
It has corrupted the study
of economics itself.

1293
01:21:25,385 --> 01:21:31,424
Deregulation had tremendous
financial and intellectual support

1294
01:21:31,591 --> 01:21:36,290
because people argued it
for their own benefit.

1295
01:21:36,196 --> 01:21:40,867
The economics profession was
the main source of that illusion.

1296
01:21:41,201 --> 01:21:44,270
Since the 1980s,
academic economists

1297
01:21:44,437 --> 01:21:46,873
have been major advocates
of deregulation

1298
01:21:47,400 --> 01:21:50,443
and played powerful roles
in shaping U.S. Government policy.

1299
01:21:51,110 --> 01:21:54,781
Very few of these economic experts
warned about the crisis.

1300
01:21:54,948 --> 01:21:59,486
And even after the crisis,
many of them opposed reform.

1301
01:21:59,753 --> 01:22:03,623
The guys who taught these things
tended to get paid a lot of money

1302
01:22:03,790 --> 01:22:05,892
being consultants.

1303
01:22:06,590 --> 01:22:10,663
Business school professors
don't live on a faculty salary.

1304
01:22:11,731 --> 01:22:14,434
They do very, very well.

1305
01:22:14,868 --> 01:22:17,871
INTERVIEWER: Over the last decade,
the financial services industries

1306
01:22:18,380 --> 01:22:24,440
made about $5 billion worth of
political contributions in the U.S.

1307
01:22:25,111 --> 01:22:27,414
That's kind of a lot of money.

1308
01:22:27,914 --> 01:22:30,583
That doesn't bother you?
No.

1309
01:22:30,750 --> 01:22:33,286
NARRATOR: Martin Feldstein
is a Professor at Harvard

1310
01:22:33,453 --> 01:22:35,855
and one of the world's
most prominent economists.

1311
01:22:36,222 --> 01:22:39,250
As President Reagan's
chief economic advisor,

1312
01:22:39,192 --> 01:22:41,628
he was a major architect
of deregulation.

1313
01:22:41,795 --> 01:22:44,831
And from 1988 until 2009,

1314
01:22:45,131 --> 01:22:48,234
he was on the board of directors
of both AIG

1315
01:22:48,401 --> 01:22:50,370
and AIG Financial Products,

1316
01:22:50,537 --> 01:22:52,772
which paid him millions of dollars.

1317
01:22:53,390 --> 01:22:55,909
INTERVIEWER: You have any regrets
about having been on AIG's board?

1318
01:22:56,760 --> 01:22:59,746
I have no comments. No, I have no
regrets about being on AIG's board.

1319
01:22:59,913 --> 01:23:03,350
INTERVIEWER: None?
That I can say. Absolutely none.

1320
01:23:03,516 --> 01:23:04,951
Okay.

1321
01:23:07,387 --> 01:23:12,920
You have any regrets
about AIG's decisions?

1322
01:23:12,258 --> 01:23:15,280
I cannot say anything more
about AIG.

1323
01:23:15,195 --> 01:23:19,265
I've taught at Northwestern in
Chicago, Harvard and Columbia.

1324
01:23:19,432 --> 01:23:22,369
NARRATOR: Glenn Hubbard is the
Dean of Columbia Business School

1325
01:23:22,535 --> 01:23:25,238
and was chairman
of the Council of Economic Advisers

1326
01:23:25,405 --> 01:23:27,407
under George W. Bush.

1327
01:23:27,574 --> 01:23:29,843
INTERVIEWER: Do you think the
financial services industry

1328
01:23:29,876 --> 01:23:33,279
has too much political power
in the United States?

1329
01:23:33,747 --> 01:23:37,884
I don't think so. No. You certainly
wouldn't get that impression

1330
01:23:38,510 --> 01:23:41,855
by the drubbing that they
regularly get in Washington.

1331
01:23:42,220 --> 01:23:44,858
Many prominent academics
quietly make fortunes

1332
01:23:45,250 --> 01:23:49,829
helping the financial industry shape
public debate and government policy.

1333
01:23:49,996 --> 01:23:53,266
The Analysis Group,
Charles River Associates,

1334
01:23:53,433 --> 01:23:54,768
Compass Lexecon

1335
01:23:54,934 --> 01:23:57,203
and the Law and Economics
Consulting Group

1336
01:23:57,370 --> 01:23:59,572
manage a multibillion-dollar
industry

1337
01:23:59,739 --> 01:24:03,430
that provides academic experts
for hire.

1338
01:24:03,209 --> 01:24:05,211
Two bankers
who used these services

1339
01:24:05,378 --> 01:24:08,415
were Ralph Cioffi
and Matthew Tannin,

1340
01:24:08,581 --> 01:24:12,552
Bear Stearns hedge fund managers
prosecuted for securities fraud.

