This documentary will be the talk of the town for a while, so I figured I better give those who wish to judge whether portions of this well done presentation are actually correct or not. There are some great insights presented in this documentary, but all too often people swallow the entire thing rather than parsing what is true in it and what is up for debate. I will start first by some resources I give via a discussion on Facebook I was involved in after the person who watched said, “[I am] done with conservatism.” I will follow that with some points I feel are important for the person who watched the documentary to know:
You would have to start something in order to quit it. It is funny because one of the most conservative radio hosts liked the movie… he isn’t done with conservatism. in fact, he even had the director, Charles H. Ferguson, on to talk about the movie: http://vimeo.com/23844840
- PART 1
Of course, I think that one of the most budget minded hawks in the Senate who could have been our President may have taken vastly more positive steps in ending this problem than Obama (http://religiopoliticaltalk.blogspot.com/2008/09/clinton-and-housing-mess.html), but that is neither here nor there.
- Clinton in his own words:
- Democrats in a hearing:
- And here is the link to my “tag” on my old site dealing with this issue:
http://religiopoliticaltalk.blogspot.com/search/label/Sub-Prime
- PART 2
I think this is a good response to some of the important miss-truths in the documentary Inside Job, which does reflect some truths in its presentation. This is a good series of commentary and there are not only the critiques I am listing below but also some points explaining some truths found in the documentary. However, for this presentation I cherry picked some of the more important points that needed to be dealt with:
Number 1 of 17:
Claim: “In 2008, the collapse of Lehman Brothers and AIG triggered the crisis.”
On the other hand: The origins of the crisis can be traced back even further, to the implosion of two Bear Stearns hedge funds run by Ralph Cioffi and Matthew Tannin, the Bear Stearns High Grade Structured Credit Strategies Fund and the Bear Stearns High Grade Structured Credit Strategies Enhanced Fund.
Cioffi and Tannin invested the funds’ $1.4 billion in CDOs backed by highly rated (meaning that they were meant to be safe, investment-grade) mortgages, aka the top tranch CDOs. In the last two weeks of June 2007, rising defaults by the least credit-worthy borrowers spread from the bottom tranches of CDOs to the top, triggering massive losses in the funds.
Many on Wall Street were surprised that the top tranches were affected, and they became aware of a crisis brewing in the mortgage market. Sophisticated investors became wary of investing in even AAA-rated mortgages, and firms that held them on their books began trying to offload them quickly before they went bad.
(By the way, Cioffi and Tannin were soon bankrupted, charged with defrauding investors and later, acquitted of fraud.) Click here to read more >
Number 3 of 17:
Claim: In the movie, deregulation is synonymous with the Gramm-Leach Bliley Act and the consolidation of the financial industry.
George Soros, for example, likens the consolidation to an oil rig that doesn’t hold oil in a number of separate compartments that will contain an oil spill to one compartment and help prevent draining of the whole supply.
On the other hand: Deregulation is an odd word to use to describe an act that allowed insurance firms, investment banks, and commercial banks to operate as one unit.
Deregulation implies that they’re not regulated as stringently as they were before. Financial firms need more regulation, but there was nothing in the GLB act that said to decrease regulation of these units. The only thing the GLB did about regulation was to establish the Federal Reserve as the regulator of all financial holding companies.
Number 4 of 17:
Claim: “Since deregulation began, banks have been caught cooking their books and defrauding investors again and again.”
On the other hand: Crime on Wall Street seems to have existed almost as long as Wall Street has. Author Steven Fraser writes that it dates back to William Duer in 1792.
According to the SEC, organized crime on Wall Street dates back to the 1970s, before the Gramm-Leach Bliley Act.
Number 7 of 17:
Claim: “Eliot Spitzer’s investigation found analysts were promoting companies that they knew were junk.”
Inside Job provides anecdotal evidence of Wall Street analysts promoting companies while writing emails that called those same companies, “junk.”
