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Iceland is a stable democracy with the high standard of living...

and until recently...

extremely low unemployment and government debt.

We had the complete infrastructure of a modern society:

clean energy, food production,

fisheries with a quota system to manage them.

Good healthcare and good education,

clean air, not much crime,

It's good place for families to life...

We had almost "end of history" status.

But in 2000 Iceland government began a broad policy of deregulation...

that would have disastrous consequences...

first for the environment and then for the economy...

They started by allowing...

multinational corporations like Alcova...

to build giant aluminum smelting plants...

and exploit Iceland�s natural geothermal...

and hydroelectric energy sources.

Many of the most beautiful areas in the highlands...

with the most spectacular colors are geothermal.

So nothing comes without consequences.

At the same time the government privatized...

Iceland�s three largest banks...

The result was one of the purest experiments in financial deregulation...

ever conducted.

Finance took over and uh,

more or less wrecked the place.

In a 5 year period this three tiny banks...

which have never operated outside of Island...

borrowed 120 billion dollars...

ten time the size of Iceland�s economy.

The bankers showered money on themselves...

each other and their friends.

There was a massive bubble...

Stock prices went up by a factor of nine,

house prices more than doubled...

Iceland bubble gave rise to people...

like Jon Asgeir Johannesson.

He borrowed billions from the banks...

to buy up high-end retail businesses in London.

He also bought a pinstriped private jet,

a 40 million dollar yacht...

and a Manhattan penthouse.

Newspapers always had headlines:

this millionaire bought this company...

in UK or in Finland or in France or wherever.

Instead of saying...

this millionaire took a billion dollars loan...

to buy this company...

and it took it from your local bank.

The banks set up money market funds...

and the banks advised deposit-holders to...

withdraw money and put them in a money market funds.

The Ponzi scheme needed everything it could, huh?

American accounted firms like KPMG...

audit the Iceland�s banks and investment firms...

and found nothing wrong.

And American credit rating agencies...

said Iceland was wonderful.

In February 2007...

the rating agencies decided...

to upgrade the banks...

to a highest possible rate � AAA.

It went so far as the government here...

traveling with the bankers as a PR show.

When Iceland�s banks collapsed at the end of 2008...

unemployment tripled in 6 months.

There is nobody unaffected in Iceland.

- So a lotta people here lost their savings. - Yes that�s the case.

The government regulators...

who should�ve been protecting the citizens of Iceland...

had done nothing.

You have two lawyers...

from regulator company who're coming to a bank...

to talk about some issues.

When they approach the bank...

they would see nineteen SUV's outside the bank...

so you went to the bank and you have...

nineteen lawyers sitting in front of you...

that very well prepared,

ready to kill any argument you make...

and then if you do very well...

they offer you job.

One third of Iceland�s financial regulators...

went to work for the banks.

But this is universal problem,

in New York you have the same problem, right?

What do you think of Wall Street incomes this days?

Excessive.

I've been told that it's extremly difficult...

for the IMF to critisize United States.

I wouldn't say that.

We deeply regret our breaches of US law.

They�re amazed at...

how much cocain these Wall Streeters can use...

and get up and go to work the next day.

I didn't know what credit default swaps are.

I'm little bit old fashioned.

Has Larry Summers ever expressed remorse?

I don't hear confessiones.

The government just writing checks...

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

Would you support legal controls on executive pay?

I would not.

Are you comfortable with...

law of compensation in financial service industry?

If they waranted, then yes, I am.

- Do you think they waranted? - I think they waranted.

And so you help this people blow the world up?

You could say that.

They were having massive private gains at public loss.

When you start thinking...

you can create something out of nothing...

it's very difficult to resist.

I'm concerned that a lot of people...

want go back to the old way...

the way they were operating prior to the crisis.

I was getting a lot of anonymus e-mails from bankers...

saying "You can't quote me,

but I'm really concerned".

Why do you think there isn't...

a more systematic investigation being undertaking?

Because then you will find the culprits.

Do you think that Columbia Business School...

has any significant conflict of interest problem?

Don't see that we do.

The regulators didn't do their job...

they had the power to do

every case that I made when I was state attorney general...

they just didn't want it.

Over the weekend, Lehman Brothers one of the most venerable...

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

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

- Crisis talks are underway... - World financial markets...

are way down today...

dramatic developments for two Wall Street giants...

In september 2008...

the bankruptcy of US investment bank Lehman Brothers...

and the collapse of the world...

largest insurance company AIG...

triggered the global financial crisis...

fears gripped markets overnight...

with Asian stocks slammed by...

Stocks fell off a cliff...

the largest single point drop in history.

Share prices continued to tumble in...

the aftermath of the Lehman collapse.

The result was the global recession...

which costs the world tens of trillions of dollars...

rendered 30 millions people unemployed...

and doubled the national debt of the US.

If you looked at the costs of it:

the structure of equity welth, of housing wealth...

then the structure of income, of jobs,

15 million people globally...

could end up below the poverty line again.

This is just a hugely, hugely expensive crisis.

This crisis was not an accident.

It was caused by an out of control industry.

Since the 1980s the rise of US financial sector...

has led to a series...

of increasingly severe financial crises.

Each crisis has caused more damage...

while the industry has made more and more money.

Part I. How we got here

After the Great Depression United States...

have 40 years of economic growth...

without a single financial crisis...

the financial industry was tightly regulated...

most regular banks were local businesses...

and they were prohibited from speculating...

with depositors savings.

Investment banks...

which handle stock and bond tradings...

were small private partnerships.

In the traditional investment banking...

partnership model...

the partners put the money up...

and obviously the partners...

watch that money very carefully.

They wanted to live well...

but they didn't want to...

bet the ranch on anything.