1341
01:24:12,719 --> 01:24:15,855
After hiring the Analysis Group,
both were acquitted.

1342
01:24:16,222 --> 01:24:21,461
Glenn Hubbard was paid $ 100,000
to testify in their defense.

1343
01:24:22,128 --> 01:24:25,980
INTERVIEWER: Do you
think the economics

1344
01:24:25,980 --> 01:24:28,680
discipline has a
conflict-of-interest problem?

1345
01:24:29,200 --> 01:24:30,603
I'm not sure
I know what you mean.

1346
01:24:30,770 --> 01:24:35,410
Do you think a significant fraction of
the economics discipline, economists,

1347
01:24:35,208 --> 01:24:40,413
have financial conflicts of interest that
might call into question or color...?

1348
01:24:40,580 --> 01:24:42,549
I see what you're saying.
I doubt it.

1349
01:24:42,716 --> 01:24:47,887
Most academic economists
aren't wealthy business people.

1350
01:24:48,540 --> 01:24:52,258
Hubbard makes $250,000 a year
as a board member of MetLife

1351
01:24:52,425 --> 01:24:54,828
and was formerly
on the board of Capmark,

1352
01:24:54,994 --> 01:24:58,310
a major commercial
mortgage lender during the bubble,

1353
01:24:58,198 --> 01:25:00,266
which went bankrupt in 2009.

1354
01:25:00,433 --> 01:25:02,802
He has also advised
Nomura Securities,

1355
01:25:02,969 --> 01:25:07,374
KKR Financial Corporation
and many other financial firms.

1356
01:25:08,675 --> 01:25:11,811
Laura Tyson, who declined
to be interviewed for this film,

1357
01:25:11,978 --> 01:25:15,749
is a Professor at the
University of California, Berkeley.

1358
01:25:15,915 --> 01:25:19,152
She was the chair of
the Council of Economic Advisers,

1359
01:25:19,319 --> 01:25:22,789
then director of the National
Economic Council under Clinton.

1360
01:25:22,956 --> 01:25:26,626
After leaving government, she joined
the board of Morgan Stanley,

1361
01:25:26,793 --> 01:25:30,330
which pays her $350,000 a year.

1362
01:25:30,497 --> 01:25:32,999
Ruth Simmons,
president of Brown University,

1363
01:25:33,166 --> 01:25:38,238
makes over $300,000 a year
on the board of Goldman Sachs.

1364
01:25:38,471 --> 01:25:41,508
Larry Summers, who, as Treasury
secretary, played a role

1365
01:25:41,675 --> 01:25:47,130
in the deregulation of derivatives,
became president of Harvard in 2001.

1366
01:25:47,347 --> 01:25:50,684
While at Harvard, he made millions
consulting to hedge funds

1367
01:25:50,850 --> 01:25:55,221
and millions more in speaking fees,
much of it from investment banks.

1368
01:25:57,957 --> 01:26:01,361
According to his federal disclosure
report, Summers' net worth

1369
01:26:01,528 --> 01:26:06,566
is between $ 16.5 million
and $39.5 million.

1370
01:26:07,333 --> 01:26:10,136
Frederic Mishkin, who returned
to Columbia Business School

1371
01:26:10,303 --> 01:26:14,441
after leaving the Federal Reserve,
reported on his disclosure report

1372
01:26:14,607 --> 01:26:18,978
that his net worth was between
$6 million and $ 17 million.

1373
01:26:19,446 --> 01:26:23,883
INTERVIEWER: In 2006, you coauthored a
study of Iceland's financial system.

1374
01:26:24,840 --> 01:26:25,885
"Iceland is an advanced country"

1375
01:26:26,520 --> 01:26:29,255
with excellent institutions,
low corruption, rule of law.

1376
01:26:29,422 --> 01:26:32,425
The economy has adjusted
to financial liberalization

1377
01:26:32,592 --> 01:26:36,830
"while prudential regulation and
supervision is generally quite strong."

1378
01:26:36,996 --> 01:26:39,733
And that was the mistake,
that it turns out

1379
01:26:39,899 --> 01:26:43,370
prudential regulation and supervision
was not strong in Iceland

1380
01:26:43,536 --> 01:26:46,406
during this period...
What led you to think it was?

1381
01:26:46,573 --> 01:26:48,842
You're going with
the information you had

1382
01:26:49,900 --> 01:26:54,547
and generally, the view was that
Iceland had very good institutions.

1383
01:26:54,714 --> 01:26:57,183
It was an advanced country...
Who told you that?

1384
01:26:57,350 --> 01:26:59,786
What research did you do?
You talk to people.

