Financial CRISIS 2008 The Inside Story You Weren't Told

foreign [Music] [Music] foreign [Music] is a stable democracy with a high standard of living and until recently extremely low unemployment and government debt foreign we had the complete infrastructure of a modern society clean energy food production Fisheries with a quota system to manage them good health care a good education you know clean air not much crime it's good a good place for families to live we had almost the end of History status but in 2000 Iceland's government began a broad policy of deregulation that would have disastrous consequences first for the environment and then for the

economy they started by allowing multinational corporations like Alcoa to build giant aluminum smelting plants and exploit Iceland's natural geothermal and hydroelectric energy sources many of the most beautiful areas in the highlands with the most spectacular colors are geothermal so nothing comes without consequence [Music] thank you [Music] foreign [Music] at the same time the government privatized Iceland's three largest banks the result was one of the purest experiments in financial deregulation ever conducted finance took over um and uh more or less wrecked the place in a five-year period these three tiny Banks which had never operated outside

of Iceland borrowed 120 billion dollars ten times the size of Iceland's economy the bankers showered money on themselves each other and their friends there was a massive bubble stock prices have went up but affected nine house price is more than doubled [Music] Iceland's bubble gave rise to people like Jan askgary Johannesen he borrowed billions from the banks to buy up high-end retail businesses in London he also bought a pinstriped private jet a 40 million dollar yacht and a Manhattan penthouse newspapers always helped the headline this millionaire bought this company in the UK or in Finland

or in in France or wherever instead of saying this millionaire took a billion dollar loan to buy this company and it took it from your local bank the bank set of money market funds and the bank's advised deposit holders to withdraw money and put them in the money market funds the policy scheme needed everything it could American accounting firms like KPMG audited the Icelandic Banks and investment firms and found nothing wrong an American credit rating agencies said Iceland was wonderful in February 2007 the rating ages it decided to upgrade the banks to the highest possible

rate AAA it went so far as the government here traveling with the bankers as a as a PR show when Iceland's Banks collapsed at the end of 2008 unemployment tripled in six months [Music] there is nobody unaffected in Iceland so a lot of people here lost their savings yes that's the case the government Regulators who should have been protecting the citizens of Iceland had done nothing you have two lawyers from the regulator going down to a bank to talk about some issue when they approached the bank they would see 19 SUVs outside outside the bank

right so you went to the bank and you have the 19 lawyers sitting in front of you right very very well prepared uh ready to kill any argument you make and then if you do really well they'll offer you a job right one third of Iceland's Financial Regulators went to work for the banks but this is a universal problem huh in New York you have the same problem right I'm on my way I'm making it [Music] so much larger than life what do you think of Wall Street incomes these days excessive I've been told it's

extremely difficult for the IMF to criticize the United States I won't say that [Music] we deeply regret our breaches of U.S law [Music] they're amazed at how much cocaine these wall streeters can use and get up and go to work the next day I didn't know what Curry default swaps are I'm a little bit old-fashioned [Music] as Larry Summers ever expressed remorse um I I don't hear confessions [Music] the government's just writing checks that's plan a that's Plan B and that's plan C would you support legal controls on Executive pay I would not [Music] are

you comfortable with the level of compensation in the financial services industry if they've earned it then yes I am do you think they've earned it I think they've earned it and so you've helped these people blow the world up oh you could say that [Music] they were having massive private games at public loss [Music] when you start thinking that you can create something out of nothing it's very difficult to resist [Music] ance [Music] I'm concerned that a lot of people want to go back to the old way the way they were operating prior to the

crisis [Music] I was getting a lot of anonymous emails from Bankers saying you can't quote me but I'm really concerned [Music] isn't a systematic investigation being undertaken because then you'll find the culprits do you think that Columbia business school has any significant conflict of interest problem don't see that we do [Music] [Applause] The Regulators didn't do their job they had the power to do every case that I made when I was State Attorney General they just didn't want it baby please the weekend Lehman Brothers one of the most venerable and biggest investment Banks was forced

