All language subtitles for Insaydery.2010.P.BDRip.720p

...to prevent
the sloshing around of oil...

...from capsizing the boat.

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

And after the Depression...

...the regulations actually introduced
these very watertight compartments.

And deregulation has led
to the end of compartmentalization.

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

The investment banks fueled
a massive bubble in Internet stocks...

...which was followed by a crash
in 2001 ...

...that caused $5 trillion
in investment losses.

The Securities and Exchange
Commission, the federal agency...

...created during the Depression
to regulate investment banking...

...had done nothing.

In the absence of meaningful
federal action...

...and given the clear failure
of self-regulation...

...it's become necessary for others
to step in...

...and adopt the protections needed.

Eliot Spitzer's investigation
revealed the investment banks...

...promoted Internet companies
they knew would fail.

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

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

Infospace,
given the highest possible rating...

...dismissed by an analyst
as a "piece of junk."

Excite, also highly rated,
called "such a piece of crap."

The defense that was proffered
by many of the investment banks...

...was not "you're wrong"...

...it was, "Everybody's doing it,
everybody knows it's going on.

Nobody should rely
on these analysts anyway."

In December, 2002...

...10 investment banks settled
the case for a total of $1.4 billion...

...and promised
to change their ways.

Scott Talbott is the chief lobbyist for
the Financial Services Roundtable...

...one of Washington's
most powerful groups...

...which represents nearly all of the
world's largest financial companies.

Are you comfortable with the fact that
several of your member companies...

...have engaged
in large-scale criminal activity?

- I-- You'll have to be specific.
- Okay.

And first of all, criminal activity
shouldn't be accepted, period.

Since deregulation began,
the world's biggest financial firms...

...have been caught laundering
money, defrauding customers...

...and cooking their books
again and again and again.

Credit Suisse helped funnel money
for Iran's nuclear program...

...and for Iran's
Aerospace Industries Organization...

...which builds ballistic missiles.

Any information that would identify it
as Iranian would be removed.

The bank was fined $536 million.

Citibank helped funnel $100 million
of drug money out of Mexico.

Did you comment that
she should, quote:

"Lose any documents connected
with the account"?

I said that in a kidding manner.

I did not mean it seriously.

Between 1998 and 2003...

...Fannie Mae overstated its earnings
by more than $10 billion.

These accounting standards
are complex...

...and require determinations
over which experts often disagree.

CEO Franklin Raines, who used to be
President Clinton's budget director...

...received over $52 million
in bonuses.

When UBS was caught helping
wealthy Americans evade taxes...

...they refused to cooperate
with the government.

Would you be willing
to supply the names?

- If there's a treaty framework.
- No treaty framework.

You've agreed you participated
in a fraud.

But while the companies face
unprecedented fines...

...the investment firms do not
have to admit any wrongdoing.

When dealing with this many products,
this many customers, mistakes happen.

The financial services industry
seems to have a level of criminality...

...that is somewhat distinctive.

You know, when was the last time
that Cisco...

...or Intel or Google or Apple or IBM,
you know--?

I agree about high-tech
versus financial services--

- So how come?
- High-tech is a creative business...

...where the value generation...

...and income derives from
actually creating something new.

Beginning in the 1990s...

...deregulation
and advances in technology...

...led to an explosion of complex
financial products called derivatives.

Economists and bankers
claimed they made markets safer.

But instead,
they made them unstable.

We went out on a weekend to see
what houses were for sale.

We saw one we liked.

The payment
was going to be $3200.

Everything was beautiful,
the house was very pretty.

The payment low. Everything was--

We won the lottery.

But the reality was when
the first payment arrived.

I felt very bad for my husband...

...because he works too much.
And we have three children.

Since the end of the Cold War...

...a lot of former physicists,
mathematicians...

...decided to apply their skills...

...not on, you know,
Cold War technology...

...but on financial markets.

And together
with investment bankers--

- Creating different weapons.
- Absolutely.

You know, as Warren Buffett said,
weapons of mass destruction.

Regulators, politicians,
business people...

...did not take seriously
the threat of innovation...

...on the stability
of the financial system.

Using derivatives...

...bankers could gamble
on virtually anything.

They could bet on the rise or fall
of oil prices...

...the bankruptcy of a company,
even the weather.

By the late 1990s...

...derivatives were a 50-trillion-dollar
unregulated market.

In 1998,
someone tried to regulate them.

Brooksley Born graduated first
in her class at Stanford Law School...

...and was the first woman
to edit a major law review.

After running the derivatives practice
at Arnold & Porter...

...Born was appointed by Clinton...

...to chair the Commodity Futures
Trading Commission...

...which oversaw
the derivatives market.

Brooksley Born asked me
if I would come work with her.

We decided that this was a serious,
potentially destabilizing market.

In May of 1998, the CFTC issued
a proposal to regulate derivatives.

Clinton's Treasury Department
had an immediate response.

I happened to go
into Brooksley's office...

...and she was just putting down
the receiver on her telephone...

...and the blood had drained
from her face.

And she looked at me and said,
"That was Larry Summers."

He had 13 bankers in his office.

He conveyed it
in a very bullying fashion...

...sort of directing her to stop.

Banks were now reliant for earnings
on these activities.

And that led to a titanic battle
to prevent this from being regulated.

Shortly after the phone call
from Summers...

...Greenspan, Rubin,
and SEC chairman Arthur Levitt...

...issued a joint statement
condemning Born...

...and recommending legislation
to keep derivatives unregulated.

Regulation of
derivatives transactions...

...that are privately negotiated
by professionals is unnecessary.

She was overruled, unfortunately.
First by the Clinton administration...

...and then by the Congress.

In 2000, Senator Phil Gramm took
a major role in getting a bill passed...

...that pretty much exempted
derivatives from regulation.

They are unifying markets,
reducing regulatory burden.

I believe we need to do it.

It is our very great hope...

...that it will be possible
to move this year...

...on legislation that,
in a suitable way...

...goes to create legal certainty
for OTC derivatives.

I wish to associate myself...

...with all the remarks
of Secretary Summers.

In December of 2000,
Congress passed...

...the Commodity Futures
Modernization Act.

Written with the help
of financial-industry lobbyists...

...it banned the regulation
of derivatives.

After that, it was off to the races.

Use of derivatives
and financial innovation...

...exploded dramatically after 2000.

- So help me God.
- So help me God.

By the time George W. Bush
took office in 2001 ...

...the U.S. financial sector
was vastly more profitable...

...concentrated and powerful
than ever before.

Dominating this industry
were five investment banks...

...two financial conglomerates...

...three securities insurance
companies...

...and three rating agencies.

And linking them all together
was the securitization food chain.

A new system
which connected trillions of dollars...

...in mortgages and other loans
with investors all over the world.

Thirty years ago,
if you went to get a loan for a home...

...the person lending you the money
expected you to pay him or her back.

You got a loan from a lender
who wanted to be paid back.

We've since developed securitization,
whereby people who make the loan...

...are no longer at risk
if they fail to repay.

In the old system, when a homeowner
paid their mortgage every month...

...the money went
to their local lender.

And since mortgages took decades
to repay, lenders were careful.

In the new system, lenders sold
mortgages to investment banks.

The banks combined
thousands of mortgages and loans...

...including car loans, student loans,
and credit card debt...

...to create complex derivatives called
collateralized debt obligations...

...or CDOs.

The investment banks then sold
the CDOs to investors.

Now when homeowners paid
their mortgages...

...the money went to investors
all over the world.

The investment banks
paid rating agencies...

...to evaluate the CDOs...

...and many of them
were given a triple-A rating...

...which is the highest possible
investment grade.

This made CDOs popular
with retirement funds...

