Inside Job

0:00:55 > 0:00:59Iceland is a stable democracy with a high standard of living

0:00:59 > 0:01:05and until recently, extremely low unemployment and government debt.

0:01:06 > 0:01:10We had the complete infrastructure of a modern society -

0:01:10 > 0:01:12clean energy, food production,

0:01:12 > 0:01:16fisheries with a quota system to manage them.

0:01:16 > 0:01:19Good health care, good education, clean air.

0:01:19 > 0:01:23Not much crime. It's a good place for families to live.

0:01:23 > 0:01:27We had almost end-of-history status.

0:01:27 > 0:01:32But in 2000, Iceland's government began a broad policy of deregulation

0:01:32 > 0:01:35that would have disastrous consequences,

0:01:35 > 0:01:39first for the environment and then for the economy.

0:01:39 > 0:01:46They allowed multinational corporations like Alcoa to build giant aluminum-smelting plants

0:01:46 > 0:01:51and exploit Iceland's natural geothermal and hydroelectric energy sources.

0:01:51 > 0:01:58Many of the most beautiful areas in the highlands with the most spectacular colours are geothermal.

0:01:58 > 0:02:01So nothing comes without consequence

0:02:37 > 0:02:42At the same time, the government privatised Iceland's three largest banks.

0:02:42 > 0:02:48The result was one of the purest experiments in financial deregulation ever conducted.

0:02:48 > 0:02:51VARIOUS VOICES INTERMINGLE

0:02:53 > 0:02:56We've had enough. How could all of this happen?

0:02:57 > 0:03:00Finance took over

0:03:00 > 0:03:02and more or less wrecked the place.

0:03:02 > 0:03:08In a five-year period, these three tiny banks, which had never operated outside of Iceland,

0:03:08 > 0:03:14borrowed 120 billion dollars, ten times the size of Iceland's economy.

0:03:14 > 0:03:19The bankers showered money on themselves, each other and their friends.

0:03:19 > 0:03:23There was a massive bubble. Stock prices went up by a factor of nine.

0:03:23 > 0:03:26House prices more than doubled.

0:03:27 > 0:03:32Iceland's bubble gave rise to people like Jon Asgeir Johannesson.

0:03:32 > 0:03:38He borrowed billions from the banks to buy up high-end retail businesses in London.

0:03:38 > 0:03:44He also bought a pin-striped private jet, a 40 million yacht and a Manhattan penthouse.

0:03:44 > 0:03:49Newspapers had the headline, "This millionaire bought this company"

0:03:49 > 0:03:53in the UK or in Finland or in France or wherever,

0:03:53 > 0:03:58instead of saying, "This millionaire took a billion-dollar loan

0:03:58 > 0:04:03"to buy this company and he took it from your local bank."

0:04:03 > 0:04:08The banks set up money market funds and the banks advised deposit holders to withdraw money

0:04:08 > 0:04:13and put them in the money market funds. The Ponzi scheme needed everything it could.

0:04:13 > 0:04:17American accounting firms, like KPMG, audited the Icelandic banks

0:04:17 > 0:04:20and investment firms and found nothing wrong.

0:04:20 > 0:04:25And American credit-rating agencies said Iceland was wonderful.

0:04:25 > 0:04:30In February 2007, the rating agencie decided to upgrade the banks

0:04:30 > 0:04:33to the highest possible rate - AAA.

0:04:33 > 0:04:37It went so far as the government here travelling with the bankers

0:04:37 > 0:04:40as a...as a PR show.

0:04:40 > 0:04:45When Iceland's banks collapsed at the end of 2008,

0:04:45 > 0:04:48unemployment tripled in six months.

0:04:52 > 0:04:55There is nobody unaffected in Iceland.

0:05:00 > 0:05:03So a lot of people here lost their savings?

0:05:03 > 0:05:05Yes, that's the case.

0:05:05 > 0:05:09The government regulators who should have been protecting

0:05:09 > 0:05:11the citizens of Iceland had done nothing.

0:05:11 > 0:05:18You have two lawyers from the regulator going to a bank to talk about some issue.

0:05:18 > 0:05:24When they approach the bank, they would see 19 SUVs outside...outside the bank.

0:05:24 > 0:05:30So you enter the bank and you have the 19 lawyers sitting in front of you, right?

0:05:30 > 0:05:34They are very well prepared, ready to kill any argument you make.

0:05:34 > 0:05:38Then if you do really well, they'll offer you a job, right?

0:05:38 > 0:05:43One-third of Iceland's financial regulators went to work for the banks.

0:05:45 > 0:05:50But this is a universal problem, huh? In New York, you have the same problem, right?

0:05:51 > 0:05:54# I'm on my way, I'm making it

0:05:54 > 0:05:56# Huh!

0:05:59 > 0:06:03# I've got to make it show, yeah

0:06:05 > 0:06:06# Hey!

0:06:08 > 0:06:11# So much larger than life

0:06:15 > 0:06:19# I'm gonna watch it growing... #

0:06:19 > 0:06:22What do you think of Wall Street incomes these days?

0:06:22 > 0:06:24Excessive.

0:06:26 > 0:06:32- I was told it's extremely difficult for the IMF to criticise the United States.- I wouldn't say that.

0:06:39 > 0:06:42We deeply regret our breaches of US law.

0:06:42 > 0:06:45# ..is a small town... #

0:06:46 > 0:06:52They're amazed at how much cocaine these Wall Streeters can use and get up and go to work the next day.

0:06:52 > 0:06:55# But not me... #

0:06:55 > 0:06:58I didn't know what credit default swaps are.

0:06:58 > 0:07:00I'm a little bit old-fashioned.

0:07:00 > 0:07:05# I'll be stretching my mouth to let those big words... #

0:07:05 > 0:07:10- Has Larry Summers ever expressed remorse?- I don't hear confessions.

0:07:10 > 0:07:13# I've had enough

0:07:13 > 0:07:15# I'm getting out

0:07:15 > 0:07:18# To the city, the big, big city

0:07:19 > 0:07:23# I'll be a big noise with all the big boys... #

0:07:23 > 0:07:29The government's just writing cheques. That's Plan A, that's Plan B and that's Plan C.

0:07:29 > 0:07:33Would you support legal controls on executive pay?

0:07:33 > 0:07:35I would not.

0:07:35 > 0:07:38# Big time, I'm on my way... #

0:07:38 > 0:07:44- Are you comfortable with the level of compensation in financial services?- If they've earned it, yes.

0:07:44 > 0:07:49- Do you think they've earned it? - I think they've earned it.

0:07:49 > 0:07:53- So you've helped these people blow the world up?- You could say that.

0:07:53 > 0:07:57# So much larger than life

0:07:59 > 0:08:02# Big time I'm gonna watch it growing... #

0:08:02 > 0:08:05They had massive private gains at public loss.

0:08:06 > 0:08:09# Big time... #

0:08:12 > 0:08:18When you start thinking that you can create something out of nothing, it's very difficult to resist.

0:08:18 > 0:08:21# My parties have all the big names

0:08:21 > 0:08:25# And I greet them with the widest smile

0:08:25 > 0:08:30# Tell them how my life is one big adventure

0:08:30 > 0:08:32# And always they're amazed... #

0:08:32 > 0:08:38I'm concerned that people want to go back to the way they were operating prior to the crisis.

0:08:39 > 0:08:42# I had it made

0:08:42 > 0:08:47# Like a mountain rage with a snow-white pillow for my big, fat head... #

0:08:47 > 0:08:55I was getting many anonymous emails from bankers saying, "You can't quote me, but I'm really concerned."

0:08:55 > 0:08:57# ..walk through the front door Big time

0:08:57 > 0:09:00# I'm on my way, I'm making it... #

0:09:00 > 0:09:04Why isn't there a more systematic investigation being undertaken?

0:09:04 > 0:09:07Because you'll find the culprits.

0:09:07 > 0:09:10# ..make it show, yeah Big time... #

0:09:10 > 0:09:16- Does Columbia Business School have any significant conflict-of-interest problem?- I don't see that we do.

0:09:20 > 0:09:23# Big time I'm gonna watch you growing... #

0:09:24 > 0:09:28The regulators didn't do their job.

0:09:28 > 0:09:34They had the power to do every case that I made when I was state attorney-general, but didn't want to

0:09:34 > 0:09:38# And the bulge in my big, big, big, big, big, big

0:09:38 > 0:09:43# Big, big, big, big, big, big, big, big, big... #

0:09:48 > 0:09:53'Over the weekend, Lehman Brothers, one of the biggest investment banks,

0:09:53 > 0:09:59'was forced to declare itself bankrupt. Merrill Lynch was forced to sell itself. Crisis talks...'

0:09:59 > 0:10:02Financial markets are way down after dramatic developments...

0:10:02 > 0:10:05SPEAKS IN ORIENTAL LANGUAGE

0:10:06 > 0:10:10'..crise indique. La presse francais annonce clairement la couleur...'

0:10:10 > 0:10:13In September 2008, the bankruptcy

0:10:13 > 0:10:16of the US investment bank Lehman Brothers

0:10:16 > 0:10:22and the collapse of the world's largest insurance company, AIG, triggered a global financial crisis.

0:10:22 > 0:10:28- 'Fears gripped markets overnight...' - Stocks fell off a cliff, the largest single point drop in history

0:10:28 > 0:10:33'Share prices continued to tumble in the aftermath of the Lehman collapse.'

0:10:35 > 0:10:40The result was a global recession which cost the world tens of trillions of dollars,

0:10:40 > 0:10:45rendered 30 million people unemployed and doubled the national debt of the US.

0:10:45 > 0:10:49If you look at the cost, the destruction of equity wealth,

0:10:49 > 0:10:53of housing wealth, the destruction of income, of jobs,

0:10:53 > 0:10:5850 million people globally could end up below the poverty line again.

0:11:00 > 0:11:03This is just a hugely, hugely expensive crisis.

0:11:03 > 0:11:06This crisis was not an accident.

0:11:06 > 0:11:10It was caused by an out-of-control industry.

0:11:10 > 0:11:14Since the 1980s, the rise of the US financial sector

0:11:14 > 0:11:18has led to a series of increasingly severe financial crises.

0:11:18 > 0:11:24Each crisis has caused more damage while the industry has made more and more money.

0:11:32 > 0:11:37After the Great Depression, the United States had 40 years of economic growth

0:11:37 > 0:11:42without a single financial crisis. The financial industry was tightly regulated.

0:11:42 > 0:11:48Most regular banks were local businesses and were not allowed to speculate with depositors' savings.

0:11:48 > 0:11:55Investment banks, which handled stock and bond trading, were small, private partnerships.

0:11:55 > 0:11:59In the traditional investment banking partnership model,

0:11:59 > 0:12:03the partners put the money up and watched that money very carefully.

0:12:03 > 0:12:08They wanted to live well, but they didn't want to bet the ranch on anything.

0:12:08 > 0:12:15Paul Volcker served in the Treasury Department and was Chairman of the Federal Reserve from 1979 to 1987.

0:12:15 > 0:12:20Before going into government, he was a financial economist at Chase Manhattan Bank.

0:12:20 > 0:12:23When I left Chase to go in the Treasury

0:12:23 > 0:12:26in 1969,

0:12:26 > 0:12:31- I think my income was in the neighbourhood of 45,000 a year. - 45,000 a year?

0:12:31 > 0:12:39Morgan Stanley in 1972 had approximately 110 total personnel,

0:12:39 > 0:12:43one office and capital of 12 million dollars.

0:12:43 > 0:12:49Now Morgan Stanley has 50,000 worker

0:12:49 > 0:12:51and has capital of several billion

0:12:51 > 0:12:54and has offices all over the world.

0:12:54 > 0:12:57In the 1980s, the financial industry exploded.

0:12:57 > 0:13:02The investment banks went public, giving them huge amounts of stockholder money.

0:13:02 > 0:13:06People on Wall Street started getting rich.

0:13:06 > 0:13:08I had a friend

0:13:08 > 0:13:14who was a bond trader at Merrill Lynch in the 1970s.

0:13:14 > 0:13:17He had a job as a train conductor at night

0:13:17 > 0:13:23because he had three kids and couldn't support them on what a bond trader made.

0:13:23 > 0:13:29By 1986, he was making millions of dollars and thought it was because he was smart.

0:13:29 > 0:13:35The highest order of business before the nation is to restore our economic prosperity.

0:13:35 > 0:13:39In 1981, President Ronald Reagan chose as Treasury Secretary

0:13:39 > 0:13:43the CEO of the investment bank Merrill Lynch, Donald Regan.

0:13:43 > 0:13:46Wall Street and the President do see eye to eye.