to declare itself bankrupt another Merrill Lynch who was forced to sell itself today crisis talks around the world financial markets are way down today following dramatic developments in September 2008 the bankruptcy of the U.S Investment Bank Lehman Brothers and the collapse of the world's largest insurance company AIG triggered a global financial crisis he has gripped markets overnight with Asian stocks stocks fell off a cliff the largest single point drop in his share prices continued to Tumble in the aftermath of the Lehman collapse the result was a global recession which cost the world tens of trillions

of dollars rendered 30 million people unemployed and doubled the national debt of the United States if you look at the cost of it destruction of equity wealth of housing wealth the destruction of income of jobs 15 million people globally could end up below the poverty line again this is just a hugely usually expensive crisis this crisis was not an accident it was caused by an out of control industry since the 1980s the rise of the U.S financial sector has led to a series of increasingly severe Financial crises each crisis has caused more damage while the

industry has made more and more money [Music] after the Great Depression the United States had 40 Years of economic growth without a single financial crisis the financial industry was tightly regulated most regular Banks were local businesses and they were prohibited from speculating with the Positive savings investment Banks which handled stock and bond trading were small private Partnerships in the traditional Investment Banking partnership model the partners put the money up and obviously the partners watch that money very carefully they wanted to live well but they didn't want to bet the ranch on anything Paul volcker served

in the treasury Department and was chairman of the Federal Reserve from 1979 to 1987. before going into government he was a financial Economist at Chase Manhattan Bank when I left Chase to go in the treasury in 1969 I think my income was in a neighborhood of forty five thousand dollars forty five thousand dollars a year Morgan Stanley in 1972 had approximately 110 total Personnel one office and capital of 12 million dollars now Morgan Stanley has 50 000 workers and has capital of several billion and has offices all over the world in the 1980s the financial

industry exploded the investment Banks went public giving them huge amounts of stockholder money people on Wall Street started getting rich I had a friend who was a bond Trader at Merrill Lynch in the 1970s he ate a job as a trained conductor at night so she had three kids and couldn't support them on what a bond Trader made by 1986 he was making millions of dollars and thought it was because he was smart the highest order of business before the nation is to restore our economic prosperity in 1981 President Ronald Reagan chose as treasury secretary

the CEO of the Investment Bank Merrill Lynch Donald Regan Wall Street and the president to see eye to eye I've talked to many leaders of Wall Street they also were behind the present 100 percent the Reagan Administration supported by economists and financial lobbyists started a 30-year period of financial deregulation in 1982 the Reagan Administration deregulated Savings and Loan Companies allowing them to make risky Investments with their depositors money by the end of the decade hundreds of savings and loan companies had failed this crisis cost taxpayers 124 billion dollars and cost many people their life savings

it may be the biggest bank heist in our history thousands of savings and loan Executives went to jail for looting their companies one of the most extreme cases was Charles Keating you got a word in 1985 when Federal Regulators began investigating him Keating hired an economist named Alan Greenspan in this letter to Regulators Greenspan praised Keating Sound business plans and expertise and said he saw no risk in allowing Keating to invest his customers money [Music] Keating reportedly paid Greenspan forty thousand dollars Charles Keating went to prison shortly afterwards as for Alan Greenspan President Reagan appointed

him chairman of America's Central Bank the Federal Reserve Greenspan was reappointed by presidents Clinton and George W bush during the Clinton Administration deregulation continued under Greenspan and treasury secretaries Robert Rubin the former CEO of the Investment Bank Goldman Sachs and Larry Summers a Harvard economics professor the financial sector Wall Street being powerful having lobbies having lots of money step-by-step capture the political system you know both on the Democratic and the Republican side by the late 1990s the financial sector had Consolidated into a few gigantic firms each of them so large that their failure could threaten