...which could only purchase
highly rated securities.

This system
was a ticking time bomb.

Lenders didn't care anymore about
whether a borrower could repay...

...so they started making
riskier loans.

The investment banks
didn't care either.

The more CDOs they sold,
the higher their profits.

And the rating agencies, which were
paid by the investment banks...

...had no liability if their ratings
of CDOs proved wrong.

You weren't gonna be on the hook,
there weren't regulatory constraints.

So it was a green light to just
pump out more and more loans.

Between 2000 and 2003...

...the number of mortgage loans
made each year nearly quadrupled.

Everybody in this securitization
food chain...

...from the very beginning
until the end...

...didn't care about
the quality of the mortgage.

They were caring
about maximizing their volume...

...and getting a fee out of it.

In the early 2000s...

...there was a huge increase
in the riskiest loans, called subprime.

When thousands of subprime loans
were combined to create CDOs...

...many of them still received
triple-A ratings.

Now, it would have been possible
to create derivative products...

...that don't have these risks...

...that carry the equivalent
of deductibles...

...where there are limits on the risks
that can be taken on, and so forth.

- They didn't do that, did they?
- They didn't.

In retrospect, they should've done.

So did these guys know they were
doing something dangerous?

I think they did.

All the incentives financial institutions
offered to their mortgage brokers...

...were based on selling
the most profitable products...

...which were predatory loans.

If they make more money,
that's where they'll put you.

Suddenly, hundreds of billions
of dollars a year...

...were flowing through
the securitization chain.

Since anyone could get
a mortgage...

...home purchases
and housing prices skyrocketed.

The result was the biggest
financial bubble in history.

Real estate is real.
They can see their asset.

They can live in their asset.
They can rent out their asset.

You had a huge boom in housing
that made no sense at all.

The financing appetites
of the financial sector...

...drove what everybody else did.

Last time we had a housing bubble
was in the late '80s.

In that case, the increase in
home price had been relatively minor.

That housing bubble led
to a relatively severe recession.

From 1996 until 2006...

...real home prices
effectively doubled.

At $500 a ticket, they've come to hear
how to buy their very own piece...

...of the American dream.

Goldman Sachs, Bear Stearns,
Lehman Brothers...

...Merrill Lynch were all in on this.

The subprime lending alone increased
from 30 billion a year in funding...

...to over 600 billion a year
in 10 years.

They knew what was happening.

Countrywide Financial,
the largest subprime lender...

...issued $97 billion worth of loans.

It made over $11 billion in profits
as a result.

On Wall Street,
annual cash bonuses spiked.

Traders and CEOs...

...became enormously wealthy
during the bubble.

Lehman Brothers was a top
underwriter of subprime lending...

...and their CEO, Richard Fuld...

...took home $485 million.

On Wall Street,
this housing and credit bubble...

...was leading to hundreds of billions
of dollars of profits.

You know, by 2006 about 40 percent
of all profits...

...of S&P 500 firms was coming
from financial institutions.

It wasn't real profits or income.

It was money created by the system
and booked as income.

Two, three years down the road
there's a default, it's all wiped out.

I think it was, in fact, in retrospect,
a great big national--

And not just national,
global Ponzi scheme.

Through the Home Ownership
and Equity Protection Act...

...the Federal Reserve board
had broad authority...

...to regulate the mortgage industry.

But Fed chairman Alan Greenspan
refused to use it.

Alan Greenspan said,
"No, that's regulation.

I don't believe in it."

For 20 years, Robert Gnaizda
was the head of Greenlining...

...a powerful consumer
advocacy group.

He met with Greenspan
on a regular basis.

We gave him an example
of Countrywide...

...and 150 different
complex adjustable-rate mortgages.

He said,
"If you had a doctorate in math...

...you wouldn't be able
to understand them enough...

...to know which was good for you
and which wasn't."

So we thought
he was gonna take action.

But as the conversation continued...

...it was clear he was stuck
with his ideology.

We met again
with Greenspan in '05.

Often we met with him twice a year,
and never less than once a year.

And he wouldn't change his mind.

In this world
of global communications...

...the efficient movement
of capital...

...is helping to create the greatest
prosperity in human history.

A hundred and forty-six people were cut
from the SEC Enforcement Division?

Is that what you also testified to?

Yes.

Yeah, I think there has been
a systematic gutting...

...or whatever you wanna call it,
of the agency...

...and its capability
through cutting back of staff.

The SEC
Office of Risk Management...

...was reduced to a staff,
did you say, of one?

Yeah. When that gentleman would
go home, he could turn the lights out.

During the bubble, investment banks
were borrowing heavily...

...to buy more loans
and create more CDOs.

The ratio between borrowed money
and the banks' own money...

...was called leverage.

The more the banks borrowed,
the higher their leverage.

In 2004, Henry Paulson,
the CEO of Goldman Sachs...

...helped lobby the SEC
to relax limits on leverage...

...allowing the banks
to sharply increase their borrowing.

The SEC somehow decided...

...to let investment banks
gamble a lot more.

That was nuts. I don't know why
they did that, but they did.

We've said these are the big guys,
and clearly that's true.

But that means if anything goes wrong,
it's going to be an awfully big mess.

You are dealing with the most highly
sophisticated financial institutions.

These are the firms that do
most of the derivative activity.

We talked to some
as to what their comfort level was.

The firms actually thought
that the number was appropriate.

The commissioners vote to adopt
the new rules as recommended.

Yes.

We do indeed. It's unanimous.
And we are adjourned.

The degree of leverage
in the financial system...

...became absolutely frightening.

Investment banks leveraging
up to the level of 33-to-1 .

Which means that
a tiny 3-percent decrease...

...in the value of their asset base
would leave them insolvent.

There was another ticking time bomb
in the financial system.

AIG, the world's largest
insurance company...

...was selling huge quantities
of derivatives...

...called credit default swaps.

For investors who owned CDOs...

...credit default swaps worked
like an insurance policy.

An investor who purchased
a credit default swap...

...paid AIG a quarterly premium.

If the CDO went bad...

...AIG promised to pay the investor
for their losses.

But unlike regular insurance...

...speculators could also buy
credit default swaps from AIG...

...in order to bet against CDOs
they didn't own.

In insurance, you can only
insure something you own.

Let's say you and I own property.
I own a house.

I can only insure that house once.

The derivatives universe
essentially enables anybody...

...to actually insure that house.

You could insure that,
somebody else could.

So 50 people might insure
my house.

So what happens is,
if my house burns down...

...the number of losses in the system
becomes proportionately larger.

Since credit default swaps
were unregulated...

...AIG didn't have to put aside
any money to cover potential losses.

Instead, AIG paid its employees
huge cash bonuses...

...as soon as contracts
were signed.

But if the CDOs later went bad...

...AIG would be on the hook.

People were essentially being
rewarded for taking massive risks.

In good times, they generate
short-term revenues and profits...

...and, therefore, bonuses.

But that's gonna lead to the firm
to be bankrupt over time.

That's a distorted system
of compensation.

AIG's Financial Products division
in London...

...issued $500 billion worth of credit
default swaps during the bubble...

...many of them for CDOs
backed by subprime mortgages.

The 400 employees at AIGFP...

...made $3.5 billion
between 2000 and 2007.

Joseph Cassano,
the head of AIGFP...

...personally made $315 million.

It's hard for us...

...and without being flippant,
to even see a scenario...

...within any kind of
realm of reason...

...that would see us losing one dollar
in any of those transactions.

In 2007,
AIG's auditors raised warnings.

One of them, Joseph St. Denis...

...resigned in protest after
Cassano repeatedly blocked him...

...from investigating
AIGFP's accounting.