Paul Volcker served on the treasury department...

and was chairman of the Federal Reserve...

from 1979... 1987.

Before going into government,

he was a financial economist...

at Chase Manhattan Bank.

When I left Chase to go in Treasury in 1969...

I think my income was in the neighbour...

- of 45,000 dollars per year. - 45,000 dollars a year?

Morgan Stanley in 1972...

had approximately 110 total personnel.

One office and capital of $12,000,000

Now Morgan Stanley has 50,000 workers...

and has capital of several billion...

and has offices all over the world.

In the 1980's the financial industry exploded.

The investment banks went public...

given them huge amount of stock holding money.

People on Wall Street started getting rich.

I had a friend who was a bond trader...

at Merilyn Lynch in 1970s.

He had a job as a train conducter at night.

Because he had 3 kids...

and couldn't support them...

on what a bond trader made.

By 1986 he was making millions of dollars...

and thought it was because he was smart.

The highest order of business before the nation...

is to restore our economic prosperity.

In 1981 president Ronald Reagan...

choses Treasury Secretary...

the CEO of investment bank Merrill Lynch...

Donald Regan.

Wall Street and the President do see eye to eye.

I've talked to many leaders of Wall Street...

they also will be behind the President on 100%.

The Reagan administration...

supported by economists and financial lobbyist...

started the 30 years period of financial deregulations.

In 1982 the Reagan administration...

deregulated savings and loan companies...

allowing them to make risky investments...

with their depositors' money.

By the end of the decade...

hundreds of saving and loan compnies had failed.

This crises cost tax payers 124 billion dollars...

and cost many people their live savings.

It may be the biggest bank heist in our history.

Thousands of saving and loan executives...

went to jail for looting their companies.

One of the most extreme cases...

was Charles Keating.

In 1985 when federal regulators...

began investigating him...

Keating hired an economist...

named Alan Greenspan.

In this letter to regulators...

Greenspan praised Keating's...

sound business plan and expertise...

and said he saw no risk in allowing...

Keating to invest his customers money.

Keating reportedly paid Greenspan 40,000 dollars.

Charles Keating went to prison shortly afterwords.

As for Alan Greenspan...

President Reagan appointed him...

chairman of America's central bank...

The Federal Reserve.

Greenspan was reappointed...

by presidents Clinton and George W. Bush.

During the Clinton administration...

deregulation continued under Greenspan.

And Treasury Secretary Robert Rubin,

the former CEO of the investment bank...

Goldman Sachs...

and Larry Summers, Harvard economics professor...

The financial sector of Wall Street being powerfull,

having lobbyist, having lots of money...

step by step captured the political system...

both on the Democratic and the Republican side.

By the late 1990s...

the financial sector had consolidated...

into few gigantic firms.

Each of them so large...

that their failure can threaten whole system

And the Clinton administration...

helped them grow even larger.

In 1999 Citicorp and Travelers...

merged to form Citigroup...

the largest financial services company...

in the world.

The merger violated the Glass-Steagal act...

a law passed after Great Depression...

which prevented banks with costumer deposits...

from engaging in risky investment banking activities.

It was illegal to acquire Travelers.

Greenspan said nothing.

The Federal Reserve gave him exemption...

for a year and then they got the law passed.

In 1999 at the urging of Summers and Rubin...

Congress passed the "Glemm-Leach-Bliley Act"

Known to some as the Citigroup Relive Act.

It overturned "Glass-Steagal"...

and clear the way for future mergers...

Why do you have big banks...

because banks like monopoly power...

because banks like lobbying power,

because banks know that when you too big...

they will be bailed.

Markets are inherently unstable...

or at least potentially unstable...

and appropriate metaphor is the old tankers...

they very big and therefore...

you have to put in compartments...

to prevent the sloshing around of oil...

from capsizing the boat...

the design of the boat has to take it into account...

and after the Depression...

the regulation actually introduced...

this very watertight compartments...

and deregulation has led to...

the end of compartmentalisation.

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

The investment banks fuel the mass of the bubble in internet stocks

Which were followed by a crash in 2001...

that caused 5 trillion dollars in investment losses.

The Securities and Exchange Commission...

the federal agency which had been created...

during the depression to regulate investment banking...

had done nothing.

In the absence of meaning for federal action...

and there has been none...

and given the clear failure of self regulation.

It is become necessary for others to step in...

and adopt the protections needed.

Eliot Spitzers investigation revealed that...

the investments banks had promoted...

internet companies they knew would fail.

Stock analysts were being paid...

based on how much business they brought in...

and what they sad publicly...

was quite different from what they sad privately.

Infospace given the highest possible rating...

dismissed by the analysts as the "piece of junk".

Excite... also highly rated...

called "such a piece of crap".

The defence that was proffered...

by many of the investment banks...

was not, you're wrong, it was...

Everybodie's doing it and everybodie knew what's going on...

and therefore nobody should rely on this analysts anyway.

In december 2002 ten investment banks...

settle the case for a total of 1.4 billion dollars...

and promised to change their ways.

Scott Talbott is the chief lobbyist...

for the Financial Services Roundtable...

one of the most powerfull groups in Washington...

which represents nearly all of...

the world largest financial companies.

Are you comfortable with the fact...

that several of your member companies...

have engaged in large scale criminal activity?

- 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 thier books...

again, and again, and again.

Credit Suisse helped funnel money...

for Iran's nuclear program...

and for the Aerospace Industries Organization of Iran...

which built ballistic missiles.

Any information that would identify it...

as Iranian would be removed.

The bank was fined 536 million dollars.

Citibank helped funnel 1.5 million dollars...

of drug money out of Mexico.

Did you comment that she should...

"loose any documents connected with the account".

I said that in a kidding manner...

it was at the early stages of this.

I did not mean it seriously.