the whole system and the Clinton Administration helped them grow even larger in 1998 citicorp and travelers merged to form Citigroup the largest financial services company in the world the merger violated the glass-steagall ACT a law passed after the Great Depression which prevented banks with consumer deposits from engaging in Risky Investment Banking activities it was illegal to acquire Travelers Greenspan said nothing the Federal Reserve gave him an exemption for a year and then they got the law passed in 1999 at the urging of Summers and Reuben Congress passed the Graham Leach bliley act known to some

as the Citigroup Relief act it overturned glass-steagall and cleared the way for future mergers foreign [Music] why do you have big Banks well because Banks like Monopoly power because Banks like lobbying power because Banks know that when they're too big they will be billed markets are inherently unstable or at least potentially unstable and appropriate metaphor is the oil tankers they're very big and therefore you have to put in compartments to prevent the sloshing around of oil from capsizing the boat the design of the boat has to take that into account and after the Depression the

regulations actually introduced this very watertight compartments and deregulation has led to the end of compartmentalization the next Crisis came at the end of the 90s the investment Banks fueled a massive bubble in Internet stocks which was followed by a crash in 2001 that caused five trillion dollars in investment losses the Securities and Exchange Commission the federal agency which had been created during the Depression to regulate Investment Banking had done nothing in the absence of meaningful Federal action and there has been none and given the clear failure of self-regulation it has become necessary for others to

step in and adopt the protections needed Elliot Spitzer's investigation revealed that the investment Banks had promoted internet companies they knew would fail stock analysts were being paid based on how much business they brought in and what they said publicly was quite different from what they said privately infospace given the highest possible rating dismissed by an analyst is a piece of junk excite also highly rated called such a piece of crap the vents was proffered by many of the investment Banks was not you're wrong it was everybody's doing it and everybody knows it's going on and

therefore nobody should rely on these analysts anyway in December 2002 10 investment Banks settled the case for a total of 1.4 billion dollars and promised to change their ways Scott Talbot is the chief lobbyist for the financial services Roundtable one of the most powerful groups in Washington which represents nearly all of the world's largest financial companies are you comfortable with the fact that several of your member companies have engaged in large-scale criminal activity you'll have to be specific okay first of all criminal activity for Iran's nuclear program and for the Aerospace Industries organization of Iran

which builds ballistic missiles any information that would identify it as an Iranian would be removed the bank was fined 536 million dollars Citibank helped funnel 100 million dollars of drug money out of Mexico did you comment that she should quote lose any documents connected with the account I said that in a kidding manner it was at the early stages of this I did not mean it seriously we make between 1998 and 2003 Fannie Mae overstated its earnings by more than 10 billion dollars these accounting standards are highly complex and require determinations over which experts often

disagree CEO Franklin Reigns who used to be President Clinton's budget director received over 52 million dollars in bonuses [Applause] when UBS was caught helping wealthy Americans evade taxes they refused to cooperate with the U.S government would you be willing to supply the names if there's a treaty framework no treaty framework you've agreed your participate companies face unprecedented fines the investment firms do not have to admit any wrongdoing when you're this large and you're dealing with this many products and this many customers mistakes happen the financial services industry seems to have a level of criminality that

is you know somewhat distinctive you know when was the last time that Cisco or Intel or Google or Apple or IBM you know I totally agree with you about high-tech versus financial services but high-tech how come high tech is a fundamentally creative business where the value generation and the income derives from actually creating something new and different beginning in the 1990s deregulation and advances in technology led to an explosion of complex Financial products called derivatives economists and bankers claim they made markets safer but instead they made them unstable since the end for Cold War a

lot of former physicists mathematicians decided to you apply their skills not on you know Cold War technology but on financial markets and to go to investment bankers and creating different weapons absolutely you know as Warren Buffett said you know weapons of mass destruction Regulators politicians and business people did not take seriously the threat of financial Innovation on the uh the stability of the financial system using derivatives Bankers could gamble on virtually anything they could bet on the rise or fall of oil prices the bankruptcy of a company even the weather by the late 1990s derivatives