One person didn't get a bonus.

That was St. Denis. Mr. St. Denis
tried to alert the two of you...

...to the fact you were running
into big problems.

He quit in frustration,
and he didn't get a bonus.

In 2005, Raghuram Rajan...

...then the chief economist
of the International Monetary Fund...

...delivered a paper
at the Jackson Hole symposium...

...the most elite banking conference
in the world.

Who was in the audience?

It was the central bankers
of the world...

...ranging from
Mr. Greenspan himself...

...Ben Bernanke...

...Larry Summers.

Tim Geithner was there.

The title of the paper
was essentially:

"Is Financial Development
Making the World Riskier?"

And the conclusion was, it is.

Rajan's paper focused
on incentive structures...

...that generated huge cash bonuses
based on short-term profits...

...but which imposed no penalties
for later losses.

Rajan argued that these incentives
encouraged bankers...

...to take risks that might eventually
destroy their own firms...

...or even the entire
financial system.

It's very easy to generate performance
by taking on more risk.

So what you need to do is compensate
for risk-adjusted performance.

And that's where all the bodies
are buried.

Rajan, you know,
hit the nail on the head.

What he particularly said was:

"You guys have claimed
you've found a way...

...to make more profits
with less risk.

I say you've found a way
to make more profits with more risk.

There's a big difference."

Summers was vocal.

He basically thought...

...that I was criticizing the change
in the financial world...

...and was worried about,
you know, regulation...

...which would reverse this change.

Essentially he accused me
of being a Luddite.

He wanted to make sure
that we didn't bring in...

...a whole new set of regulations...

...to constrain the financial sector.

You're gonna make an extra $2 million
a year, or $10 million a year...

...for putting your financial institution
at risk.

Someone else pays the bill,
you don't.

Would you make that bet?

Most people on Wall Street said,
"Sure, I'd make that bet."

It never was enough.

They don't wanna own one home,
they wanna own five homes.

And they wanna have
an expensive penthouse...

...on Park Avenue.

And they wanna have
their own private jet.

You think this is an industry
where high--?

Very high compensation levels
are justified?

I think I would take caution,
or take heed...

...or take exception to your word
"very high." It's relative.

You have a 14-million-dollar home
in Florida.

You have a summer home
in Sun Valley, Idaho.

An art collection filled
with million-dollar paintings.

Richard Fuld never appeared
on the trading floor.

There were art advisors there
all the time.

He had a private elevator.

He wanted to be disconnected.

His elevator,
they hired technicians to program it...

...so that his driver would call in
in the morning...

...and a security guard
would hold it.

There's only a three-second window
where he actually has to see people.

And he hops into this elevator
and it goes straight to 31 .

Lehman owned corporate jets.

- You know about this?
- Yes.

How many were there?

Well, there were six,
including the 767s.

They also had a helicopter.

Isn't that kind of a lot of planes
to have?

We're dealing with
type-A personalities.

Banking became a pissing contest.

"Mine's bigger than yours."
That kind of stuff.

It was all men that ran it,
incidentally.

Fifty-billion-dollar deals weren't big
enough, so we'd do 100-billion deals.

These people are risk-takers.
They're impulsive.

It's part of their behavior.
It's part of their personality.

And that manifests
outside of work as well.

It was quite typical
for the guys to go out...

...to go to strip bars, to use drugs.

I see a lot of cocaine use,
use of prostitution.

Recently, neuroscientists
have done experiments...

...where they've taken individuals
and put them into an MRI machine...

...and they have them play a game
where the prize is money.

And they noticed that when
the subjects earn money...

...the part of the brain
that gets stimulated...

...is the same part
that cocaine stimulates.

A lot of people feel that they need
to participate in that behavior...

...to make it, to get promoted,
get recognized.

According to a Bloomberg article,
business entertainment...

...represents 5 percent of revenue
for derivatives brokers...

...and often includes strip clubs,
prostitution and drugs.

A New York broker filed a lawsuit
in 2007 against his firm...

...alleging he was required to retain
prostitutes to entertain traders.

There's just a blatant disregard...

...for the impact that their actions
might have on society, on family.

They have no problem
using a prostitute...

...and going home to their wife.

How many customers?

About 10,000 at that point in time.

What fraction
were from Wall Street?

Of the higher-end clients,
probably 40 to 50 percent.

Were all the major Wall Street firms
represented?

- Goldman Sachs?
- Lehman Brothers. They're all in there.

Morgan Stanley was
a little less of that.

I think Goldman was
pretty, pretty big with that.

Clients would call and say:

"Can you get me a Lamborghini
for the girl?"

These guys were spending
corporate money.

I had many black cards from,
you know, the various financial firms.

What's happening is
services are being charged...

...to computer repair.

Trading research, you know,
consulting for market compliance.

Just gave them letterhead and said,
"Make your own invoice."

This behavior extends
to the senior management of the firm?

Absolutely does. Yeah.

I know for a fact that it does.

It extends to the very top.

A friend of mine in a company that
has a big financial presence said:

"It's about time you learned
about subprime mortgages."

So he set up a session
with his trading desk and me.

And the techie who did all this
gets very excited...

...runs to his computer,
pulls up in about three seconds...

...this Goldman Sachs
issue of securities.

It was a complete disaster.

Borrowers had borrowed, on average,
99.3 percent of the price of the house.

They have no money in the house.

If anything goes wrong,
they walk away from the mortgage.

This is not a loan
you'd really make, right?

You've gotta be crazy.

But somehow,
you took 8000 of these loans...

...and by the time
the guys were done...

...at Goldman Sachs
and the rating agencies...

...two-thirds of the loans
were rated triple-A.

They were rated as safe
as government securities.

It's utterly mad.

Goldman Sachs sold
at least $3.1 billion worth...

...of these toxic CDOs
in the first half of 2006.

The CEO of Goldman Sachs
at this time was Henry Paulson...

...the highest paid CEO
on Wall Street.

Good morning.
I'm pleased to announce...

...that I will nominate Henry Paulson
to be the Secretary of the Treasury.

He has a lifetime of experience.

He has knowledge
of financial markets.

He's earned a reputation
for candor and integrity.

You might think it would be hard...

...to adjust to a meager
government salary.

But taking the job
as Treasury secretary...

...was the best
financial decision of his life.

Paulson had to sell his $485 million
of Goldman stock...

...when he went to work
for the government.

But because of a law passed
by the first President Bush...

...he didn't have to pay
any taxes on it.

It saved him $50 million.

The article came out
in October of 2007.

Already, a third of
the mortgages defaulted.

Now most of them are going.

One group that had purchased
these now worthless securities...

...was the Public Employees'
Retirement System of Mississippi...

...which provides monthly benefits
to over 80,000 retirees.

They lost millions of dollars
and are now suing Goldman Sachs.

By late 2006, Goldman had
taken things a step further.

It didn't just sell toxic CDOs...

...it started betting against them at the
same time it was telling customers...

...that they were
high-quality investments.

By purchasing credit default swaps
from AIG...

...Goldman could bet against
CDOs it didn't own...

...and get paid
when the CDOs failed.

I asked if anybody
called the customers and said:

"We don't really like this kind
of mortgage anymore...

...and we thought
you ought to know."

They didn't say anything, but you
could feel the laughter over the phone.

Goldman Sachs bought
at least $22 billion...

...of credit default swaps from AIG.

It was so much that Goldman realized
that AIG itself might go bankrupt.

So they spent $150 million
insuring themselves...

...against AIG's potential collapse.

Then in 2007,
Goldman went even further.

They started selling CDOs
specifically designed...

...so that the more money
their customers lost...

...the more money
Goldman Sachs made.

Six hundred million dollars of
Timberwolf securities is what you sold.