Between 1998 and 2003

Fannie Mae overstated its earnings...

by more than 10 billion dollars.

This accounted standarts are highly complex...

and required determinations...

over which experts often disagree.

CEO Franklin Raines...

who used to be President Clinton's budget director...

recieved over 52 million dollars in bonuses.

When UBS was caught...

helping wealthy americans evade taxes...

they refused to cooperate with US goverment.

Would you be willing to supply the names?

If there is a treaty framework...

No treaty framework,

you've agreed you participated in a fraud.

Hm...

But while the company is faced an unprecedented fines...

the investment firms do not...

have to admit any wrong doing.

When you this large and you are dealing...

with this many products and this many customers...

mistakes happen.

The financial services industry...

seems to have level of criminality that is,

you know, somewhat distinctive.

When was the last time when...

CISCO or Intel or Google or Apple or IBM you know...

I'm totaly agree with you...

about hightech versus financial services...

but hightech is fundamentally creative business...

where value generation and income derives...

when you actually create something new and different.

Begining at 1990's...

deregulations and advances in technology...

led to an explosion of complex financial products...

called derivatives.

Economists and bankers...

claimed they made market safer.

But instead they made it unstable.

Since the end of Cold War...

a lot of former physicist and mathematicians...

decided to apply their skills...

not on Cold War technology...

but on financial markets.

And together with investment bankers and hedge funds...

- Create a different weapons? - Absolutely.

As Warren Buffett said:

"Weapons of mass destruction".

Regulators, politicians and business people...

did not take seriously...

the threat of financial innovation...

on the stability of the financial system.

Using derivatives bankers...

could gamble on virtually anything.

They could bet on rise or fall of oil prises...

the bankruptcy of the company, even the whether.

By the late 1990s derivatives...

were a 15 trillion dollar unregulated market.

In 1998 someone tried to regulate them.

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

and was the first woman...

to edit the major law review.

After running derivatives practice at Arnold & Porter...

Born was appointed by president Clinton...

to chair the Commodity Futures Trading Commission...

which oversaw the derivatives' market

Brooksley Born ask 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 Treasury department had an immediate response

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

and she was just putting down the reciever of 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.

The banks were now heavily reliant...

for earnings on this types of activities...

and that led to titanic battle...

to prevent this set of instruments from been regulated.

Shortly after the phone call from Summers

Greenspan, Rubin and SEC chairman Arthur Levitt...

issued a joint statement condemning Born...

and recomended legislation...

to keep derivatives unregulated.

Regulations 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...

and getting a bill passed...

that pretty much exempted derivatives from regulation.

They are unifying markets they are reducing regulatory burden.

I believe that we need to do it.

After leaving the Senate, Phill Gramm became Vice-Chairman of UBS.

Since 1993, his wife Wendy had served on the board of Enron.

But its our very great hope...

that it would be possible to move this year on legislation in a suitable way...

goes to create legal certainty for OTC derivatives.

I wished to assosiate myself with all of...

the remarks of secretary Summers.

In december 2000 Congress passed...

The Commodity Futures Modernization Act.

Written with a help of financial industry lobbyists...

it banned the regulation of derivatives.

Once that's was done it was off to the races.

And 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 US financial sector was vastly more profitable,

concentrated and powerfull then 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 a securitization food chain, a new system...

which connected trillion of dollars, mortgages and other loans...

with investors all over the world.

30 years ago if you wanted get a loan for a home...

the person lending you a money...

expecting you to pay him or her back...

you got a loan from a lender who wanted you to pay him back...

we've since developed securitization thereby...

people who made the loan...

are no loger at risk of failure to repay.

In old system when home owner...

paid their mortgage every months...

the money went to their local lender.

And since mortgages took decades to repay...

lenders were carefull.

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

The investment banks combined thousands of mortgages and other loans...

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

to create complex derivatives...

called collateralized debt obligation, or CDO...

the investment banks then sold the CDO's to investors.

Now when home owners paid their mortgages...

the money went to investors all over the world.

The investment banks paid rating agencies to evaluate the CDO's...

and many of them were given a AAA rating...

which is highest possible investment rate.

This made CDO's popular with retirement funds...

which can only purchase highly rated securities.

This system was a ticking time bomb.

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

So they started making riskier loans.

The investment banks didn't care either.

The more CDO's they sold the higher their profits...

and the rating agencies which were paid by the investment banks...

had no liability if their ratings of CDO's proved wrong.

You were getting to be on the hook...

and there weren't regulationly constraints...

so there were a green light to just pump out more and more loans.

Bentween 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 quality of the mortgage...

they caring about maximazing their volume...

and getting a fee out of it.

In the early 2000's there was a huge increase...

in the riskiest loans called subprime...

but when thousands of subprime loans...

were combined to create CDO's.

Many of them still received AAA ratings

Now it wouldn't have been possible to create derivative products...

that don't have this risks...

that carry the equivalent of deductibles...

where there are limits on risks...

that can be taken on and so forth...

they didn't do that, did they.

They didn't do that and in retrospect they should have done.

So these guys knew they were doing something dangerous?

I think they did.

All incentives that the financial institutions...

offered to the mortgage brokers...

were based on sawing the most profitable...

products which were predatory loans.

The bankers makes more money if they put you on subprime loan.

That's what they gonna put you

Suddenly hundreds of billions of dollars a year...

were flowing through securitization chain.

Since anyone can get a mortgage...

home purchases and house's prises skyrocketed.

The result was the biggest financial bubble in history.

Real estate is real, they can see their asset...

their can live in their asset, they can rent out their asset.

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

financing appetites out of financial sector...

droved what everyboby else did.

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

In that case the increasing home praises were relatively minor.

That housing bubble led to relatively severe recession.

