WEBVTT

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Iceland is a stable democracy

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with a high standard of living,

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and, until recently,

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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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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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first for the environment
and then for the economy.

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They started by allowing multinational
corporations like Alcoa

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to build giant
aluminum-smelting plants

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and exploit Iceland's geothermal
and hydroelectric energy sources.

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Many of the most beautiful areas
in the highlands

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with the most spectacular colors
are geothermal.

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So nothing comes
without consequence.

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..:: Presented By ZarFilm Website ::..
‏.::  www.bolboljan.net ::.

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At the same time,

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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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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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each other, and their friends.

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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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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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Newspapers
always had the headline:

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This millionaire bought
this company

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in the U.K. Or in Finland
or in France or wherever,

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instead of saying:

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"This millionaire took
a billion-dollar loan

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to buy this company,
and he took it from your local bank."

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The banks set
up money market funds,

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and the banks advised
deposit-holders to withdraw money

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and put them
in the money market funds.

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The Ponzi scheme needed
everything it could.

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American
accounting firms like KPMG

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audited the Icelandic banks
and investment firms

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and found nothing wrong.

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And American credit-rating agencies
said Iceland was wonderful.

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In February 2007,

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the rating agency upgraded the banks to
the highest possible rate, triple-A.

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It went so far as the government here
traveling with the bankers

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as a PR show.

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When Iceland's banks collapsed
at the end of 2008,

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unemployment tripled
in six months.

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There is nobody
unaffected in Iceland.

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A lot of people lost their savings.

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Yes, that's the case.

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Government regulators who
should've been protecting the citizens

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had done nothing.

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You have two lawyers from
the regulator going down to a bank

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to talk about some issue.

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When they approach the bank,

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they would see 19 SUVs
outside the bank.

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You enter the bank,

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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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And then, if you do really well,
they'll offer you a job.

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One-third of Iceland's
financial regulators

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went to work for the banks.

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But this is
a universal problem, huh?

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In New York,
you have the same problem, right?

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What do you think of
Wall Street incomes these days?

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Excessive.

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I've been told it's
extremely difficult for the IMF

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to criticize the United States.

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I wouldn't say that.

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We deeply regret our breaches
of U.S. Law.

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They're amazed at how much
cocaine these Wall Streeters can use

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and get up
and go to work the next day.

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I didn't know
what credit default swaps are.

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I'm a little bit old-fashioned.

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Has Larry Summers
ever expressed remorse?

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I don't hear confessions.

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The government's
just writing checks.

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That's plan A, that's plan B
and that's plan C.

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Would you support
legal controls on executive pay?

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I would not.

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Are you
comfortable with the

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level of compensation
in financial services?

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If they've earned it,
yes, I am.

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Do you think they've earned it?
I think so.

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And so you've helped
these people blow the world up?

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You could say that.

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They were having massive
private gains at public loss.

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When you think you can
create something out of nothing

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it's difficult to resist.

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I'm concerned people
want to go back to the old way,

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the way they were operating
prior to the crisis.

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I was getting a lot of anonymous
e-mails from bankers saying:

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"You can't quote me,
but I'm really concerned."

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Why do you think there isn't

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a more systematic investigation
being undertaken?

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Because then
you'll find the culprits.

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You think
Columbia Business.

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School has any
conflict-of-interest problem?

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I don't see that we do.

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The regulators
didn't do their job.

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They had the power to do every case
that I made. They just didn't want to.

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Lehman Brothers, one
of the most venerable

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and biggest investment banks,
was forced to declare itself bankrupt.

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Another, Merrill Lynch,
was forced to sell itself today.

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World financial markets are way down,
following dramatic developments.

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In September 2008,

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the bankruptcy of the U.S.
Investment bank Lehman Brothers

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and the collapse of the world's
largest insurance company, AIG,

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triggered a global crisis.

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Fears gripped markets overnight.

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Stocks fell off a cliff.

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The largest single point drop
in history.

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Share prices continued to tumble

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in the aftermath
of the Lehman collapse.

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The result was a global recession,

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which cost the world
tens of trillions of dollars,

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rendered 30 million people
unemployed

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and doubled the national debt
of the United States.

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With the destruction
of equity and housing wealth,

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the destruction of income,
of jobs,

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50 million people globally could
end up below the poverty line again.

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This is just a hugely,
hugely expensive crisis.

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This crisis was not an accident.

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It was caused
by an out-of-control industry.

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Since the 1980s,

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the rise of the U.S. Financial sector
has led to a series

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of increasingly severe
financial crises.

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Each crisis has caused
more damage,

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while the industry has made
more and more money.

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After the Great Depression

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the United States had 40 years
of economic growth

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without a single financial crisis.

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The financial industry
was tightly regulated.

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Most regular banks
were local businesses

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prohibited from speculating

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with depositors' savings.

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Investment banks, which handled
stock and bond trading,

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were small, private partnerships.

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In the traditional
investment banking model,

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the partners put the money up,

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and they watch that money
very carefully.

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They wanted to live well,

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but they didn't want to bet the ranch
on anything.

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Paul Volcker served
in the Treasury Department

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and was chairman of the
Federal Reserve from 1979 to 1987.

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Before going into government,

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he was a financial economist
at Chase Manhattan Bank.

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When I left Chase
to go in the Treasury in 1969,

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my income was in the neighborhood
of $45,000 a year.

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Forty-five thousand dollars a year.

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Morgan Stanley, in 1972,

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had approximately
110 total personnel,

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one office,
and capital of 12 million dollars.

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Now Morgan Stanley
has 50,000 workers

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and has capital of several billion

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and has offices all over the world.

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In the 1980s,
the financial industry exploded.

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The investment banks
went public,

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giving them huge amounts
of stockholder money.

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People on Wall Street
started getting rich.

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I had a friend
who was a bond trader

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at Merrill Lynch in the 1970s.

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He had a job as a train conductor
at night

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because he had three kids
and couldn't support them

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on what a trader made.

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By 1986,
he was making millions of dollars

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and thought
it was because he was smart.

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The highest order of business
before the nation

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is to restore
our economic prosperity.

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In 1981, President Ronald
Reagan chose as Treasury secretary

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the CEO of the investment bank
Merrill Lynch, Donald Regan.

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Wall Street and the president
see eye to eye.

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I've talked to leaders of Wall Street.

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They say, "We're behind
the president 100 percent."

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The Reagan administration,

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supported by economists
and financial lobbyists,

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started a 30-year period
of financial deregulation.

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In 1982,
the Reagan administration

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deregulated
savings-and-loan companies,

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allowing them to make risky
investments with depositors' money.

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By the end of the decade,

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hundreds of savings-and-loan
companies had failed.

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This crisis cost taxpayers
$ 124 billion

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and cost many people
their life savings.

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It may be the biggest bank heist
in our history.

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Thousands of executives went to jail
for looting their companies.

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One of the most extreme cases
was Charles Keating.

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Mr. Keating, got a word?

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In 1985, when federal regulators
began investigating him,

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Keating hired an economist
named Alan Greenspan.

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In this letter to regulators,

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Greenspan praised Keating's
sound business plans and expertise

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and said he saw no risk in allowing
Keating to invest customers' money.

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Keating reportedly
paid Greenspan $40,000.

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Keating went to prison
shortly afterwards.

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As for Alan Greenspan,

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Reagan appointed him
chairman of America's central bank,

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the Federal Reserve.

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Greenspan was reappointed

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by presidents Clinton
and George W. Bush.

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During the Clinton administration,

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deregulation continued
under Greenspan

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and Treasury secretaries
Robert Rubin,

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the former CEO of the
investment bank Goldman Sachs,

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and Larry Summers,
a Harvard economics Professor.

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The financial sector,
Wall Street being powerful,

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having lobbies, lots of money,

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step by step,
captured the political system.

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Both on the Democratic
and the Republican side.

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By the late 1990s, the
financial sector had consolidated

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into a few gigantic firms,
each of them so large

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that their failure could threaten
the whole system.

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And the Clinton administration
helped them grow even larger.

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In 1998,
Citicorp and Travelers merged

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to form Citigroup,

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the largest financial services
company in the world.

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The merger violated
the Glass-Steagall Act,

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a law passed
after the Great Depression,

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preventing banks
with consumer deposits

00:17:01.175 --> 00:17:04.406
from engaging in
risky investment-banking activities.

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It was illegal
to acquire Travelers.

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Greenspan said nothing.

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The Federal Reserve gave them
an exemption for a year,

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then they got the law passed.

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In 1999,
at the urging of Summers and Rubin,

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Congress passed
the Gramm-Leach-Bliley Act,

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known to some
as the Citigroup Relief Act.

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It overturned Glass-Steagall

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and cleared the way
for future mergers.

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Why do you have big banks?

00:17:39.847 --> 00:17:43.874
Because banks like monopoly power,
lobbying power.

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Because banks know
that when they're too big,

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they will be bailed.

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Markets are inherently unstable.

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Or at least potentially unstable.

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An appropriate metaphor
is the oil tankers.

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They are very big,

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and therefore,
you have to put in compartments

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to prevent
the sloshing around of oil

00:18:07.574 --> 00:18:09.405
from capsizing the boat.

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The design of the boat
has to take that into account.

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And after the Depression,

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the regulations actually introduced
these very watertight compartments.

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And deregulation has led
to the end of compartmentalization.

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The next crisis
came at the end of the '90s.

00:18:32.399 --> 00:18:35.891
The investment banks fueled
a massive bubble in Internet stocks,

00:18:36.069 --> 00:18:38.765
which was followed by a crash
in 2001

00:18:38.939 --> 00:18:41.840
that caused $5 trillion
in investment losses.

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The Securities and Exchange
Commission, the federal agency

00:18:45.779 --> 00:18:49.237
created during the Depression
to regulate investment banking,

00:18:49.416 --> 00:18:51.077
had done nothing.

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In the absence of meaningful
federal action,

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and given the clear failure
of self-regulation,

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it's become necessary for others
to step in

00:19:00.460 --> 00:19:02.360
and adopt the protections needed.

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Eliot Spitzer's investigation
revealed the investment banks

00:19:05.866 --> 00:19:09.302
promoted Internet companies
they knew would fail.

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Analysts were being paid based on
how much business they brought in.

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What they said publicly was quite
different from what they said privately.

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Infospace, given the
highest possible rating,

00:19:20.347 --> 00:19:22.872
dismissed by an analyst
as a "piece of junk."

00:19:23.049 --> 00:19:27.110
Excite, also highly rated,
called "such a piece of crap."

00:19:27.287 --> 00:19:33.624
The defense that was proffered
by many of the investment banks

00:19:33.960 --> 00:19:36.520
was not "you're wrong,"

00:19:36.696 --> 00:19:40.154
it was, "Everybody's doing it,
everybody knows it's going on."

00:19:40.332 --> 00:19:42.459
Nobody should rely
on these analysts anyway."

00:19:42.935 --> 00:19:44.960
In December, 2002,

00:19:45.137 --> 00:19:49.665
10 investment banks settled
the case for a total of $ 1.4 billion

00:19:49.842 --> 00:19:52.572
and promised
to change their ways.

00:19:52.978 --> 00:19:56.846
Scott Talbott is the chief lobbyist for
the Financial Services Roundtable,

00:19:57.016 --> 00:19:59.416
one of Washington's
most powerful groups,

00:19:59.585 --> 00:20:03.453
which represents nearly all of the
world's largest financial companies.

00:20:03.622 --> 00:20:07.524
Are you comfortable with the
fact that several of your member companies

00:20:07.693 --> 00:20:10.685
have engaged
in large-scale criminal activity?

00:20:10.863 --> 00:20:12.922
L... You'll have to be specific.
Okay.

00:20:13.098 --> 00:20:16.966
And first of all, criminal activity
shouldn't be accepted, period.

00:20:25.477 --> 00:20:28.810
Since deregulation began,
the world's biggest financial firms

00:20:28.981 --> 00:20:32.178
have been caught laundering
money, defrauding customers

00:20:32.351 --> 00:20:36.287
and cooking their books
again and again and again.

00:20:47.132 --> 00:20:50.795
Credit Suisse helped funnel money
for Iran's nuclear program

00:20:50.970 --> 00:20:53.461
and for Iran's
Aerospace Industries Organization,

00:20:53.639 --> 00:20:55.402
which builds ballistic missiles.

00:20:55.574 --> 00:20:59.806
Any information that would identify it
as Iranian would be removed.

00:20:59.979 --> 00:21:03.039
The bank was fined $536 million.

00:21:03.215 --> 00:21:07.151
Citibank helped funnel $ 100 million
of drug money out of Mexico.

00:21:07.319 --> 00:21:09.879
Did you comment
that she should, quote:

00:21:10.055 --> 00:21:12.888
"Lose any documents connected
with the account"?

00:21:13.058 --> 00:21:16.515
I said that in a kidding manner.
It was at the early stages of this.

00:21:16.694 --> 00:21:18.059
I did not mean it seriously.

00:21:20.398 --> 00:21:23.231
Between 1998 and 2003,

00:21:23.401 --> 00:21:26.734
Fannie Mae overstated it's earnings
by more than $ 10 billion.

00:21:26.904 --> 00:21:29.031
These accounting standards
are complex

00:21:29.207 --> 00:21:33.041
and require determinations
over which experts often disagree.

00:21:33.211 --> 00:21:37.375
CEO Franklin Raines, who used to be
President Clinton's budget director,

00:21:37.548 --> 00:21:40.540
received over $52 million
in bonuses.

00:21:45.289 --> 00:21:48.622
When UBS was caught helping
wealthy Americans evade taxes,

00:21:48.793 --> 00:21:51.318
they refused to cooperate
with the government.

00:21:51.496 --> 00:21:53.794
Would you be willing
to supply the names?

00:21:54.332 --> 00:21:57.426
If there's a treaty framework.
No treaty framework.

00:21:57.602 --> 00:21:59.695
You've agreed
you participated in a fraud.

00:21:59.871 --> 00:22:00.895
Hm.

00:22:11.315 --> 00:22:13.715
But while the companies
face unprecedented fines,

00:22:13.885 --> 00:22:17.753
the investment firms do not
have to admit any wrongdoing.

00:22:17.922 --> 00:22:22.120
When dealing with this many products,
this many customers, mistakes happen.

00:22:22.293 --> 00:22:24.699
The financial
services industry

00:22:24.712 --> 00:22:27.128
seems to have a level
of criminality

00:22:27.298 --> 00:22:29.266
that is somewhat distinctive.

00:22:29.434 --> 00:22:33.131
You know, when was the last time
that Cisco

00:22:33.304 --> 00:22:37.434
or Intel or Google or Apple or IBM,
you know...?

00:22:37.608 --> 00:22:40.304
I agree about high-tech
versus financial services...

00:22:40.478 --> 00:22:43.879
So how come?
High-tech is a creative business

00:22:44.048 --> 00:22:45.948
where the value generation

00:22:46.117 --> 00:22:49.352
and income derives from
actually creating something new.

00:22:50.620 --> 00:22:52.019
Beginning in the 1990s,

00:22:52.189 --> 00:22:54.885
deregulation
and advances in technology

00:22:55.058 --> 00:22:59.222
led to an explosion of complex
financial products called derivatives.

00:22:59.396 --> 00:23:02.832
Economists and bankers
claimed they made markets safer.

00:23:02.999 --> 00:23:06.457
But instead,
they made them unstable.

00:23:06.636 --> 00:23:08.934
Since the end of the Cold War,

00:23:09.106 --> 00:23:12.098
a lot of former physicists,
mathematicians,

00:23:12.275 --> 00:23:14.436
decided to apply their skills,

00:23:14.611 --> 00:23:17.341
not on, you know,
Cold War technology,

00:23:17.514 --> 00:23:19.379
but on financial markets.

00:23:19.549 --> 00:23:21.676
And together
with investment bankers...

00:23:21.852 --> 00:23:23.149
Creating different weapons.

00:23:23.320 --> 00:23:24.344
Absolutely.

00:23:24.521 --> 00:23:27.490
You know, as Warren Buffett said,
weapons of mass destruction.

00:23:27.657 --> 00:23:30.990
Regulators, politicians,
business people

00:23:31.161 --> 00:23:34.756
did not take seriously
the threat of innovation

00:23:34.931 --> 00:23:37.627
on the stability
of the financial system.

00:23:38.235 --> 00:23:39.532
Using derivatives,

00:23:39.703 --> 00:23:42.501
bankers could gamble
on virtually anything.

00:23:42.672 --> 00:23:45.334
They could bet on the rise or fall
of oil prices,

00:23:45.509 --> 00:23:48.376
the bankruptcy of a company,
even the weather.