Before you sold them...

...this is what your sales team
were telling to each other:

"Boy, that Timberwolf
was one shitty deal."

This was an e-mail to me in late June,
after the transaction.

No, no. You sold Timberwolf
after as well.

- We did trades after that.
- Yeah. Okay.

The next e-mail--
Take a look. July 1, '07.

--tells the sales force,
"The top priority is Timberwolf."

Your top priority to sell
is that shitty deal.

If you have an adverse interest
to your client...

...do you have the duty
to disclose it?

To tell that client
of your adverse interest?

- That's my question.
- I'm trying to understand--

I think you understand.
You don't wanna answer.

Do you believe you have a duty...

...to act in your clients'
best interest?

I repeat, we have a duty
to serve our clients...

...by showing prices on transactions
that they ask us to show prices for.

What do you think
about selling securities...

...which your own people think
are crap?

Does that bother you?

I think they would....

- As a hypothetical?
- No, this is real.

- Well, then I don't know--
- We heard it today.

We heard it today.
"This is a shitty deal." "This is crap."

I heard nothing today...

...that makes me think
anything went wrong.

Is there not a conflict when you
sell something to somebody...

...and then are determined
to bet against that same security...

...and you don't disclose that
to the person you're selling it to?

You see a problem?

In the context of market making,
that is not a conflict.

When you heard your employees in
e-mails said, "What a shitty deal"...

...did you feel anything?

That's very unfortunate
to have on e-mail.

Are you embar--?

And very unfortunate--
I don't-- I don't--

"On e-mail"?
How about feeling that way?

It's very unfortunate for anyone
to have said that in any form.

Are your competitors engaged
in similar activities?

Yes, and to a greater extent than us
in most cases.

Hedge fund manager John Paulson
made $12 billion...

...betting against
the mortgage market.

When Paulson ran out of
mortgage securities to bet against...

...he worked with Goldman Sachs
and Deutsche Bank to create more.

Morgan Stanley was also selling...

...mortgage securities it was betting
against, and it's now being sued by...

...the Government Employees'
Retirement Fund of the Virgin Islands...

...for fraud.

The lawsuit alleges
that Morgan Stanley knew...

...that the CDOs were junk.

Although they were rated triple-A...

...Morgan Stanley
was betting they would fail.

A year later, Morgan Stanley had
made hundreds of millions of dollars...

...while the investors
had lost almost all of their money.

You would have thought
pension funds would have said:

"Those are subprime.
Why am I buying them?"

They had these guys at Moody's
and Standard & Peer's...

...who said, "That's a triple-A."

No securities got issued without the
seal of approval of the rating agencies.

The three rating agencies,
Moody's, S&P and Fitch...

...made billions of dollars
giving high ratings to risky securities.

Moody's, the largest rating agency,
quadrupled its profits...

...between 2000 and 2007.

Moody's and S&P get compensated
based on putting out ratings reports.

And the more structured securities
they gave a triple-A rating to...

...the higher their earnings were.

Imagine going to The Times saying:

"Write a positive story,
I'll pay you $500,000.

If you don't, I'll give you nothing."

Rating agencies could have
stopped the party and said:

"Sorry. We're gonna tighten
our standards"...

...and immediately cut off
the funding to risky borrowers.

Triple-A-rated instruments...

...mushroomed from just a handful
to thousands and thousands.

Hundreds of billions of dollars
were being rated, you know, and--

- Per year?
- Per year. Oh, yeah.

I've now testified before
both houses of Congress...

...on the credit rating agency issue...

...and both times they trot out very
prominent First Amendment lawyers...

...and argue that, "When we say
something is rated triple-A...

...that is merely our 'opinion.'
You shouldn't rely on it."

S&P's ratings express our opinion.

Our ratings are our opinions.
They're opinions.

Opinions. And they are just opinions.

I think we are emphasizing the fact
that our ratings are opinions.

They do not speak
to the market value of a security...

...the volatility of its price,
or its suitability as an investment.

We have many economists saying:

"This is a bubble,
it's going to burst.

This is going to be
an issue for the economy."

Some say it could even cause
a recession at some point.

What is the worst-case scenario if,
in fact, we were to see prices...

...come down substantially
across the country?

I don't buy your premise.
It's an unlikely possibility.

We've never had a decline
in house prices on a nationwide basis.

Ben Bernanke became chairman of the
Federal Reserve in February 2006...

...the top year for subprime lending.

But despite numerous warnings...

...Bernanke and the
Federal Reserve Board did nothing.

Robert Gnaizda met with Bernanke
and the Federal Reserve Board...

...three times after
Bernanke became chairman.

Only at the last meeting did he
suggest that there was a problem...

...and that the government
ought to look into it.

When? When was that? What year?

It's 2009, March 11 th, in D.C.

- This year?
- This year we met, yes.

And so for the two previous years
you met him....

- Even in 2008?
- Yes.

One of the six Federal Reserve Board
governors serving under Bernanke...

...was Frederic Mishkin...

...who was appointed
by President Bush in 2006.

Did you participate in the meetings
Robert Gnaizda...

...and Greenlining had
with the Federal Reserve Board?

Yes, I did. I was on the committee
that was involved...

...with the Consumer Community
Affairs Committee.

He warned, in an extremely explicit
manner, about what was going on.

He came to the Federal Reserve
Board with loan documentation...

...of the kind of loans
that were frequently being made.

And he was listened to politely,
and nothing was done.

So again, I don't know the details
in terms of....

In fact, I just don't-- I--

Whatever information he provided,
I'm not sure exactly....

To be honest with you, I can't
remember this kind of discussion...

...but certainly there were issues
that were coming up.

The question is,
how pervasive are they?

- Why didn't you try looking?
- I think that people did.

We had people looking at--

Excuse me. You can't be serious.
You would have found things.

That's very easy to always say
that you can always find it.

As early as 2004...

...the FBI was already warning
about an epidemic of mortgage fraud.

They reported inflated appraisals...

...doctored loan documentation
and other fraudulent activity.

In 2005, the IMF's chief economist,
Raghuram Rajan...

...warned that dangerous incentives
could lead to a crisis.

Then came Nouriel Roubini's
warnings in 2006...

...Allan Sloan's articles
in Fortune magazine...

...and The Washington Post
in 2007...

...and repeated warnings
from the IMF.

I said, and on behalf of the institution,
the crisis in front of us is a huge crisis.

Who did you talk to?

The government, Treasury,
Fed, everybody.

In May of 2007, hedge fund manager
Bill Ackman circulated a presentation...

..."Who is Holding the Bag?"...

...which described
how the bubble would unravel.

And in early 2008,
Charles Morris published his book...

...about the impending crisis.

You're not sure. What do you do?

You might have some suspicions that
underwriting standards are weakened.

But then the question is,
should you do anything about it?

By 2008, home foreclosures
were skyrocketing...

...and the securitization food chain
imploded.

Lenders could no longer sell
their loans to the investment banks.

And as the loans went bad,
dozens of lenders failed.

Chuck Prince of Citibank
famously said...

...that we have to dance
until the music stops.

Actually, the music had stopped
already when he said that.

The market for CDOs collapsed...

...leaving investment banks holding
hundreds of billions of dollars...

...in loans, CDOs, and real estate
they couldn't sell.

When the crisis started,
both the Bush administration...

...and the Federal Reserve
were totally behind the curve.

They did not understand
the extent of it.

At what point do you remember
thinking for the first time:

"This is dangerous, this is bad"?

I remember very well one--
I think it was a G7 meeting...

...of February, 2008.

And I remember discussing the issue
with Hank Paulson.

And I clearly remember
telling Hank:

"We are watching
this tsunami coming...