From 1996 until 2006 real home praises effectively doubled.

At 500 dollar a ticket...

they 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...

increase from 30 billion a year in funding...

to over six hundred billion a year in ten years...

they new what was happening.

Countrywide Financial the largest subprime lender...

issued 97 billion dollars worth of loans.

It made over 11 million dollars in profits as a result.

On Wall Street annual cash bonuses spiked...

traders and CEO's became enormously wealthy during the bubble.

Lehman Brothers was the top uderwriter of subprime lending.

And their CEO Richard Fuld took home 485 million dollars.

On Wall Street this housing and credit bubble...

was leading to hundreds of billions of dollars of profits.

By 2006 about 40% of all profits of S&P 500 firms...

was coming from financial institutions.

It wasn't real profits, it wasn't real income.

It was just money that was being...

created by the system and booked as income...

to 3 years down the road this 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 equality protection act...

the Federal Reserve Board had brought authority...

to regulate mortgage industry...

but Federal Chairman Alan Greenspan refuse to use it.

Alan Greenspan said no that regulation: "I don't even believe in it".

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

a powerfull consumer advocacy group.

He met with Greenspan on a regular basis.

We gave him an example of Countrywide...

150 different complex adjustable rate mortgages.

He said if you'd 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 continues...

it was clear he was stuck with his ideology.

We met again with Greenspan at '05...

often we met with him twice a year never less than once a year...

and he wouldn't change his mind.

Alan Greenspan declined to be interviewed for this film.

In this amazing world of instant global communications.

The free and efficient movement of capital...

is helping to create the greatest prosperity in human history.

146 people were cut from the enforcement division of SEC...

is that what you also testified to.

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

gutting, or whatever you want to call it,

of the agency and its capability,

through cutting back of staff.

The SEC office of risk managment...

was reduce to a staff, did you say, of one?

Yeah, when that gentelman would go home at night he could turn the lights out.

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

to buy more loans and create more CDO's.

The ratio between borrowed money and...

bank's own money was called leverage.

The more banks borrowed the higher their leverage.

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

helped lobby the Securities and Exchange Commission...

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 that.

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.

At this levels you're obviously dealing with...

the most highly sofisticated financial institutions.

These are the firms that do most of the derivative activity in the United States.

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

The firms actually thought that the number was appropriate.

Do the commissioners vote to adopt the rule amendments and new rules...

as recommended by the staff?

We do indeed. Unanimous. And we are adjourned.

The degree of leverage in financial systemas...

became absolutely frightening...

investment banks leveraging up to the level 33 to 1...

which means that tiny 3% decrease in a value of asset base...

would leave them insolvent.

There was another ticking time bomb in the financial system.

AIG, the worlds largest insurence company...

was selling huge quantities of derivatives called credit default swaps.

For investers who owned CDO's...

credit default swaps worked like an insurance policy.

An investor who purchase credit default swap paid AIG a guatrerly premium.

If CDO went bad, AIG promised to pay to investor for their losses.

But unlike regularly insurance speculators could also buy credit default swaps from AIG

in order to bet against CDO's they didn't own.

In insurence you could only insure something you own.

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

I can only insure that house once...

the derivatives universe essentially enables anybody to actually insure that house.

So you could insure that somebody else could do that so 50 people could insure my house.

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

the number of losses in the system becomes proportionally large.

Since credit default swaps were unregulated...

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

Instead AIG paid its employees huge cash bonuses...

as soon as contract was signed...

but if a CDO's later went bad AIG would be on the hook.

People were essentially been 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 totally distorted system of compensation.

AIG Financial Products division in Lonodon...

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

Many of them for CDO's backed by subprime mortgages.

The AIG FP made 3.5 billion dollars between 2000 and 2007.

Joseph Cassano, the head of AIG FP, personally made 315 million dollars.

It's hard for us, without being flippant, to even...

to even see a scenario within any kind of realm of reason...

that would see us losing 1 dollar in any of those transactions.

In 2007 AIG auditors raised warnings.

One of them Joseph St. Denis resigned in protest.

After Cassano repeatedly blocked him from investigating AIG FP's accounting.

Let me tell you one person...

who didn't get a bonus when everybody else was getting bonuses.

That was Sant Denis.

Mr. St. Denis who tried to alert the two of you...

to the fact that you are 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 Annual Jackson Hole symposium...

the most elite banking conference in the world.

Who was in the audience?

It was, uh... I guess the central bankers of the world...

uh... ranging from Mr. Greenspan himself,

Ben Bernanke,

Larry Summers was there,

Tim Geithner was there.

The title of the paper was essentially:

Is Financial Development Making the World Riskier?

And the conclusion was, uh... it is.

Rajan's paper focused on incentives 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 perfomance by taking on more risk.

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

and that's where all the bodies are buried.

Rajan hit the nail on the head.

What he particularly said was:

"You guys have claimed you found a way to make more profit with less risk,

I say you found a way to make more profit with more risk"...

and that's a big difference.

Summers was vocal

He basically thought that I was criticizing the change in the financial world.

And was worried about regulation which reverse this whole change.

So essentially he accused me of being a Luddite.

He wanted to make sure that we didn't bring a whole new set of regulations...

to constrain the financial sector at that point.

Larry Summers declined to be interviewed for this film.

You gonna make an extra 2 million dollars a year or 10 million dollars a year.

For putting your financial institution at risk.

Someone else pays the bill, you don't pay the bill.

Would you make that bet?

Most people who worked on Wall Street said: "Sure, I make that bet".

The Hamptons 2 hours from New York City...

That's never was enough.

They don't wanna own one home.

They wanna own 5 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 were high, very high compensation levels is just fine?

I think I would take caution, take heed, or take exception at your word very high,

I mean it's all relative.