0:13:46 > 0:13:52I've talked to many leaders of Wall Street. They all say, "We're behind the President 100%."

0:13:52 > 0:13:57The Reagan administration, supported by economists and financial lobbyists,

0:13:57 > 0:14:01started a 30-year period of financial deregulation.

0:14:01 > 0:14:06In 1982, the Reagan administration deregulated savings and loan companies,

0:14:06 > 0:14:10allowing them to make risky investments with depositors' money.

0:14:10 > 0:14:15By the end of the decade, hundreds of savings and loan companies had failed.

0:14:15 > 0:14:21This crisis cost taxpayers 124 billion and cost many people their life savings.

0:14:21 > 0:14:25It may be the biggest bank heist in our history.

0:14:25 > 0:14:30Thousands of savings and loan executives went to jail for looting their companies.

0:14:30 > 0:14:34- One extreme case was Charles Keating.- Mr Keating, got a word?

0:14:34 > 0:14:38In 1985, when federal regulators began investigating him,

0:14:38 > 0:14:41Keating hired an economist named Alan Greenspan.

0:14:41 > 0:14:47In this letter to regulators, Greenspan praised Keating's sound business plans and expertise

0:14:47 > 0:14:51and said he saw no risk in allowing Keating to invest his customers' money.

0:14:51 > 0:14:55Keating reportedly paid Greenspan 40,000 dollars.

0:14:56 > 0:15:00Charles Keating went to prison shortly afterwards.

0:15:00 > 0:15:06As for Alan Greenspan, President Reagan appointed him Chairman of America's Central Bank,

0:15:06 > 0:15:08the Federal Reserve.

0:15:08 > 0:15:13Greenspan was reappointed by Presidents Clinton and George W Bush.

0:15:13 > 0:15:18During the Clinton administration, deregulation continued under Greenspan

0:15:18 > 0:15:24and Treasury Secretaries Robert Rubin, the former CEO of the investment bank Goldman Sachs,

0:15:24 > 0:15:27and Larry Summers, a Harvard economics professor.

0:15:27 > 0:15:33The financial sector, Wall Street being powerful, having lobbies, having lots of money,

0:15:33 > 0:15:39step by step captured the political system both on the Democratic and the Republican side.

0:15:39 > 0:15:45By the late 1990s, the financial sector had consolidated into a few gigantic firms,

0:15:45 > 0:15:50each of them so large that their failure could threaten the whole system.

0:15:50 > 0:15:53The Clinton administration helped them grow even larger.

0:15:53 > 0:15:58In 1998, Citicorp and Travelers merged to form Citigroup,

0:15:58 > 0:16:02the largest financial services company in the world.

0:16:02 > 0:16:07The merger violated the Glass-Steagall Act, a law passed after the Great Depression,

0:16:07 > 0:16:12to prevent banks with consumer deposits from engaging in risky investment banking activities.

0:16:12 > 0:16:15It was illegal to acquire Travelers.

0:16:15 > 0:16:17Greenspan said nothing.

0:16:17 > 0:16:22The Federal Reserve gave them an exemption for a year, then they got the law passed.

0:16:22 > 0:16:26In 1999, at the urging of Summers and Rubin,

0:16:26 > 0:16:29Congress passed the Gramm-Leach-Bliley Act,

0:16:29 > 0:16:32known to some as the Citigroup Relief Act.

0:16:32 > 0:16:36It overturned Glass-Steagall and cleared the way for future mergers.

0:16:45 > 0:16:47Why do you have big banks?

0:16:56 > 0:17:01Markets are inherently unstable or at least potentially unstable.

0:17:01 > 0:17:04An appropriate metaphor is the oil tankers.

0:17:04 > 0:17:09They are very big and therefore you have to put in compartments

0:17:09 > 0:17:14to prevent the sloshing around of oi from capsizing the boat.

0:17:14 > 0:17:19The design of the boat has to take that into account.

0:17:19 > 0:17:21And after the Depression,

0:17:21 > 0:17:27the regulations actually introduced these very watertight compartments.

0:17:27 > 0:17:33And deregulation has led to the end of compartmentalisation.

0:17:33 > 0:17:36The next crisis came at the end of the '90s.

0:17:36 > 0:17:40The investment banks fuelled a massive bubble in internet stocks

0:17:40 > 0:17:46which was followed by a crash in 2001 that caused five trillion dollars in investment losses.

0:17:46 > 0:17:51The Securities and Exchange Commission, the federal agency created during the Depression

0:17:51 > 0:17:55to regulate investment banking, had done nothing.

0:17:55 > 0:17:59In the absence of meaningful federal action, and there has been none,

0:17:59 > 0:18:02and given the clear failure of self-regulation,

0:18:02 > 0:18:05others have to step in and adopt the protections needed.

0:18:05 > 0:18:09Eliot Spitzer's investigation revealed that investment banks

0:18:09 > 0:18:12had promoted internet companies they knew would fail.

0:18:12 > 0:18:16Stock analysts were being paid based on how much business they brought in

0:18:16 > 0:18:20and what they said publicly was not what they said privately.

0:18:20 > 0:18:23Infospace, given the highest possible rating,

0:18:23 > 0:18:26dismissed by an analyst as "a piece of junk".

0:18:26 > 0:18:29Excite, also highly rated, called "such a piece of crap".

0:18:29 > 0:18:35The defence that was proffered by many of the investment banks

0:18:35 > 0:18:37was not, "You're wrong."

0:18:37 > 0:18:41It was, "Everybody's doing it and everybody knows it's going on,

0:18:41 > 0:18:44"so nobody should rely on these analysts anyway."

0:18:44 > 0:18:48In December 2002, ten investment banks settled the case

0:18:48 > 0:18:53for a total of 1.4 billion and promised to change their ways.

0:18:54 > 0:18:58Scott Talbott is chief lobbyist for the Financial Services Roundtable,

0:18:58 > 0:19:04a very powerful group in Washington, which represents nearly all of the world's largest financial companies.

0:19:04 > 0:19:08Are you comfortable with the fact that many of your member companies

0:19:08 > 0:19:11have engaged in large-scale criminal activity?

0:19:11 > 0:19:17- You'll have to be specific.- OK... - First of all, criminal activity shouldn't be accepted, period.

0:19:24 > 0:19:30Since deregulation began, the world's biggest financial firms have been caught laundering money,

0:19:30 > 0:19:35defrauding customers and cooking their books again and again and again.

0:19:35 > 0:19:39# And I'll be taking care of busines every day

0:19:39 > 0:19:42# Taking care of business every way

0:19:42 > 0:19:45# I've been taking care of business... #

0:19:45 > 0:19:48Credit Suisse helped funnel money for Iran's nuclear programme

0:19:48 > 0:19:54and for the Aerospace Industries Organisation of Iran which builds ballistic missiles.

0:19:54 > 0:19:58Any information that would identify it as Iranian would be removed.

0:19:58 > 0:20:01The bank was fined 536 million.

0:20:01 > 0:20:05Citibank helped funnel 100 million of drug money out of Mexico.

0:20:05 > 0:20:08Did you comment that she should, quote,

0:20:08 > 0:20:12"lose any documents connected with the account"?

0:20:12 > 0:20:15I said that in a kidding manner. I did not mean it seriously.

0:20:18 > 0:20:23Between 1998 and 2003, Fannie Mae overstated its earnings by more than 10 billion.

0:20:23 > 0:20:26These accounting standards are highly complex

0:20:26 > 0:20:30and require determinations over which experts often disagree.

0:20:30 > 0:20:35CEO Franklin Raines, who used to be President Clinton's budget director,

0:20:35 > 0:20:38received over 52 million in bonuses.

0:20:41 > 0:20:48When UBS was caught helping wealthy Americans evade taxes, they did not co-operate with the US government.

0:20:48 > 0:20:52- Would you supply the names? - If there's a treaty framework...

0:20:52 > 0:20:56- No treaty framework. You've agreed you participated in a fraud.- Hmm.

0:21:02 > 0:21:05# Take good care of my business... #

0:21:05 > 0:21:09But while the companies face unprecedented fines,

0:21:09 > 0:21:13the investment firms do not have to admit any wrongdoing.

0:21:13 > 0:21:17When you deal with so many products and customers, mistakes happen.

0:21:17 > 0:21:24The financial services industry seems to have a level of criminality that is somewhat distinctive.

0:21:24 > 0:21:32You know, when was the last time that Cisco or Intel or Google or Apple or IBM...

0:21:32 > 0:21:35I totally agree about hi-tech versus financial services.

0:21:35 > 0:21:39- How come?- Hi-tech is a creative business where the value generation

0:21:39 > 0:21:43and income derives from creating something new and different.

0:21:43 > 0:21:49Beginning in the 1990s, deregulation and advances in technology led to an explosion

0:21:49 > 0:21:52of complex financial products called derivatives.

0:21:52 > 0:21:56Economists and bankers claimed they made markets safer,

0:21:56 > 0:21:59but instead they made them unstable.

0:21:59 > 0:22:02Since the end of the Cold War,

0:22:02 > 0:22:06a lot of former physicists and mathematicians decided

0:22:06 > 0:22:11to apply their skills, not on Cold War technology, but on financial markets.

0:22:11 > 0:22:15And together with investment bankers and hedge funds...

0:22:15 > 0:22:20- Creating different weapons? - Yes. As Warren Buffett said, weapons of mass destruction.

0:22:20 > 0:22:24Regulators, politicians and business people did not take seriously

0:22:24 > 0:22:26the threat of financial innovation

0:22:26 > 0:22:29on the stability of the financial system.

0:22:29 > 0:22:34Using derivatives, bankers could gamble on virtually anything.

0:22:34 > 0:22:40They could bet on the rise or fall of oil prices, the bankruptcy of a company, even the weather.

0:22:40 > 0:22:47By the late 1990s, derivatives were a 50-trillion-dollar unregulated market.

0:22:47 > 0:22:52In 1998, someone tried to regulate them.

0:22:52 > 0:22:56Brooksley Born graduated first in her class at Stanford Law School

0:22:56 > 0:22:59and was the first woman to edit a major law review.

0:22:59 > 0:23:04After running the derivatives practice at Arnold & Porter, Born was appointed by President Clinton

0:23:04 > 0:23:10to chair the Commodity Futures Trading Commission which oversaw the derivatives market.

0:23:10 > 0:23:13Brooksley Born asked me if I would come work with her.

0:23:13 > 0:23:17We decided that this was a serious,

0:23:17 > 0:23:21potentially destabilising market.

0:23:21 > 0:23:26In May of 1998, the CFTC issued a proposal to regulate derivatives.

0:23:26 > 0:23:30Clinton's Treasury Department had an immediate response.

0:23:30 > 0:23:33I happened to go into Brooksley's office

0:23:33 > 0:23:38and she was just putting down the receiver on her telephone.

0:23:38 > 0:23:41And the blood had drained from her face.

0:23:41 > 0:23:45And she looked at me and said, "That was Larry Summers."

0:23:45 > 0:23:48He had 13 bankers in his office.

0:23:48 > 0:23:52He conveyed it in a very bullying fashion,

0:23:52 > 0:23:55sort of directing her to stop.

0:23:56 > 0:24:00The banks were now heavily reliant for earnings on these activities.

0:24:00 > 0:24:02That led to a titanic battle

0:24:02 > 0:24:06to prevent this set of instruments from being regulated.

0:24:06 > 0:24:08Shortly after the phone call from Summers,

0:24:08 > 0:24:14Greenspan, Rubin and SEC Chairman Arthur Levitt issued a joint statement condemning Born

0:24:14 > 0:24:19and recommending legislation to keep derivatives unregulated.

0:24:20 > 0:24:23Regulation of derivatives transactions

0:24:23 > 0:24:27that are privately negotiated by professionals is unnecessary.

0:24:27 > 0:24:32She was overruled, unfortunately, first by the Clinton administration,

0:24:32 > 0:24:36then by the Congress. In 2000, Senator Phil Gramm took a major role

0:24:36 > 0:24:40in getting a bill passed to exempt derivatives from regulation.

0:24:40 > 0:24:44They are unifying markets, they are reducing regulatory burden.

0:24:44 > 0:24:46I believe that we need to do it.

0:24:54 > 0:24:56It is our very great hope

0:24:56 > 0:25:01that it will be possible to move this year on legislation

0:25:01 > 0:25:05that in a suitable way goes to create legal certainty

0:25:05 > 0:25:09for OTC, uh, derivatives.

0:25:14 > 0:25:17I wish to associate myself

0:25:17 > 0:25:21with all of the remarks of Secretary Summers.