were a 50 trillion dollar unregulated market in 1998 someone tried to regulate them brooksley born graduated first in her class at Stanford law school and was the first woman to edit a major law review after running the derivatives practice at Arnold and Porter Bourne was appointed by President Clinton to chair the commodity Futures Trading Commission which oversaw the derivatives Market brooksley born asked me if I would come work with her we decided that this was a serious potentially destabilizing Market in May of 1998 the cftc issued a proposal to regulate derivatives Clinton's Treasury Department had

an immediate response I happened to go into brooksley's office and she was just putting down the receiver on her telephone and the blood had drained from her face and she looked at me and said that was Larry Summers he had 13 Bankers in his office invaded in a very bullying fashion sort of directing her to stop the banks went out heavily relied for earnings on these types of activities and that led to a Titanic battle to prevent this set of instruments from being regulated shortly after the phone call from Summers Greenspan Reuben and SEC chairman

Arthur Levitt issued a joint statement condemning born and recommending legislation to keep derivatives unregulated thank you regulation of derivatives transactions that are privately negotiated by professionals is unnecessary your rules unfortunately first by the Ukrainian Administration and then by the Congress in 2000 the senator Phil Graham took a major role in getting a bill passed that pretty much Exempted derivatives from radiation they are unifying markets they're reducing regulatory burden I believe that we need to do it foreign hope that it will be possible to move this year on legislation that in a suitable way goes to

create legal certainty for OTC uh derivatives I wish to associate myself with all of the remarks of secretary summers in December of 2000 Congress passed the commodity Futures modernization Act written with the help of financial industry lobbyists it banned the regulation of derivatives once that was done it was Off to the Races and the use of derivatives and financial Innovation exploded dramatically after 2000. so help me God so help me God by the time George W bush took office in 2001 the U.S financial sector was vastly more profitable concentrated and powerful than ever before dominating

this industry were five investment Banks two Financial conglomerates three Securities insurance companies and three rating agencies and linking them all together was the securitization food chain a new system which connected trillions of dollars in mortgages and other loans with investors all over the world 30 years ago if you went to get a loan for a home the person lending you the money expected you to pay him or her back you got a loan from A lender who wanted you to pay him back we've since developed securitization whereby the people who make the loan are no

longer at risk if there's a failure to repay in the old system when a homeowner paid their mortgage every month the money went to their local lender and since mortgages took decades to repay lenders were careful in the new system lenders sold the mortgages to investment Banks the investment Banks combined thousands of mortgages and other loans including car loans student loans and credit card debt to create complex derivatives called collateralized debt obligations or cdos the investment Banks then sold the cdos to investors now when homeowners paid their mortgages the money went to investors all over

the world the investment Banks paid rating agencies to evaluate the cdos and many of them were given a triple A rating which is the highest possible investment grade this made cdos popular with retirement funds which could only purchase highly rated securities this system was a ticking time bomb lenders didn't care anymore about whether a borrower could repay so they started making riskier loans the investment Banks didn't care either the more cdos they sold the higher their profits and the rating agencies which were paid by the investment Banks had no liability if their ratings of cdos

proved wrong you weren't going to be on the hook and there weren't regulatory constraints so it was a green light to just pump out more and more and more loans between 2000 and 2003 the number of mortgage loans made each year nearly quadrupled everybody in this secretization food chain from the very beginning until the end they didn't care about the quality of the mortgage they were caring about maximizing the volume and getting a fee out of it in the early 2000s there was a huge increase in the riskiest loans called subprime but when thousands of

subprime loans were combined to create cdos many of them still received AAA ratings now it would have been possible to create derivative products that don't have these risks that carry the equivalent of deductibles where there are limits on the risks that can be taken on and so forth they didn't do that did they they didn't do that and in retrospect they should have done so these guys know that they were doing something dangerous I think they did thank you all the incentives that the financial institutions offered to their mortgage brokers were based on selling the