You have a 14 million dollar oceanfront home in Florida,

you have a summer vacation home in Sun Valley, Idaho...

you and your wife have art collection filled with million dollar paintings.

Richard Fuld never appeared on the trading floor.

There was art advisors up there all the time.

You know, he had his own private elevator, he were out of his way to be disconnected

I mean, his elevator, the hire technicians to program it, you know,

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

a security guard would hold it.

and there'a only like 2 or 3 seconds window when he actually he has to see people...

and he hops in the elevator and he goes straight to 31.

Lehman owned a bunch of corporate jets, do you know about this?

Yes.

How many were there?

Well, there were 6, including 767's.

- They also had a helicopter. - I see.

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

We deal with type A personalities and, uh...

type A personalities know everything in the world.

Banking became a pissing contest, you know

mine is bigger than yours, that's kind of stuff.

It was all men that ran it, incidentally.

15 billion dollar deals weren't large enough so we do 100 billion dollar deals.

These people are risk-takers, they're impulsive.

Jonathan Alpert is a therapist whose clients include high-level Wall Street executive...

That's part of their behavior it's part of their personality...

and that manifests outside of work as well.

It's quite typical for the guys to go out, to go strip bars,

to use drugs. I see a lot of cocain use, a lot of use of prostitution.

Recently neuroscientists have done experiments...

where, uh... they've taken individuals,

put them into MRI machine...

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

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

the part of the brain that get stimulated is the same part that cocain stimulates.

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

to make it to get promoted, to get recognized.

According to a Bloomberg article...

business entertainment represents 5% of revenue...

for New York 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,

on society, or on family.

They have no problem using a prostitute, uh... and going home to their wife.

Kristin Davis ran an elite prostitution ring from her high-rise apartment.

It was located a few blocks from the new york stock exchange.

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.

And were all the major Wall Street firms represented? Goldman Sachs.

Lehman Brothers, yeah, they�re all in there.

Morgan Stanley was a little less of that...

uh... I think Goldman was, was pretty, pretty big with that.

A lot of clients would call me, and say, can you get me a Lamborghini...

for the night 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.

I just usually gave them a piece of letterhead,

and said, make your own invoice.

So this pattern of behavior, you think, 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, who, who's involved in a company that has a big financial presence,

said: Well, it's about time you learned about subprime mortgages.

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

and, and a techie, who, 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.

Which means they have no money in the house.

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

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

You've gotta be crazy.

But somehow, you took 8,000 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 AAA,

which meant they were rated as safe as government securities.

It's, it's utterly mad.

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

of these toxic CDO's 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, welcome to the White House.

I am pleased to announce that I will nominate Henry Paulson...

to be the secretary of the Treasury.

He has a lifetime of business experience,

he has an intimate knowledge of financial markets...

he has earned a reputation for candor and integrity.

You might think it would be hard for Paulson...

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 dollars 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 dollars.

The article came out in October of 2007.

Already, a third of the mortgages defaulted.

Now, uh, most of them are goin'.

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 CDO's...

it started actively 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 CDO's it didn't own,

and get paid when the CDOs failed.

I asked them if anybody called the customers,

and said, you know, we don't really like this kind of mortgage anymore,

and we thought you ought to know, you know.

They, they didn't really say anything...

but, you know, you could just feel the laughter coming over the phone.

Goldman Sachs bought at least 22 billion dollars of credit default swaps from AIG.

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

so they spent 150 million dollars...

insuring themselves against AIG's potential collapse.

Then, in 2007, Goldman went even further.

They started selling CDO's specifically designed...

so that the more money their customers lost,

the more money Goldman Sachs made.

Six hundred million dollars, Timberwolf Securities is what you sold.

Before you sold them,

this is what your sales team were tellin' to each other.

Boy, that Timberwolf was one shitty deal.

This was an e-mail to me in late June.

- Right. And you're callin' Timberwol - After the transaction.

No, no, you sold Timberwolf after as well.

W... 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 that to your client...

to tell that client of your adverse interest? That's my question.

Mr. Chairman, just tryin' to understand...

No, I think you understand it I don't think you want to answer it.

Do you believe that you have a duty to act...

in the best interests of your clients?

Again, uh... uh... Senator, I,

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

by showing prices on transaction where 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, again, as a hypothetical?

No. This is real

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

- Well... - We heard it today:

this is a shitty deal, this is crap.

I... I... I heard nothing today that makes me think anything, um...

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.

- In the... - Do you see a problem?

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

When you heard that your employees, in these e-mails, said,

"god, what a shitty deal, god, what a piece of crap"...

do you feel anything?

If... I think that's very unfortunate to have on e-mail.

Are you b...

And, and, and very unfortunate... I don't, I don't...

On e-mail? How about feeling that way?

I think it's very unfortunate for anyone to have said that, in any form.

Is it your understanding...

that your competitors were engaged in similar activities?

Uh... yes. And, and to a greater extent than us, in most cases.

Hedge fund manager John Paulson...

made 12 billion dollars betting against the mortgage market.

When John Paulson ran out of mortgage securities to bet against,

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

Morgan Stanley was also selling mortgage securities that 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 CDO's were junk.

Although they were rated AAA,

Morgan Stanley was betting they would fail.

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

while the investors had lost almost all of their money.

You would have thought that pension funds would have said, "those are subprime...

why am I buying them?"

And they had these guys at Moody's and Standard and Poor's who said, that's a AAA.

None of these securities got issued without the imprimatur, you know,

the Good Housekeeping 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 AAA rating to,

the higher their earnings were gonna be for the quarter.

Imagine if you went to the New York Times,

and you said, look, if you write a positive story, I'll pay you 500,000 dollars.

But if you don't, I'll give you nothing.

The rating agencies could have stopped the party, and said:

We're sorry, you know... we're gonna tighten our standards.