00:23:49.112 --> 00:23:50.807
By the late 1990s,

00:23:50.981 --> 00:23:55.975
derivatives were a 50-trillion-dollar
unregulated market.

00:23:56.319 --> 00:24:00.881
In 1998,
someone tried to regulate them.

00:24:01.057 --> 00:24:04.959
Brooksley Born graduated first
in her class at Stanford Law School

00:24:05.128 --> 00:24:08.461
and was the first woman
to edit a major law review.

00:24:08.632 --> 00:24:11.760
After running the derivatives practice
at Arnold & Porter,

00:24:11.935 --> 00:24:13.800
Born was appointed by Clinton

00:24:13.970 --> 00:24:16.837
to chair the Commodity Futures
Trading Commission,

00:24:17.007 --> 00:24:19.601
which oversaw
the derivatives market.

00:24:19.776 --> 00:24:23.336
Brooksley Born asked
me if I would come work with her.

00:24:23.946 --> 00:24:27.677
We decided that this was a serious,

00:24:27.850 --> 00:24:31.183
potentially destabilizing market.

00:24:31.353 --> 00:24:36.791
In May of 1998, the CFTC issued
a proposal to regulate derivatives.

00:24:36.959 --> 00:24:40.156
Clinton's Treasury Department
had an immediate response.

00:24:40.329 --> 00:24:44.891
I happened to go
into Brooksley's office,

00:24:45.067 --> 00:24:49.094
and she was just putting down
the receiver on her telephone,

00:24:49.271 --> 00:24:53.002
and the blood had drained
from her face.

00:24:53.175 --> 00:24:56.542
And she looked at me and said,
"That was Larry Summers."

00:24:56.712 --> 00:24:59.909
He had 13 bankers in his office.

00:25:00.316 --> 00:25:04.082
He conveyed it
in a very bullying fashion,

00:25:04.253 --> 00:25:07.518
sort of directing her to stop.

00:25:07.957 --> 00:25:11.449
Banks were now reliant for earnings
on these activities.

00:25:11.660 --> 00:25:17.997
And that led to a Titanic battle
to prevent this from being regulated.

00:25:18.167 --> 00:25:20.533
Shortly after the phone call
from Summers,

00:25:20.703 --> 00:25:24.935
Greenspan, Rubin,
and SEC chairman Arthur Levitt

00:25:25.107 --> 00:25:27.507
issued a joint statement
condemning Born

00:25:27.676 --> 00:25:32.272
and recommending legislation
to keep derivatives unregulated.

00:25:32.715 --> 00:25:35.616
Regulation of
derivatives transactions

00:25:35.784 --> 00:25:40.653
that are privately negotiated
by professionals is unnecessary.

00:25:40.823 --> 00:25:45.419
She was overruled, unfortunately.
First by the Clinton administration

00:25:45.594 --> 00:25:47.255
and then by the Congress.

00:25:47.429 --> 00:25:51.456
In 2000, Senator Phil Gramm took
a major role in getting a bill passed

00:25:51.634 --> 00:25:54.694
that pretty much exempted
derivatives from regulation.

00:25:54.870 --> 00:25:58.566
They are unifying markets,
reducing regulatory burden.

00:25:58.740 --> 00:26:00.537
I believe we need to do it.

00:26:07.982 --> 00:26:10.951
It is our very great hope

00:26:11.119 --> 00:26:14.555
that it will be possible
to move this year

00:26:14.722 --> 00:26:17.816
on legislation that,
in a suitable way

00:26:17.992 --> 00:26:24.329
goes to create legal certainty
for OTC derivatives.

00:26:30.972 --> 00:26:32.769
I wish to associate myself

00:26:32.941 --> 00:26:36.206
with all the remarks
of Secretary Summers.

00:26:36.611 --> 00:26:39.444
In December of
2000, Congress passed

00:26:39.614 --> 00:26:42.412
the Commodity Futures
Modernization Act.

00:26:42.583 --> 00:26:45.518
Written with the help
of financial-industry lobbyists,

00:26:45.687 --> 00:26:48.747
it banned the regulation
of derivatives.

00:26:49.691 --> 00:26:52.785
After that, it was off to the races.

00:26:53.361 --> 00:26:56.489
Use of derivatives
and financial innovation

00:26:56.664 --> 00:26:59.030
exploded dramatically after 2000.

00:26:59.200 --> 00:27:01.691
So help me God.
So help me God.

00:27:01.869 --> 00:27:05.566
By the time George W. Bush
took office in 2001,

00:27:05.740 --> 00:27:08.766
the U.S. Financial sector
was vastly more profitable,

00:27:08.943 --> 00:27:12.743
concentrated and powerful
than ever before.

00:27:12.981 --> 00:27:16.781
Dominating this industry
were five investment banks,

00:27:16.951 --> 00:27:19.215
two financial conglomerates,

00:27:19.387 --> 00:27:22.049
three securities insurance
companies

00:27:22.223 --> 00:27:24.521
and three rating agencies.

00:27:25.259 --> 00:27:28.626
And linking them all together
was the securitization food chain.

00:27:28.796 --> 00:27:31.662
A new system
which connected trillions of dollars

00:27:31.832 --> 00:27:36.326
in mortgages and other loans
with investors all over the world.

00:27:36.503 --> 00:27:39.165
Thirty years ago, if you went
to get a loan for a home,

00:27:39.339 --> 00:27:43.036
the person lending you the money
expected you to pay him or her back.

00:27:43.210 --> 00:27:46.145
You got a loan from a lender
who wanted to be paid back.

00:27:46.313 --> 00:27:50.147
We've since developed securitization,
whereby people who make the loan

00:27:50.317 --> 00:27:52.751
are no longer at risk
if they fail to repay.

00:27:53.220 --> 00:27:57.122
In the old system, when a homeowner
paid their mortgage every month,

00:27:57.290 --> 00:27:59.758
the money went
to their local lender.

00:27:59.926 --> 00:28:04.920
And since mortgages took decades
to repay, lenders were careful.

00:28:05.265 --> 00:28:09.759
In the new system, lenders sold
mortgages to investment banks.

00:28:09.936 --> 00:28:13.303
The banks combined
thousands of mortgages and loans,

00:28:13.473 --> 00:28:17.534
including car loans, student loans,
and credit card debt,

00:28:17.711 --> 00:28:21.875
to create complex derivatives called
collateralized debt obligations,

00:28:22.049 --> 00:28:23.778
or CDOs.

00:28:23.950 --> 00:28:28.819
The investment banks then sold
the CDOs to investors.

00:28:28.989 --> 00:28:31.287
Now when homeowners paid
their mortgages,

00:28:31.458 --> 00:28:34.552
the money went to investors
all over the world.

00:28:34.828 --> 00:28:37.296
The investment banks
paid rating agencies

00:28:37.464 --> 00:28:39.159
to evaluate the CDOs,

00:28:39.332 --> 00:28:41.994
and many of them
were given a triple-A rating,

00:28:42.169 --> 00:28:44.797
which is the highest possible
investment grade.

00:28:44.971 --> 00:28:47.997
This made CDOs popular
with retirement funds,

00:28:48.175 --> 00:28:51.941
which could only purchase
highly rated securities.

00:28:53.613 --> 00:28:56.446
This system
was a ticking time bomb.

00:28:56.616 --> 00:29:00.279
Lenders didn't care anymore about
whether a borrower could repay,

00:29:00.454 --> 00:29:03.150
so they started making
riskier loans.

00:29:03.323 --> 00:29:05.484
The investment banks
didn't care either.

00:29:05.659 --> 00:29:09.389
The more CDOs they sold,
the higher their profits.

00:29:09.562 --> 00:29:13.123
And the rating agencies, which
were paid by the investment banks,

00:29:13.299 --> 00:29:17.759
had no liability if their ratings
of CDOs proved wrong.

00:29:18.904 --> 00:29:23.136
You weren't gonna be on the hook,
there weren't regulatory constraints.

00:29:23.309 --> 00:29:26.506
So it was a green light to just
pump out more and more loans.

00:29:26.979 --> 00:29:29.812
Between 2000 and 2003,

00:29:29.982 --> 00:29:34.749
the number of mortgage loans
made each year nearly quadrupled.

00:29:34.920 --> 00:29:37.855
Everybody in this
securitization food chain,

00:29:38.023 --> 00:29:40.514
from the very beginning
until the end,

00:29:40.693 --> 00:29:43.025
didn't care about
the quality of the mortgage.

00:29:43.195 --> 00:29:45.720
They were caring
about maximizing their volume

00:29:45.898 --> 00:29:47.661
and getting a fee out of it.

00:29:47.833 --> 00:29:49.323
In the early 2000s,

00:29:49.502 --> 00:29:54.235
there was a huge increase in the
riskiest loans, called subprime.

00:29:54.406 --> 00:29:58.968
When thousands of subprime loans
were combined to create CDOs,

00:29:59.145 --> 00:30:02.774
many of them still received
triple-A ratings.

00:30:04.984 --> 00:30:09.478
Now, it would have been
possible to create derivative products

00:30:09.655 --> 00:30:11.885
that don't have these risks,

00:30:12.057 --> 00:30:14.457
that carry the equivalent
of deductibles,

00:30:14.627 --> 00:30:19.428
where there are limits on the risks
that can be taken on, and so forth.

00:30:19.598 --> 00:30:22.032
They didn't do that, did they?
They didn't.

00:30:22.201 --> 00:30:24.066
In retrospect,
they should've done.

00:30:24.236 --> 00:30:27.148
So did these guys know
they were doing something dangerous?

00:30:27.173 --> 00:30:28.470
I think they did.

00:30:46.291 --> 00:30:51.251
All the incentives financial institutions
offered to their mortgage brokers

00:30:51.429 --> 00:30:55.024
were based on selling
the most profitable products,

00:30:55.200 --> 00:30:56.827
which were predatory loans.

00:30:57.168 --> 00:31:01.339
If they make more money,
that's where they'll put you.

00:31:07.178 --> 00:31:10.170
Suddenly, hundreds
of billions of dollars a year

00:31:10.348 --> 00:31:13.146
were flowing through
the securitization chain.

00:31:13.318 --> 00:31:15.183
Since anyone could get
a mortgage,

00:31:15.353 --> 00:31:18.379
home purchases
and housing prices skyrocketed.

00:31:18.556 --> 00:31:23.016
The result was the biggest
financial bubble in history.

00:31:23.194 --> 00:31:25.628
Real estate is real.
They can see their asset.

00:31:25.797 --> 00:31:28.925
They can live in their asset.
They can rent out their asset.

00:31:29.100 --> 00:31:32.331
You had a huge boom in housing
that made no sense at all.

00:31:32.704 --> 00:31:39.041
The financing appetites
of the financial sector

00:31:39.377 --> 00:31:42.312
drove what everybody else did.

00:31:42.480 --> 00:31:46.348
Last time we had a housing bubble
was in the late '80s.

00:31:47.485 --> 00:31:51.615
In that case, the increase in home
price had been relatively minor.

00:31:51.990 --> 00:31:56.723
That housing bubble led
to a relatively severe recession.

00:31:56.894 --> 00:32:00.955
From 1996 until 2006,

00:32:01.132 --> 00:32:03.965
real home prices
effectively doubled.

00:32:08.906 --> 00:32:13.366
At $500 a ticket, they've come to
hear how to buy their very own piece

00:32:13.544 --> 00:32:15.738
of the American dream.

00:32:15.912 --> 00:32:20.076
Goldman Sachs, Bear Stearns,
Lehman Brothers,

00:32:20.250 --> 00:32:23.048
Merrill Lynch were all in on this.

00:32:23.220 --> 00:32:29.090
The subprime lending alone increased
from 30 billion a year in funding

00:32:29.259 --> 00:32:33.195
to over 600 billion a year
in 10 years.

00:32:33.363 --> 00:32:34.887
They knew what was happening.

00:32:35.265 --> 00:32:38.632
Countrywide Financial,
the largest subprime lender,

00:32:38.802 --> 00:32:42.829
issued $97 billion worth of loans.

00:32:43.006 --> 00:32:47.568
It made over $ 11 billion in profits
as a result.

00:32:48.312 --> 00:32:51.645
On Wall Street,
annual cash bonuses spiked.

00:32:51.815 --> 00:32:53.305
Traders and CEOs

00:32:53.483 --> 00:32:56.179
became enormously wealthy
during the bubble.

00:32:56.353 --> 00:33:00.312
Lehman Brothers was a top
underwriter of subprime lending,

00:33:00.490 --> 00:33:02.720
and their CEO, Richard Fuld,

00:33:03.060 --> 00:33:06.791
took home $485 million.

00:33:06.963 --> 00:33:10.228
On Wall Street,
this housing and credit bubble

00:33:10.400 --> 00:33:13.927
was leading to hundreds
of billions of dollars of profits.

00:33:14.104 --> 00:33:17.540
You know, by 2006
about 40 percent of all profits

00:33:17.708 --> 00:33:21.804
of S&P 500 firms was coming
from financial institutions.

00:33:21.978 --> 00:33:24.139
It wasn't real profits or income.

00:33:24.314 --> 00:33:29.183
It was money created by the system
and booked as income.

00:33:29.353 --> 00:33:32.948
Two, three years down the road
there's a default, it's all wiped out.

00:33:33.123 --> 00:33:37.082
I think it was, in fact, in retrospect,
a great big national...

00:33:37.260 --> 00:33:39.922
And not just national,
global Ponzi scheme.

00:33:40.664 --> 00:33:43.531
Through the Home Ownership
and Equity Protection Act,

00:33:43.700 --> 00:33:46.362
the Federal Reserve board
had broad authority

00:33:46.536 --> 00:33:48.504
to regulate the mortgage industry.

00:33:48.671 --> 00:33:52.300
But Fed chairman Alan Greenspan
refused to use it.

00:33:52.475 --> 00:33:55.000
Alan Greenspan said,
"No, that's regulation.

00:33:55.177 --> 00:33:56.508
I don't believe in it."

00:33:56.679 --> 00:34:00.513
For 20 years, Robert Gnaizda
was the head of Greenlining,

00:34:00.683 --> 00:34:03.117
a powerful consumer
advocacy group.

00:34:03.285 --> 00:34:06.049
He met with Greenspan
on a regular basis.

00:34:06.222 --> 00:34:08.690
We gave him an example
of Countrywide

00:34:08.858 --> 00:34:13.921
and 150 different complex
adjustable-rate mortgages.

00:34:14.096 --> 00:34:16.929
He said,
"If you had a doctorate in math"

00:34:17.099 --> 00:34:19.795
you wouldn't be able
to understand them enough

00:34:19.969 --> 00:34:23.302
"to know which was good for you
and which wasn't."

00:34:23.706 --> 00:34:26.539
So we thought
he was gonna take action.

00:34:26.709 --> 00:34:28.939
But as the conversation continued,

00:34:29.111 --> 00:34:31.944
it was clear he was stuck
with his ideology.

00:34:32.114 --> 00:34:35.208
We met again
with Greenspan in '05.

00:34:35.384 --> 00:34:39.286
Often we met with him twice a year,
and never less than once a year.

00:34:39.455 --> 00:34:41.616
And he wouldn't change his mind.

00:34:46.695 --> 00:34:50.392
In this world
of global communications,

00:34:50.566 --> 00:34:52.591
the efficient movement
of capital

00:34:52.768 --> 00:34:56.465
is helping to create the greatest
prosperity in human history.

00:35:02.845 --> 00:35:06.713
A hundred and forty-six people were cut
from the SEC Enforcement Division?

00:35:06.882 --> 00:35:08.816
Is that what you also testified to?

00:35:08.984 --> 00:35:10.281
Yes.

00:35:10.453 --> 00:35:15.789
Yeah, I think there has been
a systematic gutting,

00:35:15.958 --> 00:35:18.552
or whatever you wanna call it,
of the agency

00:35:18.727 --> 00:35:21.821
and it's capability
through cutting back of staff.

00:35:21.997 --> 00:35:24.726
The SEC Office
of Risk Management

00:35:24.899 --> 00:35:28.858
was reduced to a staff,
did you say, of one?

00:35:29.037 --> 00:35:33.167
Yeah. When that gentleman would
go home, he could turn the lights out.

00:35:35.143 --> 00:35:38.340
During the bubble, investment
banks were borrowing heavily

00:35:38.513 --> 00:35:42.313
to buy more loans
and create more CDOs.

00:35:43.117 --> 00:35:46.245
The ratio between borrowed money
and the banks' own money

00:35:46.421 --> 00:35:48.286
was called leverage.

00:35:48.456 --> 00:35:52.620
The more the banks borrowed,
the higher their leverage.