On the other hand: Analysts were accused of lying to clients based on edited emails that don’t tell the whole story. When taken in context, the full emails might have provided evidence that actually indicated that the analysts were analyzing the shape of the market and new research. And that might have been all they were doing in those emails: reacting to new research that said, this thing is “junk.” After which, they moved on to finding new evidence by doing their own research and proving it wrong. And THEN they promoted the companies.
Number 8 of 17:
Claim: “Derivatives have no value of their own, yet are a $50 trillion market. Using derivatives, traders can bet on anything.”
Inside Job argues that derivatives have no value of its own because its value is derived from another asset.
On the other hand: A Reuters special report on derivatives has a good argument: Big companies regularly use derivatives as a form of insurance to guard against jumps in the price of everything from cocoa to interest rates. An airline will buy jet fuel derivatives so that if prices spike, the contract helps to make up the difference in price, enabling the carrier to budget and plan ahead. If jet fuel prices fall, the loss made on the derivatives contract is canceled out by savings from cheaper refueling bills. It’s the same with barley for beer or aluminium for cans, or any other commodity you can think of.
Also, the OTC market is a $600 trillion industry, so if you’re going to take issue with something that should be regulated, you might want to take it up with OTC.
Number 9 of 17:
Claim: Derivatives are a destructive market, but no one regulates it.
The Commodity Futures Modernization Act bans all regulation of financial derivatives and exempts them from anti-gambling laws, according to the movie.
On the other hand: S. 3217, which divides the regulation of OTC derivatives between the SEC and the CFTC, assigning the SEC regulatory authority over some – but not all – securities-related derivatives and the CFTC authority for others, such as indexes of those securities, passed the Senate this summer.
But there’s a counterpoint: These new regulations may not even pass, and a senior policy advisor at the SEC says “these regulations are begging to be gamed.” Click here to read more >
Number 10 of 17:
Claim: “The average salary of a Goldman Sachs employee is $600,000”
In 2006, the average salary of a Goldman employee was $622,000.
On the other hand: This year, the average salary of a Goldman employee was $431,000 this year.
Number 11 of 17:
Claim: Dick Fuld earned $485 million
On the other hand: Fuld says his total compensation from 2000 through 2007 was less than $310 million, not $485 million. He explained 85% of his pay was in Lehman stock that had become worthless. “I never sold my shares,” Fuld said at one point. At another, he said he had not sold the “vast majority” of them.
Source: BusinessWeek
Number 14 of 17:
Claim: Wall Street compensation rewards short term goals that will ultimately bankrupt the company.
On the other hand: That’s an overstatement. It’s true that in past years, many employees of financial firms had contracts with their firm that entitled them to profit-sharing agreements. The contracts stipulated that they would earn a share of the profits they earned for the firm that year (encouraging short term profits).
However since the crisis, many firms have increased the proportion of an employee’s bonus that is paid in stock while decreasing the portion that is paid annually. Many employees must now wait around 3-5 years before cashing in their stock.
Research from Harvard, a school which the movie claims is perpetuating the culture of greed by employing teachers and Presidents whom are paid handsomely by the financial services sector via consultancies, suggests that rewarding employees with profits that pay out over the long-term are most beneficial.
Counterpoint: “Clawbacks,” when an executive has had to give back their bonus, have almost never happened. Click here to see 9 execs who had to give back their bonuses >
Numbewr 15 of 17:
Claim: The meltdown was not an accident.
Financiers knew they were selling junk, and knew they would ultimately come out on top and leave the rest of the world in a recession.
On the other hand: There is no proof that it was an accident (and no proof that it wasn’t).
There is a conspiracy theory we’ve heard that says that in the early 1990s, people on Wall Street discovered that triggering a bubble and then going “short” before it blew up could outearn any long-term investment, even investing in Coca-Cola or McDonald’s 50 years ago.
It remains a conspiracy theory for now, and the movie (thankfully) doesn’t touch on it
Number 16 of 17:
Also, unlike the movie suggests, Wall Street has changed a lot since the crisis.
But it’s all relative, considering how ridiculous it was before.
Click here to see 10 crazy tales from the days leading up to the financial crisis >