1385
01:26:59,953 --> 01:27:04,524
You have faith in the central bank, which
actually did fall down on the job.

1386
01:27:04,691 --> 01:27:07,160
That clearly it... This...

1387
01:27:07,327 --> 01:27:10,897
Why have faith in a central bank?
Well, that faith... You try...

1388
01:27:11,640 --> 01:27:13,233
Because you go with
the information you have.

1389
01:27:13,400 --> 01:27:16,200
How much were you paid to write it?
I was paid...

1390
01:27:16,169 --> 01:27:18,571
I think the number...
It's public information.

1391
01:27:26,146 --> 01:27:29,249
INTERVIEWER: On your CV, the title
of this report has been changed

1392
01:27:29,416 --> 01:27:33,553
from "Financial Stability in Iceland"
to "Financial Instability in Iceland."

1393
01:27:33,720 --> 01:27:38,291
Well, I don't know. Whatever it is...
If there's a typo, there's a typo.

1394
01:27:38,458 --> 01:27:40,326
What should be publicly available

1395
01:27:40,493 --> 01:27:42,929
is whenever anybody
does research on a topic

1396
01:27:43,960 --> 01:27:47,801
that they disclose if they have any
financial conflict with that research.

1397
01:27:47,967 --> 01:27:51,971
INTERVIEWER: But if I recall, there
is no policy to that effect.

1398
01:27:52,505 --> 01:27:57,977
I can't imagine anybody not doing that in
terms of putting it in a paper. You...

1399
01:27:58,144 --> 01:28:01,748
There would be significant professional
sanction for failure to do that.

1400
01:28:01,915 --> 01:28:06,553
INTERVIEWER: I didn't see any place in the
study where you indicated you'd been paid

1401
01:28:06,720 --> 01:28:10,230
by the Icelandic Chamber
of Commerce to produce it.

1402
01:28:10,190 --> 01:28:12,992
No, I don't... You know.
Okay.

1403
01:28:13,360 --> 01:28:16,363
NARRATOR: Richard Portes, the
most famous economist in Britain

1404
01:28:16,529 --> 01:28:18,665
and a Professor at
London Business School,

1405
01:28:18,832 --> 01:28:22,902
was also commissioned by the
Icelandic Chamber of Commerce

1406
01:28:23,690 --> 01:28:27,107
to write a report which praised
the Icelandic financial sector.

1407
01:28:27,674 --> 01:28:29,542
The banks themselves
are highly liquid.

1408
01:28:29,709 --> 01:28:32,512
They've made money
on the fall of the Icelandic krona.

1409
01:28:32,679 --> 01:28:34,800
These are strong banks.

1410
01:28:34,247 --> 01:28:37,517
Their market funding is assured
for the coming year.

1411
01:28:37,684 --> 01:28:39,652
These are well-run banks.
MAN: Thank you.

1412
01:28:39,819 --> 01:28:43,156
Like Mishkin, Portes' report
didn't disclose his payment

1413
01:28:43,323 --> 01:28:45,825
from the Icelandic
Chamber of Commerce.

1414
01:28:45,992 --> 01:28:48,461
INTERVIEWER: Does Harvard
require disclosures

1415
01:28:48,461 --> 01:28:50,964
of financial conflict
of interest?

1416
01:28:51,931 --> 01:28:53,366
Not to my knowledge.

1417
01:28:53,533 --> 01:28:56,569
Do you require people
to report the compensation

1418
01:28:56,736 --> 01:28:59,272
received from outside activities?
No.

1419
01:28:59,439 --> 01:29:01,141
Don't you think that's a problem?

1420
01:29:01,307 --> 01:29:02,575
I don't see why.

1421
01:29:02,742 --> 01:29:05,412
INTERVIEWER: Martin Feldstein
being on the board of AIG,

1422
01:29:05,578 --> 01:29:07,480
Laura Tyson at Morgan Stanley,

1423
01:29:07,647 --> 01:29:12,485
Larry Summers making $ 10 million
consulting to financial services firms.

1424
01:29:12,652 --> 01:29:13,720
Irrelevant?

1425
01:29:13,887 --> 01:29:15,188
Hm. Yeah.

1426
01:29:15,355 --> 01:29:16,856
Yeah. Basically irrelevant.

1427
01:29:17,657 --> 01:29:22,495
INTERVIEWER: You've written many
articles about a wide array of subjects.

1428
01:29:22,662 --> 01:29:25,432
You never saw fit
to investigate the risks

1429
01:29:25,598 --> 01:29:28,935
of unregulated
credit default swaps?

1430
01:29:29,202 --> 01:29:30,837
I never did.

1431
01:29:31,400 --> 01:29:34,774
Same question with regard
to executive compensation?