00:35:53.862 --> 00:35:58.356
In 2004, Henry Paulson,
the CEO of Goldman Sachs,

00:35:58.533 --> 00:36:02.799
helped lobby the SEC
to relax limits on leverage,

00:36:03.238 --> 00:36:07.072
allowing the banks
to sharply increase their borrowing.

00:36:07.242 --> 00:36:09.767
The SEC somehow decided

00:36:09.944 --> 00:36:13.311
to let investment banks
gamble a lot more.

00:36:13.481 --> 00:36:16.609
That was nuts. I don't know why
they did that, but they did.

00:36:23.324 --> 00:36:26.724
We've said these
are the big guys, and clearly that's true.

00:36:26.728 --> 00:36:32.394
But that means if anything goes wrong,
it's going to be an awfully big mess.

00:36:33.535 --> 00:36:36.305
You are
dealing with the most

00:36:36.318 --> 00:36:39.098
highly sophisticated
financial institutions.

00:36:39.274 --> 00:36:43.074
These are the firms that do
most of the derivative activity.

00:36:43.244 --> 00:36:46.680
We talked to some
as to what their comfort level was.

00:36:46.848 --> 00:36:51.842
The firms actually thought
that the number was appropriate.

00:36:52.020 --> 00:36:56.320
The commissioners vote to
adopt the new rules as recommended.

00:36:56.491 --> 00:36:57.684
- Yes.
- Yes.

00:36:58.091 --> 00:37:01.862
We do indeed. It's unanimous.
And we are adjourned.

00:37:04.698 --> 00:37:07.929
The degree of leverage
in the financial system

00:37:08.101 --> 00:37:10.626
became absolutely frightening.

00:37:10.804 --> 00:37:15.264
Investment banks leveraging
up to the level of 33-to-1.

00:37:15.442 --> 00:37:18.138
Which means that
a tiny 3-percent decrease

00:37:18.312 --> 00:37:21.645
in the value of their asset base
would leave them insolvent.

00:37:23.951 --> 00:37:27.216
There was another ticking
time bomb in the financial system.

00:37:27.387 --> 00:37:30.652
AIG, the world's largest
insurance company,

00:37:30.824 --> 00:37:33.315
was selling huge quantities
of derivatives

00:37:33.493 --> 00:37:35.324
called credit default swaps.

00:37:37.264 --> 00:37:39.459
For investors who owned CDOs,

00:37:39.633 --> 00:37:43.160
credit default swaps worked
like an insurance policy.

00:37:43.337 --> 00:37:45.965
An investor who purchased
a credit default swap

00:37:46.139 --> 00:37:49.131
paid AIG a quarterly premium.

00:37:49.309 --> 00:37:51.072
If the CDO went bad,

00:37:51.244 --> 00:37:55.374
AIG promised to pay the investor
for their losses.

00:37:56.416 --> 00:37:58.350
But unlike regular insurance,

00:37:58.518 --> 00:38:02.113
speculators could also buy
credit default swaps from AIG

00:38:02.289 --> 00:38:05.884
in order to bet against CDOs
they didn't own.

00:38:06.360 --> 00:38:09.454
In insurance, you can only
insure something you own.

00:38:09.630 --> 00:38:12.690
Let's say you and I own property.
I own a house.

00:38:12.866 --> 00:38:15.232
I can only insure that house once.

00:38:15.402 --> 00:38:18.337
The derivatives universe
essentially enables anybody

00:38:18.505 --> 00:38:20.473
to actually insure that house.

00:38:20.641 --> 00:38:22.973
You could insure that,
somebody else could.

00:38:23.143 --> 00:38:25.202
So 50 people might insure
my house.

00:38:25.379 --> 00:38:28.109
So what happens is,
if my house burns down,

00:38:28.281 --> 00:38:32.114
the number of losses in the system
becomes proportionately larger.

00:38:32.685 --> 00:38:35.449
Since credit default swaps
were unregulated,

00:38:35.621 --> 00:38:39.955
AIG didn't have to put aside
any money to cover potential losses.

00:38:40.126 --> 00:38:44.187
Instead, AIG paid it's employees
huge cash bonuses

00:38:44.363 --> 00:38:46.729
as soon as contracts
were signed.

00:38:46.899 --> 00:38:49.367
But if the CDOs later went bad,

00:38:49.535 --> 00:38:52.163
AIG would be on the hook.

00:38:52.338 --> 00:38:56.502
People were essentially being
rewarded for taking massive risks.

00:38:56.676 --> 00:39:00.510
In good times, they generate
short-term revenues and profits

00:39:00.680 --> 00:39:02.113
and, therefore, bonuses.

00:39:02.281 --> 00:39:05.648
But that's gonna lead to the firm
to be bankrupt over time.

00:39:05.818 --> 00:39:08.309
That's a distorted system
of compensation.

00:39:09.055 --> 00:39:12.081
AIG's Financial Products division
in London

00:39:12.258 --> 00:39:16.627
issued $500 billion worth of credit
default swaps during the bubble,

00:39:17.329 --> 00:39:21.789
many of them for CDOs
backed by subprime mortgages.

00:39:21.967 --> 00:39:24.401
The 400 employees at AIGFP

00:39:24.570 --> 00:39:28.597
made $3.5 billion
between 2000 and 2007.

00:39:29.375 --> 00:39:32.105
Joseph Cassano,
the head of AIGFP,

00:39:32.278 --> 00:39:35.475
personally made $315 million.

00:39:35.648 --> 00:39:37.209
It's hard for us,

00:39:37.216 --> 00:39:41.880
and without being flippant,
to even see a scenario

00:39:42.054 --> 00:39:44.352
within any kind of realm of reason

00:39:44.523 --> 00:39:49.426
that would see us losing one dollar
in any of those transactions.

00:39:49.762 --> 00:39:53.926
In 2007, AIG's
auditors raised warnings.

00:39:54.100 --> 00:39:56.193
One of them, Joseph St. Denis,

00:39:56.368 --> 00:39:59.997
resigned in protest after
Cassano repeatedly blocked him

00:40:00.172 --> 00:40:03.107
from investigating
AIGFP's accounting.

00:40:03.275 --> 00:40:05.231
Let me tell you one
person that didn't get a

00:40:05.244 --> 00:40:07.210
bonus while everybody
else was getting bonuses.

00:40:07.378 --> 00:40:11.371
That was St. Denis. Mr. St. Denis
tried to alert the two of you

00:40:11.549 --> 00:40:14.211
to the fact you were running
into big problems.

00:40:14.753 --> 00:40:18.018
He quit in frustration,
and he didn't get a bonus.

00:40:18.389 --> 00:40:21.153
In 2005, Raghuram Rajan,

00:40:21.326 --> 00:40:24.818
then the chief economist
of the International Monetary Fund,

00:40:24.996 --> 00:40:27.624
delivered a paper
at the Jackson Hole symposium,

00:40:27.799 --> 00:40:30.461
the most elite banking conference
in the world.

00:40:30.635 --> 00:40:32.125
Who was in the audience?

00:40:32.303 --> 00:40:37.138
It was the central bankers
of the world,

00:40:37.308 --> 00:40:40.675
ranging from
Mr. Greenspan himself,

00:40:40.845 --> 00:40:42.039
Ben Bernanke

00:40:42.213 --> 00:40:43.339
Larry Summers.

00:40:43.615 --> 00:40:45.480
Tim Geithner was there.

00:40:45.650 --> 00:40:47.618
The title of the paper
was essentially:

00:40:47.919 --> 00:40:51.514
"Is Financial Development
Making the World Riskier?"

00:40:51.689 --> 00:40:55.056
And the conclusion was, it is.

00:40:57.095 --> 00:40:59.825
Rajan's paper focused
on incentive structures

00:40:59.998 --> 00:41:04.230
that generated huge cash bonuses
based on short-term profits,

00:41:04.402 --> 00:41:07.667
but which imposed no penalties
for later losses.

00:41:07.839 --> 00:41:10.774
Rajan argued that these incentives
encouraged bankers

00:41:10.942 --> 00:41:14.537
to take risks that might eventually
destroy their own firms

00:41:14.712 --> 00:41:17.943
or even the entire
financial system.

00:41:20.518 --> 00:41:24.750
It's very easy to generate
performance by taking on more risk.

00:41:24.923 --> 00:41:29.451
So what you need to do is compensate
for risk-adjusted performance.

00:41:29.627 --> 00:41:31.891
And that's where
all the bodies are buried.

00:41:32.063 --> 00:41:35.191
Rajan, you know,
hit the nail on the head.

00:41:35.366 --> 00:41:37.357
What he particularly said was:

00:41:37.535 --> 00:41:39.935
"You guys have claimed
you've found a way"

00:41:40.103 --> 00:41:42.571
to make more profits
with less risk.

00:41:42.739 --> 00:41:45.936
I say you've found a way
to make more profits with more risk.

00:41:46.109 --> 00:41:47.474
"There's a big difference."

00:41:47.644 --> 00:41:50.238
Summers was vocal.

00:41:50.581 --> 00:41:52.776
He basically thought

00:41:52.950 --> 00:41:58.217
that I was criticizing the change
in the financial world

00:41:58.388 --> 00:42:01.687
and was worried about,
you know, regulation,

00:42:01.859 --> 00:42:03.884
which would reverse
this change.

00:42:04.061 --> 00:42:06.461
Essentially he accused me
of being a Luddite.

00:42:07.531 --> 00:42:11.092
He wanted to make sure
that we didn't bring in

00:42:11.268 --> 00:42:13.065
a whole new set of regulations

00:42:13.237 --> 00:42:15.728
to constrain the financial sector.

00:42:19.843 --> 00:42:23.973
You're gonna make an extra $2 million
a year, or $ 10 million a year,

00:42:24.147 --> 00:42:26.741
for putting your financial institution
at risk.

00:42:26.917 --> 00:42:29.044
Someone else pays the bill,
you don't.

00:42:29.219 --> 00:42:30.652
Would you make that bet?

00:42:30.821 --> 00:42:34.132
Most people on Wall Street said,
"Sure, I'd make that bet."

00:43:17.400 --> 00:43:18.890
It never was enough.

00:43:19.068 --> 00:43:22.333
They don't wanna own one home,
they wanna own five homes.

00:43:22.505 --> 00:43:25.303
And they wanna have
an expensive penthouse

00:43:25.474 --> 00:43:27.601
on Park Avenue.

00:43:28.177 --> 00:43:31.044
And they wanna have
their own private jet.

00:43:31.213 --> 00:43:34.080
You think this
is an industry where high...?

00:43:34.250 --> 00:43:36.480
Very high compensation levels
are justified?

00:43:36.652 --> 00:43:39.348
I think I would take caution,
or take heed,

00:43:39.522 --> 00:43:42.719
or take exception to your word
"very high." It's relative.

00:43:42.892 --> 00:43:45.258
You have a 14-million-dollar home
in Florida.

00:43:45.428 --> 00:43:48.329
You have a summer home
in Sun Valley, Idaho.

00:43:48.497 --> 00:43:51.933
An art collection filled
with million-dollar paintings.

00:43:52.101 --> 00:43:54.729
Richard Fuld never
appeared on the trading floor.

00:43:54.904 --> 00:43:57.202
There were art advisors there
all the time.

00:43:57.373 --> 00:43:58.965
He had a private elevator.

00:43:59.141 --> 00:44:01.701
He wanted to be disconnected.

00:44:01.877 --> 00:44:04.710
His elevator,
they hired technicians to program it

00:44:04.880 --> 00:44:07.644
so that his driver would call in
in the morning

00:44:07.817 --> 00:44:09.944
and a security guard
would hold it.

00:44:10.119 --> 00:44:14.579
There's only a three-second window
where he actually has to see people.

00:44:14.757 --> 00:44:17.783
And he hops into this elevator
and it goes straight to 31.

00:44:17.960 --> 00:44:20.258
Lehman owned corporate jets.

00:44:20.429 --> 00:44:22.454
You know about this?
Yes.

00:44:22.631 --> 00:44:23.941
How many were there?

00:44:23.966 --> 00:44:26.628
Well, there were
six, including the 767 s.

00:44:26.902 --> 00:44:28.563
They also had a helicopter.

00:44:28.738 --> 00:44:31.229
Isn't that kind
of a lot of planes to have?

00:44:34.110 --> 00:44:36.078
We're dealing with
type-A personalities.

00:44:36.278 --> 00:44:38.508
And type-A personalities know
everything in the world.

00:44:38.681 --> 00:44:41.013
Banking became a pissing contest.

00:44:41.183 --> 00:44:43.447
"Mine's bigger than yours."
That kind of stuff.

00:44:43.619 --> 00:44:45.780
It was all men that ran it,
incidentally.

00:44:45.955 --> 00:44:49.947
Fifty-billion-dollar deals weren't large
enough, so we'd do 100-billion deals.

00:44:50.125 --> 00:44:52.958
These people are risk-takers.
They're impulsive.

00:44:58.433 --> 00:45:01.561
It's part of their behavior.
It's part of their personality.

00:45:01.736 --> 00:45:04.796
And that manifests
outside of work as well.

00:45:04.973 --> 00:45:07.498
It was quite typical
for the guys to go out

00:45:07.675 --> 00:45:09.666
to go to strip bars, to use drugs.

00:45:09.844 --> 00:45:12.642
I see a lot of cocaine use,
use of prostitution.

00:45:19.754 --> 00:45:22.086
Recently, neuroscientists
have done experiments

00:45:22.257 --> 00:45:27.217
where they've taken individuals
and put them into an MRI machine,

00:45:27.395 --> 00:45:31.661
and they have them play a game
where the prize is money.

00:45:31.833 --> 00:45:35.428
And they noticed that when
the subjects earn money,

00:45:35.603 --> 00:45:37.901
the part of the brain
that gets stimulated

00:45:38.073 --> 00:45:40.439
is the same part
that cocaine stimulates.

00:45:40.608 --> 00:45:44.271
A lot of people feel that they
need to participate in that behavior

00:45:44.446 --> 00:45:46.880
to make it, to get promoted,
get recognized.

00:45:47.048 --> 00:45:50.108
According to a Bloomberg
article, business entertainment

00:45:50.285 --> 00:45:53.618
represents 5 percent of revenue
for derivatives brokers

00:45:53.788 --> 00:45:58.122
and often includes strip clubs,
prostitution and drugs.

00:45:58.293 --> 00:46:01.956
A New York broker filed a lawsuit
in 2007 against his firm

00:46:02.530 --> 00:46:07.331
alleging he was required to retain
prostitutes to entertain traders.

00:46:07.502 --> 00:46:09.367
There's just a blatant disregard

00:46:09.537 --> 00:46:14.201
for the impact that their actions
might have on society, on family.

00:46:14.375 --> 00:46:17.606
They have no problem
using a prostitute

00:46:17.779 --> 00:46:20.009
and going home to their wife.

00:46:29.022 --> 00:46:30.922
How many customers?

00:46:31.091 --> 00:46:33.389
About 10,000
at that point in time.

00:46:37.531 --> 00:46:39.692
What fraction
were from Wall Street?

00:46:39.867 --> 00:46:44.327
Of the higher-end clients,
probably 40 to 50 percent.

00:46:44.505 --> 00:46:46.945
Were all the major
Wall Street firms represented?

00:46:47.107 --> 00:46:48.131
Goldman Sachs?

00:46:48.308 --> 00:46:51.243
Lehman Brothers.
They're all in there.

00:46:51.411 --> 00:46:55.211
Morgan Stanley was
a little less of that.

00:46:55.382 --> 00:46:58.408
I think Goldman was
pretty, pretty big with that.

00:46:58.719 --> 00:47:00.152
Clients would call and say:

00:47:00.320 --> 00:47:03.084
"Can you get me a Lamborghini
for the girl?"

00:47:03.257 --> 00:47:05.555
These guys were spending
corporate money.

00:47:05.726 --> 00:47:10.095
I had many black cards from,
you know, the various financial firms.

00:47:10.597 --> 00:47:13.998
What's happening is
services are being charged

00:47:14.168 --> 00:47:15.931
to computer repair.

00:47:16.270 --> 00:47:20.434
Trading research, you know,
consulting for market compliance.

00:47:20.607 --> 00:47:23.872
Just gave them letterhead and said,
"Make your own invoice."

00:47:24.044 --> 00:47:27.207
This behavior extends to
the senior management of the firm?

00:47:27.381 --> 00:47:29.008
Absolutely does. Yeah.

00:47:29.183 --> 00:47:31.276
I know for a fact that it does.

00:47:31.451 --> 00:47:34.215
It extends to the very top.

00:47:37.691 --> 00:47:41.855
A friend of mine in a company that
has a big financial presence said:

00:47:42.029 --> 00:47:45.988
"It's about time you learned
about subprime mortgages."