0:25:21 > 0:25:26In December of 2000, Congress passed the Commodity Futures Modernization Act.

0:25:26 > 0:25:30Written with the help of financial industry lobbyists,

0:25:30 > 0:25:33it banned the regulation of derivatives.

0:25:34 > 0:25:37Once that was done, it was off to the races.

0:25:37 > 0:25:40The use of derivatives and financial innovation

0:25:40 > 0:25:42exploded dramatically after 2000.

0:25:42 > 0:25:45- So help me God.- So help me God.

0:25:45 > 0:25:49By the time George W Bush took office in 2001,

0:25:49 > 0:25:55the US financial sector was vastly more profitable, concentrated and powerful than ever before.

0:25:55 > 0:25:59Dominating this industry were five investment banks,

0:25:59 > 0:26:02two financial conglomerates,

0:26:02 > 0:26:04three securities insurance companies

0:26:04 > 0:26:07and three rating agencies.

0:26:07 > 0:26:12And linking them all together was the securitisation food chain,

0:26:12 > 0:26:16a new system connecting trillions of dollars in mortgages and other loans

0:26:16 > 0:26:18with investors all over the world.

0:26:18 > 0:26:2130 years ago, if you went to get a loan for a home

0:26:21 > 0:26:26the person lending you the money expected you to pay him or her back.

0:26:26 > 0:26:30We've since developed securitisation whereby the people who make the loan

0:26:30 > 0:26:34are no longer at risk if there is a failure to repay.

0:26:34 > 0:26:38In the old system, when a home owner paid their mortgage every month,

0:26:38 > 0:26:41the money went to their local lender.

0:26:41 > 0:26:45And since mortgages took decades to repay, lenders were careful.

0:26:45 > 0:26:50In the new system, lenders sold the mortgages to investment banks.

0:26:50 > 0:26:54The investment banks combined thousands of mortgages and other loans,

0:26:54 > 0:26:58including car loans, student loans and credit card debt,

0:26:58 > 0:27:02to create complex derivatives called "collateralized debt obligations"

0:27:02 > 0:27:04or CDOs.

0:27:04 > 0:27:07The investment banks then sold the CDOs to investors.

0:27:07 > 0:27:13Now when home owners paid their mortgages, the money went to investors all over the world.

0:27:13 > 0:27:18The investment banks paid rating agencies to evaluate the CDOs

0:27:18 > 0:27:24and many of them were given a AAA rating which is the highest possible investment grade.

0:27:24 > 0:27:27This made CDOs popular with retirement funds

0:27:27 > 0:27:31which could only purchase highly rated securities.

0:27:32 > 0:27:35This system was a ticking time bomb.

0:27:35 > 0:27:42Lenders didn't care any more about whether a borrower could repay, so they started making riskier loans.

0:27:42 > 0:27:45The investment banks didn't care either.

0:27:45 > 0:27:48The more CDOs they sold, the higher their profits.

0:27:48 > 0:27:52And the rating agencies, which were paid by the investment banks,

0:27:52 > 0:27:56had no liability if their ratings of CDOs proved wrong.

0:27:56 > 0:27:58You weren't going to be on the hook

0:27:58 > 0:28:01and there weren't regulatory constraints.

0:28:01 > 0:28:04It was a green light to pump out more and more loans.

0:28:04 > 0:28:07Between 2000 and 2003,

0:28:07 > 0:28:11the number of mortgage loans made each year nearly quadrupled.

0:28:11 > 0:28:17Everybody in this securitisation food chain, from the very beginning until the end,

0:28:17 > 0:28:20they didn't care about the quality of the mortgage.

0:28:20 > 0:28:25They were caring about maximising their volume and getting a fee out of it.

0:28:25 > 0:28:30In the early 2000s, there was a huge increase in the riskiest loans called sub-prime.

0:28:30 > 0:28:35But when thousands of sub-prime loans were combined to create CDOs,

0:28:35 > 0:28:38many of them still received AAA ratings.

0:28:40 > 0:28:47Now, it would have been possible to create derivative products that don't have these risks,

0:28:47 > 0:28:51that carry the equivalent of deductibles where there are limits

0:28:51 > 0:28:54on the risks that can be taken on and so forth.

0:28:54 > 0:28:59- They didn't do that, did they?- No. In retrospect, they should have done

0:28:59 > 0:29:03- Did these guys know they were doing something dangerous?- I think so.

0:29:20 > 0:29:24All the incentives that the financial institutions offered

0:29:24 > 0:29:27to their mortgage brokers were based

0:29:27 > 0:29:31on selling the most profitable products which were predatory loans.

0:29:31 > 0:29:33If the banker makes more money

0:29:33 > 0:29:36if they put you in a sub-prime loan, that's where they'll put you.

0:29:39 > 0:29:46Suddenly, hundreds of billions of dollars a year were flowing through the securitisation chain.

0:29:46 > 0:29:52Since anyone could get a mortgage, home purchases and housing prices sky-rocketed.

0:29:52 > 0:29:56The result was the biggest financial bubble in history.

0:29:56 > 0:30:01Real estate is real. They can see their asset, they can live in their asset and rent it out.

0:30:01 > 0:30:05You had a huge boom in housing that made no sense.

0:30:05 > 0:30:11The financing appetites of the financial sector

0:30:11 > 0:30:14drove what everybody else did.

0:30:14 > 0:30:18The last time we had a housing bubbl was in the late '80s.

0:30:18 > 0:30:23In that case, the increase in home prices had been relatively minor.

0:30:23 > 0:30:28That housing bubble led to a relatively severe recession.

0:30:28 > 0:30:31From 1996 until 2006,

0:30:31 > 0:30:34real home prices effectively doubled

0:30:39 > 0:30:46'At 500 dollars a ticket, they've come to hear how to buy their very own piece of the American dream.'

0:30:46 > 0:30:49Goldman Sachs, Bear Stearns,

0:30:49 > 0:30:53Lehman Brothers, Merrill Lynch were all in on this.

0:30:53 > 0:30:59The sub-prime lending alone increased from 30 billion a year in funding

0:30:59 > 0:31:02to over 600 billion a year in ten years.

0:31:02 > 0:31:05They knew what was happening.

0:31:05 > 0:31:08Countrywide Financial, the largest sub-prime lender,

0:31:08 > 0:31:12issued 97 billion worth of loans.

0:31:12 > 0:31:16It made over 11 billion in profits as a result.

0:31:17 > 0:31:20On Wall Street, annual cash bonuses spiked.

0:31:20 > 0:31:25Traders and CEOs became enormously wealthy during the bubble.

0:31:25 > 0:31:29Lehman Brothers was a top underwriter of sub-prime lending

0:31:29 > 0:31:31and their CEO, Richard Fuld,

0:31:31 > 0:31:34took home 485 million.

0:31:35 > 0:31:39On Wall Street, this housing and credit bubble was leading

0:31:39 > 0:31:42to hundreds of billions of dollars of profits.

0:31:42 > 0:31:50By 2006, about 40% of all profits of S&P 500 firms was coming from financial institutions.

0:31:50 > 0:31:52It wasn't real profits or real income.

0:31:52 > 0:31:57It was just money being created by the system and booked as income.

0:31:57 > 0:32:00Two, three years later, there's a default, it's wiped out.

0:32:00 > 0:32:03It was in fact, in retrospect,

0:32:03 > 0:32:07a great big, national, and not just national, global Ponzi scheme.

0:32:07 > 0:32:11Through the Home Ownership and Equity Protection Act,

0:32:11 > 0:32:16the Federal Reserve Board had broad authority to regulate the mortgage industry.

0:32:16 > 0:32:20But Fed Chairman Alan Greenspan refused to use it.

0:32:20 > 0:32:24Alan Greenspan said, "Ideologically, I don't believe in regulation."

0:32:24 > 0:32:30For 20 years, Robert Gnaizda was the head of Greenlining, a powerful consumer advocacy group.

0:32:30 > 0:32:33He met with Greenspan on a regular basis.

0:32:33 > 0:32:35We gave him an example of Countrywide

0:32:35 > 0:32:40and 150 different, complex, adjustable rate mortgages.

0:32:40 > 0:32:45He said, "If you had a doctorate in math, you wouldn't be able to understand them enough

0:32:45 > 0:32:49"to know which was good for you and which wasn't."

0:32:49 > 0:32:51So we thought he was going to take action,

0:32:51 > 0:32:57but as the conversation continued, it was clear he was stuck with his ideology.

0:32:57 > 0:32:59We met again with Greenspan in '05.

0:32:59 > 0:33:04Often we met with him twice a year and never less than once a year.

0:33:04 > 0:33:06And he wouldn't change his mind.

0:33:11 > 0:33:14In this amazing world of instant global communications,

0:33:14 > 0:33:17the free movement of capital

0:33:17 > 0:33:20is helping to create the greatest prosperity in human history.

0:33:26 > 0:33:30146 people were cut from the enforcement division of the SEC.

0:33:30 > 0:33:32Is that what you testified to?

0:33:32 > 0:33:34Yes.

0:33:34 > 0:33:39Yeah, I think there has been a systematic gutting,

0:33:39 > 0:33:45or whatever you want to call it, of the agency and its capability through cutting back of staff.

0:33:45 > 0:33:49The SEC Office of Risk Management was reduced to a staff,

0:33:49 > 0:33:52did you say, of one?

0:33:52 > 0:33:56Yes. When that gentleman went home a night, he could turn the lights out.

0:33:56 > 0:34:00During the bubble, the investment banks were borrowing heavily

0:34:00 > 0:34:04to buy more loans and create more CDOs.

0:34:05 > 0:34:10The ratio between borrowed money and the bank's own money was called leverage.

0:34:10 > 0:34:14The more the banks borrowed, the higher their leverage.

0:34:15 > 0:34:19In 2004, Henry Paulson, the CEO of Goldman Sachs,

0:34:19 > 0:34:25helped lobby the Securities and Exchange Commission to relax limits on leverage,

0:34:25 > 0:34:28allowing the banks to sharply increase their borrowing.

0:34:28 > 0:34:31The SEC somehow decided

0:34:31 > 0:34:37to let investment banks gamble a lot more. That was nuts. I don't know why they did that, but they did that

0:35:23 > 0:35:29The degree of leverage in the financial system became absolutely frightening,

0:35:29 > 0:35:33investment banks leveraging up to the level of, you know, 33 to 1,

0:35:33 > 0:35:40which means that a tiny 3% decrease in the value of their asset base would leave them insolvent.

0:35:41 > 0:35:45There was another ticking time bomb in the financial system.

0:35:45 > 0:35:48AIG, the world's largest insurance company,

0:35:48 > 0:35:53was selling huge quantities of derivatives called credit default swaps.

0:35:54 > 0:35:56For investors who owned CDOs,

0:35:56 > 0:36:00credit default swaps worked like an insurance policy.

0:36:00 > 0:36:05An investor who purchased a credit default swap paid AIG a quarterly premium.

0:36:05 > 0:36:08If the CDO went bad,

0:36:08 > 0:36:11AIG promised to pay the investor for their losses.

0:36:12 > 0:36:18But unlike regular insurance, speculators could also buy credit default swaps from AIG

0:36:18 > 0:36:21in order to bet against CDOs they didn't own.

0:36:22 > 0:36:26In insurance, you can only insure something you own.

0:36:26 > 0:36:29Let's say you and I own property. I own a house.

0:36:29 > 0:36:31I can only insure that house once.

0:36:31 > 0:36:36The derivatives universe essentially enables anybody to insure that house

0:36:36 > 0:36:40So you could insure that. 50 people might insure my house.

0:36:40 > 0:36:43What happens is, if my house burns down,

0:36:43 > 0:36:47the number of losses in the system becomes proportionately larger.

0:36:47 > 0:36:50Since credit default swaps were unregulated,

0:36:50 > 0:36:54AIG didn't have to put aside any money to cover potential losses.

0:36:54 > 0:36:59Instead, AIG paid its employees huge cash bonuses

0:36:59 > 0:37:01as soon as contracts were signed.

0:37:01 > 0:37:04But if the CDOs later went bad,

0:37:04 > 0:37:06AIG would be on the hook.

0:37:06 > 0:37:10People were essentially being rewarded for taking massive risks.

0:37:10 > 0:37:16In good times, they generate short-term revenues and profits and therefore bonuses,

0:37:16 > 0:37:22but that will lead the firm to be bankrupt over time. That's a totally distorted system of compensation.

0:37:22 > 0:37:25AIG's Financial Products Division in London

0:37:25 > 0:37:30issued 500 billion worth of credit default swaps during the bubble,

0:37:30 > 0:37:34many of them for CDOs backed by sub-prime mortgages.