most profitable products which were predatory loans the banker makes more money if they put you in a subprime loan that's where they're gonna that's where they're gonna put you foreign ly hundreds of billions of dollars a year were flowing through the securitization chain since anyone could get a mortgage home purchases and housing prices skyrocketed the result was the biggest Financial bubble in history real estate is real they can see their asset they can live in their asset they can rent out their asset you had a huge boom in housing that made no sense at all

the financing appetites of the financial sector drove what everybody else did last time we had the housing bubble was in the late 80s in that case the increase in home price has been relatively minor that housing bubble led to a relatively severe recession from 1996 until 2006 real home prices effectively doubled [Music] and 500 a ticket they've come to hear how to buy their very own piece of the American dream Goldman Sachs bear Stearns Layman Brothers Merrill Lynch we're all in on this the sub subprime lending alone increase from 30 billion a year in funding

to over 600 billion a year in 10 years they knew what was happening Countrywide Financial the largest subprime lender issued 97 billion dollars worth of loans it made over 11 billion dollars in profits as a result on Wall Street annual cash bonuses spiked Traders and CEOs became enormously wealthy during the bubble Lehman Brothers was a top underwriter of subprime lending and their CEO Richard fold took home 485 million dollars on Wall Street to these housing and credit bubble was leading to hundreds of billions of dollars of profits you know by 2006 about 40 percent of

all profits of s p 500 firms was coming from financial institutions wasn't real profits it wasn't real income it was just money that was being created by the system and booked as income two three years down the road there's a default it's all wiped out I think it was in fact in retrospect a great big National and not just National Global Ponzi scheme through the home ownership and Equity protection act the Federal Reserve board had broad authority to regulate the mortgage industry fed chairman Alan Greenspan refused to use it Alan Greenspan said no that's regulation

ideologically I don't believe in it for 20 years Robert ganizeda was the head of green lining a powerful consumer advocacy group he met with Greenspan on a regular basis we gave him an example of countrywide and 150 different complex adjustable rate mortgages he said if you had a doctorate in math you wouldn't be able to understand them enough to know which was good for you and which wasn't so we thought he was going to take action but as the conversation continued it was clear he was stuck with his ideology we met again with Greenspan in

o5 often we met with them twice a year and never less than once a year and he wouldn't change his mind [Music] in this amazing world of instant Global Communications the free and efficient movement of capital is helping to create the greatest prosperity in human history foreign six people were cut from the enforcement division of the SEC is that what you also testified to yes yeah I think there has been a a systematic gutting or whatever you want to call it of the agency and its capability through cutting back a staff the SEC office of

risk management was reduced to a staff did you say of one yeah when that gentleman would go home at night he could turn the lights out during the bubble the investment Banks were borrowing heavily to buy more loans and create more cdos the ratio between borrowed money and the bank's own money was called Leverage the more the banks borrowed the higher their Leverage in 2004 Henry Paulson the CEO of Goldman Sachs helped Lobby the Securities and Exchange Commission to relax limits on Leverage allowing the banks to sharply increase their borrowing the SEC somehow decided to

let investment Banks gamble a lot more that was nuts I don't know why they did that but they did that we've said these are the big guys completely that's true but that means if anything goes wrong it's going to be an awfully big mess at these levels you obviously are dealing with the most highly sophisticated financial institutions these are the firms that do most of the derivative activity in the United States we talk to some of them as to what their comfort level was the firms actually thought that the number was appropriate Commissioners vote to

adopt the rule amendments and new rules as recommended by the staff yes yes yes we do indeed unanimous and we are adjourned the degree of Leverage in the financial system became absolutely frightening investment Banks leveraging up to the level of you know 33 to 1 which means that a tiny three percent decrease in the value of their acid base would leave them in Solomon there was another ticking time bomb in the financial system AIG the world's largest insurance company was selling huge quantities of derivatives called credit default swaps for investors who owned cdos credit default