1432
01:29:34,941 --> 01:29:36,943
The regulation
of corporate governance?

1433
01:29:37,110 --> 01:29:39,446
The effect of political contributions?

1434
01:29:39,612 --> 01:29:43,583
I don't know that I would have
anything to add to those discussions.

1435
01:29:43,750 --> 01:29:45,819
INTERVIEWER:
I'm looking at your resume now.

1436
01:29:45,985 --> 01:29:50,790
It looks to me as if the majority
of your outside activities

1437
01:29:50,957 --> 01:29:53,793
are consulting
and directorship arrangements

1438
01:29:53,960 --> 01:29:56,620
with the financial services
industry.

1439
01:29:56,229 --> 01:29:58,398
Would you not agree
with that characterization?

1440
01:29:58,565 --> 01:30:01,835
To my knowledge, I don't think my
consulting clients are on my CV.

1441
01:30:02,100 --> 01:30:04,804
So I wouldn't know.
Who are your consulting clients?

1442
01:30:04,971 --> 01:30:06,973
I don't believe I have to
discuss that with you.

1443
01:30:07,140 --> 01:30:08,575
Okay.

1444
01:30:09,175 --> 01:30:13,113
In fact, you have a few more
minutes and the interview's over.

1445
01:30:13,279 --> 01:30:15,882
INTERVIEWER: Do you consult for
any financial services firms?

1446
01:30:16,490 --> 01:30:18,618
The answer is I do.
And?

1447
01:30:18,785 --> 01:30:21,955
And... But I do not wanna go
into details about that.

1448
01:30:22,122 --> 01:30:24,924
INTERVIEWER: Do they include
other financial services firms?

1449
01:30:25,910 --> 01:30:26,259
Possibly.

1450
01:30:26,426 --> 01:30:28,940
You don't remember?

1451
01:30:28,261 --> 01:30:31,498
This isn't a deposition, sir. I was
polite enough to give you time.

1452
01:30:31,664 --> 01:30:35,368
Foolishly, I now see. But you
have three more minutes.

1453
01:30:35,535 --> 01:30:37,370
Give it your best shot.

1454
01:30:37,537 --> 01:30:40,173
NARRATOR: In 2004, at the
height of the bubble,

1455
01:30:40,340 --> 01:30:44,177
Glenn Hubbard coauthored a widely
read paper with William C. Dudley,

1456
01:30:44,344 --> 01:30:47,147
the chief economist
of Goldman Sachs.

1457
01:30:47,313 --> 01:30:49,883
In the paper,
Hubbard praised credit derivatives

1458
01:30:50,500 --> 01:30:51,851
and the securitization chain,

1459
01:30:52,180 --> 01:30:54,621
stating they had improved
allocation of capital

1460
01:30:54,788 --> 01:30:57,257
and were enhancing
financial stability.

1461
01:30:57,424 --> 01:30:59,959
He cited reduced volatility
in the economy

1462
01:31:00,126 --> 01:31:04,764
and stated that recessions had
become less frequent and milder.

1463
01:31:04,931 --> 01:31:07,967
Credit derivatives were
protecting banks against losses

1464
01:31:08,134 --> 01:31:10,603
and helping to distribute risk.

1465
01:31:12,272 --> 01:31:15,241
INTERVIEWER: A medical researcher
writes an article, saying:

1466
01:31:15,408 --> 01:31:19,979
"To treat this disease,
you should prescribe this drug."

1467
01:31:20,246 --> 01:31:23,316
Turns out doctor makes 80 percent
of personal income

1468
01:31:23,483 --> 01:31:26,653
from manufacture of this drug.
Does not bother you?

1469
01:31:26,820 --> 01:31:32,250
I think it's certainly important
to disclose the, um...

1470
01:31:32,192 --> 01:31:34,561
The, um...

1471
01:31:36,863 --> 01:31:39,320
Well, I think that's also
a little different

1472
01:31:39,199 --> 01:31:43,737
from cases that we're talking
about here because, um...

1473
01:31:58,485 --> 01:32:02,722
INTERVIEWER: So, what do you think this
says about the economics discipline?

1474
01:32:02,889 --> 01:32:06,860
Well, I mean, it has no
relevance to anything, really.

1475
01:32:07,270 --> 01:32:10,930
And, indeed,
I think it's a part of the...

1476
01:32:11,970 --> 01:32:15,101
It's an important part
of the problem.

1477
01:32:29,716 --> 01:32:32,952
NARRATOR: The rising power of the U.S.
Financial sector

1478
01:32:33,119 --> 01:32:35,889
was part of a wider change
in America.