0:37:36 > 0:37:41The 400 employees at AIGFP made 3.5 billion between 2000 and 2007.

0:37:41 > 0:37:45Joseph Cassano, the head of AIGFP,

0:37:45 > 0:37:48personally made 315 million.

0:37:48 > 0:37:51'It's hard for us, without being flippant,

0:37:51 > 0:37:56'to even see a scenario within any kind of realm of reason

0:37:56 > 0:38:01'that would see us losing one dollar in any of those transactions.'

0:38:01 > 0:38:06In 2007, AIG's auditors raised warnings.

0:38:06 > 0:38:10One of them, Joseph St Denis, resigned in protest

0:38:10 > 0:38:14after Cassano blocked him from investigating AIGFP's accounting.

0:38:14 > 0:38:18Let me tell you one person that didn't get a bonus.

0:38:18 > 0:38:22That was Mr St Denis who tried to alert the two of you

0:38:22 > 0:38:29to the fact that you were running into big problems. He quit in frustration. He didn't get a bonus.

0:38:29 > 0:38:34In 2005, Raghuram Rajan, then the chief economist of the International Monetary Fund,

0:38:34 > 0:38:41delivered a paper at the Jackson Hole Symposium, the most elite banking conference in the world.

0:38:41 > 0:38:43Who was in the audience?

0:38:43 > 0:38:47It was, I guess, the central bankers of the world,

0:38:47 > 0:38:50ranging from Mr Greenspan himself,

0:38:50 > 0:38:55Ben Bernanke, Larry Summers was there, Tim Geithner was there.

0:38:55 > 0:39:01The title of the paper was, essentially, Is Financial Developmen Making The World Riskier?

0:39:01 > 0:39:04And the conclusion was, um, it is.

0:39:04 > 0:39:08Rajan's paper focused on incentive structures

0:39:08 > 0:39:13that generated huge cash bonuses based on short-term profits,

0:39:13 > 0:39:16but which imposed no penalties for later losses.

0:39:16 > 0:39:20Rajan argued that these incentives encouraged bankers to take risks

0:39:20 > 0:39:26that might eventually destroy their own firms or even the entire financial system.

0:39:28 > 0:39:31It is very easy to generate performance

0:39:31 > 0:39:33by taking on more risk,

0:39:33 > 0:39:37so you need to compensate for risk-adjusted performance.

0:39:37 > 0:39:40That's where all the bodies are buried.

0:39:40 > 0:39:43Rajan, you know, hit the nail on the head.

0:39:43 > 0:39:47What he said was, "You guys have claimed you have found a way

0:39:47 > 0:39:50"to make more profits with less risk.

0:39:50 > 0:39:55"You've found a way to make more profits with more risk. There's a big difference."

0:39:55 > 0:39:57Summers was...was vocal.

0:39:57 > 0:40:05He basically thought that I was criticising the change in the financial world

0:40:05 > 0:40:10and was worried about regulation which would reverse this whole change.

0:40:10 > 0:40:13So essentially he accused me of being a Luddite.

0:40:13 > 0:40:18He wanted to make sure that we didn't bring in a whole new set of regulations

0:40:18 > 0:40:22to constrain the financial sector at that point.

0:40:25 > 0:40:29You'll make an extra 2 million or 10 million a year

0:40:29 > 0:40:32for putting your financial institution at risk.

0:40:32 > 0:40:35Someone else pays the bill. You don't pay the bill.

0:40:35 > 0:40:40Would you make that bet? Most people working on Wall Street said, "Sure."

0:40:44 > 0:40:47# Many years since I was here

0:40:49 > 0:40:53# On the street I was passing my time away

0:40:53 > 0:40:56# To the left and to the right

0:40:56 > 0:40:59# Buildings towering to the sky

0:40:59 > 0:41:02# It's outta sight In the dead of night

0:41:02 > 0:41:05- # Ooh - Here I am

0:41:05 > 0:41:08# And in this city

0:41:08 > 0:41:10# With a fistful of dollars

0:41:10 > 0:41:13# And baby, you'd better believe

0:41:13 > 0:41:17# I'm back, back in the New York groove

0:41:17 > 0:41:21# I'm back, back in the New York groove... #

0:41:21 > 0:41:26It never was enough. They don't want to own one home, they want to own five homes.

0:41:26 > 0:41:30And they want to have an expensive penthouse on Park Avenue.

0:41:30 > 0:41:34And they want to have their own private jet.

0:41:34 > 0:41:36You think this is an industry

0:41:36 > 0:41:39where very high compensation levels are justified?

0:41:39 > 0:41:42I think I would take caution or take heed

0:41:42 > 0:41:45or take exception to "very high". It's all relative.

0:41:45 > 0:41:49You have a 14 million home in Florida, a summer vacation home

0:41:49 > 0:41:54in Sun Valley, Idaho. You and your wife have million-dollar paintings.

0:41:54 > 0:41:59Richard Fuld never appeared on the trading floor. There were art advisers up there.

0:41:59 > 0:42:03He had a private elevator. He went out of his way to be disconnected.

0:42:03 > 0:42:06They hired technicians to program his elevator,

0:42:06 > 0:42:11so his driver would call in in the morning and a security guard would hold it.

0:42:11 > 0:42:15There's only a two or three-second window where he has to see people.

0:42:15 > 0:42:19He hops into this elevator and goes straight to 31.

0:42:19 > 0:42:23- Lehman owned a bunch of corporate jets. Do you know about this?- Yes.

0:42:23 > 0:42:27- How many were there? - There were six, including the 767s.

0:42:27 > 0:42:32- They also had a helicopter.- Isn't that a lot of planes to have for...?

0:42:34 > 0:42:39They're Type A personalities and they know everything in the world.

0:42:39 > 0:42:43Banking became a pissing contest - "mine's bigger than yours".

0:42:43 > 0:42:46It was all men that ran it.

0:42:46 > 0:42:5050 billion deals were not large enough, so we do 100 billion deals.

0:42:50 > 0:42:52These people are risk takers, they're impulsive.

0:42:58 > 0:43:03It's part of their behaviour and personality. That manifests outside of work as well.

0:43:03 > 0:43:07It's quite typical for the guys to go out, to go to strip bars,

0:43:07 > 0:43:11to use drugs. I see a lot of cocaine use, a lot of use of prostitution.

0:43:18 > 0:43:22Recently, neuroscientists have done experiments

0:43:22 > 0:43:25where they've put individuals into an MRI machine.

0:43:25 > 0:43:29And they have them play a game where the prize is money.

0:43:29 > 0:43:33And they noticed that when these subjects earn money,

0:43:33 > 0:43:38the part of the brain that gets stimulated is the same par that cocaine stimulates.

0:43:38 > 0:43:44A lot of people feel that they need to participate in that behaviour to get promoted, to get recognised.

0:43:44 > 0:43:50According to a Bloomberg article, business entertainment represents 5% of revenue

0:43:50 > 0:43:55for New York derivatives brokers and often includes strip clubs, prostitution and drugs.

0:43:55 > 0:44:00A New York broker filed a lawsuit in 2007 against his firm,

0:44:00 > 0:44:04alleging he was required to retain prostitutes to entertain traders.

0:44:04 > 0:44:10There's a blatant disregard for the impact their actions might have on society, on family.

0:44:10 > 0:44:16They have no problem using a prostitute and going home to their wife.

0:44:24 > 0:44:29- How many customers? - About 10,000 at that point in time.

0:44:31 > 0:44:34What fraction were from Wall Street?

0:44:34 > 0:44:39Of the higher-end clients, probably 40 to 50%.

0:44:39 > 0:44:46- Were all the major Wall Street firms represented? Goldman Sachs?- Lehman Brothers, yeah, they're all in there

0:44:46 > 0:44:49Morgan Stanley was a little less of that.

0:44:49 > 0:44:53I think Goldman was pretty big with that.

0:44:53 > 0:44:57A lot of clients would say, "Can you get me a Lamborghini for the girl?"

0:44:57 > 0:45:00These guys were spending corporate money.

0:45:00 > 0:45:04I had many black cards from the various financial firms.

0:45:04 > 0:45:10What's happening is services are being charged to computer repair.

0:45:10 > 0:45:14Trading research, you know, consulting for market compliance.

0:45:14 > 0:45:17I gave them a letterhead and said, "Make your own invoice."

0:45:17 > 0:45:22- This pattern of behaviour extends to the senior management of the firm? - Absolutely.

0:45:22 > 0:45:24I know for a fact that it does.

0:45:24 > 0:45:27It extends to the very top.

0:45:31 > 0:45:35A friend who's involved in a company with a big financial presence said,

0:45:35 > 0:45:39"It's about time you learned about sub-prime mortgages."

0:45:39 > 0:45:42So he set up a session with his trading desk and me.

0:45:42 > 0:45:47And a techie who did all this gets very excited, runs to his computer,

0:45:47 > 0:45:50pulls up in about three seconds.

0:45:50 > 0:45:54This Goldman Sachs issue of securities was a complete disaster.

0:45:54 > 0:46:02Borrowers had borrowed on average 99.3% of the price of the house, so they have no money in the house.

0:46:02 > 0:46:08If anything goes wrong, they'll walk away from the mortgage. This is not a loan you'd really make, right?

0:46:08 > 0:46:10You've got to be crazy.

0:46:10 > 0:46:12Somehow you took 8,000 of these loan

0:46:12 > 0:46:18and by the time the guys were done at Goldman Sachs and the rating agencies,

0:46:18 > 0:46:25two-thirds of the loans were rated AAA, so they were rated as safe as government securities. Utterly mad!

0:46:25 > 0:46:30Goldman Sachs sold at least 3.1 billion worth of these toxic CDOs

0:46:30 > 0:46:33in the first half of 2006.

0:46:33 > 0:46:39The CEO of Goldman Sachs at this time was Henry Paulson, the highest paid CEO on Wall Street.

0:46:39 > 0:46:43Good morning. Welcome to the White House.

0:46:43 > 0:46:48I'm pleased to nominate Henry Paulso to be the Secretary of the Treasury.

0:46:48 > 0:46:51He has an intimate knowledge of financial markets.

0:46:51 > 0:46:55He's earned a reputation for candour and integrity.

0:46:55 > 0:47:00You might think it would be hard for Paulson to adjust to a meagre government salary,

0:47:00 > 0:47:06but taking the job as Treasury Secretary was the best financial decision of his life.

0:47:06 > 0:47:11Paulson had to sell his 485 million of Goldman stock when he went to work for the government,

0:47:11 > 0:47:17but because of a law passed by the first President Bush, he didn't have to pay any taxes on it.

0:47:17 > 0:47:19It saved him 50 million.

0:47:26 > 0:47:30The article came out in October of 2007.

0:47:30 > 0:47:34Already a third of the mortgages defaulted.

0:47:34 > 0:47:36Now most of them are going.

0:47:36 > 0:47:41One group that had purchased these now worthless securities

0:47:41 > 0:47:45was the Public Employees Retirement System of Mississippi

0:47:45 > 0:47:49which provides monthly benefits to over 80,000 retirees.

0:47:49 > 0:47:53They lost millions of dollars and are now suing Goldman Sachs.

0:48:07 > 0:48:11By late 2006, Goldman had taken things a step further.

0:48:11 > 0:48:14It didn't just sell toxic CDOs.

0:48:14 > 0:48:17It started actively betting against them

0:48:17 > 0:48:22at the same time it was telling customers that they were high quality investments.

0:48:22 > 0:48:25By purchasing credit default swaps from AIG,

0:48:25 > 0:48:31Goldman could bet against CDOs it didn't own and get paid when the CDOs failed.

0:48:33 > 0:48:37I asked if anybody called the customers and said,

0:48:37 > 0:48:41"We don't like this kind of mortgage now and we thought you should know."

0:48:41 > 0:48:46They didn't say anything, but you could feel the laughter coming over the phone.

0:48:46 > 0:48:52Goldman Sachs bought at least 22 billion of credit default swaps from AIG.

0:48:52 > 0:48:57It was so much that Goldman realised that AIG itself might go bankrupt,

0:48:57 > 0:49:02so they spent 150 million insuring themselves against AIG's potential collapse.

0:49:02 > 0:49:05Then in 2007,

0:49:05 > 0:49:07Goldman went even further.

0:49:07 > 0:49:13They started selling CDOs specifically designed so that the more money their customers lost,

0:49:13 > 0:49:15the more money Goldman Sachs made.

0:49:22 > 0:49:25600 million of Timberwolf Securities is what you sold.

0:49:25 > 0:49:27Before you sold them,

0:49:27 > 0:49:32this is what your sales team were telling to each other.