...and you're just proposing
that we ask...

...which swimming costume
we're going to put on."

What was his response?
What was his feeling?

"Things are under control.

Yes, we are looking
at this situation carefully...

...and, yeah, it's under control."

We're gonna keep growing. Okay?
And, obviously, I'll say it:

If you're growing,
you're not in recession, right?

I mean, we all know that.

One of the pillars of Wall Street....

In March 2008, the investment bank
Bear Stearns ran out of cash...

...and was acquired for $2 a share
by JP Morgan Chase.

The deal was backed by $30 billion
in emergency guarantees...

...from the Federal Reserve.

That was when the administration
could have come in...

...and put in place various measures
to reduce system risk.

The information I'm receiving
is the end is not here...

...that there are other shoes to fall.

Well, I've seen
those investment banks...

...working with the Fed
and the SEC...

...strengthen their liquidity,
strengthen their capital positions.

I get reports all the time.
Our regulators are very vigilant.

On September 7th, 2008...

...Henry Paulson announced
the federal takeover...

...of Fannie Mae and Freddie Mac,
giant lenders on the brink of collapse.

Nothing about our actions today
reflects a changed view...

...of the housing correction...

...or the strength
of other U.S. financial institutions.

Two days later...

...Lehman Brothers announced
record losses of $3.2 billion...

...and its stock collapsed.

The effects of Lehman and AIG
in September still came as a surprise.

I mean, this is even after July
and Fannie and Freddie.

So clearly there was stuff that,
as of September...

...major stuff,
that nobody knew about.

I think that's-- I think that's fair.

Bear Stearns was rated triple-A
like a month before it went bankrupt?

- More likely A2.
- A2?

- Yeah.
- Okay.

A2 is still not bankrupt.

No, that's a high investment grade.
Solid investment grade rating.

Lehman Brothers,
A2 within days of failing.

AIG, double-A
within days of being bailed out.

Fannie Mae and Freddie Mac
were triple-A when they were rescued.

Citigroup, Merrill, all of them
had investment-grade ratings.

- How can that be?
- Well, that's a good question.

That's a great question.

At no point did the administration ever
go to all the major institutions and say:

"This is serious.
Tell us what your positions are.

You know, no bullshit.
Where are you?"

Well, first, that's what the regulators--
That's their job, right?

Their job is to understand
the exposure across these institutions.

And they have
a very refined understanding...

...that I think became more respon--
More refined as the crisis proceeded.

- So--
- Forgive me, but that's clearly not true.

What do you mean, that's not true?

In August of 2008...

...were you aware of the credit ratings
held by Lehman Brothers...

...Merrill Lynch, AIG...

...and did you think
that they were accurate?

Well, certainly by that time...

...it was clear earlier credit ratings
weren't accurate.

- They had been downgraded.
- No, they hadn't.

There was downgrading in terms
of the industry and concerns of the--

All those firms were rated
at least A2...

...until a couple of days
before they were rescued.

The answer is I don't know enough
to answer your question on this issue.

Governor Fred Mishkin is resigning,
effective August 31 .

He plans to return to Columbia's
Graduate School of Business.

Why did you leave the
Federal Reserve in August of 2008...

...in the middle
of the worst financial crisis?

So that-- I had to revise a textbook.

His departure leaves the board
with three of its seven seats vacant...

...just when the economy
needs it most.

I'm sure your textbook is important
and widely read, but in August 2008...

...some more important things were
going on in the world, don't you think?

By Friday, September 12th...

...Lehman Brothers had
run out of cash...

...and the entire investment-banking
industry was sinking fast.

The stability of the global
financial system was in jeopardy.

That weekend, Henry Paulson
and Timothy Geithner...

...president of
the New York Federal Reserve...

...called an emergency meeting
with the CEOs of the major banks...

...in an effort to rescue Lehman.

But Lehman wasn't alone.

Merrill Lynch was also
on the brink of failure.

And that Sunday,
it was acquired by Bank of America.

The only bank interested in buying
Lehman was the British firm Barclays.

But British regulators demanded
a financial guarantee from the U.S.

Paulson refused.

We got in a cab and went
to the Federal Reserve Bank.

They wanted the bankruptcy case
commenced before midnight...

...of September 14.

We kept pressing
that this would be a terrible event...

...and at some point
I used the word Armageddon...

...and they consider the consequences
of what they were proposing.

The effect on the market
would be extraordinary.

- You said this?
- Yes.

They just said they had considered
all of the comments we had made...

...and they were still of the belief
that in order to calm the markets...

...and move forward, it was necessary
for Lehman to go into bankruptcy.

- "Calm the markets"?
- Yes.

When were you first told that Lehman,
in fact, was going to go bankrupt?

- After the fact.
- After the fact?

Okay.

And what was your reaction
when you learned of it?

"Holy cow."

Paulson and Bernanke had not
consulted with other governments...

...and didn't know the consequences
of foreign bankruptcy laws.

--Lehman Brothers London
empty their desks....

Under British law...

...Lehman's London office
had to be closed immediately.

All transactions came to a halt, and
there are thousands of transactions.

The hedge funds who had had assets
with Lehman in London...

...discovered overnight,
to their complete horror...

...they couldn't get
those assets back.

One of the points of the hub failed.

And that had huge knock-on effects
around the system.

The oldest money market fund
in the nation...

...wrote off three-quarters
of a billion dollars in bad debt...

...issued by now-bankrupt
Lehman Brothers.

Lehman's failure caused a collapse
in the commercial paper market...

...which many companies depend on
to pay for expenses...

...such as payroll.

That means they have to lay off
employees, they can't buy parts.

It stops business in its tracks.

People stood and said,
"Listen, what can we believe in?

There's nothing
we can trust anymore."

That same week,
AIG owed $13 billion...

...to holders of credit default swaps
and it didn't have the money.

AIG was another hub.

If AIG had stopped, you know,
all planes may have to stop flying.

On September 17th,
AIG is taken over by the government.

One day later, Paulson
and Bernanke ask Congress...

...for $700 billion
to bail out the banks.

We're coming together....

They warned that the alternative
would be a catastrophic collapse.

It was scary.
You know, the entire system froze up.

Every part of the financial system,
every part of the credit system.

Nobody could borrow money.

It was like a cardiac arrest
of the global financial system.

I'm playing the hand dealt me.

A lot of what I'm dealing with--

I'm dealing with the consequences
of things that were done years ago.

Secretary Paulson spoke
through the fall.

All the potential root causes of this,
and there are plenty...

- ...he called them. I'm not sure--
- You're not being serious about that.

I am being serious.
What would you have expected?

What were you looking for
that you didn't see?

He was the senior advocate...

...for prohibiting the regulation
of credit default swaps...

...and also lifting the leverage limits
on the investment banks.

So again, what--?

He mentioned those things? I never
heard him mention those things.

Could we turn this off for a second?

When AIG was bailed out, the owners
of its credit default swaps...

...the most prominent of which
was Goldman Sachs...

...were paid $61 billion
the next day.

Paulson, Bernanke
and Tim Geithner...

...forced AIG to pay 100 cents
on the dollar...

...rather than negotiate
lower prices.

Eventually, the AIG bailout
cost taxpayers over $150 billion.

A hundred and sixty billion dollars
went through AIG.

Fourteen billion went
to Goldman Sachs.

At the same time,
Paulson and Geithner forced AIG...

...to surrender its right to sue Goldman
and the other banks for fraud.

Isn't there a problem when the person
in charge of dealing with this crisis...

...is the former CEO
of Goldman Sachs?

Someone who had a major role
in causing it.

It's fair to say
that the financial markets today...

...are incredibly complicated.

--and supply
urgently needed money....