1479
01:32:36,256 --> 01:32:40,860
Since the 1980s, the United States
has become a more unequal society,

1480
01:32:41,428 --> 01:32:44,831
and it's economic dominance
has declined.

1481
01:32:45,131 --> 01:32:49,602
Companies like General Motors,
Chrysler and U.S. Steel,

1482
01:32:49,769 --> 01:32:52,339
formerly the core
of the U.S. Economy,

1483
01:32:52,505 --> 01:32:57,110
were poorly managed and falling
behind their foreign competitors.

1484
01:32:57,911 --> 01:33:00,980
And as countries like China
opened their economies,

1485
01:33:01,147 --> 01:33:05,318
American companies
sent jobs overseas to save money.

1486
01:33:07,287 --> 01:33:10,623
For many, many years,
the 660 million people

1487
01:33:10,790 --> 01:33:13,930
in the developed world
were sheltered

1488
01:33:13,259 --> 01:33:17,130
from all of this additional labor
that existed on the planet.

1489
01:33:17,297 --> 01:33:20,166
Suddenly the Bamboo Curtain
and the Iron Curtain are lifted

1490
01:33:20,333 --> 01:33:23,503
and you have 2.5 billion
additional people.

1491
01:33:24,204 --> 01:33:28,208
American factory workers were laid
off by the tens of thousands.

1492
01:33:28,375 --> 01:33:31,110
Our manufacturing base
was destroyed, literally,

1493
01:33:31,177 --> 01:33:32,479
over a few years.

1494
01:33:32,645 --> 01:33:36,950
As manufacturing declined,
other industries rose.

1495
01:33:37,117 --> 01:33:40,353
The United States leads the world
in information technology,

1496
01:33:40,520 --> 01:33:43,590
where high-paying jobs
are easy to find.

1497
01:33:43,757 --> 01:33:45,925
But those jobs
require an education.

1498
01:33:46,226 --> 01:33:51,970
And for average Americans,
college is increasingly out of reach.

1499
01:33:51,431 --> 01:33:56,569
While universities like Harvard have
billions of dollars in endowments,

1500
01:33:56,736 --> 01:34:01,410
funding for public universities
is shrinking and tuition is rising.

1501
01:34:02,800 --> 01:34:04,477
Tuition for California's
public universities

1502
01:34:04,644 --> 01:34:10,984
rose from $650 in the 1970s
to over $ 10,000 in 2010.

1503
01:34:12,180 --> 01:34:16,289
The most important determinant
of whether Americans go to college

1504
01:34:16,456 --> 01:34:19,459
is whether they can find
the money to pay for it.

1505
01:34:19,726 --> 01:34:24,698
Meanwhile, American tax policy
shifted to favor the wealthy.

1506
01:34:24,864 --> 01:34:30,700
When I first came to office, I thought
taxes were too high, and they were.

1507
01:34:30,236 --> 01:34:33,390
The most dramatic change
was a series of tax cuts

1508
01:34:33,206 --> 01:34:35,842
designed by Glenn Hubbard,
who was serving

1509
01:34:36,900 --> 01:34:39,312
as President Bush's
chief economic advisor.

1510
01:34:40,460 --> 01:34:43,683
The Bush administration sharply
reduced taxes on investment gains,

1511
01:34:43,850 --> 01:34:46,853
stock dividends,
and eliminated the estate tax.

1512
01:34:47,200 --> 01:34:50,156
We had a comprehensive plan
that when acted

1513
01:34:50,323 --> 01:34:54,940
has left nearly $ 1.1 trillion
in the hands of American workers,

1514
01:34:54,260 --> 01:34:56,863
families, investors
and small-business owners.

1515
01:34:57,300 --> 01:35:02,836
Most benefits of these cuts went to the
wealthiest 1 percent of Americans.

1516
01:35:03,370 --> 01:35:05,638
And by the way,
it was the cornerstone

1517
01:35:05,805 --> 01:35:08,174
in many ways,
of our economic recovery policy.

1518
01:35:08,641 --> 01:35:11,177
Inequality of wealth
in the United States

1519
01:35:11,344 --> 01:35:14,748
is now higher
than in any other developed country.

1520
01:35:15,348 --> 01:35:18,118
American families responded
to these changes in two ways:

1521
01:35:19,552 --> 01:35:24,124
By working longer hours
and by going into debt.

1522
01:35:24,290 --> 01:35:27,894
As the middle class falls
further and further behind,

1523
01:35:28,610 --> 01:35:31,931
there is a political urge
to respond

1524
01:35:32,980 --> 01:35:35,435
by making it easier to get credit.

1525
01:35:35,602 --> 01:35:38,104
You don't have to have
a lousy home.

1526
01:35:38,271 --> 01:35:43,877
The low-income home buyer can have
just as nice a house as anybody else.