0:49:32 > 0:49:36"Boy, that Timberwolf was one shitty deal!"

0:49:36 > 0:49:39This was an email to me in late June...

0:49:39 > 0:49:41- Right.- ..after the transaction.

0:49:41 > 0:49:44No, no, you sold Timberwolf after as well.

0:49:44 > 0:49:47- We did trades after that.- Yeah, OK.

0:49:47 > 0:49:51The next email, take a look, July 1, '07. Tells the sales force,

0:49:51 > 0:49:53"The top priority is Timberwolf."

0:49:53 > 0:49:57Your top priority to sell is that shitty deal.

0:49:57 > 0:50:01If you have an adverse interest to your client, do you have the duty

0:50:01 > 0:50:05to tell that client of your adverse interest? That's my question.

0:50:05 > 0:50:09- I'm trying to understand... - I don't think you want to answer it.

0:50:09 > 0:50:11Do you believe that you have a duty

0:50:11 > 0:50:15to act in the best interests of your clients?

0:50:16 > 0:50:21Again, Senator, I will repeat, we have a duty to serve our clients

0:50:21 > 0:50:25by showing prices on transactions that they ask us to show prices for.

0:50:25 > 0:50:28What do you think about selling securities

0:50:28 > 0:50:31which your own people think are "crap"?

0:50:31 > 0:50:35- Does that bother you? - I think they would...

0:50:35 > 0:50:38- Again as a hypothetical? - No, this is real.

0:50:38 > 0:50:40- Then I don't...- We heard it today.

0:50:40 > 0:50:44We heard it today. "This is a shitty deal. This is crap."

0:50:44 > 0:50:50I-I heard nothing today that makes me think anything, um, went wrong.

0:50:50 > 0:50:54Is there not a conflict when you sell something to somebody

0:50:54 > 0:50:59and then are determined to bet against that same security

0:50:59 > 0:51:03and you don't disclose that to the person you're selling it to?

0:51:03 > 0:51:07- Do you see a problem?- In market making, that is not a conflict.

0:51:07 > 0:51:14When you heard that your employees in these emails said, "God, what a shitty deal. What a piece of crap,"

0:51:14 > 0:51:17- did you feel anything?- It's very unfortunate to have on email.

0:51:17 > 0:51:21LAUGHTER And very unfortunate. I don't...

0:51:21 > 0:51:24How about feeling that way?

0:51:24 > 0:51:28It's very unfortunate for anyone to have said that in any form.

0:51:28 > 0:51:32Were your competitors engaged in similar activities?

0:51:32 > 0:51:37Yes, and to a greater extent than us in most cases.

0:51:37 > 0:51:43Hedge fund manager John Paulson made 12 billion betting against the mortgage market.

0:51:43 > 0:51:47When he ran out of mortgage securities to bet against,

0:51:47 > 0:51:51he worked with Goldman Sachs and Deutsche Bank to create more.

0:51:51 > 0:51:56Morgan Stanley also sold mortgage securities that it bet against and is now being sued

0:51:56 > 0:52:02by the government employees' retirement fund of the Virgin Islands for fraud.

0:52:02 > 0:52:06The lawsuit alleges that Morgan Stanley knew the CDOs were junk.

0:52:06 > 0:52:10Although they were rated AAA, Morgan Stanley bet they would fail.

0:52:10 > 0:52:14A year later, Morgan Stanley had made hundreds of millions,

0:52:14 > 0:52:18while the investors had lost almost all of their money.

0:52:33 > 0:52:39You would have thought that pension funds would have said, "Those are subprime. Why am I buying them?"

0:52:39 > 0:52:45And they had these guys at Moody's and Standard and Poor's who said, "That's AAA."

0:52:45 > 0:52:51None of these securities got issued without the imprimatur, the seal of approval, of the rating agencies.

0:52:51 > 0:52:55The three rating agencies - Moody's, S&P and Fitch -

0:52:55 > 0:52:59made billions of dollars giving high ratings to risky securities.

0:52:59 > 0:53:02Moody's, the largest rating agency,

0:53:02 > 0:53:06quadrupled its profits between 2000 and 2007.

0:53:06 > 0:53:11Moody's and S&P get compensated based on putting out ratings reports

0:53:11 > 0:53:16and the more structured securities they gave a AAA rating to, the higher their earnings.

0:53:16 > 0:53:23Imagine if you went to the New York Times and said, "Write a positive story and I'll pay you 500,000."

0:53:23 > 0:53:27The rating agencies could have stopped the party and said, "Sorry.

0:53:27 > 0:53:29"We're tightening our standards."

0:53:29 > 0:53:33This would immediately cut off a lot of funding to risky borrowers.

0:53:33 > 0:53:36AAA-rated instruments

0:53:36 > 0:53:42mushroomed from just a handful to thousands and thousands.

0:53:43 > 0:53:49- Hundreds of billions of dollars were being rated and...- Per year. - Per year. Oh, yeah.

0:53:49 > 0:53:55I've now testified before both houses of Congress on the credit rating agency issue

0:53:55 > 0:54:00and both times they trot out very prominent First Amendment lawyers

0:54:00 > 0:54:04and argue, "When we say something is rated AAA,

0:54:04 > 0:54:08"that is merely our 'opinion'. You shouldn't rely on it."

0:54:08 > 0:54:10S&P's ratings express our opinion.

0:54:10 > 0:54:13Our ratings are our opinions.

0:54:13 > 0:54:16Opinions. They are just opinions.

0:54:16 > 0:54:20I think we are emphasising the fact that our ratings are, uh, opinions.

0:54:26 > 0:54:33They do not speak to market value of a security, volatility of its price or its suitability as an investment.

0:54:51 > 0:54:57We have so many economists coming on our air and saying, "This is a bubble and it's going to burst

0:54:57 > 0:55:02"and this will be a real issue for the economy." Some say a recession.

0:55:02 > 0:55:09What is the worst-case scenario if we were to see prices come down substantially across the country?

0:55:09 > 0:55:16I don't buy your premise. It's pretty unlikely. We've never had a decline of house prices nationwide.

0:55:16 > 0:55:20Ben Bernanke became chairman of the Federal Reserve Board in February, 2006,

0:55:20 > 0:55:23the top year for subprime lending.

0:55:23 > 0:55:29But despite numerous warnings, Bernanke and the Federal Reserve Board did nothing.

0:55:33 > 0:55:40Robert Gnaizda met with Ben Bernanke and the Federal Reserve Board three times after he became chairman.

0:55:40 > 0:55:44Only at the last meeting did he suggest that there was a problem

0:55:44 > 0:55:49- and that the government ought to look into it.- When was that?

0:55:49 > 0:55:54- It's 2009, March 11th. In DC. - This year?- This year we met, yes.

0:55:54 > 0:55:59- And so for the two previous years you met him, even in 2008...?- Yes.

0:55:59 > 0:56:04One of the six Federal Reserve Board governors serving under Bernanke was Frederic Mishkin,

0:56:04 > 0:56:08appointed by President Bush in 2006.

0:56:08 > 0:56:15Did you participate in the semi-annual meetings that Robert Gnaizda and Greenlining had?

0:56:15 > 0:56:21Yes, I did. I was on the committee involved with that, the Consumer Community Affairs Committee.

0:56:21 > 0:56:25He warned in an extremely explicit manner about what was going on

0:56:25 > 0:56:30and he came with loan documentation of the kind of loans being made

0:56:30 > 0:56:34- and he was listened to politely and nothing was done.- Yeah.

0:56:34 > 0:56:38So...I don't know the details in terms of, um...

0:56:38 > 0:56:44In fact, I just don't know... Whatever information he provided, I'm not sure exactly...

0:56:46 > 0:56:50Uh, to be honest, I can't remember this kind of discussion,

0:56:50 > 0:56:54but certainly there were issues that were, uh, coming up.

0:56:54 > 0:56:56Then it's how pervasive are they?

0:56:56 > 0:57:02- Why didn't you try looking?- I think people did. We had a whole group of people looking at this...

0:57:02 > 0:57:08- You can't be serious. If you'd looked, you'd have found things.- You know, it's very easy to say that.

0:57:08 > 0:57:14As early as 2004, the FBI was already warning about an epidemic of mortgage fraud.

0:57:14 > 0:57:21They reported inflated appraisals, doctored loan documentation and other fraudulent activity.

0:57:22 > 0:57:26In 2005, the IMF's chief economist, Raghuram Rajan,

0:57:26 > 0:57:30warned that dangerous incentives could lead to a crisis.

0:57:30 > 0:57:34Then came Nouriel Roubini's warnings in 2006,

0:57:34 > 0:57:38Allan Sloan's articles in Fortune and the Washington Post in 2007

0:57:38 > 0:57:41and repeated warnings from the IMF.

0:57:41 > 0:57:47I said it, and on behalf of the institution, the crisis in front of us is a huge crisis.

0:57:47 > 0:57:50- Who did you talk to?- The government, Treasury, the Fed, everybody.

0:57:50 > 0:57:55In May of 2007, hedge fund manager Bill Ackman circulated a presentation

0:57:55 > 0:58:01called Who's Holding The Bag?, which described how the bubble would unravel.

0:58:01 > 0:58:07And in early 2008, Charles Morris published his book about the impending crisis.

0:58:09 > 0:58:13You're just not sure. What do you do? You might have some suspicions

0:58:13 > 0:58:17about underwriting standards, but should you do anything about it?

0:58:20 > 0:58:24By 2008, home foreclosures were skyrocketing

0:58:24 > 0:58:30and the securitisation food chain imploded. Lenders could no longer sell their loans to investment banks

0:58:30 > 0:58:35and as the loans went bad, dozens of lenders failed.

0:58:35 > 0:58:40Chuck Prince of Citibank famously said that...

0:58:40 > 0:58:47we have to dance until the music stops. Actually, the music had stopped already when he said that.

0:58:47 > 0:58:51The market for CDOs collapsed, leaving the investment banks

0:58:51 > 0:58:57holding hundreds of billions of dollars in loans, CDOs and real estate they couldn't sell.

0:58:57 > 0:59:03When the crisis started, both the Bush administration and the Federal Reserve

0:59:03 > 0:59:07were totally behind the curve. They did not understand the extent.

0:59:07 > 0:59:11At what point do you remember thinking for the first time

0:59:11 > 0:59:14"This is dangerous, this is bad"?

0:59:14 > 0:59:20I remember very well one... I think it was a G7 meeting of February, 2008.

0:59:20 > 0:59:24I remember discussing the issue with Hank Paulson

0:59:24 > 0:59:29and I clearly remember telling Hank, "We are watching this tsunami coming

0:59:29 > 0:59:36"and you're just proposing that we ask which swimming costume we're going to put on".

0:59:36 > 0:59:39What was his response, his feeling?

0:59:39 > 0:59:45"Things are pretty much under control. We are looking at this situation carefully.

0:59:45 > 0:59:48"Yeah, it's under control."

0:59:48 > 0:59:51We're gonna keep growing, OK?

0:59:51 > 0:59:55And obviously, if you're growing, you're not in recession, right?

0:59:55 > 0:59:57I mean, we all know that.

1:00:02 > 1:00:05One of the pillars of Wall Street...

1:00:05 > 1:00:09In March of 2008, investment bank Bear Stearns ran out of cash

1:00:09 > 1:00:13and was acquired for 2 a share by JP Morgan Chase.

1:00:13 > 1:00:19The deal was backed by 30 billion in emergency guarantees from the Federal Reserve.

1:00:19 > 1:00:23That was the time when the administration could have come in

1:00:23 > 1:00:28and put in place various measures to reduce system risk.

1:00:28 > 1:00:35The information I'm receiving from some entities is the end is not here. There are other shoes to fall.

1:00:35 > 1:00:41I-I've seen those investment banks working with the Fed and the SEC

1:00:41 > 1:00:47to strengthen their liquidity, strengthen their capital positions.

1:00:47 > 1:00:51I get reports all the time. Our regulators are very vigilant.

1:00:51 > 1:00:57On September 7th, 2008, Paulson announced the federal takeover of Fannie Mae and Freddie Mac,

1:00:57 > 1:01:01two giant mortgage lenders on the brink of collapse.

1:01:01 > 1:01:05Nothing about our actions today in any way reflects a changed view

1:01:05 > 1:01:10of housing or the strength of other US financial institutions.

1:01:10 > 1:01:16Two days later, Lehman Brothers announced record losses of 3.2 billion and its stock collapsed.

1:01:18 > 1:01:22The effects of Lehman and AIG in September still came as a surprise.

1:01:22 > 1:01:26This is even after July and Fannie and Freddie.