00:47:46.166 --> 00:47:49.932
So he set up a session
with his trading desk and me.

00:47:50.337 --> 00:47:53.966
And the techie who did all this
gets very excited,

00:47:54.141 --> 00:47:57.632
runs to his computer,
pulls up in about three seconds

00:47:57.810 --> 00:48:00.836
this Goldman Sachs
issue of securities.

00:48:01.013 --> 00:48:02.446
It was a complete disaster.

00:48:02.815 --> 00:48:08.185
Borrowers had borrowed, on average,
99.3 percent of the price of the house.

00:48:08.354 --> 00:48:10.254
They have no money
in the house.

00:48:10.423 --> 00:48:13.654
If anything goes wrong,
they walk away from the mortgage.

00:48:13.826 --> 00:48:16.590
This is not a loan
you'd really make, right?

00:48:16.762 --> 00:48:18.195
You've gotta be crazy.

00:48:18.364 --> 00:48:21.492
But somehow,
you took 8000 of these loans,

00:48:21.667 --> 00:48:23.862
and by the time
the guys were done

00:48:24.036 --> 00:48:26.834
at Goldman Sachs
and the rating agencies,

00:48:27.006 --> 00:48:29.440
two-thirds of the loans
were rated triple-A.

00:48:29.609 --> 00:48:32.476
They were rated as safe
as government securities.

00:48:32.645 --> 00:48:34.169
It's utterly mad.

00:48:35.047 --> 00:48:38.608
Goldman Sachs sold at least $3.
1 billion worth

00:48:38.784 --> 00:48:42.550
of these toxic CDOs
in the first half of 2006.

00:48:42.955 --> 00:48:46.891
The CEO of Goldman Sachs
at this time was Henry Paulson,

00:48:47.059 --> 00:48:49.550
the highest paid CEO
on Wall Street.

00:48:52.231 --> 00:48:54.461
Good morning.
I'm pleased to announce

00:48:54.634 --> 00:48:58.502
that I will nominate Henry Paulson
to be the Secretary of the Treasury.

00:48:58.671 --> 00:49:00.400
He has a lifetime of experience.

00:49:00.573 --> 00:49:02.734
He has knowledge
of financial markets.

00:49:02.908 --> 00:49:05.809
He's earned a reputation
for candor and integrity.

00:49:06.312 --> 00:49:08.177
You might think it would be hard

00:49:08.347 --> 00:49:10.907
to adjust to a meager
government salary.

00:49:11.083 --> 00:49:13.313
But taking the job
as Treasury secretary

00:49:13.486 --> 00:49:16.478
was the best
financial decision of his life.

00:49:16.656 --> 00:49:20.990
Paulson had to sell his $485 million
of Goldman stock

00:49:21.160 --> 00:49:23.321
when he went to work
for the government.

00:49:23.496 --> 00:49:26.522
But because of a law passed
by the first President Bush,

00:49:26.699 --> 00:49:28.860
he didn't have to pay
any taxes on it.

00:49:29.035 --> 00:49:32.060
It saved him $50 million.

00:49:38.843 --> 00:49:42.472
The article came
out in October of 2007.

00:49:42.814 --> 00:49:46.341
Already, a third of
the mortgages defaulted.

00:49:46.518 --> 00:49:48.952
Now most of them are going.

00:49:51.189 --> 00:49:54.420
One group that had purchased
these now worthless securities

00:49:54.592 --> 00:49:58.084
was the Public Employees'
Retirement System of Mississippi,

00:49:58.263 --> 00:50:01.790
which provides monthly benefits
to over 80,000 retirees.

00:50:02.734 --> 00:50:07.535
They lost millions of dollars
and are now suing Goldman Sachs.

00:50:21.519 --> 00:50:25.853
By late 2006, Goldman had
taken things a step further.

00:50:26.024 --> 00:50:28.515
It didn't just sell toxic CDOs,

00:50:28.693 --> 00:50:32.857
it started betting against them at the
same time it was telling customers

00:50:33.031 --> 00:50:35.761
that they were
high-quality investments.

00:50:36.668 --> 00:50:39.933
By purchasing credit default swaps
from AIG,

00:50:40.105 --> 00:50:43.074
Goldman could bet against
CDOs it didn't own

00:50:43.241 --> 00:50:46.472
and get paid
when the CDOs failed.

00:50:47.445 --> 00:50:51.643
I asked if anybody
called the customers and said:

00:50:51.816 --> 00:50:54.614
"We don't really like this kind
of mortgage anymore,

00:50:54.786 --> 00:50:56.947
and we thought
you ought to know."

00:50:57.122 --> 00:51:01.650
They didn't say anything, but you could
feel the laughter over the phone.

00:51:02.927 --> 00:51:05.793
Goldman Sachs bought
at least $22 billion

00:51:05.963 --> 00:51:08.557
of credit default swaps from AIG.

00:51:08.732 --> 00:51:13.635
It was so much that Goldman realized
that AIG itself might go bankrupt.

00:51:13.804 --> 00:51:16.773
So they spent $ 150 million
insuring themselves

00:51:16.940 --> 00:51:19.738
against AIG's potential collapse.

00:51:19.910 --> 00:51:23.505
Then in 2007,
Goldman went even further.

00:51:23.680 --> 00:51:26.376
They started selling CDOs
specifically designed

00:51:26.550 --> 00:51:29.075
so that the more money
their customers lost,

00:51:29.253 --> 00:51:31.655
the more money
Goldman Sachs made.

00:51:38.061 --> 00:51:43.089
Six hundred million dollars of
Timberwolf securities is what you sold.

00:51:43.267 --> 00:51:45.895
Before you sold them,

00:51:46.069 --> 00:51:49.402
this is what your sales team
were telling to each other:

00:51:50.207 --> 00:51:53.904
"Boy, that Timberwolf
was one shitty deal."

00:51:54.077 --> 00:51:59.174
This was an e-mail to me in late
June, after the transaction.

00:51:59.349 --> 00:52:02.648
No, no. You sold Timberwolf
after as well.

00:52:02.820 --> 00:52:05.050
We did trades after that.
Yeah. Okay.

00:52:05.322 --> 00:52:08.553
The next e-mail...
Take a look. July 1, '07.

00:52:08.725 --> 00:52:11.888
Tells the sales force,
"The top priority is Timberwolf."

00:52:12.162 --> 00:52:15.495
Your top priority to sell
is that shitty deal.

00:52:15.666 --> 00:52:17.930
If you have an adverse interest
to your client,

00:52:18.101 --> 00:52:19.932
do you have the duty
to disclose it?

00:52:20.103 --> 00:52:22.435
To tell that client
of your adverse interest?

00:52:22.606 --> 00:52:25.097
That's my question.
I'm trying to understand...

00:52:25.275 --> 00:52:27.766
I think you understand.
You don't wanna answer.

00:52:27.945 --> 00:52:30.243
Do you believe you have a duty

00:52:30.414 --> 00:52:34.180
to act in your clients'
best interest?

00:52:35.552 --> 00:52:40.420
I repeat, we have a duty
to serve our clients

00:52:40.590 --> 00:52:45.050
by showing prices on transactions
that they ask us to show prices for.

00:52:45.228 --> 00:52:47.992
What do you think
about selling securities

00:52:48.164 --> 00:52:51.292
which your own people think
are crap?

00:52:51.467 --> 00:52:53.230
Does that bother you?

00:52:53.402 --> 00:52:55.666
I think they would.

00:52:55.872 --> 00:52:58.636
- As a hypothetical?
- No, this is real.

00:52:58.808 --> 00:53:01.208
- Well, then I don't know...
- We heard it today.

00:53:01.377 --> 00:53:04.437
We heard it today. "This is a
shitty deal." "This is crap."

00:53:04.614 --> 00:53:06.639
I heard nothing today

00:53:06.816 --> 00:53:10.582
that makes me think
anything went wrong.

00:53:10.753 --> 00:53:14.814
Is there not a conflict when you
sell something to somebody

00:53:14.991 --> 00:53:20.395
and then are determined
to bet against that same security,

00:53:20.563 --> 00:53:24.158
and you don't disclose that
to the person you're selling it to?

00:53:24.333 --> 00:53:25.357
You see a problem?

00:53:25.535 --> 00:53:28.629
In the context of market making,
that is not a conflict.

00:53:28.804 --> 00:53:31.898
When you heard your
employees in e-mails said,

00:53:32.074 --> 00:53:35.635
"What a shitty deal,"
"What a piece of crap,"

00:53:35.811 --> 00:53:37.176
did you feel anything?

00:53:37.346 --> 00:53:39.507
That's very unfortunate
to have on e-mail.

00:53:39.682 --> 00:53:40.706
Are you embar...?

00:53:42.385 --> 00:53:44.182
And very unfortunate...
I don't... I don't...

00:53:44.353 --> 00:53:47.083
"On e-mail"? How
about feeling that way?

00:53:47.256 --> 00:53:50.657
It's very unfortunate for anyone
to have said that in any form.

00:53:50.826 --> 00:53:55.422
Are your competitors engaged
in similar activities?

00:53:55.598 --> 00:53:59.830
Yes, and to a greater extent
than us in most cases.

00:54:00.202 --> 00:54:03.660
Hedge fund manager
John Paulson made $ 12 billion

00:54:03.839 --> 00:54:05.864
betting against
the mortgage market.

00:54:06.042 --> 00:54:09.239
When Paulson ran out of
mortgage securities to bet against,

00:54:09.412 --> 00:54:13.872
he worked with Goldman Sachs
and Deutsche Bank to create more.

00:54:14.282 --> 00:54:15.874
Morgan Stanley was also selling

00:54:16.051 --> 00:54:19.782
mortgage securities it was betting
against, and it's now being sued by

00:54:19.955 --> 00:54:23.447
the Government Employees' Retirement
Fund of the Virgin Islands

00:54:23.625 --> 00:54:24.853
for fraud.

00:54:25.026 --> 00:54:27.460
The lawsuit alleges
that Morgan Stanley knew

00:54:27.629 --> 00:54:29.256
that the CDOs were junk.

00:54:29.431 --> 00:54:31.365
Although they were rated triple-A,

00:54:31.533 --> 00:54:34.161
Morgan Stanley
was betting they would fail.

00:54:34.336 --> 00:54:38.534
A year later, Morgan Stanley had made
hundreds of millions of dollars,

00:54:38.707 --> 00:54:42.643
while the investors
had lost almost all of their money.

00:54:58.660 --> 00:55:01.424
You would have thought
pension funds would have said:

00:55:01.596 --> 00:55:05.123
"Those are subprime.
Why am I buying them?"

00:55:05.834 --> 00:55:08.826
They had these guys at Moody's
and Standard & Poor's

00:55:09.004 --> 00:55:10.733
who said, "That's a triple-A."

00:55:10.905 --> 00:55:16.935
No securities got issued without the
seal of approval of the rating agencies.

00:55:17.112 --> 00:55:21.845
The three rating agencies,
Moody's, S&P and Fitch,

00:55:22.017 --> 00:55:25.680
made billions of dollars giving
high ratings to risky securities.

00:55:26.488 --> 00:55:30.322
Moody's, the largest rating agency,
quadrupled it's profits

00:55:30.492 --> 00:55:33.757
between 2000 and 2007.

00:55:34.162 --> 00:55:37.757
Moody's and S&P get compensated
based on putting out ratings reports.

00:55:37.932 --> 00:55:41.561
And the more structured securities
they gave a triple-A rating to,

00:55:41.736 --> 00:55:43.533
the higher their earnings were.

00:55:43.705 --> 00:55:45.502
Imagine going to
The Times saying:

00:55:45.674 --> 00:55:48.108
"Write a positive story,
I'll pay you $500,000.

00:55:48.276 --> 00:55:50.243
If you don't,
I'll give you nothing."

00:55:50.411 --> 00:55:52.242
Rating agencies could have
stopped the party and said:

00:55:52.413 --> 00:55:55.849
"Sorry. We're gonna tighten
our standards,"

00:55:56.016 --> 00:56:01.147
and immediately cut off
the funding to risky borrowers.

00:56:01.321 --> 00:56:03.721
Triple-A-rated instruments

00:56:04.458 --> 00:56:10.795
mushroomed from just a handful
to thousands and thousands.

00:56:11.331 --> 00:56:15.768
Hundreds of billions of dollars
were being rated, you know, and...

00:56:15.936 --> 00:56:17.801
Per year?
Per year. Oh, yeah.

00:56:17.971 --> 00:56:21.031
I've now testified before
both houses of Congress

00:56:21.208 --> 00:56:24.473
on the credit rating agency issue,

00:56:24.645 --> 00:56:29.105
and both times they trot out very
prominent First Amendment lawyers

00:56:29.283 --> 00:56:33.447
and argue that, "When we say
something is rated triple-A",

00:56:33.620 --> 00:56:37.249
that is merely our 'opinion.'
You shouldn't rely on it."

00:56:37.424 --> 00:56:39.585
S&P's ratings express our opinion.

00:56:39.760 --> 00:56:42.991
Our ratings are our opinions.
They're opinions.

00:56:43.230 --> 00:56:45.425
Opinions.
And they are just opinions.

00:56:45.599 --> 00:56:50.036
I think we are emphasizing the fact
that our ratings are opinions.

00:56:56.343 --> 00:56:59.141
They do not speak
to the market value of a security,

00:56:59.313 --> 00:57:03.951
the volatility of it's price,
or it's suitability as an investment.

00:57:22.436 --> 00:57:24.960
We have many
economists saying:

00:57:25.138 --> 00:57:27.402
"Oh. This is a bubble,
it's going to burst.

00:57:27.573 --> 00:57:29.973
This is going to be
an issue for the economy."

00:57:30.143 --> 00:57:33.010
Some say it could even 'cause
a recession at some point.

00:57:33.179 --> 00:57:37.115
What is the worst-case scenario
if, in fact, we were to see prices

00:57:37.283 --> 00:57:40.047
come down substantially
across the country?

00:57:40.219 --> 00:57:43.347
I don't buy your premise.
It's an unlikely possibility.

00:57:43.523 --> 00:57:47.892
We've never had a decline in house
prices on a nationwide basis.

00:57:48.060 --> 00:57:50.505
Ben Bernanke became
chairman of the Federal Reserve

00:57:50.530 --> 00:57:52.555
in February 2006,

00:57:52.732 --> 00:57:55.633
the top year for subprime lending.

00:57:56.068 --> 00:57:58.229
But despite numerous warnings,

00:57:58.404 --> 00:58:01.532
Bernanke and the
Federal Reserve Board did nothing.

00:58:06.112 --> 00:58:09.479
Robert Gnaizda met with Bernanke
and the Federal Reserve Board

00:58:09.649 --> 00:58:12.777
three times after
Bernanke became chairman.

00:58:12.952 --> 00:58:17.912
Only at the last meeting did he
suggest that there was a problem

00:58:18.090 --> 00:58:20.388
and that the government
ought to look into it.

00:58:20.560 --> 00:58:22.357
When? When was that? What year?

00:58:22.528 --> 00:58:25.656
It's 2009, March 11 th, in D.C.

00:58:25.832 --> 00:58:27.629
This year?
This year we met, yes.

00:58:27.800 --> 00:58:30.325
And so for the two previous years
you met him.

00:58:30.503 --> 00:58:33.131
Even in 2008?
Yes.

00:58:33.306 --> 00:58:37.140
One of the six Federal Reserve Board
governors serving under Bernanke

00:58:37.310 --> 00:58:38.743
was Frederic Mishkin,

00:58:38.911 --> 00:58:42.347
who was appointed
by President Bush in 2006.

00:58:42.515 --> 00:58:46.611
Did you participate
in the meetings Robert Gnaizda

00:58:46.786 --> 00:58:49.584
and Greenlining had
with the Federal Reserve Board?

00:58:49.755 --> 00:58:52.622
Yes, I did. I was on the
committee that was involved

00:58:52.792 --> 00:58:55.352
with the Consumer Community
Affairs Committee.

00:58:55.528 --> 00:58:59.361
He warned, in an extremely
explicit manner, about what was going on.

00:58:59.531 --> 00:59:02.830
He came to the Federal Reserve
Board with loan documentation

00:59:03.001 --> 00:59:05.936
of the kind of loans
that were frequently being made.

00:59:06.104 --> 00:59:08.902
And he was listened to politely,
and nothing was done.

00:59:09.074 --> 00:59:14.637
So again, I don't know the details
in terms of, um...

00:59:15.080 --> 00:59:17.776
In fact, I just don't... l...

00:59:17.949 --> 00:59:21.680
Whatever information he provided,
I'm not sure exactly.

00:59:22.053 --> 00:59:25.511
To be honest with you, I can't
remember this kind of discussion,

00:59:25.690 --> 00:59:30.525
but certainly there were issues
that were coming up.