On October 4th, 2008...

...President Bush signs
a 700-billion-dollar bailout bill.

But world stock markets
continue to fall...

...amid fears that a global recession
is now underway.

The bailout legislation does nothing
to stem the tide of layoffs...

...and foreclosures.

Unemployment in the United States
and Europe rises to 10 percent.

The recession accelerates
and spreads globally.

I began to get really scared
because I hadn't foreseen...

...the whole world going down
at the same rate at the same time.

By December of 2008...

...General Motors and Chrysler
are facing bankruptcy.

And as U.S. consumers cut back
on spending...

...Chinese manufacturers
see sales plummet.

Over 10 million migrant workers
in China lose their jobs.

At the end of the day, the poorest,
as always, pay the most.

Here, you can earn a lot of money.

Like 70, 80 U.S. dollars per month.

As a farmer in the countryside,
you cannot earn as much money.

The workers, they just wire
their salary to their hometown...

...to give to their families.

The crisis started in America.

We all know it will be coming
to China.

Some of the factories try
to cut off some workers.

And some people will get poor
because they'll lose their jobs.

Life gets harder.

We were growing
at about 20 percent.

It was a super year. Then we suddenly
went to minus-nine this quarter.

Exports collapsed,
and we're talking like 30 percent.

So we just took a hit, you know.
Fell off a cliff.

Even as the crisis unfolded, we didn't
know how wide it was going to spread...

...or how severe it was going to be.

We were still hoping
that there would be some way...

...for us to have a shelter
and be less battered by the storm.

But it's not possible.

It's a very globalized world.

The economies
are all linked together.

Every time a home
goes into foreclosure...

...it affects everyone
who lives around that house.

When that house goes on the market,
it'll be sold at a lower price.

Maybe before it goes on the market,
it won't be well-maintained.

We estimate another 9 million
homeowners will lose their homes.

We went out on a weekend to see
what houses were for sale.

We saw one we liked.

The payment
was going to be $3200.

Everything was beautiful,
the house was very pretty.

The payment low. Everything was--

We won the lottery.

But the reality was when
the first payment arrived.

I felt very bad for my husband...

...because he works too much.
And we have three children.

The majority I've seen are people
hurt by the economy.

They were living day to day,
paycheck to paycheck...

...and that ran out.

Unemployment won't pay a mortgage.
It won't pay a car bill.

I was a log truck driver.

They shut down the logging systems,
shut down the sawmills.

So I moved down here
on a construction job.

And the construction jobs
got shut down too, so....

Things are so tough.
There's a lot of people out there.

Soon you're gonna be seeing
more camps like this...

...because there's just no jobs
right now.

When the company did well,
we did well.

When the company did not do well,
sir, we did not do well.

The men who destroyed
their own companies...

...and plunged the world
into crisis...

...walked away from the wreckage
with their fortunes intact.

The top five executives at Lehman
Brothers made over a billion dollars...

...between 2000 and 2007.

And when the firm went bankrupt,
they got to keep all the money.

The system worked.

It doesn't make sense to make
a failing loan because we lose.

The borrower loses,
the community loses and we lose.

Countrywide's CEO,
Angelo Mozilo...

...made $470 million
between 2003 and 2008.

One hundred forty million came from
dumping his Countrywide stock...

...in the 12 months
before the company collapsed.

I hold the board accountable
when a business fails.

They're responsible
for hiring and firing the CEO...

...and overseeing
big strategic decisions.

The problem with boards in America
is the way boards are elected.

You know, the boards are pretty much,
in many cases, picked by the CEO.

The board of directors
and compensation committees...

...are the two bodies best situated
to determine pay for executives.

How do you think they've done
over the past 10 years?

Well, I think that if you look at those--
I would give about a B, because--

- A B?
- A B, yes.

- Not an F?
- Not an F, not an F.

Stan O'Neal,
the CEO of Merrill Lynch...

...received $90 million
in 2006 and 2007 alone.

After driving his firm
into the ground...

...the board of directors
allowed him to resign...

...and he collected $161 million
in severance.

Instead of being fired,
Stan O'Neal is allowed to resign...

...and takes away $151 million.

That's a decision that
that board of directors made.

What grade
do you give that decision?

That's a tougher one.
I don't know if I'd give it a B as well.

O'Neal's successor, John Thain,
was paid $87 million in 2007.

And in December of 2008...

...two months after Merrill
was bailed out by U.S. taxpayers...

...Thain and Merrill's board
handed out billions in bonuses.

In March of 2008,
AIG's Financial Products division...

...lost $11 billion.

Instead of being fired,
Joseph Cassano, head of AIGFP...

...was kept on as a consultant
for a million dollars a month.

You wanna make sure key players
and key employees within AIGFP...

...we retain
that intellectual knowledge.

I attended
a very interesting dinner...

...organized by Hank Paulson
a little more than one year ago...

...with some officials
and a couple of CEOs...

...from the biggest banks in the U.S.

And surprisingly enough,
all these gentlemen were arguing:

"We were too greedy, so we have
part of the responsibility." Fine.

Then they were turning to the treasurer,
Secretary of the Treasury, and saying:

"You should regulate more.
We're too greedy, we can't avoid it.

The only way to avoid this
is to have more regulation."

I have spoken to many bankers
about this question...

...including very senior ones.

And this is the first time
that I've ever heard anybody say...

...they wanted their compensation
to be regulated in any way.

Yeah, because it was at the moment
where they were afraid.

And after, when solution to the crisis
began to appear...

...then probably
they changed their mind.

In the U.S., the banks are now bigger,
more powerful...

...and more concentrated
than ever before.

There are fewer competitors.

A lot of smaller banks have been
taken over by big ones.

J.P. Morgan is even bigger
than it was before.

J.P. Morgan took over first
Bear Stearns and then WaMu.

Bank of America took over
Countrywide and Merrill Lynch.

Wells Fargo took over Wachovia.

After the crisis,
the financial industry...

...including the
Financial Services Roundtable...

...worked harder than ever
to fight reform.

The financial sector
employs 3000 lobbyists...

...more than five
for each member of Congress.

You think the financial services
industry...

...has excessive political influence
in the United States?

No. I think that every person
in the country...

...is represented
here in Washington.

And you think that all segments
of American society...

...have equal and fair access
to the system?

That you can walk into any hearing
room that you would like. Yes, I do.

One can walk into any hearing room.
One cannot necessarily...

...write the lobbying checks
that your industry writes...

...or engage in the level of political
contributions your industry engages in.

Between 1998 and 2008...

...the financial industry
spent over $5 billion...

...on lobbying
and campaign contributions.

And since the crisis,
they're spending even more money.

The financial industry
also exerts its influence...

...in a more subtle way, one that
most Americans don't know about.

It has corrupted the study
of economics itself.

Deregulation had tremendous
financial and intellectual support...

...because people argued it
for their own benefit.

The economics profession
was the main source of that illusion.

Since the 1980s,
academic economists...

...have been major advocates
of deregulation...

...and played powerful roles
in shaping U.S. government policy.

Very few of these economic experts
warned about the crisis.

And even after the crisis,
many of them opposed reform.

The guys who taught these things
tended to get paid a lot of money...

...being consultants.

Business school professors
don't live on a faculty salary.

They do very, very well.

Over the last decade,
the financial services industries...

...made about $5 billion worth of
political contributions in the U.S.

That's kind of a lot of money.

- That doesn't bother you?
- No.

Martin Feldstein
is a professor at Harvard...

...and one of the world's
most prominent economists.

As President Reagan's
chief economic advisor...

...he was a major architect
of deregulation.

And from 1988 until 2009...

...he was on the board of directors
of both AIG...