This is, and... and... and immediately cut off...

a lot of the flow of funding to risky borrowers.

AAA-rated instruments mushroomed from just a handful to thousands and thousands.

Hundreds of billions of dollars, uh... 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 AAA,

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

S&P's ratings express our opinion.

Our ratings are, uh... are our opinions. But they're opinions.

Opinions, and those are, they are just opinions.

I think we are emphasizing the fact that our ratings are, uh... uh...

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 so many economists coming on our air, and saying,

oh, this is a bubble, and it's going to burst,

and this is going to be a real 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?

Well, I, I guess I don't buy your premise. It's a pretty unlikely possibility.

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

Ben Bernanke became chairman of the Federal Reserve Board 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 Ben 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?

In 2009, March 11th, 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 semiannual meetings that, uh...

Robert Gnaizda and, and, uh... Greenlining...

had with the Federal Reserve Board?

Yes I did. I was actually on the committee that, uh...

that was involved, involved with that the Consumer Community Affairs Committee.

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

and 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.

Yeah. So, uh... again, I... I don't know the details,

in terms of, of, uh... of, uh... um...

in fact, I... I just don't... I... I really don't,

whatever information he provide, I'm not sure exactly, that, uh...

it's, it's actually, to be honest, I can't remember this, this kind of discussion,

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

But then the question is, how pervasive are they?

Why didn't you try looking?

I think that people did.

We had people looking at, a whole group of people looking at this,

- for whatever reason... - Excuse me, you can't be serious.

If you would've looked, you would have found things.

Uh... you know, that's very, 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 it, and on behalf of the institution:

uh, the crisis which is in front of us is a huge crisis.

Who did you talk to?

The government, Treasury, so, the Fed, everybody.

In May of 2007, hedge fund manager Bill Ackman...

circulated a presentation called "Who's Holding the Bag?",

which described how the bubble would unravel.

And in early 2008, Charles Morris published his book about the impending crisis.

Easy Money, High Rollers, and the Great Credit Crash.

You're just not sure, what do you do?

And you might have some suspicions that underwriting standards are being 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, uh, uh...

we have to dance until the music stops.

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

The market for CDOs collapsed,

leaving the investment banks holding hundreds of billions of dollars in loans,

CDOs, and real estate they couldn't sell.

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, uh, one

I think it was a G7 meeting, of February 2008.

And I remember discussing the issue with, with Hank Paulson.

And I clearly remember telling Hank:

we are watching this tsunami coming...

and just... proposing...

that we ask which swimming costume we're going to put on.

What was his response, what was his feeling?

Things are pretty much under control. Yes, we are looking at,

this situation carefully, and uh...

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.

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

and was acquired for two dollars a share by JP Morgan Chase.

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

from the Federal Reserve.

That was the time when the administration could have come in,

and put in place various kinds of measures...

that would have reduced system risk.

The information that I'm receiving from some entities...

is the end is not here, that there are other shoes to fall.

I've seen those investment banks working with...

the Fed and the SEC to strengthen their liquidity,

to strengthen their the, their capital positions.

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

On September 7th, 2008...

Henry Paulson announced the federal takeover...

of Fannie Mae and Freddie Mac,

two giant mortgage lenders on the brink of collapse.

Nothing about our actions today...

in any way 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 dollars, 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 AAA, like, a month before it went bankrupt?

- Uh... more likely A2. - A2.

- Yeah. - Okay.

- A2 is still not bankrupt. - No no no. No.

That's, that's a high investment grade, solid investment-grade rating

Lehman Brothers; A2, within days of failing.

Um... AIG, AA, within days of being bailed out.

Fannie Mae and Freddie Mac were AAA when they were rescued.

Um... Citigroup, Merrill, all, all of 'em 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,

you know: this is serious, tell us what your positions are, you know,

uh... 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 different institutions, and they have a very refined, uh...

understanding that I think became more respon, more refined...

as the crisis, um, proceeded. So...

Forgive me, but that's clearly not true. I m

What do you mean, it's not true?

In August of 2008, were you aware of the,

the credit ratings held then by Lehman Brothers, Merrill Lynch, AIG...

and did you think that they were accurate?

Well, uh... uh... certainly by that time, it was clear...

that that earlier credit ratings were inaccurate,

because they had been downgraded substantially.

No they hadn't.

Uh... there's still, there was still some downgrading, in terms of the,

the industry, concerns of the ind... certainly the stock prices

Not some, all those firms were rated at least A2...

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

Well then, you know, then the answer is, I just don't, don't know enough to...

really answer your question on this particular issue.

Governor Fred Mishkin is resigning, effective August 31.

He says he plans to return to his teaching post...

at Columbia's Graduate School of Business.

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

I mean, in, in the middle of the worst financial crisis.

So, so, uh, that, uh... I had to, to revise a textbook.

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

just when the economy needs it most.

Well, I'm sure your textbook is important and widely read.

But in August of 2008, you know, some,

somewhat 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 CEO's of the major banks...

in an effort to rescue Lehman.

But Lehman wasn't alone.

Merrill Lynch, another major investment bank,

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 Barclay's.

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

Paulson refused.

We all jumped into a yellow cab

and went down to the Federal Reserve Bank.

They wanted the bankruptcy case commenced before midnight...

of September 14.

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

And at some point, I used the word "Armageddon".

Had they fully considered 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 that 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?

Ah, after the fact.

After the fact?

Wow. 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 understand the consequences of foreign bankruptcy laws.

Under British law, Lehman's London office had to be closed immediately.

All transactions came to a halt.

And there are thousands and thousands and thousands of transactions.

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

discovered overnight, to their complete horror,

that they couldn't get those assets back.

One of the points of the hub failed.