1527
01:35:44,411 --> 01:35:48,815
American families borrowed
to finance their homes, their cars,

1528
01:35:48,982 --> 01:35:52,752
their healthcare,
and their children's educations.

1529
01:35:53,119 --> 01:35:55,789
People in the bottom 90 percent

1530
01:35:56,256 --> 01:36:00,827
lost ground
between 1980 and 2007.

1531
01:36:00,994 --> 01:36:05,732
It all went to the top 1 percent.

1532
01:36:07,701 --> 01:36:10,603
For the first time in history,
average Americans

1533
01:36:10,770 --> 01:36:15,542
have less education and are less
prosperous than their parents.

1534
01:36:17,711 --> 01:36:20,947
The era of greed and irresponsibility

1535
01:36:21,114 --> 01:36:24,417
on Wall Street and in Washington

1536
01:36:24,584 --> 01:36:26,653
has led us to a financial crisis

1537
01:36:26,820 --> 01:36:30,523
as serious as any that we've faced
since the Great Depression.

1538
01:36:30,690 --> 01:36:33,960
NARRATOR: When the financial crisis
struck before the 2008 election,

1539
01:36:34,394 --> 01:36:36,663
Barack Obama pointed
to Wall Street greed

1540
01:36:36,830 --> 01:36:41,134
and regulatory failures as examples
of the need for change in America.

1541
01:36:41,301 --> 01:36:44,300
A lack of oversight in Washington
and on Wall Street

1542
01:36:44,170 --> 01:36:47,173
is exactly what got us
into this mess.

1543
01:36:47,774 --> 01:36:52,780
NARRATOR: After taking office, Obama spoke
of the need to reform the industry.

1544
01:36:52,245 --> 01:36:55,548
We want a risk regulator,
increased capital requirements.

1545
01:36:55,715 --> 01:36:58,351
We need a consumer financial
protection agency.

1546
01:36:58,518 --> 01:37:00,353
We need to change
Wall Street's culture.

1547
01:37:00,987 --> 01:37:03,923
But when finally enacted
in mid-2010,

1548
01:37:04,900 --> 01:37:06,860
the administration's
financial reforms were weak.

1549
01:37:07,270 --> 01:37:10,463
And in some critical areas,
including the rating agencies,

1550
01:37:10,630 --> 01:37:12,899
lobbying and compensation,

1551
01:37:13,660 --> 01:37:16,360
nothing significant
was even proposed.

1552
01:37:16,202 --> 01:37:19,706
Addressing Obama and,
quote, "regulatory reform,"

1553
01:37:19,873 --> 01:37:24,770
my response, if it was
one word, would be "ha."

1554
01:37:24,878 --> 01:37:27,313
There's very little reform.

1555
01:37:27,480 --> 01:37:29,490
INTERVIEWER:
How come?

1556
01:37:30,150 --> 01:37:32,318
It's a Wall Street government.

1557
01:37:34,788 --> 01:37:38,324
NARRATOR: Obama chose Timothy
Geithner as Treasury secretary.

1558
01:37:38,491 --> 01:37:41,261
Geithner was president
of the New York Federal Reserve

1559
01:37:41,428 --> 01:37:44,297
during the crisis,
and a key player in the decision

1560
01:37:44,464 --> 01:37:47,670
to pay Goldman Sachs
100 cents on the dollar

1561
01:37:47,233 --> 01:37:49,135
for it's bets against mortgages.

1562
01:37:49,302 --> 01:37:52,305
When Tim Geithner
was testifying

1563
01:37:52,472 --> 01:37:54,708
to be confirmed
as Treasury secretary

1564
01:37:54,874 --> 01:37:57,944
he said,
"I have never been a regulator."

1565
01:37:58,111 --> 01:38:00,714
That said to me
he did not understand his job

1566
01:38:00,880 --> 01:38:02,582
as President of the New York Fed.

1567
01:38:06,920 --> 01:38:10,123
The new President of the
New York Fed is William C. Dudley,

1568
01:38:10,290 --> 01:38:12,826
the former chief economist
of Goldman Sachs

1569
01:38:12,992 --> 01:38:16,162
whose paper with Glenn Hubbard
praised derivatives.

1570
01:38:16,329 --> 01:38:18,732
Geithner's chief of staff
is Mark Patterson,

1571
01:38:18,898 --> 01:38:20,967
a former lobbyist for Goldman.

1572
01:38:21,134 --> 01:38:23,670
And one of the senior advisors
is Lewis Sachs,

1573
01:38:23,837 --> 01:38:26,973
who oversaw Tricadia,
a company heavily involved

1574
01:38:27,140 --> 01:38:30,777
in betting against the mortgage
securities it was selling.