00:59:30.695 --> 00:59:32.993
The question is,
how pervasive are they?

00:59:33.164 --> 00:59:34.495
Why didn't you try looking?

00:59:34.666 --> 00:59:36.293
I think that people did.

00:59:36.468 --> 00:59:38.026
We had people looking at...

00:59:38.203 --> 00:59:41.434
Excuse me. You can't be
serious. You would have found things.

00:59:41.606 --> 00:59:45.975
That's very easy to always say
that you can always find it.

00:59:46.144 --> 00:59:47.839
As early as 2004,

00:59:48.013 --> 00:59:52.313
the FBI was already warning about
an epidemic of mortgage fraud.

00:59:52.484 --> 00:59:54.748
They reported inflated appraisals,

00:59:54.920 --> 00:59:58.549
doctored loan documentation
and other fraudulent activity.

00:59:59.691 --> 01:00:03.923
In 2005, the IMF's chief economist,
Raghuram Rajan,

01:00:04.095 --> 01:00:07.724
warned that dangerous incentives
could lead to a crisis.

01:00:08.266 --> 01:00:11.827
Then came Nouriel Roubini's
warnings in 2006,

01:00:12.003 --> 01:00:14.494
Allan Sloan's articles
in Fortune magazine

01:00:14.673 --> 01:00:16.732
and The Washington Post
in 2007,

01:00:17.275 --> 01:00:19.709
and repeated warnings
from the IMF.

01:00:19.878 --> 01:00:22.073
I said,
and on behalf of the institution,

01:00:22.247 --> 01:00:25.648
the crisis in front of us
is a huge crisis.

01:00:25.817 --> 01:00:26.875
Who did you talk to?

01:00:27.052 --> 01:00:29.213
The government, Treasury,
Fed, everybody.

01:00:29.387 --> 01:00:35.222
In May of 2007, hedge fund manager
Bill Ackman circulated a presentation,

01:00:35.392 --> 01:00:37.019
"Who is Holding the Bag?"

01:00:37.194 --> 01:00:40.027
Which described
how the bubble would unravel.

01:00:40.564 --> 01:00:43.829
And in early 2008,
Charles Morris published his book

01:00:44.001 --> 01:00:46.299
about the impending crisis.

01:00:48.405 --> 01:00:50.635
You're not sure. What do you do?

01:00:50.808 --> 01:00:54.972
You might have some suspicions that
underwriting standards are weakened.

01:00:55.145 --> 01:00:58.603
But then the question is,
should you do anything about it?

01:01:00.050 --> 01:01:03.713
By 2008, home foreclosures
were skyrocketing

01:01:03.887 --> 01:01:07.050
and the securitization food chain
imploded.

01:01:07.224 --> 01:01:10.660
Lenders could no longer sell
their loans to the investment banks.

01:01:10.828 --> 01:01:15.060
And as the loans went bad,
dozens of lenders failed.

01:01:15.699 --> 01:01:20.432
Chuck Prince of Citibank
famously said

01:01:21.605 --> 01:01:24.506
that we have to dance
until the music stops.

01:01:24.675 --> 01:01:27.974
Actually, the music had stopped
already when he said that.

01:01:28.145 --> 01:01:30.613
The market for CDOs collapsed,

01:01:30.781 --> 01:01:34.114
leaving investment banks holding
hundreds of billions of dollars

01:01:34.284 --> 01:01:38.482
in loans, CDOs, and real estate
they couldn't sell.

01:01:38.655 --> 01:01:42.216
When the crisis started,
both the Bush administration

01:01:42.393 --> 01:01:46.762
and the Federal Reserve
were totally behind the curve.

01:01:46.930 --> 01:01:49.262
They did not understand
the extent of it.

01:01:49.500 --> 01:01:53.493
At what point do you
remember thinking for the first time:

01:01:53.670 --> 01:01:56.002
"This is dangerous, this is bad"?

01:01:56.173 --> 01:02:00.337
I remember very well one...
I think it was a G 7 meeting

01:02:00.511 --> 01:02:02.502
of February, 2008.

01:02:02.679 --> 01:02:06.580
And I remember discussing
the issue with Hank Paulson.

01:02:06.749 --> 01:02:09.809
And I clearly remember
telling Hank:

01:02:09.986 --> 01:02:12.978
"We are watching
this Tsunami coming,"

01:02:13.156 --> 01:02:16.887
and you're just proposing
that we ask

01:02:17.060 --> 01:02:19.654
"which swimming costume
we're going to put on."

01:02:19.829 --> 01:02:22.161
What was his response?
What was his feeling?

01:02:22.331 --> 01:02:23.730
"Things are under control."

01:02:23.900 --> 01:02:27.859
Yes, we are looking
at this situation carefully,

01:02:28.037 --> 01:02:31.473
"and, yeah, it's under control."

01:02:32.175 --> 01:02:36.703
We're gonna keep growing. Okay?
And, obviously, I'll say it:

01:02:36.879 --> 01:02:39.473
If you're growing,
you're not in recession, right?

01:02:39.649 --> 01:02:41.640
I mean, we all know that.

01:02:46.856 --> 01:02:48.881
One of the pillars of Wall Street...

01:02:49.058 --> 01:02:53.324
In March 2008, the investment
bank Bear Stearns ran out of cash

01:02:53.963 --> 01:02:57.694
and was acquired for $2 a share
by JPMorgan Chase.

01:02:57.867 --> 01:03:01.530
The deal was backed by $30 billion
in emergency guarantees

01:03:01.704 --> 01:03:03.171
from the Federal Reserve.

01:03:04.707 --> 01:03:07.642
That was when the administration
could have come in

01:03:07.810 --> 01:03:13.407
and put in place various measures
to reduce system risk.

01:03:13.583 --> 01:03:18.452
The information I'm receiving
is the end is not here,

01:03:18.621 --> 01:03:20.816
that there are other shoes to fall.

01:03:20.990 --> 01:03:23.515
Well, I've seen
those investment banks,

01:03:23.693 --> 01:03:27.288
working with the Fed
and the SEC,

01:03:27.463 --> 01:03:33.527
strengthen their liquidity,
strengthen their capital positions.

01:03:33.703 --> 01:03:37.764
I get reports all the time.
Our regulators are very vigilant.

01:03:38.441 --> 01:03:40.340
On September 7 th, 2008,

01:03:40.509 --> 01:03:43.103
Henry Paulson announced
the federal takeover

01:03:43.278 --> 01:03:47.840
of Fannie Mae and Freddie Mac, giant
lenders on the brink of collapse.

01:03:48.016 --> 01:03:52.248
Nothing about our actions today
reflects a changed view

01:03:52.420 --> 01:03:54.047
of the housing correction

01:03:54.222 --> 01:03:57.248
or the strength
of other U.S. Financial institutions.

01:03:57.492 --> 01:03:58.516
Two days later,

01:03:58.693 --> 01:04:02.356
Lehman Brothers announced
record losses of $3.2 billion,

01:04:02.531 --> 01:04:04.829
and it's stock collapsed.

01:04:05.634 --> 01:04:10.071
The effects of Lehman and AIG
in September still came as a surprise.

01:04:10.238 --> 01:04:13.674
I mean, this is even after July
and Fannie and Freddie.

01:04:13.842 --> 01:04:18.711
So clearly there was stuff that,
as of September,

01:04:18.880 --> 01:04:22.782
major stuff,
that nobody knew about.

01:04:22.951 --> 01:04:25.146
I think that's... I think that's fair.

01:04:25.320 --> 01:04:27.191
Bear Stearns
was rated triple-A

01:04:27.204 --> 01:04:29.086
like a month before
it went bankrupt?

01:04:29.257 --> 01:04:31.919
More likely A2.
A2?

01:04:32.093 --> 01:04:33.185
Yeah.
Okay.

01:04:33.361 --> 01:04:35.124
A2 is still not bankrupt.

01:04:35.297 --> 01:04:38.789
No, that's a high investment grade.
Solid investment grade rating.

01:04:38.967 --> 01:04:42.027
Lehman Brothers,
A2 within days of failing.

01:04:42.204 --> 01:04:47.005
AIG, double-A
within days of being bailed out.

01:04:47.876 --> 01:04:51.812
Fannie Mae and Freddie Macwere
triple-A when they were rescued.

01:04:51.980 --> 01:04:55.916
Citigroup, Merrill, all of them
had investment-grade ratings.

01:04:56.084 --> 01:04:58.644
How can that be?
Well, that's a good question.

01:05:00.722 --> 01:05:01.984
That's a great question.

01:05:02.157 --> 01:05:03.488
At no point did the administration

01:05:03.658 --> 01:05:07.059
ever go to
all the major institutions and say:

01:05:07.229 --> 01:05:10.130
"This is serious.
Tell us what your positions are.

01:05:10.298 --> 01:05:14.165
You know, no bullshit.
Where are you?"

01:05:14.635 --> 01:05:18.366
Well, first, that's what the regulators...
That's their job, right?

01:05:18.539 --> 01:05:22.635
Their job is to understand the
exposure across these institutions.

01:05:22.810 --> 01:05:25.711
And they have
a very refined understanding

01:05:25.879 --> 01:05:30.282
that I think became more respon... More
refined as the crisis proceeded. So...

01:05:30.451 --> 01:05:33.113
Forgive me, but
that's clearly not true.

01:05:33.287 --> 01:05:35.152
What do you mean, that's not true?

01:05:35.322 --> 01:05:36.755
In August of 2008,

01:05:36.924 --> 01:05:42.419
were you aware of the credit ratings
held by Lehman Brothers,

01:05:42.596 --> 01:05:44.291
Merrill Lynch, AIG,

01:05:44.465 --> 01:05:46.933
and did you think
that they were accurate?

01:05:47.101 --> 01:05:50.093
Well, certainly by that time,

01:05:50.271 --> 01:05:53.172
it was clear earlier credit ratings
weren't accurate.

01:05:53.340 --> 01:05:56.002
- They had been downgraded.
- No, they hadn't.

01:05:56.176 --> 01:06:00.272
There was downgrading in terms
of the industry and concerns of the...

01:06:00.447 --> 01:06:02.813
All those firms were rated
at least A2

01:06:02.983 --> 01:06:05.747
until a couple of days
before they were rescued.

01:06:05.919 --> 01:06:10.515
The answer is I don't know enough to
answer your question on this issue.

01:06:10.691 --> 01:06:14.058
Governor Fred Mishkin is resigning,
effective August 31.

01:06:14.228 --> 01:06:18.164
He plans to return to Columbia's
Graduate School of Business.

01:06:18.332 --> 01:06:21.358
Why did you leave the
Federal Reserve in August of 2008

01:06:21.535 --> 01:06:24.299
in the middle
of the worst financial crisis?

01:06:24.471 --> 01:06:28.601
So that...
I had to revise a textbook.

01:06:28.776 --> 01:06:32.542
His departure leaves the board
with three of it's seven seats vacant

01:06:32.713 --> 01:06:34.874
just when the economy
needs it most.

01:06:35.049 --> 01:06:36.971
I'm sure
your textbook is

01:06:36.984 --> 01:06:38.917
important and widely read,
but in August 2008,

01:06:39.086 --> 01:06:43.182
some more important things were going
on in the world, don't you think?

01:06:43.724 --> 01:06:45.692
By Friday, September 12th,

01:06:45.859 --> 01:06:47.986
Lehman Brothers had
run out of cash

01:06:48.162 --> 01:06:51.858
and the entire investment-banking
industry was sinking fast.

01:06:52.031 --> 01:06:55.694
The stability of the global
financial system was in jeopardy.

01:06:56.903 --> 01:06:59.701
That weekend, Henry Paulson
and Timothy Geithner

01:06:59.872 --> 01:07:02.306
president of
the New York Federal Reserve,

01:07:02.475 --> 01:07:05.933
called an emergency meeting
with the CEOs of the major banks

01:07:06.112 --> 01:07:07.636
in an effort to rescue Lehman.

01:07:08.448 --> 01:07:09.972
But Lehman wasn't alone.

01:07:10.383 --> 01:07:15.184
Merrill Lynch was also
on the brink of failure.

01:07:15.355 --> 01:07:19.155
And that Sunday,
it was acquired by Bank of America.

01:07:19.325 --> 01:07:24.388
The only bank interested in buying
Lehman was the British firm Barclays.

01:07:24.564 --> 01:07:28.432
But British regulators demanded
a financial guarantee from the U.S.

01:07:28.968 --> 01:07:30.993
Paulson refused.

01:07:35.541 --> 01:07:40.808
We got in a cab and went
to the Federal Reserve Bank.

01:07:42.548 --> 01:07:45.847
They wanted the bankruptcy case
commenced before midnight

01:07:46.018 --> 01:07:48.009
of September 14.

01:07:48.187 --> 01:07:54.456
We kept pressing
that this would be a terrible event,

01:07:54.627 --> 01:07:57.221
and at some point
I used the word Armageddon,

01:07:57.397 --> 01:08:02.027
and they consider the consequences
of what they were proposing.

01:08:02.201 --> 01:08:04.726
The effect on the market
would be extraordinary.

01:08:04.904 --> 01:08:06.701
You said this?
Yes.

01:08:06.873 --> 01:08:11.970
They just said they had considered
all of the comments we had made,

01:08:12.145 --> 01:08:17.583
and they were still of the belief
that in order to calm the markets

01:08:17.750 --> 01:08:21.481
and move forward, it was necessary
for Lehman to go into bankruptcy.

01:08:21.654 --> 01:08:23.094
"Calm the markets"?
Yes.

01:08:23.422 --> 01:08:27.791
When were you first told that
Lehman, in fact, was going to go bankrupt?

01:08:28.593 --> 01:08:31.687
After the fact.
After the fact?

01:08:32.798 --> 01:08:36.063
Wow. Okay. Um...

01:08:36.234 --> 01:08:41.262
And what was your reaction
when you learned of it?

01:08:41.873 --> 01:08:43.650
"Holy cow."

01:08:43.675 --> 01:08:47.008
Paulson and Bernanke had
not consulted with other governments

01:08:47.179 --> 01:08:50.148
and didn't know the consequences
of foreign bankruptcy laws.

01:08:50.315 --> 01:08:53.284
Lehman Brothers London
continue to empty their desks.

01:08:53.452 --> 01:08:54.680
Under British law,

01:08:54.853 --> 01:08:58.186
Lehman's London office
had to be closed immediately.

01:08:58.356 --> 01:09:02.554
All transactions came to a halt, and
there are thousands of transactions.

01:09:02.727 --> 01:09:06.094
The hedge funds who had had
assets with Lehman in London

01:09:06.264 --> 01:09:09.062
discovered overnight,
to their complete horror,

01:09:09.234 --> 01:09:11.327
they couldn't get
those assets back.

01:09:11.503 --> 01:09:14.267
One of the points of the hub failed.

01:09:14.439 --> 01:09:17.567
And that had huge knock-on effects
around the system.

01:09:17.742 --> 01:09:19.733
The oldest money market fund
in the nation

01:09:19.911 --> 01:09:24.041
wrote off three-quarters
of a billion dollars in bad debt

01:09:24.216 --> 01:09:26.207
issued by now-bankrupt
Lehman Brothers.

01:09:26.384 --> 01:09:29.979
Lehman's failure caused a
collapse in the commercial paper market,

01:09:30.155 --> 01:09:33.454
which many companies depend on
to pay for expenses

01:09:33.625 --> 01:09:34.956
such as payroll.

01:09:35.126 --> 01:09:38.095
That means they have to lay off
employees, they can't buy parts.

01:09:38.263 --> 01:09:40.060
It stops business in it's tracks.

01:09:40.232 --> 01:09:43.099
People stood and said,
"Listen, what can we believe in?

01:09:43.268 --> 01:09:45.236
There's nothing
we can trust anymore."

01:09:45.403 --> 01:09:48.964
That same week,
AIG owed $ 13 billion

01:09:49.140 --> 01:09:53.008
to holders of credit default swaps,
and it didn't have the money.

01:09:53.178 --> 01:09:55.146
AIG was another hub.

01:09:55.313 --> 01:09:59.408
If AIG had stopped, you know,
all planes may have to stop flying.

01:09:59.583 --> 01:10:02.984
On September 17 th, AIG is
taken over by the government.

01:10:03.654 --> 01:10:07.090
One day later, Paulson
and Bernanke ask Congress

01:10:07.258 --> 01:10:09.692
for $700 billion
to bail out the banks.

01:10:09.860 --> 01:10:11.191
We're coming together.

01:10:11.362 --> 01:10:15.765
They warned that the alternative
would be a catastrophic collapse.