1:01:26 > 1:01:34So clearly there was stuff that - as of September - major stuff that nobody knew about.

1:01:34 > 1:01:37I think that's fair.

1:01:37 > 1:01:41Bear Stearns was rated AAA a month before it went bankrupt.

1:01:41 > 1:01:44- More likely A2.- A2?- Yeah.- OK.

1:01:44 > 1:01:50- A2 is still not bankrupt. - No, no, it's a high investment grade. Solid rating.

1:01:50 > 1:01:53Lehman Brothers - A2 within days of failing.

1:01:53 > 1:01:57AIG - AA within days of being bailed out.

1:01:58 > 1:02:02Fannie Mae and Freddie Mac were AAA when they were rescued.

1:02:02 > 1:02:06Citigroup, Merrill, all of them had investment-grade ratings.

1:02:06 > 1:02:10- How can that be? - Well, that's a good question.

1:02:10 > 1:02:12That's a great question!

1:02:12 > 1:02:18At no point did the administration go to all the major institutions and say, "This is serious.

1:02:18 > 1:02:23"Tell us what your positions are. You know, no bullshit. Where are you?"

1:02:23 > 1:02:28Well, first, that's what the regulators... That's their job.

1:02:28 > 1:02:32Their job is to understand the exposure across these institutions

1:02:32 > 1:02:39and they have a very refined understanding that became more refined as the crisis proceeded.

1:02:39 > 1:02:44- So... - Forgive me, but that's clearly not true.- What do you mean, not true?

1:02:44 > 1:02:48In August of 2008, were you aware of the credit ratings

1:02:48 > 1:02:50held then by Lehman Brothers,

1:02:50 > 1:02:55Merrill Lynch, AIG, and did you think they were accurate?

1:02:55 > 1:03:01Well, uh...by that time it was clear that earlier credit ratings were inaccurate

1:03:01 > 1:03:05- because they had been downgraded substantially.- No, they hadn't.

1:03:05 > 1:03:11- There was still some downgrading in terms of the industry...- All those firms were rated at least A2

1:03:11 > 1:03:18- until a couple of days before they were rescued.- Then I just don't know enough to answer your question.

1:03:18 > 1:03:25Fred Mishkin is resigning effective August 31 to return to teaching at Columbia School of Business.

1:03:25 > 1:03:31Why did you leave the Federal Reserve in August, 2008, the middle of the worst financial crisis...?

1:03:31 > 1:03:35So, uh, that I had to revise a textbook.

1:03:35 > 1:03:41His departure leaves the Fed with three of seven seats vacant, just when the economy needs it most.

1:03:41 > 1:03:49I'm sure your textbook is important, but more important things were going on in the world, don't you think?

1:03:49 > 1:03:54By Friday, September 12th, Lehman Brothers had run out of cash

1:03:54 > 1:03:58and the entire investment banking industry was sinking fast.

1:03:58 > 1:04:02The stability of the global financial system was in jeopardy.

1:04:02 > 1:04:07Henry Paulson and Timothy Geithner, president of the NY Federal Reserve,

1:04:07 > 1:04:12called an emergency meeting with the CEOs of the major banks in an effort to rescue Lehman.

1:04:12 > 1:04:15But Lehman wasn't alone.

1:04:15 > 1:04:21Merrill Lynch, another major investment bank, was also on the brink of failure.

1:04:21 > 1:04:25That Sunday it was acquired by Bank of America.

1:04:25 > 1:04:29The only bank interested in Lehman was Barclays,

1:04:29 > 1:04:35but British regulators demanded a financial guarantee from the US Government. Paulson refused.

1:04:39 > 1:04:44We all jumped into a yellow cab and went to the Federal Reserve Bank.

1:04:44 > 1:04:50They wanted the bankruptcy case commenced before midnight of September 14th.

1:04:51 > 1:04:57We kept pressing that this would be a terrible event

1:04:57 > 1:05:00and at some point I used the word Armageddon.

1:05:00 > 1:05:04Had they fully considered the consequences?

1:05:04 > 1:05:09- The effect on the market would be extraordinary.- You said this?- Yes.

1:05:09 > 1:05:14They said they had considered all of the comments we had made

1:05:14 > 1:05:20and they were still of the belief that in order to calm the markets and move forward,

1:05:20 > 1:05:25- it was necessary for Lehman to enter bankruptcy.- "Calm the markets".- Yes.

1:05:25 > 1:05:29When were you first told that Lehman was going to go bankrupt?

1:05:29 > 1:05:33- After the fact. - After the fact?- Mm-hm.

1:05:34 > 1:05:35Wow. OK.

1:05:35 > 1:05:38Um, and...

1:05:38 > 1:05:43..what was your reaction when you learned of it?

1:05:43 > 1:05:44Holy cow!

1:05:44 > 1:05:49Paulson and Bernanke had not consulted with other governments

1:05:49 > 1:05:53or understood the consequences of foreign bankruptcy laws.

1:05:53 > 1:05:58Under British law, Lehman's London office had to be closed immediately.

1:05:58 > 1:06:03All transactions came to a halt. There are thousands of transactions.

1:06:03 > 1:06:09The hedge funds who had had assets with Lehman in London discovered overnight, to their horror,

1:06:09 > 1:06:13- that they couldn't get them back. - One of the points of the hub failed.

1:06:13 > 1:06:17That had huge knock-on effects around the system.

1:06:17 > 1:06:25The oldest money market fund in the nation wrote off roughly 0.75 billion dollars in bad debt...

1:06:25 > 1:06:29Lehman's also caused a collapse in the commercial paper market,

1:06:29 > 1:06:35which many companies depend on to pay for operating expenses, such as payroll.

1:06:35 > 1:06:39They have to lay off employees. It stops business in its tracks.

1:06:39 > 1:06:44Suddenly, people stood and said, "There is nothing we can trust now."

1:06:44 > 1:06:51That same week, AIG owed 13 billion to holders of credit default swaps and it didn't have the money.

1:06:51 > 1:06:53AIG was another hub.

1:06:53 > 1:06:57If AIG had stopped, all planes may have to stop flying.

1:06:57 > 1:07:01On September 17th, AIG is taken over by the government.

1:07:01 > 1:07:07One day later, Paulson and Bernanke ask Congress for 700 billion to bail out the banks.

1:07:07 > 1:07:13They warn that the alternative would be catastrophic financial collapse.

1:07:13 > 1:07:19It was scary. The entire system froze up. Every part of the financial system, the credit system.

1:07:19 > 1:07:24Nobody could borrow money. It was like a cardiac arrest of the global financial system.

1:07:24 > 1:07:29I'm playing the hand that was dealt me. A lot of what I'm dealing with,

1:07:29 > 1:07:33I'm dealing with the consequences of things done many years ago.

1:07:33 > 1:07:40Paulson spoke throughout the fall and all the potential root causes of this, he called them.

1:07:40 > 1:07:44- So I'm not sure...- You're not being serious, are you?- I am.

1:07:44 > 1:07:47What would you have expected?

1:07:47 > 1:07:54He was the senior advocate for prohibiting the regulation of credit default swaps

1:07:54 > 1:07:58and also lifting the leverage limits on the investment banks.

1:07:58 > 1:08:02- So again, what...?- He mentioned those things? I never heard it.

1:08:03 > 1:08:05Can we turn this off for a second?

1:08:10 > 1:08:16When AIG was bailed out, the owners of its credit default swaps - the most prominent being Goldman Sachs -

1:08:16 > 1:08:19were paid 61 billion the next day.

1:08:19 > 1:08:25Paulson, Bernanke and Tim Geithner forced AIG to pay 100 cents on the dollar,

1:08:25 > 1:08:28rather than negotiate lower prices.

1:08:28 > 1:08:33Eventually, the AIG bailout cost taxpayers over 150 billion.

1:08:34 > 1:08:41160 billion went through AIG. 14 billion went to Goldman Sachs.

1:08:41 > 1:08:48Paulson and Geithner forced AIG to surrender its right to sue Goldman and the other banks for fraud.

1:08:48 > 1:08:53Isn't there a problem when the person in charge of dealing with this crisis

1:08:53 > 1:08:59is the former CEO of Goldman Sachs, someone with a major role in causing it?

1:08:59 > 1:09:03I think it's fair to say that the markets are incredibly complicated.

1:09:05 > 1:09:11On October 4th, 2008, President Bush signs a 700 billion bailout bill.

1:09:11 > 1:09:17But world stock markets continue to fall, amid fears that a global recession is now underway.

1:09:21 > 1:09:27The bailout legislation does nothing to stem the tide of layoffs and foreclosures.

1:09:27 > 1:09:32Unemployment in the US and Europe quickly rises to 10%.

1:09:32 > 1:09:35The recession accelerates and spreads globally.

1:09:39 > 1:09:41I began to get really scared

1:09:41 > 1:09:48because I hadn't foreseen the whole world going down at the same rate at the same time.

1:09:48 > 1:09:53By December of 2008, General Motors and Chrysler are facing bankruptcy.

1:09:54 > 1:10:00And as US consumers cut back on spending, Chinese manufacturers see sales plummet.

1:10:00 > 1:10:05Over 10 million migrant workers in China lose their jobs.

1:10:05 > 1:10:07At the end of the day,

1:10:07 > 1:10:10the poorest, as always, pay the most.

1:11:05 > 1:11:08We were growing at about 20%.

1:11:08 > 1:11:12It was a super year. And then we suddenly went

1:11:12 > 1:11:15to minus 9 this quarter.

1:11:15 > 1:11:20Exports collapsed. And we're talking, like, 30%.

1:11:20 > 1:11:24So we just took a hit, you know. Fell off a cliff. Bump.

1:11:24 > 1:11:30Even as the crisis unfolded, we didn't know how wide it would spread or how severe it'd be.

1:11:30 > 1:11:37We were still hoping for some way for us to have a shelter and be less battered by the storm.

1:11:37 > 1:11:44But it is not possible. It's a very globalised world. The economies are all linked together.

1:12:14 > 1:12:18Every time a home goes into foreclosure, it affects everyone.

1:12:18 > 1:12:25When that property goes on the market, it's at a lower price, it won't be well maintained.

1:12:25 > 1:12:29We estimate another 9 million home owners will lose their homes.

1:13:30 > 1:13:33The vast majority I've seen lately

1:13:33 > 1:13:36are people hurt by the economy.

1:13:36 > 1:13:39They were living day to day.

1:13:39 > 1:13:42Unemployment isn't going to pay a house mortgage.

1:13:42 > 1:13:44I was a log truck driver.

1:13:44 > 1:13:50And they shut down all the logging systems, sawmills and everything.

1:13:50 > 1:13:55I moved down here on a construction job and those got shut down, too.

1:13:55 > 1:14:01Things are so tough. There's a lot of people out there and soon you'll be seeing more camps like this.

1:14:01 > 1:14:03There's just no jobs right now.

1:14:08 > 1:14:12When the company did well, we did well.

1:14:12 > 1:14:16When the company did not do well, sir, we did not do well.

1:14:16 > 1:14:21The men who destroyed their own companies and plunged the world into crisis walked away

1:14:21 > 1:14:24with their fortunes intact.

1:14:24 > 1:14:30The top five executives at Lehman's made over a billion dollars between 2000 and 2007.

1:14:30 > 1:14:36- When the firm went bankrupt, they kept all the money. - The system worked.

1:14:36 > 1:14:42It doesn't make any sense for us to make a loan that's gonna fail. They lose and we lose.

1:14:42 > 1:14:45Countrywide CEO Angelo Mozilo

1:14:45 > 1:14:49made 470 million between 2003 and 2008.

1:14:49 > 1:14:56140 million came from dumping his Countrywide stock in the 12 months before the company collapsed.

1:14:56 > 1:15:02Ultimately, I hold the board accountable when a business fails. They hire and fire the CEO

1:15:02 > 1:15:08and oversee big strategic decisions. The problem in America is the way boards are elected -

1:15:08 > 1:15:10pretty much picked by the CEO.

1:15:10 > 1:15:18The directors and the compensation committees are best situated to determine executive pay packages.

1:15:18 > 1:15:25- How do you think they've done over the past 10 years?- If you look at those... I would give about a B.

1:15:25 > 1:15:29- A B?- Yes. - Not an F?- Not an F. Not an F.

1:15:29 > 1:15:35Stan O'Neal, CEO of Merrill Lynch, received 90 million in 2006 and 2007 alone.

1:15:35 > 1:15:41After driving his firm into the ground, the board of directors allowed him to resign

1:15:41 > 1:15:45and he collected 161 million in severance.

1:15:45 > 1:15:52Instead of being fired, Stan O'Neal is allowed to resign and takes away 151 million.