1575
01:38:31,111 --> 01:38:33,780
To head the Commodity Futures
Trading Commission,

1576
01:38:33,947 --> 01:38:37,717
Obama picked Gary Gensler,
a former Goldman Sachs executive

1577
01:38:37,884 --> 01:38:40,820
who had helped ban
the regulation of derivatives.

1578
01:38:40,987 --> 01:38:43,289
To run the Securities
and Exchange Commission,

1579
01:38:43,456 --> 01:38:47,394
Obama picked Mary Schapiro,
the former CEO of FINRA,

1580
01:38:47,560 --> 01:38:51,231
the investment banking industry's
self-regulation body.

1581
01:38:51,398 --> 01:38:53,767
Obama's chief of staff,
Rahm Emanuel,

1582
01:38:53,933 --> 01:38:58,505
made $320,000 serving
on the board of Freddie Mac.

1583
01:38:58,738 --> 01:39:01,341
Both Martin Feldstein
and Laura Tyson are members

1584
01:39:01,508 --> 01:39:05,111
of Obama's
Economic Recovery Advisory Board.

1585
01:39:05,412 --> 01:39:10,116
And Obama's chief economic
advisor is Larry Summers.

1586
01:39:10,650 --> 01:39:12,485
SPITZER: The most senior
economic advisors

1587
01:39:12,652 --> 01:39:15,221
are the ones who were there,
who built the structure.

1588
01:39:15,488 --> 01:39:18,580
When it was clear
that Summers and Geithner

1589
01:39:18,224 --> 01:39:22,662
were going to play major roles
as advisors,

1590
01:39:22,829 --> 01:39:25,365
I knew this was
going to be status quo.

1591
01:39:25,932 --> 01:39:29,636
NARRATOR: The Obama administration
resisted regulation of bank compensation

1592
01:39:29,803 --> 01:39:32,472
even as foreign leaders
took action.

1593
01:39:32,639 --> 01:39:35,800
The financial industry
is a service industry.

1594
01:39:35,175 --> 01:39:38,545
It should serve others
before it serves itself.

1595
01:39:39,120 --> 01:39:42,150
In September of 2009,
Christine Lagarde

1596
01:39:42,182 --> 01:39:44,951
and the finance ministers
of Sweden, the Netherlands,

1597
01:39:45,118 --> 01:39:48,488
Luxembourg, Italy,
Spain and Germany

1598
01:39:48,655 --> 01:39:51,958
called for the G20 nations,
including the United States,

1599
01:39:52,125 --> 01:39:55,695
to impose strict regulations
on bank compensation.

1600
01:39:55,862 --> 01:39:57,831
And in July of 2010,

1601
01:39:57,997 --> 01:40:02,100
the European Parliament
enacted those very regulations.

1602
01:40:02,268 --> 01:40:05,505
The Obama administration
had no response.

1603
01:40:05,672 --> 01:40:09,709
Their view is it's a temporary blip
and things will go back to normal.

1604
01:40:10,210 --> 01:40:13,313
That is why I am reappointing him

1605
01:40:13,480 --> 01:40:16,483
as chairman of the Federal Reserve.
Thank you, Ben.

1606
01:40:16,649 --> 01:40:20,487
In 2009, Barack Obama
reappointed Ben Bernanke.

1607
01:40:20,653 --> 01:40:21,855
Thank you, Mr. President.

1608
01:40:23,289 --> 01:40:27,193
As of mid-2010, not a single
senior financial executive

1609
01:40:27,360 --> 01:40:30,363
had been criminally prosecuted,
or even arrested.

1610
01:40:30,530 --> 01:40:33,990
No special prosecutor
had been appointed.

1611
01:40:33,266 --> 01:40:36,690
Not a single firm had been
prosecuted criminally

1612
01:40:36,236 --> 01:40:39,239
for securities fraud
or accounting fraud.

1613
01:40:39,406 --> 01:40:41,941
The Obama administration
has made no attempt

1614
01:40:42,108 --> 01:40:43,910
to recover any compensation

1615
01:40:44,770 --> 01:40:47,113
given to financial executives
during the bubble.

1616
01:40:48,281 --> 01:40:51,618
I certainly would think
of criminal action

1617
01:40:51,785 --> 01:40:55,455
against some of Countrywide's
top leaders, like Mozilo.

1618
01:40:55,622 --> 01:40:58,958
I'd certainly look at Bear Stearns,
Goldman Sachs

1619
01:40:59,125 --> 01:41:01,394
and Lehman Brothers
and Merrill Lynch.

1620
01:41:01,561 --> 01:41:02,696
INTERVIEWER:
For criminal prosecutions?