...and AIG Financial Products...

...which paid him millions of dollars.

You have any regrets
about having been on AIG's board?

I have no comments. No, I have
no regrets about being on AIG's board.

- None?
- That I can say. Absolutely none.

Okay.

You have any regrets
about AIG's decisions?

I cannot say anything more
about AIG.

I've taught at Northwestern
in Chicago, Harvard and Columbia.

Glenn Hubbard is the dean
of Columbia Business School...

...and was chairman
of the Council of Economic Advisers...

...under George W. Bush.

Do you think
the financial services industry...

...has too much political power
in the United States?

I don't think so. No. You certainly
wouldn't get that impression...

...by the drubbing
that they regularly get in Washington.

Many prominent academics
quietly make fortunes...

...helping the financial industry shape
public debate and government policy.

The Analysis Group,
Charles River Associates...

...Compass Lexecon...

...and the Law and Economics
Consulting Group...

...manage a multibillion-dollar
industry...

...that provides academic experts
for hire.

Two bankers
who used these services...

...were Ralph Cioffi
and Matthew Tannin...

...Bear Stearns hedge fund managers
prosecuted for securities fraud.

After hiring the Analysis Group,
both were acquitted.

Glenn Hubbard was paid $100,000
to testify in their defense.

Do you think the economics discipline
has a conflict-of-interest problem?

I'm not sure I know what you mean.

Do you think a significant fraction of
the economics discipline, economists...

...have financial conflicts of interest
that might call into question or color--?

I see what you're saying. I doubt it.

Most academic economists
aren't wealthy business people.

Hubbard makes $250,000 a year
as a board member of MetLife...

...and was formerly
on the board of Capmark...

...a major commercial
mortgage lender during the bubble...

...which went bankrupt in 2009.

He has also advised
Nomura Securities...

...KKR Financial Corporation
and many other financial firms.

Laura Tyson, who declined
to be interviewed for this film...

...is a professor at the
University of California, Berkeley.

She was the chair of
the Council of Economic Advisers...

...then director of the National
Economic Council under Clinton.

After leaving government, she joined
the board of Morgan Stanley...

...which pays her $350,000 a year.

Ruth Simmons,
president of Brown University...

...makes over $300,000 a year
on the board of Goldman Sachs.

Larry Summers, who,
as Treasury secretary, played a role...

...in the deregulation of derivatives,
became president of Harvard in 2001 .

While at Harvard, he made millions
consulting to hedge funds...

...and millions more in speaking fees,
much of it from investment banks.

According to his federal disclosure
report, Summers' net worth...

...is between $16.5 million
and $39.5 million.

Frederic Mishkin, who returned
to Columbia Business School...

...after leaving the Federal Reserve,
reported on his disclosure report...

...that his net worth was between
$6 million and $17 million.

In 2006, you coauthored a study
of Iceland's financial system.

"Iceland is an advanced country...

...with excellent institutions,
low corruption, rule of law.

The economy has adjusted
to financial liberalization...

...while prudential regulation and
supervision is generally quite strong."

And that was the mistake,
that it turns out...

...prudential regulation and supervision
was not strong in Iceland...

- ...during this period--
- What led you to think it was?

You're going with the information
you had...

...and generally, the view was that
Iceland had very good institutions.

- It was an advanced country--
- Who told you that?

- What research did you do?
- You talk to people.

You have faith in the central bank,
which actually did fall down on the job.

That clearly it-- This--

- Why have faith in a central bank?
- Well, that faith-- You try--

Because you go with
the information you have.

- How much were you paid to write it?
- I was paid--

I think the number--
It's public information.

On your CV, the title of this report
has been changed...

...from "Financial Stability in Iceland"
to "Financial Instability in Iceland."

Well, I don't know. Whatever it is--
If there's a typo, there's a typo.

What should be publicly available...

...is whenever anybody
does research on a topic...

...that they disclose if they have any
financial conflict with that research.

But if I recall,
there is no policy to that effect.

I can't imagine anybody not doing that
in terms of putting it in a paper. You--

There would be significant professional
sanction for failure to do that.

I didn't see any place in the study
where you indicated you'd been paid...

...by the Icelandic Chamber
of Commerce to produce it.

- No, I don't-- You know.
- Okay.

Richard Portes, the most
famous economist in Britain...

...and a professor at
London Business School...

...was also commissioned by the
Icelandic Chamber of Commerce...

...to write a report which praised
the Icelandic financial sector.

The banks themselves
are highly liquid.

They've made money
on the fall of the Icelandic króna.

These are strong banks.

Their market funding is assured
for the coming year.

- These are well-run banks.
- Thank you.

Like Mishkin, Portes' report
didn't disclose his payment...

...from the Icelandic
Chamber of Commerce.

Does Harvard require disclosures
of financial conflict of interest?

Not to my knowledge.

Do you require people
to report the compensation...

- ...received from outside activities?
- No.

Don't you think that's a problem?

I don't see why.

Martin Feldstein
being on the board of AIG...

...Laura Tyson at Morgan Stanley...

...Larry Summers making $10 million
consulting to financial services firms....

Irrelevant?

Yeah.

Yeah. Basically irrelevant.

You've written many articles
about a wide array of subjects.

You never saw fit
to investigate the risks...

...of unregulated
credit default swaps?

I never did.

Same question with regard
to executive compensation?

The regulation
of corporate governance?

The effect of political contributions?

I don't know that I would have
anything to add to those discussions.

I'm looking at your résumé now.

It looks to me as if the majority
of your outside activities...

...are consulting
and directorship arrangements...

...with the financial services
industry.

Would you not agree
with that characterization?

To my knowledge, I don't think
my consulting clients are on my CV.

- So I wouldn't know.
- Who are your consulting clients?

I don't believe I have to
discuss that with you.

Okay.

In fact, you have a few more minutes
and the interview's over.

Do you consult
for any financial services firms?

- The answer is I do.
- And?

And-- But I do not wanna go
into details about that.

Do they include
other financial services firms?

Possibly.

You don't remember?

This isn't a deposition, sir.
I was polite enough to give you time.

Foolishly, I now see.
But you have three more minutes.

Give it your best shot.

In 2004,
at the height of the bubble...

...Glenn Hubbard coauthored a widely
read paper with William C. Dudley...

...the chief economist
of Goldman Sachs.

In the paper,
Hubbard praised credit derivatives...

...and the securitization chain...

...stating they had improved
allocation of capital...

...and were enhancing
financial stability.

He cited reduced volatility
in the economy...

...and stated that recessions
had become less frequent and milder.

Credit derivatives were
protecting banks against losses...

...and helping to distribute risk.

A medical researcher
writes an article, saying:

"To treat this disease,
you should prescribe this drug."

Turns out doctor makes 80 percent
of personal income...

...from manufacture of this drug.
Does not bother you?

I think it's certainly important
to disclose the....

Well, I think that's also
a little different...

...from cases that we're
talking about here because....

So, what do you think this says
about the economics discipline?

Well, I mean, it has no relevance
to anything, really.

And, indeed,
I think it's a part of the--

It's an important part of the problem.

The rising power
of the U.S. financial sector...

...was part of a wider change
in America.

Since the 1980s, the United States
has become a more unequal society...

...and its economic dominance
has declined.

Companies like General Motors,
Chrysler and U.S. Steel...

...formerly the core
of the U.S. economy...

...were poorly managed and falling
behind their foreign competitors.

And as countries like China
opened their economies...

...American companies
sent jobs overseas to save money.

For many, many years,
the 660 million people...

...in the developed world
were sheltered...

...from all of this additional labor
that existed on the planet.

Suddenly the Bamboo Curtain
and the Iron Curtain are lifted...