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

The oldest money market fund in the nation...

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

issued by the now-bankrupt Lehman Brothers.

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

which many companies depend on...

to pay for operating expenses, such as payroll.

That means maybe they have to lay off employees...

they can't buy parts. It stops business in its tracks.

Suddenly, people stood, and said:

Listen; what can we believe in? There's nothing we can trust anymore.

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

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 be, you know, stop flying.

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

And one day later, Paulson and Bernanke...

ask Congress for 700 billion dollars to bail out the banks.

They warn that the alternative would be a catastrophic financial 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.

am playing the hand that was dealt me.

a lot of what I am dealing with, you know,

I'm dealing with the consequences of things that were done,

often, many years ago.

Secretary Paulson spoke throughout the fall.

And all the potential root causes of this...

and there are plenty... he called 'em, uh...

so I... I'm not sure...

You're not being serious about that,

- are you? - I am being serious.

What... what would you have expected? Uh...

A... and what're you, 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 a-, again, what - He mentioned those things?

I never heard him mention those things.

C... can 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 dollars 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 dollars.

A hundred and sixty billion dollars went through AIG,

14 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?

Well, I think it's fair to say that the financial markets today...

are incredibly complicated.

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 quickly rises to 10 percent.

The recession accelerates, and spreads globally.

I began to get really scared,

'cause I hadn't foreseen...

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

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.

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

Here you can earn a lot of money, like, uh,

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

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

The workers just wire their salaries 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.

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.

And 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, boom!

Even as the crisis unfolded,

we didn't know how wide it was going to spread,

or how severe it was going to be.

And we were still hoping that there would be some...

way for us to have a shelter...

and be, uh, less battered by the storm.

But it is 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.

'Cause when that property goes on the market,

it's gonna 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 dollars.

Everything was beautifull, the house was very pretty.

The payments were low. Everything was like... we won the lottery.

But the reality set in when the first payment arrived.

I felt really, really bad for my husband,

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

The vast majority I've seen lately, unfortunately,

are people who have just been hurt by the economy.

They were living, you know, day to day, paycheck to paycheck,

and unfortunately, that ran out

And unemployment isn't gonna pay a house mortgage...

it's not gonna pay a car bill.

I was a log-truck driver.

And they shut down, they shut down...

all the logging systems up there...

shut down the sawmills and everything.

So I moved down here, I had a construction job.

And the construction jobs got shut down too so... things are so tough...

there's a lot o' people out there, and pretty soon...

you're gonna be seeing more camps like this around

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 any sense for us to make a loan that's gonna fail,

'cause we lose. They lose

the borrower loses, the community loses, and we lose.

Countrywide's CEO Angelo Mozilo...

made 470 million dollars between 2003 and 2008.

One hundred forty million...

came from dumping his Countrywide stock...

in the 12 months before the company collapsed.

Ultimately, I hold the board accountable when a business fails.

'Cause the board is responsible for hiring and firing the CEO...

and overseeing big strategic decisions.

The problem with board composition in America...

is the way boards are elected.

The boards are pretty much, in many cases,

picked by the CEO.

The board of directors and the compensation committees...

are the two bodies best situated...

to determine the pay packages, uh... for executives.

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

Well, I think that, if you look at those,

uh, in, I would give about a B. Because...

- A B? - Yes.

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

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

received 90 million dollars in 2006 and 2007 alone.

After driving his firm into the ground.

Merrill Lynch's board of directors allowed him to resign...

and he collected 161 million dollars in severance.

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

and takes away 151 million dollars.

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

And what grade do you give that decision?

Uh, that's a tougher one. I don't know

if I would give that one a B as well.

O'Neal's successor, John Thain,

was paid 87 million dollars 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 dollars

Instead of being fired, Joseph Cassano, the head of AIG FP...

was kept on as a consultant...

for a million dollars a month.

And you want to make sure that the key players...

and the key, key employees, uh... within AIG FP...

yeah, we retain that intellectual knowledge.

I attended a very interesting, uh, dinner,

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

with some officials and a couple of, uh...

CEOs from the biggest, uh, banks in the U.S.

And, uh... surprisingly enough, all these gentlemen...

were arguing we were too greedy,

so we have part responsibility. Fine.

And then they were turning to the treasurer, to the secretary of the Treasury,

and say, you should regulate more because we are 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...

that they actually wanted their compensation to be regulated.

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

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

then probably they, 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, and a lot of smaller banks...

have been taken over by big ones.

JP Morgan today is even bigger than it was before.

JP 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.

he financial sector employs 3,000 lobbyists...

more than five for each member of Congress.

Do you think the financial services industry...

has excessive political influence in the United States?

No. I think that every person in, in the wo...

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?

Yet, you can walk into any hearing room, uh...

that you would like. Yes, I do.

Um... one could walk into any hearing room...

one can not necessarily write the kind of lobbying checks...

that your industry writes...

or engage in the level of political contributions...

that your industry engages in.

Between 1998 and 2008...

the financial industry spent over 5 billion dollars...

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, uh, uh... people argued it for their own benefit.

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 industry...

has made about 5 billion dollars worth of...

political contributions in the United States.

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. - Than I can say, absolutely none.

Absolutely none.

Okay. Um...

You have any regrets about, uh... AIG's decisions?

I cannot say anything more about AIG.

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

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

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

under George W. Bush.

Do you think the financial services industry

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

I don't think so, no. You certainly,

you certainly wouldn't get that impression...

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

Many prominent academics quietly make fortunes...

while 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 multi-billion-dollar industry...

that provides academic experts for hire.

Two bankers who used these services were Ralph Ciofi...

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 dollars...

to testify in their defense.

Do you think that the economics discipline has, uh...

a conflict of interest problem?

I'm not sure I know what you mean.