01:10:15.933 --> 01:10:18.595
It was scary. You know,
the entire system froze up.

01:10:18.769 --> 01:10:22.535
Every part of the financial system,
every part of the credit system.

01:10:22.706 --> 01:10:24.435
Nobody could borrow money.

01:10:24.608 --> 01:10:27.771
It was like a cardiac arrest
of the global financial system.

01:10:27.945 --> 01:10:29.879
I'm playing the hand dealt me.

01:10:30.047 --> 01:10:32.481
A lot of what I'm dealing with...

01:10:32.650 --> 01:10:37.087
I'm dealing with the consequences
of things that were done years ago.

01:10:37.254 --> 01:10:39.265
Secretary Paulson
spoke through the fall.

01:10:39.290 --> 01:10:42.316
All the potential root causes of this,
and there are plenty,

01:10:42.493 --> 01:10:44.552
he called them. I'm not sure...

01:10:44.728 --> 01:10:46.127
You're not being serious about that.

01:10:46.297 --> 01:10:48.993
I am being serious.
What would you have expected?

01:10:49.166 --> 01:10:51.566
What were you looking for
that you didn't see?

01:10:51.735 --> 01:10:54.533
He was the senior advocate

01:10:54.705 --> 01:10:59.074
for prohibiting the regulation
of credit default swaps

01:10:59.243 --> 01:11:02.838
and also lifting the leverage limits
on the investment banks.

01:11:03.013 --> 01:11:04.037
So again, what...?

01:11:04.214 --> 01:11:07.672
He mentioned those things? I never
heard him mention those things.

01:11:07.851 --> 01:11:10.547
Could we turn this off for a second?

01:11:15.359 --> 01:11:16.986
When AIG was bailed out,

01:11:17.161 --> 01:11:19.129
the owners of
it's credit default swaps,

01:11:19.296 --> 01:11:21.958
the most prominent of which
was Goldman Sachs,

01:11:22.132 --> 01:11:25.693
were paid $61 billion
the next day.

01:11:25.869 --> 01:11:27.996
Paulson, Bernanke
and Tim Geithner

01:11:28.172 --> 01:11:31.368
forced AIG to pay 100 cents
on the dollar

01:11:31.541 --> 01:11:34.305
rather than negotiate
lower prices.

01:11:34.477 --> 01:11:40.643
Eventually, the AIG bailout
cost taxpayers over $ 150 billion.

01:11:40.817 --> 01:11:44.218
A hundred and sixty billion dollars
went through AIG.

01:11:44.387 --> 01:11:47.185
Fourteen billion went
to Goldman Sachs.

01:11:47.357 --> 01:11:50.554
At the same time,
Paulson and Geithner forced AIG

01:11:50.727 --> 01:11:54.629
to surrender it's right to sue Goldman
and the other banks for fraud.

01:11:54.797 --> 01:11:57.334
Isn't there
a problem when the

01:11:57.347 --> 01:11:59.894
person in charge of
dealing with this crisis

01:12:00.069 --> 01:12:02.230
is the former CEO
of Goldman Sachs?

01:12:02.405 --> 01:12:05.966
Someone who had a major role
in causing it.

01:12:06.142 --> 01:12:08.872
It's fair to say
that the financial markets today

01:12:09.045 --> 01:12:10.842
are incredibly complicated.

01:12:11.014 --> 01:12:12.743
And supply
urgently needed money.

01:12:12.915 --> 01:12:15.145
On October 4th, 2008,

01:12:15.318 --> 01:12:19.345
President Bush signs
a 700-billion-dollar bailout bill.

01:12:19.522 --> 01:12:21.854
But world stock markets
continue to fall

01:12:22.025 --> 01:12:24.892
amid fears that a global recession
is now underway.

01:12:30.199 --> 01:12:33.498
The bailout legislation does nothing
to stem the tide of layoffs

01:12:33.670 --> 01:12:35.467
and foreclosures.

01:12:35.638 --> 01:12:40.735
Unemployment in the United States
and Europe rises to 10 percent.

01:12:40.910 --> 01:12:44.243
The recession accelerates
and spreads globally.

01:12:48.051 --> 01:12:52.317
I began to get really scared
because I hadn't foreseen

01:12:52.488 --> 01:12:57.050
the whole world going down
at the same rate at the same time.

01:12:57.760 --> 01:12:59.591
By December of 2008,

01:12:59.762 --> 01:13:03.254
General Motors and Chrysler
are facing bankruptcy.

01:13:03.599 --> 01:13:06.328
And as U.S. Consumers cut back
on spending,

01:13:06.501 --> 01:13:10.028
Chinese manufacturers
see sales plummet.

01:13:11.106 --> 01:13:15.566
Over 10 million migrant workers
in China lose their jobs.

01:13:16.044 --> 01:13:20.606
At the end of the day, the
poorest, as always, pay the most.

01:13:26.088 --> 01:13:28.079
Here, you can earn a lot of money.

01:13:28.256 --> 01:13:34.217
Like 70, 80 U.S. Dollars per month.

01:13:35.430 --> 01:13:40.299
As a farmer in the countryside,
you cannot earn as much money.

01:13:40.469 --> 01:13:44.530
The workers, they just wire
their salary to their hometown

01:13:44.706 --> 01:13:47.436
to give to their families.

01:13:47.843 --> 01:13:50.710
The crisis started in America.

01:13:50.879 --> 01:13:54.610
We all know it will be coming
to China.

01:13:59.054 --> 01:14:02.114
Some of the factories try
to cut off some workers.

01:14:03.625 --> 01:14:06.890
And some people will get poor
because they'll lose their jobs.

01:14:08.263 --> 01:14:09.696
Life gets harder.

01:14:18.240 --> 01:14:20.800
We were growing
at about 20 percent.

01:14:21.576 --> 01:14:23.976
It was a super year.

01:14:24.146 --> 01:14:28.048
Then we suddenly went
to minus-nine this quarter.

01:14:28.216 --> 01:14:32.949
Exports collapsed,
and we're talking like 30 percent.

01:14:33.755 --> 01:14:37.384
So we just took a hit, you know.
Fell off a cliff. Boomp.

01:14:37.559 --> 01:14:41.654
Even as the crisis unfolded, we didn't
know how wide it was going to spread

01:14:41.829 --> 01:14:43.694
or how severe it was going to be.

01:14:43.864 --> 01:14:46.458
We were still hoping
that there would be some way

01:14:46.634 --> 01:14:51.628
for us to have a shelter
and be less battered by the storm.

01:14:51.806 --> 01:14:53.000
But it's not possible.

01:14:53.474 --> 01:14:55.203
It's a very globalized world.

01:14:55.376 --> 01:14:58.174
The economies
are all linked together.

01:15:29.777 --> 01:15:32.211
Every time a home
goes into foreclosure,

01:15:32.379 --> 01:15:34.711
it affects everyone
who lives around that house.

01:15:34.882 --> 01:15:38.045
When that house goes on the market,
it'll be sold at a lower price.

01:15:38.219 --> 01:15:41.552
Maybe before it goes on the market,
it won't be well-maintained.

01:15:41.722 --> 01:15:45.055
We estimate another 9 million
homeowners will lose their homes.

01:15:51.665 --> 01:15:56.693
We went out on a weekend
to see what houses were for sale.

01:15:56.871 --> 01:15:58.429
We saw one we liked.

01:15:58.606 --> 01:16:01.837
The payment
was going to be $3200.

01:16:13.420 --> 01:16:16.081
Everything was beautiful,
the house was very pretty.

01:16:16.256 --> 01:16:18.315
The payment low.
Everything was...

01:16:18.491 --> 01:16:20.186
We won the lottery.

01:16:20.360 --> 01:16:23.261
But the reality was when
the first payment arrived.

01:16:28.034 --> 01:16:32.733
I felt very bad
for my husband

01:16:33.840 --> 01:16:40.143
because he works too much.
And we have three children.

01:16:49.656 --> 01:16:53.490
The majority I've seen are
people hurt by the economy.

01:16:53.660 --> 01:16:56.652
They were living day to day,
paycheck to paycheck,

01:16:56.829 --> 01:16:58.057
and that ran out.

01:16:58.231 --> 01:17:01.564
Unemployment won't pay a mortgage.
It won't pay a car bill.

01:17:02.168 --> 01:17:03.897
I was a log truck driver.

01:17:04.070 --> 01:17:08.905
They shut down the logging systems,
shut down the sawmills.

01:17:09.075 --> 01:17:11.543
So I moved down here
on a construction job.

01:17:11.711 --> 01:17:14.578
And the construction jobs
got shut down too, so...

01:17:14.747 --> 01:17:17.272
Things are so tough.
There's a lot of people out there.

01:17:17.450 --> 01:17:19.850
Soon you're gonna be seeing
more camps like this

01:17:20.019 --> 01:17:22.180
because there's just no jobs
right now.

01:17:28.494 --> 01:17:33.090
When the company did well,
we did well.

01:17:33.266 --> 01:17:37.066
When the company did not do well,
sir, we did not do well.

01:17:37.470 --> 01:17:39.495
The men who
destroyed their own companies

01:17:39.672 --> 01:17:41.435
and plunged the world
into crisis

01:17:41.607 --> 01:17:44.940
walked away from the wreckage
with their fortunes intact.

01:17:45.111 --> 01:17:48.705
The top five executives at Lehman
Brothers made over a billion dollars

01:17:48.880 --> 01:17:51.610
between 2000 and 2007.

01:17:51.783 --> 01:17:55.583
And when the firm went bankrupt,
they got to keep all the money.

01:17:55.754 --> 01:17:57.346
The system worked.

01:17:57.522 --> 01:18:00.457
It doesn't make sense to make
a failing loan because we lose.

01:18:00.625 --> 01:18:04.527
The borrower loses, the
community loses and we lose.

01:18:04.696 --> 01:18:07.028
Countrywide's CEO,
Angelo Mozilo,

01:18:07.199 --> 01:18:11.568
made $470 million
between 2003 and 2008.

01:18:11.937 --> 01:18:15.566
One hundred forty million came from
dumping his Countrywide stock

01:18:15.741 --> 01:18:18.471
in the 12 months
before the company collapsed.

01:18:18.643 --> 01:18:21.305
I hold the board accountable
when a business fails.

01:18:21.480 --> 01:18:24.176
They're responsible
for hiring and firing the CEO

01:18:24.349 --> 01:18:26.510
and overseeing
big strategic decisions.

01:18:26.685 --> 01:18:29.677
The problem with boards in America
is the way boards are elected.

01:18:29.855 --> 01:18:33.382
You know, the boards are pretty much,
in many cases, picked by the CEO.

01:18:33.558 --> 01:18:36.049
The board of directors
and compensation committees

01:18:36.228 --> 01:18:41.325
are the two bodies best situated
to determine pay for executives.

01:18:41.500 --> 01:18:44.111
How do you think they've
done over the past 10 years?

01:18:44.136 --> 01:18:49.506
Well, I think that if you look at those...
I would give about a B, because...

01:18:49.674 --> 01:18:50.698
A B?
A B, yes.

01:18:50.876 --> 01:18:52.605
Not an F?
Not an F, not an F.

01:18:52.911 --> 01:18:55.607
Stan O'neal, the
CEO of Merrill Lynch,

01:18:55.781 --> 01:19:00.218
received $90 million
in 2006 and 2007 alone.

01:19:00.385 --> 01:19:02.546
After driving his firm
into the ground,

01:19:02.721 --> 01:19:05.315
the board of directors
allowed him to resign,

01:19:05.490 --> 01:19:09.449
and he collected $ 161 million
in severance.

01:19:09.795 --> 01:19:13.822
Instead of being fired,
Stan O'neal is allowed to resign

01:19:13.999 --> 01:19:17.196
and takes away $ 151 million.

01:19:17.369 --> 01:19:19.837
That's a decision that
that board of directors made.

01:19:20.005 --> 01:19:21.836
What grade
do you give that decision?

01:19:22.007 --> 01:19:24.873
That's a tougher one. I don't
know if I'd give it a B as well.

01:19:25.409 --> 01:19:31.473
O'neal's successor, John Thain,
was paid $87 million in 2007.

01:19:31.649 --> 01:19:33.241
And in December of 2008,

01:19:33.417 --> 01:19:37.114
two months after Merrill
was bailed out by U.S. Taxpayers,

01:19:37.288 --> 01:19:41.520
Thain and Merrill's board
handed out billions in bonuses.

01:19:42.259 --> 01:19:46.252
In March of 2008,
AIG's Financial Products division

01:19:46.430 --> 01:19:48.728
lost $ 11 billion.

01:19:48.899 --> 01:19:53.199
Instead of being fired,
Joseph Cassano, head of AIGFP,

01:19:53.571 --> 01:19:57.473
was kept on as a consultant
for a million dollars a month.

01:19:57.641 --> 01:20:03.136
You wanna make sure key players
and key employees within AIGFP,

01:20:03.314 --> 01:20:05.475
we retain
that intellectual knowledge.

01:20:05.649 --> 01:20:07.617
I attended
a very interesting dinner

01:20:07.785 --> 01:20:11.448
organized by Hank Paulson
a little more than one year ago

01:20:11.622 --> 01:20:14.250
with some officials
and a couple of CEOs

01:20:14.425 --> 01:20:16.689
from the biggest banks
in the U.S.

01:20:16.861 --> 01:20:21.161
And surprisingly enough,
all these gentlemen were arguing:

01:20:21.332 --> 01:20:25.632
"We were too greedy, so we have
part of the responsibility." Fine.

01:20:25.803 --> 01:20:27.430
Then they were turning
to the treasurer,

01:20:27.605 --> 01:20:29.300
Secretary of the Treasury,
and saying:

01:20:29.473 --> 01:20:32.636
"You should regulate more. We're
too greedy, we can't avoid it.

01:20:32.810 --> 01:20:35.779
The only way to avoid this
is to have more regulation."

01:20:35.946 --> 01:20:38.847
I have spoken to
many bankers about this question,

01:20:39.016 --> 01:20:40.950
including very senior ones.

01:20:41.118 --> 01:20:45.919
And this is the first time
that I've ever heard anybody say

01:20:46.090 --> 01:20:49.116
they wanted their compensation
to be regulated in any way.

01:20:49.293 --> 01:20:52.490
Yeah, because it was at the
moment where they were afraid.

01:20:52.663 --> 01:20:56.962
And after, when solution
to the crisis began to appear,

01:20:57.133 --> 01:20:59.397
then probably
they changed their mind.

01:21:01.804 --> 01:21:05.638
In the U.S., the banks
are now bigger, more powerful

01:21:05.808 --> 01:21:08.868
and more concentrated
than ever before.

01:21:09.045 --> 01:21:10.910
There are fewer competitors.

01:21:11.080 --> 01:21:15.039
A lot of smaller banks have been
taken over by big ones.

01:21:15.218 --> 01:21:17.652
J.P. Morgan is even bigger
than it was before.

01:21:17.820 --> 01:21:21.779
J.P. Morgan took over first
Bear Stearns and then WaMu.

01:21:21.958 --> 01:21:25.792
Bank of America took over
Countrywide and Merrill Lynch.

01:21:25.962 --> 01:21:28.453
Wells Fargo took over Wachovia.

01:21:28.631 --> 01:21:30.929
After the crisis,
the financial industry,

01:21:31.100 --> 01:21:33.898
including the
Financial Services Roundtable,

01:21:34.070 --> 01:21:36.595
worked harder than ever
to fight reform.

01:21:36.773 --> 01:21:39.435
The financial sector
employs 3000 lobbyists,

01:21:39.976 --> 01:21:43.412
more than five
for each member of Congress.

01:21:43.913 --> 01:21:46.057
You think the
financial services industry

01:21:46.082 --> 01:21:48.744
has excessive political influence
in the United States?

01:21:48.918 --> 01:21:53.355
No. I think that every
person in the country

01:21:53.523 --> 01:21:55.320
is represented
here in Washington.

01:21:55.491 --> 01:21:59.222
And you think that
all segments of American society

01:21:59.395 --> 01:22:02.728
have equal and fair access
to the system?

01:22:02.899 --> 01:22:07.768
That you can walk into any hearing
room that you would like. Yes, I do.

01:22:08.037 --> 01:22:11.234
One can walk into any
hearing room. One cannot necessarily

01:22:11.407 --> 01:22:14.240
write the lobbying checks
that your industry writes

01:22:14.410 --> 01:22:18.314
or engage in the level of political
contributions your industry engages in.

01:22:18.514 --> 01:22:21.381
Between 1998 and 2008,

01:22:21.551 --> 01:22:24.486
the financial industry
spent over $5 billion

01:22:24.654 --> 01:22:27.145
on lobbying
and campaign contributions.