...and you have 2.5 billion
additional people.

American factory workers
were laid off by the tens of thousands.

Our manufacturing base
was destroyed, literally...

...over a few years.

As manufacturing declined,
other industries rose.

The United States leads the world
in information technology...

...where high-paying jobs
are easy to find.

But those jobs
require an education.

And for average Americans,
college is increasingly out of reach.

While universities like Harvard have
billions of dollars in endowments...

...funding for public universities
is shrinking and tuition is rising.

Tuition for California's
public universities...

...rose from $650 in the 1970s
to over $10,000 in 2010.

The most important determinant
of whether Americans go to college...

...is whether they can find
the money to pay for it.

Meanwhile, American tax policy
shifted to favor the wealthy.

When I first came to office, I thought
taxes were too high, and they were.

The most dramatic change
was a series of tax cuts...

...designed by Glenn Hubbard,
who was serving...

...as President Bush's
chief economic advisor.

The Bush administration sharply
reduced taxes on investment gains...

...stock dividends,
and eliminated the estate tax.

We had a comprehensive plan
that when acted...

...has left nearly $1.1 trillion
in the hands of American workers...

...families, investors
and small-business owners.

Most benefits of these cuts went to
the wealthiest 1percent of Americans.

And by the way,
it was the cornerstone...

...in many ways,
of our economic recovery policy.

Inequality of wealth
in the United States...

...is now higher
than in any other developed country.

American families responded
to these changes in two ways:

By working longer hours
and by going into debt.

As the middle class falls
further and further behind...

...there is a political urge
to respond...

...by making it easier to get credit.

You don't have to have
a lousy home.

The low-income home buyer can have
just as nice a house as anybody else.

American families borrowed
to finance their homes, their cars...

...their healthcare,
and their children's educations.

People in the bottom 90 percent...

...lost ground
between 1980 and 2007.

It all went to the top 1percent.

For the first time in history,
average Americans...

...have less education and are
less prosperous than their parents.

The era of greed and irresponsibility
on Wall Street and in Washington...

...has led us to a financial crisis...

...as serious as any that we've faced
since the Great Depression.

When the financial crisis struck
before the 2008 election...

...Barack Obama pointed
to Wall Street greed...

...and regulatory failures as examples
of the need for change in America.

A lack of oversight in Washington
and on Wall Street...

...is exactly what got us
into this mess.

After taking office, Obama spoke
of the need to reform the industry.

We want a risk regulator,
increased capital requirements.

We need a consumer financial
protection agency.

We need to change
Wall Street's culture.

But when finally enacted
in mid-201 0...

...the administration's
financial reforms were weak.

And in some critical areas,
including the rating agencies...

...lobbying and compensation...

...nothing significant
was even proposed.

Addressing Obama
and, quote, "regulatory reform"...

...my response, if it was one word,
would be "ha."

There's very little reform.

How come?

It's a Wall Street government.

Obama chose Timothy Geithner
as Treasury secretary.

Geithner was president
of the New York Federal Reserve...

...during the crisis,
and a key player in the decision...

...to pay Goldman Sachs
1 00 cents on the dollar...

...for its bets against mortgages.

When Tim Geithner was testifying...

...to be confirmed
as Treasury secretary...

...he said,
"I have never been a regulator."

That said to me he did not understand
his job...

...as president of the New York Fed.

The new president of the
New York Fed is William C. Dudley...

...the former chief economist
of Goldman Sachs...

...whose paper with Glenn Hubbard
praised derivatives.

Geithner's chief of staff
is Mark Patterson...

...a former lobbyist for Goldman.

And one of the senior advisors
is Lewis Sachs...

...who oversaw Tricadia,
a company heavily involved...

...in betting against
the mortgage securities it was selling.

To head the Commodity Futures
Trading Commission...

...Obama picked Gary Gensler,
a former Goldman Sachs executive...

...who had helped ban
the regulation of derivatives.

To run the Securities
and Exchange Commission...

...Obama picked Mary Schapiro,
the former CEO of FINRA...

...the investment banking industry's
self-regulation body.

Obama's chief of staff,
Rahm Emanuel...

...made $320,000 serving
on the board of Freddie Mac.

Both Martin Feldstein
and Laura Tyson are members...

...of Obama's
Economic Recovery Advisory Board.

And Obama's chief economic advisor
is Larry Summers.

The most senior
economic advisors...

...are the ones who were there,
who built the structure.

When it was clear
that Summers and Geithner...

...were going to play major roles
as advisors...

...I knew this was
going to be status quo.

The Obama administration resisted
regulation of bank compensation...

...even as foreign leaders
took action.

The financial industry
is a service industry.

It should serve others
before it serves itself.

In September of 2009,
Christine Lagarde...

...and the finance ministers
of Sweden, the Netherlands...

...Luxembourg, Italy,
Spain and Germany...

...called for the G20 nations,
including the United States...

...to impose strict regulations
on bank compensation.

And in July of 2010...

...the European Parliament
enacted those very regulations.

The Obama administration
had no response.

Their view is it's a temporary blip
and things will go back to normal.

That is why I am reappointing him...

...as chairman of the Federal Reserve.
Thank you, Ben.

In 2009, Barack Obama
reappointed Ben Bernanke.

Thank you, Mr. President.

As of mid-2010, not a single
senior financial executive...

...had been criminally prosecuted,
or even arrested.

No special prosecutor
had been appointed.

Not a single firm had been
prosecuted criminally...

...for securities fraud
or accounting fraud.

The Obama administration
has made no attempt...

...to recover any compensation...

...given to financial executives
during the bubble.

I certainly would think
of criminal action...

...against some of Countrywide's
top leaders, like Mozilo.

I'd certainly look at Bear Stearns,
Goldman Sachs...

...and Lehman Brothers
and Merrill Lynch.

- For criminal prosecutions?
- Yes.

- In regard to--
- Yes. They'd be very hard to win...

...but I think they could do it if they got
enough underlings to tell the truth.

In an industry
in which drug use, prostitution...

...and billing of prostitutes
as a business expense...

...occur on an industrial scale...

...it wouldn't be hard to make
people talk if you really wanted to.

They gave me a plea bargain
and I took it.

They were not interested
in my records.

They weren't interested in anything.

- Not interested in your records?
- That's correct. Correct.

There's a sensibility that you don't
use people's personal vices...

...in the context of Wall Street cases,
necessarily, to get them to flip.

Maybe after the cataclysms that we've
been through, people will reevaluate.

I'm not the one to pass judgment
on that right now.

You come to us today telling us,
"We're sorry, we didn't mean it.

We won't do it again. Trust us."

Well, I have some people
in my constituency...

...that actually robbed
some of your banks.

And they say the same thing.

They're sorry. They didn't mean it.
They won't do it again.

In 2009, as unemployment hit
its highest level in 17 years...

...Morgan Stanley paid its employees
over $14 billion...

...and Goldman Sachs paid out
over $16 billion.

In 2010,
bonuses were even higher.

Why should a financial engineer
be paid...

...four times to 100 times more
than a real engineer?

A real engineer build bridges.

A financial engineer build dreams.

And, you know, when those dreams
turn out to be nightmares...

...other people pay for it.

For decades...

...the American financial system
was stable and safe.

But then something changed.

The financial industry
turned its back on society...

...corrupted our political system...

...and plunged the world economy
into crisis.

At enormous cost,
we've avoided disaster...

...and are recovering.

But the men and institutions that
caused the crisis are still in power...

...and that needs to change.

They will tell us
that we need them...

...and that what they do is too
complicated for us to understand.

They will tell us
it won't happen again.

They will spend billions
fighting reform.

It won't be easy.

But some things
are worth fighting for.