1:15:52 > 1:15:56- That's a decision that that board made...- What grade do you give that?

1:15:56 > 1:16:00That's tougher. I don't know if that's a B.

1:16:00 > 1:16:05O'Neal's successor, John Thain, was paid 87 million in 2007

1:16:05 > 1:16:12and in December of 2008, two months after Merrill was bailed out by US taxpayers,

1:16:12 > 1:16:15Thain and Merrill's board handed out billions in bonuses.

1:16:15 > 1:16:22In March of 2008, AIG's Financial Products Division lost 11 billion.

1:16:22 > 1:16:28Instead of being fired, Joseph Cassano, the head of AIGFP, was kept on as a consultant -

1:16:28 > 1:16:31for a million dollars a month.

1:16:31 > 1:16:38You want to make sure that the key players within AIGFP, that we retain that intellectual knowledge.

1:16:38 > 1:16:45I attended a very interesting dinner organised by Hank Paulson a little more than one year ago

1:16:45 > 1:16:49with some officials and a couple of CEOs from the biggest US banks

1:16:49 > 1:16:55and, surprisingly enough, all of these gentlemen were arguing we were too greedy.

1:16:55 > 1:17:01So we have part responsibility, fine. Then they turned to the Secretary of the Treasury and say,

1:17:01 > 1:17:08"You should regulate more. We are too greedy. The only way to avoid this is more regulation."

1:17:08 > 1:17:13I have spoken to many bankers about this question, including very senior ones,

1:17:13 > 1:17:20and this is the first time that I've ever heard anybody say they wanted their compensation regulated.

1:17:20 > 1:17:28It was at a moment when they were afraid. And after, when solutions to the crisis began to appear,

1:17:28 > 1:17:30probably they changed their mind.

1:17:32 > 1:17:39In the US, the banks are now bigger, more powerful and more concentrated than ever before.

1:17:40 > 1:17:44There are fewer competitors. A lot of smaller banks were taken over.

1:17:44 > 1:17:48JP Morgan today is even bigger.

1:17:48 > 1:17:52JP Morgan took over first Bear Stearns and then WAMU.

1:17:52 > 1:17:55Bank of America took over Countrywide and Merrill Lynch.

1:17:55 > 1:17:58Wells Fargo took over Wachovia.

1:17:58 > 1:18:03After the crisis, the financial industry including the Financial Services Roundtable,

1:18:03 > 1:18:09worked harder than ever to fight reform. The financial sector employs 3,000 lobbyists,

1:18:09 > 1:18:13more than five for each member of Congress.

1:18:13 > 1:18:19- Do you think the financial services industry has excessive political influence in the US?- No.

1:18:19 > 1:18:24I think every person in the country is represented here in Washington.

1:18:24 > 1:18:31And you think all segments of American society have equal and fair access to the system?

1:18:31 > 1:18:35You can walk into any hearing room that you would like. Yes, I do.

1:18:35 > 1:18:42One can walk into any hearing room. One could not write the lobbying cheques your industry writes

1:18:42 > 1:18:46or engage in the level of political contributions it engages in.

1:18:46 > 1:18:52Between 1998 and 2008, the financial industry spent over 5 billion

1:18:52 > 1:18:57on lobbying and campaign contributions. Since the crisis, they're spending even more money.

1:18:58 > 1:19:05The financial industry also exerts its influence in a more subtle way, one most Americans don't know about.

1:19:05 > 1:19:10It has corrupted the study of economics itself.

1:19:11 > 1:19:16Deregulation had tremendous financial and intellectual support

1:19:16 > 1:19:21because people argued it for their own benefit.

1:19:21 > 1:19:25The economics profession was the main source of that illusion.

1:19:25 > 1:19:31Since the 1980s, academic economists have been major advocates of deregulation

1:19:31 > 1:19:39and played powerful roles in shaping US government policy. Very few of these experts warned of the crisis

1:19:39 > 1:19:43and even after the crisis many of them opposed reform.

1:19:43 > 1:19:49The guys who taught these things tended to get paid a lot of money being consultants.

1:19:49 > 1:19:54Business school professors don't live on a faculty salary.

1:19:55 > 1:19:58They do very, very well.

1:19:58 > 1:20:02Over the last decade, the financial services industry has made

1:20:02 > 1:20:07about 5 billion of political contributions in the US.

1:20:07 > 1:20:09That's kind of a lot of money.

1:20:09 > 1:20:12That doesn't bother you?

1:20:12 > 1:20:13No.

1:20:13 > 1:20:18Martin Feldstein is a professor at Harvard and one of the world's most prominent economists.

1:20:18 > 1:20:24As President Reagan's chief economic advisor, he was a major architect of deregulation

1:20:24 > 1:20:30and from 1988 until 2009 he was on the board of directors of both AIG

1:20:30 > 1:20:34and AIG Financial Products, which paid him millions of dollars.

1:20:34 > 1:20:39- You have any regrets about being on AIG's board?- I have no comments.

1:20:39 > 1:20:44No, I have no regrets about it. That I can say. Absolutely none.

1:20:44 > 1:20:45OK.

1:20:45 > 1:20:47Um...

1:20:48 > 1:20:52Do you have any regrets about AIG's decisions?

1:20:52 > 1:20:56I cannot say anything more about AIG.

1:20:56 > 1:21:00I've taught at Northwestern and Chicago, Harvard and Columbia.

1:21:00 > 1:21:03Glenn Hubbard is Dean of Columbia Business School

1:21:03 > 1:21:08and was chairman of the Council of Economic Advisers to George W Bush.

1:21:08 > 1:21:14Do you think the financial services industry has too much political power in the United States?

1:21:14 > 1:21:21I don't think so, no. You wouldn't get that impression by the drubbing they regularly get in Washington.

1:21:21 > 1:21:25Many prominent academics quietly make fortunes

1:21:25 > 1:21:29while helping the financial industry shape public debate and government policy.

1:21:29 > 1:21:35The Analysis Group, Charles River Associates, Compass Lexecon

1:21:35 > 1:21:42and the Law and Economics Consulting Group manage a multi-billion-dollar industry of academics for hire.

1:21:42 > 1:21:47Two bankers who used these services were Ralph Ciofi and Matthew Tannin,

1:21:47 > 1:21:52Bear Stearns hedge fund managers prosecuted for securities fraud.

1:21:52 > 1:21:58After hiring the Analysis Group, both were acquitted. Hubbard was paid 100,000 to testify for them.

1:22:00 > 1:22:08- Do you think economics has a conflict of interest problem? - I'm not sure I know what you mean.

1:22:08 > 1:22:12Do you think a significant fraction of the economics discipline

1:22:12 > 1:22:18- have financial conflicts of interest that might call into question or colour...- Oh, I see.

1:22:18 > 1:22:25I doubt it. Most academic economists, you know, aren't wealthy businesspeople.

1:22:25 > 1:22:29Hubbard makes 250,000 a year as a board member of Met Life

1:22:29 > 1:22:37and was formerly on the board of Capmark, a major mortgage lender which went bankrupt in 2009.

1:22:37 > 1:22:43He also advised Nomura Securities, KKR Financial Corporation and many other financial firms.

1:22:45 > 1:22:51Laura Tyson, who declined to be interviewed for this film, is a professor at UC Berkeley.

1:22:51 > 1:22:55She was the chair of the Council of Economic Advisers,

1:22:55 > 1:23:01then director of the National Economic Council in the Clinton administration. After leaving this,

1:23:01 > 1:23:06she joined the board of Morgan Stanley for 350,000 a year.

1:23:06 > 1:23:13Ruth Simmons, president of Brown University, makes over 300,000 a year on the board of Goldman Sachs.

1:23:13 > 1:23:19Larry Summers, who as Treasury Secretary played a critical role in the deregulation of derivatives,

1:23:19 > 1:23:22became president of Harvard in 2001.

1:23:22 > 1:23:28While at Harvard, he made millions consulting to hedge funds and millions more in speaking fees,

1:23:28 > 1:23:31much of it from investment banks.

1:23:31 > 1:23:37According to his federal disclosure report, Summer's net worth is between 16.5 million

1:23:37 > 1:23:40and 39.5 million.

1:23:41 > 1:23:47Frederic Mishkin, who returned to Columbia Business School after leaving the Federal Reserve,

1:23:47 > 1:23:52reported that his net worth was between 6 million and 17 million.

1:23:53 > 1:23:57- In 2006, you co-authored a study of Iceland's financial system.- Right.

1:23:57 > 1:24:03"Iceland is also an advanced country with excellent institutions, low corruption, rule of law.

1:24:03 > 1:24:09"The economy has already adjusted and prudential regulation and supervision is quite strong."

1:24:09 > 1:24:16That was the mistake. It turns out that the prudential regulation and supervision was not strong there.

1:24:16 > 1:24:21- What made you think that it was? - I think you go with the information that you had

1:24:21 > 1:24:26and, generally, the view was that Iceland had very good institutions.

1:24:26 > 1:24:32- It was a very advanced country... - Who told you that? What research did you do?- You talk to people,

1:24:32 > 1:24:38you have faith in the Central Bank, which did fall down on the job. And clearly this, uh...

1:24:38 > 1:24:44- Why do you have faith in a central bank?- That's... You go with the information you have.

1:24:44 > 1:24:49- How much were you paid to write it? - I was paid, uh... It's public information.

1:24:56 > 1:25:02On your CV, the title of this report has been changed from Financial Stability In Iceland

1:25:02 > 1:25:08- to Financial INSTABILITY In Iceland. - Oh, well, I don't know... If there's a typo, there's a typo.

1:25:08 > 1:25:13What should be publicly available is whenever anybody researches a topic,

1:25:13 > 1:25:17they disclose any financial conflict with that research.

1:25:17 > 1:25:21But, if I recall, there is no policy to that effect.

1:25:21 > 1:25:27I can't imagine anybody not doing that, in terms of putting it in a paper.

1:25:27 > 1:25:31There would be significant professional sanction for that.

1:25:31 > 1:25:36I didn't see any place in the study where you indicated you had been paid

1:25:36 > 1:25:42- by the Icelandic Chamber of Commerce to produce it.- No, I...- OK.

1:25:42 > 1:25:47Richard Portes, the most famous economist in Britain and a professor at London Business School,

1:25:47 > 1:25:53was also commissioned by the Icelandic Chamber of Commerce in 2007 to write a report

1:25:53 > 1:25:55praising Iceland's financial sector.

1:25:55 > 1:26:01The banks are highly liquid. They've made money on the fall of the krona.

1:26:01 > 1:26:07These are strong banks. Their market funding is assured. These are well-run banks.

1:26:07 > 1:26:13Like Mishkin, Portes's report didn't disclose his payment from the Icelandic Chamber of Commerce.

1:26:13 > 1:26:19Does Harvard require disclosures of financial conflict of interest in publications?

1:26:19 > 1:26:26- Not to my knowledge.- Do you require people to report their compensation from outside activities?- No.

1:26:26 > 1:26:32- Don't you think that's a problem? - I don't see why.- Martin Feldstein on the board of AIG,

1:26:32 > 1:26:38Laura Tyson on the board of Morgan Stanley, Larry Summers making 10 million from consulting...

1:26:38 > 1:26:40Irrelevant?

1:26:40 > 1:26:43Well, yeah. Basically, irrelevant.

1:26:43 > 1:26:48You've written a large number of articles on a wide array of subjects

1:26:48 > 1:26:52and you never saw fit to investigate the risks

1:26:52 > 1:26:56- of unregulated credit default swaps? - I never did.

1:26:56 > 1:27:02Same question with regard to executive compensations, regulation of corporate governance,

1:27:02 > 1:27:08- the effect of political contributions...- I don't know that I would have anything to add on those.

1:27:08 > 1:27:15I'm looking at your resume now. It looks to me as if the majority of your outside activities

1:27:15 > 1:27:21are consulting and directorship arrangements with the financial services industry.

1:27:21 > 1:27:27- Would you not agree with that? - I don't think my consulting clients are even on my CV, so...

1:27:27 > 1:27:33- Uh, who are your consulting clients? - I don't believe I have to discuss that with you.- OK.

1:27:33 > 1:27:37You have a few more minutes and then the interview is over.

1:27:37 > 1:27:41- Do you consult for any financial services firms?- The answer is I do.

1:27:41 > 1:27:45- And...- But I do not want to go into details about that.

1:27:45 > 1:27:49- Do they include other financial services firms?- Possibly.

1:27:49 > 1:27:53- You don't remember? - This isn't a deposition, sir.

1:27:53 > 1:28:00I was polite enough to give you time. Foolishly, I now see. You have 3 minutes. Give it your best shot.