01:22:27.323 --> 01:22:30.190
And since the crisis,
they're spending even more money.

01:22:31.927 --> 01:22:34.395
The financial industry
also exerts it's influence

01:22:34.563 --> 01:22:38.499
in a more subtle way, one that
most Americans don't know about.

01:22:40.102 --> 01:22:43.697
It has corrupted the study
of economics itself.

01:22:44.172 --> 01:22:50.202
Deregulation had tremendous
financial and intellectual support

01:22:50.379 --> 01:22:54.816
because people argued it
for their own benefit.

01:22:54.983 --> 01:22:59.647
The economics profession was
the main source of that illusion.

01:22:59.988 --> 01:23:03.048
Since the 1980s,
academic economists

01:23:03.225 --> 01:23:05.659
have been major advocates
of deregulation

01:23:05.827 --> 01:23:09.228
and played powerful roles
in shaping U.S. Government policy.

01:23:09.798 --> 01:23:13.564
Very few of these economic experts
warned about the crisis.

01:23:13.735 --> 01:23:18.263
And even after the crisis,
many of them opposed reform.

01:23:18.540 --> 01:23:22.408
The guys who taught these things
tended to get paid a lot of money

01:23:22.577 --> 01:23:24.670
being consultants.

01:23:24.846 --> 01:23:29.442
Business school professors
don't live on a faculty salary.

01:23:30.519 --> 01:23:33.215
They do very, very well.

01:23:33.655 --> 01:23:36.647
Over the last decade,
the financial services industries

01:23:36.825 --> 01:23:42.821
made about $5 billion worth of
political contributions in the U.S.

01:23:43.899 --> 01:23:46.197
That's kind of a lot of money.

01:23:46.702 --> 01:23:49.364
That doesn't bother you?
No.

01:23:49.538 --> 01:23:52.063
Martin Feldstein
is a Professor at Harvard

01:23:52.240 --> 01:23:54.640
and one of the world's
most prominent economists.

01:23:55.010 --> 01:23:57.808
As President Reagan's
chief economic advisor,

01:23:57.979 --> 01:24:00.413
he was a major architect
of deregulation.

01:24:00.582 --> 01:24:03.608
And from 1988 until 2009,

01:24:03.919 --> 01:24:07.012
he was on the board of directors
of both AIG

01:24:07.188 --> 01:24:09.156
and AIG Financial Products,

01:24:09.323 --> 01:24:11.553
which paid him millions of dollars.

01:24:11.826 --> 01:24:14.693
You have any regrets
about having been on AIG's board?

01:24:14.862 --> 01:24:18.525
I have no comments. No, I have no
regrets about being on AIG's board.

01:24:18.699 --> 01:24:22.135
None?
That I can say. Absolutely none.

01:24:22.303 --> 01:24:23.736
Okay.

01:24:26.173 --> 01:24:30.872
You have any regrets
about AIG's decisions?

01:24:31.045 --> 01:24:33.809
I cannot say anything more
about AIG.

01:24:33.981 --> 01:24:38.042
I've taught at Northwestern in
Chicago, Harvard and Columbia.

01:24:38.219 --> 01:24:41.154
Glenn Hubbard is the
Dean of Columbia Business School

01:24:41.322 --> 01:24:44.018
and was chairman
of the Council of Economic Advisers

01:24:44.191 --> 01:24:46.182
under George W. Bush.

01:24:46.360 --> 01:24:48.637
Do you think the
financial services industry

01:24:48.662 --> 01:24:52.063
has too much political power
in the United States?

01:24:52.533 --> 01:24:56.663
I don't think so. No. You certainly
wouldn't get that impression

01:24:56.837 --> 01:25:00.637
by the drubbing that they
regularly get in Washington.

01:25:00.808 --> 01:25:03.641
Many prominent academics
quietly make fortunes

01:25:03.811 --> 01:25:08.612
helping the financial industry shape
public debate and government policy.

01:25:08.783 --> 01:25:12.048
The Analysis Group,
Charles River Associates,

01:25:12.219 --> 01:25:13.550
Compass Lexecon

01:25:13.721 --> 01:25:15.985
and the Law and Economics
Consulting Group

01:25:16.157 --> 01:25:18.352
manage a multibillion-dollar
industry

01:25:18.526 --> 01:25:21.825
that provides academic experts
for hire.

01:25:21.996 --> 01:25:23.987
Two bankers
who used these services

01:25:24.165 --> 01:25:27.191
were Ralph Cioffi
and Matthew Tannin,

01:25:27.368 --> 01:25:31.327
Bear Stearns hedge fund managers
prosecuted for securities fraud.

01:25:31.505 --> 01:25:34.633
After hiring the Analysis Group,
both were acquitted.

01:25:35.009 --> 01:25:40.241
Glenn Hubbard was paid $ 100,000
to testify in their defense.

01:25:40.914 --> 01:25:43.872
Do you
think the economics

01:25:43.885 --> 01:25:46.853
discipline has a
conflict-of-interest problem?

01:25:47.787 --> 01:25:49.379
I'm not sure
I know what you mean.

01:25:49.556 --> 01:25:53.822
Do you think a significant fraction of
the economics discipline, economists,

01:25:53.993 --> 01:25:59.192
have financial conflicts of interest that
might call into question or color...?

01:25:59.365 --> 01:26:01.333
I see what you're saying.
I doubt it.

01:26:01.501 --> 01:26:06.666
Most academic economists
aren't wealthy business people.

01:26:06.840 --> 01:26:11.038
Hubbard makes $250,000 a year
as a board member of MetLife

01:26:11.211 --> 01:26:13.611
and was formerly
on the board of Capmark,

01:26:13.780 --> 01:26:16.806
a major commercial
mortgage lender during the bubble,

01:26:16.983 --> 01:26:19.042
which went bankrupt in 2009.

01:26:19.219 --> 01:26:21.585
He has also advised
Nomura Securities,

01:26:21.754 --> 01:26:26.157
KKR Financial Corporation
and many other financial firms.

01:26:27.460 --> 01:26:30.588
Laura Tyson, who declined
to be interviewed for this film,

01:26:30.763 --> 01:26:34.529
is a Professor at the
University of California, Berkeley.

01:26:34.701 --> 01:26:37.932
She was the chair of
the Council of Economic Advisers,

01:26:38.104 --> 01:26:41.562
then director of the National
Economic Council under Clinton.

01:26:41.741 --> 01:26:45.404
After leaving government, she joined
the board of Morgan Stanley,

01:26:45.578 --> 01:26:49.105
which pays her $350,000 a year.

01:26:49.282 --> 01:26:51.773
Ruth Simmons,
president of Brown University,

01:26:51.951 --> 01:26:57.014
makes over $300,000 a year
on the board of Goldman Sachs.

01:26:57.257 --> 01:27:00.283
Larry Summers, who, as Treasury
secretary, played a role

01:27:00.460 --> 01:27:05.796
in the deregulation of derivatives,
became president of Harvard in 2001.

01:27:06.132 --> 01:27:09.465
While at Harvard, he made millions
consulting to hedge funds

01:27:09.636 --> 01:27:14.004
and millions more in speaking fees,
much of it from investment banks.

01:27:16.742 --> 01:27:20.143
According to his federal disclosure
report, Summers' net worth

01:27:20.312 --> 01:27:25.340
is between $ 16.5 million
and $39.5 million.

01:27:26.118 --> 01:27:28.916
Frederic Mishkin, who returned
to Columbia Business School

01:27:29.087 --> 01:27:33.217
after leaving the Federal Reserve,
reported on his disclosure report

01:27:33.392 --> 01:27:37.761
that his net worth was between
$6 million and $ 17 million.

01:27:38.230 --> 01:27:42.667
In 2006, you coauthored a
study of Iceland's financial system.

01:27:42.868 --> 01:27:44.665
"Iceland is an advanced country"

01:27:44.836 --> 01:27:48.033
with excellent institutions,
low corruption, rule of law.

01:27:48.206 --> 01:27:51.198
The economy has adjusted
to financial liberalization

01:27:51.376 --> 01:27:55.608
"while prudential regulation and
supervision is generally quite strong."

01:27:55.781 --> 01:27:58.511
And that was the mistake,
that it turns out

01:27:58.684 --> 01:28:02.142
prudential regulation and supervision
was not strong in Iceland

01:28:02.321 --> 01:28:05.188
during this period...
What led you to think it was?

01:28:05.357 --> 01:28:07.621
You're going with
the information you had

01:28:07.793 --> 01:28:13.322
and generally, the view was that
Iceland had very good institutions.

01:28:13.498 --> 01:28:15.966
It was an advanced country...
Who told you that?

01:28:16.134 --> 01:28:18.568
What research did you do?
You talk to people.

01:28:18.737 --> 01:28:23.299
You have faith in the central bank, which
actually did fall down on the job.

01:28:23.475 --> 01:28:25.943
That clearly it... This...

01:28:26.111 --> 01:28:29.672
Why have faith in a central bank?
Well, that faith... You try...

01:28:29.848 --> 01:28:32.009
Because you go with
the information you have.

01:28:32.184 --> 01:28:34.778
How much were you paid to write it?
I was paid...

01:28:34.953 --> 01:28:37.353
I think the number...
It's public information.

01:28:44.930 --> 01:28:48.023
On your CV, the title
of this report has been changed

01:28:48.199 --> 01:28:52.329
from "Financial Stability in Iceland"
to "Financial Instability in Iceland."

01:28:52.503 --> 01:28:57.065
Well, I don't know. Whatever it is...
If there's a typo, there's a typo.

01:28:57.241 --> 01:28:59.106
What should be publicly available

01:28:59.276 --> 01:29:01.710
is whenever anybody
does research on a topic

01:29:01.879 --> 01:29:06.578
that they disclose if they have any
financial conflict with that research.

01:29:06.751 --> 01:29:10.744
But if I recall, there
is no policy to that effect.

01:29:11.288 --> 01:29:16.749
I can't imagine anybody not doing that in
terms of putting it in a paper. You...

01:29:16.927 --> 01:29:20.522
There would be significant professional
sanction for failure to do that.

01:29:20.698 --> 01:29:25.328
I didn't see any place in the
study where you indicated you'd been paid

01:29:25.503 --> 01:29:28.802
by the Icelandic Chamber
of Commerce to produce it.

01:29:28.973 --> 01:29:31.771
No, I don't... You know.
Okay.

01:29:32.143 --> 01:29:35.135
Richard Portes, the
most famous economist in Britain

01:29:35.312 --> 01:29:37.439
and a Professor at
London Business School,

01:29:37.615 --> 01:29:41.676
was also commissioned by the
Icelandic Chamber of Commerce

01:29:41.852 --> 01:29:45.879
to write a report which praised
the Icelandic financial sector.

01:29:46.457 --> 01:29:48.322
The banks themselves
are highly liquid.

01:29:48.492 --> 01:29:51.290
They've made money
on the fall of the Icelandic krona.

01:29:51.462 --> 01:29:52.861
These are strong banks.

01:29:53.030 --> 01:29:56.295
Their market funding is assured
for the coming year.

01:29:56.467 --> 01:29:58.435
- These are well-run banks.
- Thank you.

01:29:58.602 --> 01:30:01.935
Like Mishkin, Portes' report
didn't disclose his payment

01:30:02.106 --> 01:30:04.597
from the Icelandic
Chamber of Commerce.

01:30:04.775 --> 01:30:07.243
Does Harvard
require disclosures

01:30:07.256 --> 01:30:09.735
of financial conflict
of interest?

01:30:10.715 --> 01:30:12.148
Not to my knowledge.

01:30:12.316 --> 01:30:15.342
Do you require people
to report the compensation

01:30:15.519 --> 01:30:18.044
received from outside activities?
No.

01:30:18.222 --> 01:30:19.917
Don't you think that's a problem?

01:30:20.091 --> 01:30:21.353
I don't see why.

01:30:21.525 --> 01:30:24.186
Martin Feldstein
being on the board of AIG,

01:30:24.360 --> 01:30:26.260
Laura Tyson at Morgan Stanley,

01:30:26.429 --> 01:30:31.264
Larry Summers making $ 10 million
consulting to financial services firms.

01:30:31.434 --> 01:30:32.492
Irrelevant?

01:30:32.669 --> 01:30:33.966
Hm. Yeah.

01:30:34.137 --> 01:30:35.627
Yeah. Basically irrelevant.

01:30:36.439 --> 01:30:41.274
You've written many
articles about a wide array of subjects.

01:30:41.444 --> 01:30:44.208
You never saw fit
to investigate the risks

01:30:44.380 --> 01:30:47.713
of unregulated
credit default swaps?

01:30:47.984 --> 01:30:49.611
I never did.

01:30:49.786 --> 01:30:53.552
Same question with regard
to executive compensation?

01:30:53.723 --> 01:30:55.714
The regulation
of corporate governance?

01:30:55.892 --> 01:30:58.224
The effect of political contributions?

01:30:58.394 --> 01:31:02.353
I don't know that I would have
anything to add to those discussions.

01:31:02.532 --> 01:31:04.591
I'm looking at your resume now.

01:31:04.768 --> 01:31:09.569
It looks to me as if the majority
of your outside activities

01:31:09.739 --> 01:31:12.572
are consulting
and directorship arrangements

01:31:12.742 --> 01:31:14.835
with the financial services
industry.

01:31:15.011 --> 01:31:17.172
Would you not agree
with that characterization?

01:31:17.347 --> 01:31:20.612
To my knowledge, I don't think my
consulting clients are on my CV.

01:31:20.784 --> 01:31:23.582
So I wouldn't know.
Who are your consulting clients?

01:31:23.753 --> 01:31:25.744
I don't believe I have to
discuss that with you.

01:31:25.922 --> 01:31:27.355
Okay.

01:31:27.957 --> 01:31:31.893
In fact, you have a few more
minutes and the interview's over.

01:31:32.061 --> 01:31:34.655
Do you consult for
any financial services firms?

01:31:34.831 --> 01:31:37.391
The answer is I do.
And?

01:31:37.567 --> 01:31:40.730
And... But I do not wanna go
into details about that.

01:31:40.904 --> 01:31:43.702
Do they include
other financial services firms?

01:31:43.873 --> 01:31:45.033
Possibly.

01:31:45.208 --> 01:31:46.869
You don't remember?

01:31:47.043 --> 01:31:50.274
This isn't a deposition, sir. I was
polite enough to give you time.

01:31:50.446 --> 01:31:54.143
Foolishly, I now see. But you
have three more minutes.

01:31:54.317 --> 01:31:56.148
Give it your best shot.

01:31:56.319 --> 01:31:58.946
In 2004, at the
height of the bubble,

01:31:59.121 --> 01:32:02.955
Glenn Hubbard coauthored a widely
read paper with William C. Dudley,

01:32:03.125 --> 01:32:05.923
the chief economist
of Goldman Sachs.

01:32:06.094 --> 01:32:08.654
In the paper,
Hubbard praised credit derivatives

01:32:08.831 --> 01:32:10.628
and the securitization chain,

01:32:10.799 --> 01:32:13.393
stating they had improved
allocation of capital

01:32:13.569 --> 01:32:16.037
and were enhancing
financial stability.

01:32:16.205 --> 01:32:18.730
He cited reduced volatility
in the economy

01:32:18.907 --> 01:32:23.537
and stated that recessions had
become less frequent and milder.

01:32:23.712 --> 01:32:26.738
Credit derivatives were
protecting banks against losses

01:32:26.915 --> 01:32:29.383
and helping to distribute risk.

01:32:31.053 --> 01:32:34.022
A medical researcher
writes an article, saying:

01:32:34.189 --> 01:32:38.751
"To treat this disease,
you should prescribe this drug."

01:32:39.027 --> 01:32:42.087
Turns out doctor makes 80 percent
of personal income

01:32:42.264 --> 01:32:45.427
from manufacture of this drug.
Does not bother you?

01:32:45.601 --> 01:32:50.800
I think it's certainly important
to disclose the, um...

01:32:50.973 --> 01:32:53.339
The, um...

01:32:55.644 --> 01:32:57.805
Well, I think that's also
a little different

01:32:57.980 --> 01:33:02.508
from cases that we're talking
about here because, um...

01:33:17.266 --> 01:33:21.498
So, what do you think this
says about the economics discipline?

01:33:21.670 --> 01:33:25.629
Well, I mean, it has no
relevance to anything, really.

01:33:25.807 --> 01:33:29.709
And, indeed,
I think it's a part of the...

01:33:29.878 --> 01:33:33.881
It's an important part
of the problem.

01:33:48.496 --> 01:33:51.727
The rising power of the U.S.
Financial sector

01:33:51.899 --> 01:33:54.663
was part of a wider change
in America.