1621
01:41:02,862 --> 01:41:04,300
Yes.

1622
01:41:04,197 --> 01:41:07,867
INTERVIEWER: In regard to...
Yes. They'd be very hard to win,

1623
01:41:08,101 --> 01:41:13,606
but I think they could do it if they got
enough underlings to tell the truth.

1624
01:41:13,940 --> 01:41:16,776
In an industry
in which drug use, prostitution

1625
01:41:16,943 --> 01:41:19,913
and billing of prostitutes
as a business expense

1626
01:41:20,800 --> 01:41:21,915
occur on an industrial scale,

1627
01:41:22,820 --> 01:41:26,190
it wouldn't be hard to make
people talk if you really wanted to.

1628
01:41:26,453 --> 01:41:29,723
They gave me a plea bargain
and I took it.

1629
01:41:29,889 --> 01:41:31,991
They were not interested
in my records.

1630
01:41:32,158 --> 01:41:33,827
They weren't interested in anything.

1631
01:41:33,993 --> 01:41:35,295
INTERVIEWER:
Not interested in your records?

1632
01:41:35,462 --> 01:41:37,970
That's correct. Correct.

1633
01:41:37,263 --> 01:41:43,436
There's a sensibility that you
don't use people's personal vices

1634
01:41:43,603 --> 01:41:47,507
in the context of Wall Street cases,
necessarily, to get them to flip.

1635
01:41:47,674 --> 01:41:53,460
Maybe after the cataclysms that we've
been through, people will reevaluate.

1636
01:41:53,213 --> 01:41:57,150
I'm not the one to pass judgment
on that right now.

1637
01:42:10,497 --> 01:42:15,869
CAPUANO: You come to us today telling
us, "We're sorry, we didn't mean it."

1638
01:42:16,360 --> 01:42:19,239
We won't do it again. Trust us."

1639
01:42:19,406 --> 01:42:22,342
Well, I have some people
in my constituency

1640
01:42:22,509 --> 01:42:25,211
that actually robbed
some of your banks.

1641
01:42:25,378 --> 01:42:27,313
And they say the same thing.

1642
01:42:27,480 --> 01:42:30,550
They're sorry. They didn't mean it.
They won't do it again.

1643
01:42:31,151 --> 01:42:36,220
In 2009, as unemployment hit
it's highest level in 17 years,

1644
01:42:36,189 --> 01:42:39,492
Morgan Stanley paid it's employees
over $ 14 billion,

1645
01:42:39,659 --> 01:42:42,829
and Goldman Sachs paid out
over $ 16 billion.

1646
01:42:42,996 --> 01:42:46,733
In 2010,
bonuses were even higher.

1647
01:42:46,900 --> 01:42:50,336
Why should a financial engineer
be paid

1648
01:42:50,537 --> 01:42:56,710
four times to 100 times more
than a real engineer?

1649
01:42:56,876 --> 01:42:59,450
A real engineer build Bridges.

1650
01:42:59,212 --> 01:43:02,549
A financial engineer build dreams.

1651
01:43:02,716 --> 01:43:06,319
And, you know, when those dreams
turn out to be nightmares,

1652
01:43:06,486 --> 01:43:08,221
other people pay for it.

1653
01:43:10,724 --> 01:43:11,825
For decades,

1654
01:43:11,991 --> 01:43:15,662
the American financial system
was stable and safe.

1655
01:43:16,620 --> 01:43:17,997
But then something changed.

1656
01:43:18,164 --> 01:43:21,501
The financial industry
turned it's back on society,

1657
01:43:21,668 --> 01:43:24,137
corrupted our political system

1658
01:43:24,571 --> 01:43:27,240
and plunged the world economy
into crisis.

1659
01:43:29,242 --> 01:43:32,178
At enormous cost,
we've avoided disaster

1660
01:43:32,479 --> 01:43:34,447
and are recovering.

1661
01:43:34,814 --> 01:43:38,651
But the men and institutions that
caused the crisis are still in power,

1662
01:43:38,818 --> 01:43:40,887
and that needs to change.

1663
01:43:41,988 --> 01:43:44,124
They will tell us
that we need them,

1664
01:43:44,290 --> 01:43:48,461
and that what they do is too
complicated for us to understand.

1665
01:43:49,262 --> 01:43:51,531
They will tell us
it won't happen again.

1666
01:43:51,931 --> 01:43:55,201
They will spend billions
fighting reform.

1667
01:43:55,602 --> 01:43:57,637
It won't be easy.

1668
01:43:58,972 --> 01:44:02,609
But some things
are worth fighting for.

1669
01:44:06,513 --> 01:44:08,481
(MGMT'S "CONGRATULATIONS" PLAYS)