1:28:00 > 1:28:06In 2004, the height of the bubble, Hubbard co-authored a widely-read paper with William C Dudley,

1:28:06 > 1:28:12the chief economist of Goldman Sachs. In the paper, Hubbard praised credit derivatives

1:28:12 > 1:28:18and the securitisation chain as they had improved allocation of capital and enhanced financial stability.

1:28:18 > 1:28:25He cited reduced volatility in the economy and stated that recessions had become less frequent and milder.

1:28:25 > 1:28:31Credit derivatives were protecting banks against losses and helping to distribute risk.

1:28:33 > 1:28:41A medical researcher writes an article saying to treat this disease you should prescribe this drug.

1:28:41 > 1:28:47The doctor makes 80% of personal income from the manufacturer of this drug. It does not bother you?

1:28:47 > 1:28:51I think it's certainly important to disclose the, um...

1:28:52 > 1:28:54..the, um...

1:28:57 > 1:29:03Well, I think that's also a little different from cases we are talking about here because, um...

1:29:05 > 1:29:07Um...

1:29:17 > 1:29:22So what do you think this says about the economics discipline?

1:29:22 > 1:29:26Well, it has no relevance to anything, really.

1:29:26 > 1:29:30Indeed, I think, it's a part of...

1:29:30 > 1:29:34It's an important part of the problem.

1:29:47 > 1:29:53The rising power of the US financial sector was part of a wider change in America.

1:29:53 > 1:29:58Since the 1980s, the United States has become a more unequal society,

1:29:58 > 1:30:02and its economic dominance has declined.

1:30:02 > 1:30:09Companies like General Motors, Chrysler and US Steel, formerly the core of the US economy,

1:30:09 > 1:30:13were poorly managed and falling behind their foreign competitors.

1:30:13 > 1:30:18And as countries like China opened their economies,

1:30:18 > 1:30:22American companies sent jobs overseas to save money.

1:30:23 > 1:30:26For many, many years

1:30:26 > 1:30:29the 660 million people in the developed world were sheltered

1:30:29 > 1:30:33from all of this additional labour that existed on the planet.

1:30:33 > 1:30:39Suddenly, the Bamboo Curtain and the Iron Curtain are lifted and you have 2.5 billion additional people.

1:30:39 > 1:30:44American factory workers were laid off by the tens of thousands.

1:30:44 > 1:30:48Our manufacturing base was destroyed over a few years.

1:30:48 > 1:30:52As manufacturing declined, other industries rose.

1:30:52 > 1:30:59The United States leads the world in information technology, where high-paying jobs are easy to find,

1:30:59 > 1:31:06but those jobs require an education and, for average Americans, college is increasingly out of reach.

1:31:06 > 1:31:11While top private universities like Harvard have billions of dollars in their endowments,

1:31:11 > 1:31:15funding for public universities is shrinking and tuition is rising.

1:31:15 > 1:31:21Tuition for California's public universities rose from 650 in the 1970s

1:31:21 > 1:31:24to over 10,000 in 2010.

1:31:26 > 1:31:31Increasingly, the most important determinant of whether Americans go to college

1:31:31 > 1:31:38is whether they can find the money to pay for it. Meanwhile, tax policy shifted to favour the wealthy.

1:31:38 > 1:31:43When I first came to office, I thought taxes were too high. They were.

1:31:43 > 1:31:49The most dramatic change was a series of tax cuts designed by Glenn Hubbard,

1:31:49 > 1:31:53who was President Bush's chief economic advisor.

1:31:53 > 1:31:59They sharply reduced taxes on investment gains, stock dividends and eliminated estate tax.

1:31:59 > 1:32:05We had a comprehensive plan that, when acted, has left nearly 1.1 trillion in the hands

1:32:05 > 1:32:10of American workers, families, investors and small business owners.

1:32:10 > 1:32:15Most of the benefits of these cuts went to the wealthiest 1% of Americans.

1:32:15 > 1:32:20And, by the way, it was really the cornerstone of our economic recovery policy.

1:32:20 > 1:32:26Inequality of wealth in the United States is now higher than in any other developed country.

1:32:26 > 1:32:34American families responded to these changes in two ways: by working longer hours and going into debt.

1:32:35 > 1:32:40As the middle class falls further and further behind,

1:32:40 > 1:32:46there is a political urge to respond by making it easier to get credit.

1:32:46 > 1:32:48You don't have to have a lousy home.

1:32:48 > 1:32:54The low-income home buyer can have just as nice a house as anybody else.

1:32:54 > 1:32:58American families borrowed to finance their homes, their cars,

1:32:58 > 1:33:03their healthcare and their children's educations.

1:33:03 > 1:33:10People in the bottom 90% lost ground between 1980 and 2007.

1:33:10 > 1:33:14It all went to the top 1%.

1:33:16 > 1:33:18For the first time in history,

1:33:18 > 1:33:24average Americans have less education and are less prosperous than their parents.

1:33:26 > 1:33:31The era of greed and irresponsibility on Wall Street

1:33:31 > 1:33:35and in Washington has led us to a financial crisis

1:33:35 > 1:33:39as serious as any we've faced since the Great Depression.

1:33:39 > 1:33:45When the crisis struck, just before the 2008 election, Barack Obama pointed to Wall Street greed

1:33:45 > 1:33:49and regulatory failures as examples of the need for change in America.

1:33:49 > 1:33:55A lack of oversight in Washington and on Wall Street is exactly what got us into this mess.

1:33:55 > 1:34:00In office, he spoke of the need to reform the financial industry.

1:34:00 > 1:34:03We want a systemic risk regulator,

1:34:03 > 1:34:07a consumer financial protection agency, and to change Wall Street.

1:34:07 > 1:34:14But when finally enacted in mid-2010 the administration's financial reforms were weak

1:34:14 > 1:34:20and, in some critical areas, including the rating agencies, lobbying and compensation,

1:34:20 > 1:34:22nothing significant was proposed.

1:34:22 > 1:34:29Addressing Obama and "regulatory reform", my response, if it was one word, would be: ha!

1:34:30 > 1:34:33There's very little reform.

1:34:33 > 1:34:35How come?

1:34:35 > 1:34:38It's a Wall Street government.

1:34:39 > 1:34:44Obama chose Timothy Geithner as Treasury Secretary.

1:34:44 > 1:34:48Geithner was president of the New York Federal Reserve in the crisis

1:34:48 > 1:34:54and a key player in the decision to pay Goldman Sachs 100 cents on the dollar for bets against mortgages.

1:34:54 > 1:34:59When Tim Geithner was testifying to be confirmed as Treasury Secretary,

1:34:59 > 1:35:07he said, "I have never been a regulator." He didn't understand his job as president of the NY Fed.

1:35:11 > 1:35:17The new president of the New York Fed is William C Dudley, former chief economist of Goldman Sachs,

1:35:17 > 1:35:21whose paper with Glenn Hubbard praised derivatives.

1:35:21 > 1:35:25Geithner's chief of staff is Mark Patterson, former Goldman lobbyist,

1:35:25 > 1:35:29and one of the senior advisors is Lewis Sachs, who oversaw Tricadia,

1:35:29 > 1:35:35a company heavily involved in betting against the mortgage securities it was selling.

1:35:35 > 1:35:39To head the Commodity Futures Trading Commission, Gary Gensler,

1:35:39 > 1:35:43a former Goldman Sachs executive who helped ban derivatives regulation.

1:35:43 > 1:35:50To run the Securities and Exchange Commission, Obama picked Mary Shapiro, former CEO of FINRA,

1:35:50 > 1:35:54the investment banking industry's self-regulation body.

1:35:54 > 1:36:00Obama's chief of staff, Rahm Emanuel, made 320,000 serving on the board of Freddie Mac.

1:36:01 > 1:36:07Both Martin Feldstein and Laura Tyson are members of Obama's Economic Recovery Advisory Board

1:36:07 > 1:36:12and Obama's chief economic advisor is Larry Summers.

1:36:12 > 1:36:17The most senior economic advisors are the very people who built the structure.

1:36:26 > 1:36:33The Obama administration resisted regulation of bank compensation even as foreign leaders took action.

1:36:33 > 1:36:39The financial industry is a service industry. It should serve others before it serves itself.

1:36:39 > 1:36:45In September of 2009, Christine Lagarde and the finance ministers of Sweden, the Netherlands,

1:36:45 > 1:36:52Luxembourg, Italy, Spain and Germany called for the G20 nations, including the United States,

1:36:52 > 1:36:55to impose strict regulations on bank compensation.

1:36:55 > 1:37:02And in July of 2010, the European Parliament enacted those very regulations.

1:37:02 > 1:37:05The Obama administration had no response.

1:37:05 > 1:37:09Their view is it's a temporary blip. Things will go back to normal.

1:37:09 > 1:37:15That is why I am reappointing him to another term as chairman of the Federal Reserve.

1:37:15 > 1:37:21- In 2009, Barack Obama reappointed Ben Bernanke. - Thank you, Mr President.

1:37:21 > 1:37:27As of mid-2010, not a single senior financial executive had been criminally prosecuted

1:37:27 > 1:37:31or even arrested. No special prosecutor had been appointed,

1:37:31 > 1:37:37not a single financial firm had been prosecuted criminally for securities fraud or accounting fraud.

1:37:37 > 1:37:42Obama has made no attempt to recover any of the compensation

1:37:42 > 1:37:46given to financial executives during the bubble.

1:37:46 > 1:37:53I certainly would think of criminal action against some of Countrywide's top leaders, like Mozilo.

1:37:53 > 1:37:58I'd certainly look at Bear Stearns, Goldman Sachs, Lehman Brothers and Merrill Lynch.

1:37:58 > 1:38:01- For criminal prosecutions?- Yes.

1:38:01 > 1:38:04They'd be very hard to win,

1:38:04 > 1:38:10but I think they could do it if they got enough underlings to tell the truth.

1:38:10 > 1:38:16In an industry in which drug use, prostitution and fraudulent billing of prostitutes as a business expense

1:38:16 > 1:38:22occur on an industrial scale, it wouldn't be hard to make people talk if you really wanted to.

1:38:22 > 1:38:26They gave me a plea bargain and I took it.

1:38:26 > 1:38:33- They were not interested in any of my records.- They were not interested in your records?- That's correct.

1:38:33 > 1:38:38There's a sensibility that you don't use people's...personal vices

1:38:38 > 1:38:42in the context of Wall Street cases, necessarily, to get them to flip.

1:38:42 > 1:38:48I think maybe after the cataclysms that we've been through, maybe people will re-evaluate that.

1:38:48 > 1:38:53I'm not the one to pass judgment on that right now.

1:39:04 > 1:39:10You come to us today telling us, "We're sorry, we didn't mean it.

1:39:10 > 1:39:13"We won't do it again. Trust us."

1:39:13 > 1:39:19Well, I have some people in my constituency that actually robbed some of your banks

1:39:19 > 1:39:24and they say the same thing! They're sorry. They won't do it again.

1:39:24 > 1:39:29In 2009, as unemployment hit its highest level in 17 years,

1:39:29 > 1:39:35Morgan Stanley paid its employees over 14 billion and Goldman Sachs paid out over 16 billion.

1:39:35 > 1:39:40In 2010, bonuses were even higher.

1:39:40 > 1:39:42Why should a financial engineer

1:39:42 > 1:39:48be paid four times to a hundred times more than a real engineer?

1:39:48 > 1:39:51A real engineer builds bridges.

1:39:51 > 1:39:54A financial engineer builds dreams.

1:39:54 > 1:39:58And, uh, you know, when those dreams turn out to be nightmares,

1:39:58 > 1:40:00other people pay for it.

1:40:02 > 1:40:06For decades, the American financial system was stable and safe.

1:40:06 > 1:40:09But then something changed.

1:40:09 > 1:40:16The financial industry turned its back on society, corrupted our political system

1:40:16 > 1:40:20and plunged the world economy into crisis.

1:40:20 > 1:40:25At enormous cost, we've avoided disaster and are recovering,

1:40:25 > 1:40:32but the men and institutions that caused the crisis are still in power and that needs to change.

1:40:32 > 1:40:38They will tell us that we need them and that what they do is too complicated for us to understand.

1:40:38 > 1:40:42They will tell us it won't happen again.

1:40:42 > 1:40:45They will spend billions fighting reform.

1:40:45 > 1:40:48It won't be easy,

1:40:48 > 1:40:52but some things are worth fighting for.

1:41:09 > 1:41:12# Dead in the water

1:41:12 > 1:41:16# It's not a paid vacation

1:41:16 > 1:41:21# The sons and daughters of city officials... #