01:33:55.036 --> 01:33:59.632
Since the 1980s, the United States
has become a more unequal society,

01:34:00.207 --> 01:34:03.608
and it's economic dominance
has declined.

01:34:03.911 --> 01:34:08.371
Companies like General Motors,
Chrysler and U.S. Steel,

01:34:08.549 --> 01:34:11.109
formerly the core
of the U.S. Economy,

01:34:11.285 --> 01:34:15.881
were poorly managed and falling
behind their foreign competitors.

01:34:16.691 --> 01:34:19.751
And as countries like China
opened their economies,

01:34:19.927 --> 01:34:24.091
American companies
sent jobs overseas to save money.

01:34:26.067 --> 01:34:29.400
For many, many years,
the 660 million people

01:34:29.570 --> 01:34:31.868
in the developed world
were sheltered

01:34:32.039 --> 01:34:35.907
from all of this additional labor
that existed on the planet.

01:34:36.077 --> 01:34:38.944
Suddenly the Bamboo Curtain
and the Iron Curtain are lifted

01:34:39.113 --> 01:34:42.276
and you have 2.5 billion
additional people.

01:34:42.984 --> 01:34:46.977
American factory workers were laid
off by the tens of thousands.

01:34:47.154 --> 01:34:49.782
Our manufacturing base
was destroyed, literally,

01:34:49.957 --> 01:34:51.254
over a few years.

01:34:51.425 --> 01:34:55.725
As manufacturing declined,
other industries rose.

01:34:55.896 --> 01:34:59.127
The United States leads the world
in information technology,

01:34:59.300 --> 01:35:02.360
where high-paying jobs
are easy to find.

01:35:02.536 --> 01:35:04.697
But those jobs
require an education.

01:35:05.006 --> 01:35:09.874
And for average Americans,
college is increasingly out of reach.

01:35:10.210 --> 01:35:15.341
While universities like Harvard have
billions of dollars in endowments,

01:35:15.515 --> 01:35:19.815
funding for public universities
is shrinking and tuition is rising.

01:35:20.787 --> 01:35:23.255
Tuition for California's
public universities

01:35:23.423 --> 01:35:29.760
rose from $650 in the 1970s
to over $ 10,000 in 2010.

01:35:30.797 --> 01:35:35.063
The most important determinant
of whether Americans go to college

01:35:35.235 --> 01:35:38.227
is whether they can find
the money to pay for it.

01:35:38.505 --> 01:35:43.465
Meanwhile, American tax policy
shifted to favor the wealthy.

01:35:43.643 --> 01:35:48.842
When I first came to office, I thought
taxes were too high, and they were.

01:35:49.015 --> 01:35:51.813
The most dramatic change
was a series of tax cuts

01:35:51.985 --> 01:35:54.613
designed by Glenn Hubbard,
who was serving

01:35:54.788 --> 01:35:58.087
as President Bush's
chief economic advisor.

01:35:58.825 --> 01:36:02.454
The Bush administration sharply
reduced taxes on investment gains,

01:36:02.629 --> 01:36:05.621
stock dividends,
and eliminated the estate tax.

01:36:05.799 --> 01:36:08.927
We had a comprehensive plan
that when acted

01:36:09.102 --> 01:36:12.868
has left nearly $ 1.1 trillion
in the hands of American workers,

01:36:13.039 --> 01:36:15.633
families, investors
and small-business owners.

01:36:15.809 --> 01:36:21.611
Most benefits of these cuts went to the
wealthiest 1 percent of Americans.

01:36:22.148 --> 01:36:24.412
And by the way,
it was the cornerstone

01:36:24.584 --> 01:36:26.950
in many ways,
of our economic recovery policy.

01:36:27.420 --> 01:36:29.945
Inequality of wealth
in the United States

01:36:30.123 --> 01:36:33.524
is now higher
than in any other developed country.

01:36:34.127 --> 01:36:36.891
American families responded
to these changes in two ways:

01:36:38.331 --> 01:36:42.892
By working longer hours
and by going into debt.

01:36:43.068 --> 01:36:46.663
As the middle class falls
further and further behind,

01:36:46.839 --> 01:36:50.707
there is a political urge
to respond

01:36:50.876 --> 01:36:54.209
by making it easier to get credit.

01:36:54.379 --> 01:36:56.870
You don't have to have
a lousy home.

01:36:57.049 --> 01:37:02.646
The low-income home buyer can have
just as nice a house as anybody else.

01:37:03.188 --> 01:37:07.591
American families borrowed
to finance their homes, their cars,

01:37:07.759 --> 01:37:11.525
their healthcare,
and their children's educations.

01:37:11.897 --> 01:37:14.559
People in the bottom 90 percent

01:37:15.033 --> 01:37:19.595
lost ground
between 1980 and 2007.

01:37:19.771 --> 01:37:24.504
It all went to the top 1 percent.

01:37:26.478 --> 01:37:29.379
For the first time in history,
average Americans

01:37:29.548 --> 01:37:34.315
have less education and are less
prosperous than their parents.

01:37:36.488 --> 01:37:39.719
The era of greed and irresponsibility

01:37:39.892 --> 01:37:43.191
on Wall Street and in Washington

01:37:43.362 --> 01:37:45.421
has led us to a financial crisis

01:37:45.597 --> 01:37:49.294
as serious as any that we've faced
since the Great Depression.

01:37:49.468 --> 01:37:52.733
When the financial crisis
struck before the 2008 election,

01:37:53.172 --> 01:37:55.436
Barack Obama pointed
to Wall Street greed

01:37:55.607 --> 01:37:59.907
and regulatory failures as examples
of the need for change in America.

01:38:00.078 --> 01:38:02.774
A lack of oversight in Washington
and on Wall Street

01:38:02.948 --> 01:38:05.940
is exactly what got us
into this mess.

01:38:06.552 --> 01:38:10.852
After taking office, Obama spoke
of the need to reform the industry.

01:38:11.023 --> 01:38:14.321
We want a risk regulator,
increased capital requirements.

01:38:14.492 --> 01:38:17.120
We need a consumer financial
protection agency.

01:38:17.295 --> 01:38:19.126
We need to change
Wall Street's culture.

01:38:19.764 --> 01:38:22.699
But when finally enacted
in mid-2010,

01:38:22.867 --> 01:38:25.631
the administration's
financial reforms were weak.

01:38:25.803 --> 01:38:29.239
And in some critical areas,
including the rating agencies,

01:38:29.407 --> 01:38:31.671
lobbying and compensation,

01:38:31.842 --> 01:38:34.811
nothing significant
was even proposed.

01:38:34.979 --> 01:38:38.471
Addressing Obama and,
quote, "regulatory reform,"

01:38:38.649 --> 01:38:42.847
my response, if it was
one word, would be "ha."

01:38:43.654 --> 01:38:46.088
There's very little reform.

01:38:46.257 --> 01:38:47.815
How come?

01:38:48.926 --> 01:38:51.087
It's a Wall Street government.

01:38:53.564 --> 01:38:57.091
Obama chose Timothy
Geithner as Treasury secretary.

01:38:57.268 --> 01:39:00.032
Geithner was president
of the New York Federal Reserve

01:39:00.204 --> 01:39:03.071
during the crisis,
and a key player in the decision

01:39:03.241 --> 01:39:05.835
to pay Goldman Sachs
100 cents on the dollar

01:39:06.010 --> 01:39:07.910
for it's bets against mortgages.

01:39:08.079 --> 01:39:11.071
When Tim Geithner
was testifying

01:39:11.249 --> 01:39:13.479
to be confirmed
as Treasury secretary

01:39:13.651 --> 01:39:16.711
he said,
"I have never been a regulator."

01:39:16.887 --> 01:39:19.481
That said to me
he did not understand his job

01:39:19.657 --> 01:39:21.352
as President of the New York Fed.

01:39:25.696 --> 01:39:28.893
The new President of the
New York Fed is William C. Dudley,

01:39:29.066 --> 01:39:31.591
the former chief economist
of Goldman Sachs

01:39:31.769 --> 01:39:34.932
whose paper with Glenn Hubbard
praised derivatives.

01:39:35.106 --> 01:39:37.506
Geithner's chief of staff
is Mark Patterson,

01:39:37.675 --> 01:39:39.734
a former lobbyist for Goldman.

01:39:39.910 --> 01:39:42.435
And one of the senior advisors
is Lewis Sachs,

01:39:42.613 --> 01:39:45.741
who oversaw Tricadia,
a company heavily involved

01:39:45.916 --> 01:39:49.544
in betting against the mortgage
securities it was selling.

01:39:49.886 --> 01:39:52.548
To head the Commodity Futures
Trading Commission,

01:39:52.722 --> 01:39:56.488
Obama picked Gary Gensler,
a former Goldman Sachs executive

01:39:56.660 --> 01:39:59.595
who had helped ban
the regulation of derivatives.

01:39:59.763 --> 01:40:02.061
To run the Securities
and Exchange Commission,

01:40:02.232 --> 01:40:06.168
Obama picked Mary Schapiro,
the former CEO of FINRA,

01:40:06.336 --> 01:40:09.999
the investment banking industry's
self-regulation body.

01:40:10.173 --> 01:40:12.539
Obama's chief of staff,
Rahm Emanuel,

01:40:12.709 --> 01:40:17.271
made $320,000 serving
on the board of Freddie Mac.

01:40:17.514 --> 01:40:20.108
Both Martin Feldstein
and Laura Tyson are members

01:40:20.283 --> 01:40:23.878
of Obama's
Economic Recovery Advisory Board.

01:40:24.187 --> 01:40:28.886
And Obama's chief economic
advisor is Larry Summers.

01:40:29.426 --> 01:40:31.257
The most senior
economic advisors

01:40:31.428 --> 01:40:33.988
are the ones who were there,
who built the structure.

01:40:34.264 --> 01:40:36.824
When it was clear
that Summers and Geithner

01:40:37.000 --> 01:40:41.437
were going to play major roles
as advisors,

01:40:41.604 --> 01:40:44.140
I knew this was
going to be status quo.

01:40:44.708 --> 01:40:48.405
The Obama administration
resisted regulation of bank compensation

01:40:48.578 --> 01:40:51.240
even as foreign leaders
took action.

01:40:51.414 --> 01:40:53.780
The financial industry
is a service industry.

01:40:53.950 --> 01:40:57.317
It should serve others
before it serves itself.

01:40:57.787 --> 01:41:00.779
In September of 2009,
Christine Lagarde

01:41:00.957 --> 01:41:03.721
and the finance ministers
of Sweden, the Netherlands,

01:41:03.893 --> 01:41:07.260
Luxembourg, Italy,
Spain and Germany

01:41:07.430 --> 01:41:10.729
called for the G20 nations,
including the United States,

01:41:10.900 --> 01:41:14.461
to impose strict regulations
on bank compensation.

01:41:14.637 --> 01:41:16.605
And in July of 2010,

01:41:16.773 --> 01:41:20.766
the European Parliament
enacted those very regulations.

01:41:21.044 --> 01:41:24.274
The Obama administration
had no response.

01:41:24.446 --> 01:41:28.473
Their view is it's a temporary blip
and things will go back to normal.

01:41:28.984 --> 01:41:32.078
That is why I am reappointing him

01:41:32.254 --> 01:41:35.246
as chairman of the Federal Reserve.
Thank you, Ben.

01:41:35.424 --> 01:41:39.258
In 2009, Barack Obama
reappointed Ben Bernanke.

01:41:39.428 --> 01:41:40.622
Thank you, Mr. President.

01:41:42.064 --> 01:41:45.966
As of mid-2010, not a single
senior financial executive

01:41:46.135 --> 01:41:49.127
had been criminally prosecuted,
or even arrested.

01:41:49.304 --> 01:41:51.864
No special prosecutor
had been appointed.

01:41:52.040 --> 01:41:54.838
Not a single firm had been
prosecuted criminally

01:41:55.010 --> 01:41:58.002
for securities fraud
or accounting fraud.

01:41:58.180 --> 01:42:00.705
The Obama administration
has made no attempt

01:42:00.883 --> 01:42:02.680
to recover any compensation

01:42:02.851 --> 01:42:05.877
given to financial executives
during the bubble.

01:42:07.055 --> 01:42:10.388
I certainly would think
of criminal action

01:42:10.559 --> 01:42:14.222
against some of Countrywide's
top leaders, like Mozilo.

01:42:14.396 --> 01:42:17.729
I'd certainly look at Bear Stearns,
Goldman Sachs

01:42:17.900 --> 01:42:20.164
and Lehman Brothers
and Merrill Lynch.

01:42:20.335 --> 01:42:21.461
For criminal prosecutions?

01:42:21.637 --> 01:42:22.797
Yes.

01:42:22.971 --> 01:42:26.634
In regard to...
Yes. They'd be very hard to win,

01:42:26.875 --> 01:42:32.370
but I think they could do it if they got
enough underlings to tell the truth.

01:42:32.714 --> 01:42:35.547
In an industry
in which drug use, prostitution

01:42:35.717 --> 01:42:38.686
and billing of prostitutes
as a business expense

01:42:38.854 --> 01:42:40.685
occur on an industrial scale,

01:42:40.856 --> 01:42:44.792
it wouldn't be hard to make
people talk if you really wanted to.

01:42:45.227 --> 01:42:48.492
They gave me a plea bargain
and I took it.

01:42:48.664 --> 01:42:50.757
They were not interested
in my records.

01:42:50.933 --> 01:42:52.594
They weren't interested in anything.

01:42:52.768 --> 01:42:54.065
Not interested in your records?

01:42:54.236 --> 01:42:55.863
That's correct. Correct.

01:42:56.038 --> 01:43:02.203
There's a sensibility that you
don't use people's personal vices

01:43:02.376 --> 01:43:06.278
in the context of Wall Street cases,
necessarily, to get them to flip.

01:43:06.447 --> 01:43:11.817
Maybe after the cataclysms that we've
been through, people will reevaluate.

01:43:11.986 --> 01:43:15.945
I'm not the one to pass judgment
on that right now.

01:43:29.270 --> 01:43:34.640
You come to us today telling
us, "We're sorry, we didn't mean it."

01:43:34.809 --> 01:43:38.006
We won't do it again. Trust us."

01:43:38.179 --> 01:43:41.114
Well, I have some people
in my constituency

01:43:41.282 --> 01:43:43.978
that actually robbed
some of your banks.

01:43:44.151 --> 01:43:46.085
And they say the same thing.

01:43:46.254 --> 01:43:49.314
They're sorry. They didn't mean it.
They won't do it again.

01:43:49.924 --> 01:43:54.793
In 2009, as unemployment hit
it's highest level in 17 years,

01:43:54.962 --> 01:43:58.261
Morgan Stanley paid it's employees
over $ 14 billion,

01:43:58.432 --> 01:44:01.595
and Goldman Sachs paid out
over $ 16 billion.

01:44:01.769 --> 01:44:05.500
In 2010,
bonuses were even higher.

01:44:05.673 --> 01:44:09.131
Why should a financial engineer
be paid

01:44:09.310 --> 01:44:15.476
four times to 100 times more
than a real engineer?

01:44:15.650 --> 01:44:17.811
A real engineer build Bridges.

01:44:17.985 --> 01:44:21.318
A financial engineer build dreams.

01:44:21.489 --> 01:44:25.084
And, you know, when those dreams
turn out to be nightmares,

01:44:25.259 --> 01:44:26.988
other people pay for it.

01:44:29.497 --> 01:44:30.589
For decades,

01:44:30.764 --> 01:44:34.427
the American financial system
was stable and safe.

01:44:34.834 --> 01:44:36.768
But then something changed.

01:44:36.937 --> 01:44:40.270
The financial industry
turned it's back on society,

01:44:40.440 --> 01:44:42.908
corrupted our political system

01:44:43.343 --> 01:44:46.005
and plunged the world economy
into crisis.

01:44:48.014 --> 01:44:50.949
At enormous cost,
we've avoided disaster

01:44:51.251 --> 01:44:53.219
and are recovering.

01:44:53.587 --> 01:44:57.421
But the men and institutions that
caused the crisis are still in power,

01:44:57.591 --> 01:44:59.650
and that needs to change.

01:45:00.760 --> 01:45:02.887
They will tell us
that we need them,

01:45:03.063 --> 01:45:07.227
and that what they do is too
complicated for us to understand.

01:45:08.034 --> 01:45:10.298
They will tell us
it won't happen again.

01:45:10.704 --> 01:45:13.969
They will spend billions
fighting reform.

01:45:14.374 --> 01:45:16.433
It won't be easy.

01:45:17.744 --> 01:45:21.373
But some things
are worth fighting for.

01:45:21.397 --> 01:45:32.397
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