Do you think that a significant fraction of the economics discipline,

a number of economists, have financial conflicts of interests...

that in some way might call into question or color.

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

You know, most academic economists, uh... you know,

aren't wealthy business people.

Hubbard makes 250,000 dollars a year...

as a board member of Met Life...

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,

and then director of the National Economic Council...

in the Clinton administration.

Shortly after leaving government,

she joined the board of Morgan Stanley...

which pays her 350,000 dollars a year.

Ruth Simmons, the president of Brown University,

makes over 300,000 dollars a year...

on the board of Goldman Sachs.

Larry Summers, who as Treasury secretary...

played a critical 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's net worth is between 16.5 million and 39.5 million dollars.

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

after leaving the Federal Reserve,

reported on his federal disclosure report...

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

In 2006, you coauthored a study...

- of Iceland's financial system. - Right, right.

Iceland is also an advanced country with excellent institutions,

low corruption, rule of law.

The economy has already adjusted to financial liberalization...

while prudential regulation and supervision is generally quite strong.

Yeah. And that was the mistake. That it turns out that, uh...

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

- And particularly during this period... - So what led you to think that it was?

I think that, uh... you're going with the information you have and...

and generally, uh... the view was that, that, uh...

hat Iceland had very good institutions. It was a very advanced country.

Who told you that? Who did, what kind of research did you do?

You, you talk to people, you have faith in, in, uh the Central Bank...

which actually did fall down on the job.

Uh... that, uh... clearly, it, this, uh...

Why do you have "faith" in a central bank?

Well, that faith, you, ya, d-, because you had,

go with the information you have.

Um... how much were you paid to write it?

I was paid, uh... I think the number was, uh...

it's public information.

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

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

Oh. Well, I don't know, if, which... whatever it is, is, the, uh...

thing... if it's a typo, there's a typo.

I think what should be publicly available is...

whenever anybody does research on a topic...

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.

If you would, there would be significant professional sanction...

for failure to do that.

I didn't see any place in the study where...

you indicated that you had been paid, uh...

by the Icelandic Chamber of Commerce to produce it.

- No, I - 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 in 2007...

to write a report which praised the Icelandic financial sector.

The banks themselves are highly liquid.

They've actually made money on the fall of the Icelandic krona.

These are strong banks, their funding,

their market funding is assured for the coming year.

These are well-run banks.

Richard, thank you so much.

Like Mishkin, Portes's report...

didn't disclose his payment from the Icelandic Chamber of Commerce.

Does Harvard require disclosures

of financial conflict of interest in publications?

Um, not to my knowledge.

Do you require people to report the compensation...

they�ve 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 going on the board of Morgan Stanley, uh...

Larry Summer's making 10 million dollars a year...

consulting to financial services firms...

Irrelevant.

Well, uh... yeah, basically irrelevant.

You've written a very large number of articles...

about a very 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... - What, uh... what, uh... w...

I don't know that I would have anything...

to add to those discussions.

I'm looking at your resume now.

It looks to me as if the majority...

of your outside activities are, uh...

consulting and directorship arrangements with...

the financial services industry.

Is that, would you not agree with that characterization?

No, to my knowledge,

I don't think my consulting clients are even on my CV, so...

Uh... who are your consulting clients?

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

Okay.

Look, you have a few more minutes, and the interview is over.

Do you consult for any financial services firms?

Uh... the answer is, I do.

- And... - And, but I do...

I do not want to 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 that 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.

It turns out Doctor makes 80% of...

personal income from manufacturer of this drug.

Does not bother you.

I think, uh... it's certainly important to disclose...

the, um... the, um...

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

that we are talking about here. Because, um... um...

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

Well, heh heh, it has no relevance to anything, really.

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

important part of the problem

PART V: WHERE WE ARE NOW

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

was part of a wider change in America.

Since the 1980's, 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 effectively 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 the course of 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 top private universities like Harvard...

have billions of dollars in their endowments...

funding for public universities is shrinking,

and tuition is rising.

Tuition for California's public universities...

rose from 650 dollars in the 1970's,

to over 10,000 dollars in 2010.

Increasingly, 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 at the time 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 dollars...

in the hands of American workers, families, investors,

and small business owners.

Most of the benefits of these tax cuts...

went to the wealthiest 1% of Americans.

And by the way, it was really 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%...

lost ground between 1980 and 2007.

It all went to the top 1 percent.

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 have faced since the Great Depression.

When the financial crisis struck...

just 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, President Obama...

spoke of the need to reform the financial industry.

We want a systemic-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-2010...

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 the president of the New York Federal Reserve...

during the crisis...

and one of the key players...

in the decision to pay Goldman Sachs...

100 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".

Now 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 Paterson...

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 Shapiro...

the former CEO of FINRA...

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

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

made 320,000 dollars...

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 very people 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.

I think 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, this is a temporary blip...

and things will go back to normal.

And that is why I am reappointing him...

to another term as chairman of the Federal Reserve.

Thank you so much, 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 financial firm...

had been prosecuted criminally...

for securities fraud or accounting fraud.

The Obama administration has made no attempt...

to recover any of the 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. Yes.

They'd be very hard to, 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 fraudulent 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.

Um... they were not interested in any of my records...

they weren't interested in anything.

They were not interested in your records?

That's correct. That's correct.

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

personal vices in the context of Wall Street cases...

necessarily, to get them to flip.

I think maybe it's,

after the cataclysms that we've been through...

maybe people will reevaluate that..

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 dollars...

and Goldman Sachs paid out over 16 billion.

In 2010, bonuses were even higher.

Why should a financial engineer be paid four, four times...

to a hundred times more than the, uh... real engineer?

A real engineer build bridges...

a financial engineer build, build dreams.

And when those dream 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...

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