swaps worked like an insurance policy an investor who purchased a credit default swap paid AIG a quarterly premium if the CDO went bad AIG promised to pay the investor for their losses but unlike regular Insurance speculators could also buy credit default swaps from AIG in order to bet against cdos they didn't own in Insurance you can only ensure something you own let's say you and I own property I own a house I can only ensure that house once the derivatives Universe essentially enables anybody to actually ensure that it has so you could ensure that somebody

else could do that so 50 people might insure my house so what happens is if my husband's down now the number of losses in the system becomes proportionately larger since credit default swaps were unregulated AIG didn't have to put aside any money to cover potential losses instead AIG paid its employees huge cash bonuses as soon as contracts were signed but if the cdos later went bad AIG would be on the hook people were essentially being rewarded for taking massive risks and good times to generate short-term revenues and profits and therefore bonuses but that's going to

lead to the firm to be bankrupt over time that's a total distorted system of compensation aig's Financial products division in London issued 500 billion dollars worth of credit default swaps during the bubble many of them for cdos backed by subprime mortgages the 400 employees at aigfp made 3.5 billion dollars between 2000 and 2007. Joseph Cassano the head of aigfp personally made 315 million dollars scenario within any kind of Realm or Reason that would see us losing one dollar in any of those transactions in 2007 aig's Auditors raised warnings one of them Joseph St Dennis resigned

in protest after casano repeatedly blocked him from investigating aigfp's accounting let me tell you one person that didn't get a bonus while everybody else was getting bonuses that was Saint Dennis Mr Saint Dennis who tried to alert the two of you to the fact that you were running into big problems he quit in frustration and he didn't get a bonus in 2005 raghuram Rajan then the chief Economist of the international monetary fund delivered a paper at the annual Jackson Hole Symposium the most elite banking conference in the world who is in the audience it was

uh I guess the central Bankers of the world um ranging from Mr Greenspan himself Ben Bernanke Larry Summers was a Tim Geithner was there the title of the paper was essentially is financial development making the world riskier and the conclusion was it is rajan's paper focused on incentive structures that generated huge cash bonuses based on short-term profits but which imposed no penalties for later losses Rajan argued that these incentives encouraged Bankers to take risks that might eventually destroy their own firms or even the entire Financial system it's very easy to generate performance by taking on

more risk and so what you need to do is compensate for risk-adjusted performance and that's where all the bodies are buried Rajan will you know hit the nail on the head what he particularly said was you guys have claimed you found a way to make more profits with less risk I say you found a way to make more profits with more risk and there's a big difference Summers was was vocal basically thought that I was criticizing the change in the financial world and was worried about uh you know regulation which would reverse this whole change

so essentially accuse me of being a Luddite he wanted to make sure that we didn't bring in a whole new set of regulations to constrain the financial sector at that point you're going to make an extra two million dollars a year or 10 million dollars a year for putting your financial institution at risk someone else pays the bill you don't pay the bill levels are Justified well I think yeah I would I would take caution or take heed or take exception to your word very high I mean it's all relative you have a 14 million

dollar Oceanfront home in Florida you have a summer vacation home in Sun Valley Idaho you and your wife have an art collection filled with million dollar paintings Richard fold never appeared on the trading floor there aren't advisors up there all the time you know he had his own private elevator they he went out of his way to be disconnected I mean his elevator they hired technicians to program it you know so that his driver would call in in the morning and a security guard would hold it and there's only like a two or three second

window where he actually has to see people and he hops into this elevator and goes straight to 31. Layman owned a bunch of corporate Jets do you know about this yes how many were there well there was six including the 767s he also had a helicopter see isn't that kind of a lot of planes to have her we deal with type A personalities and a type A personalities know everything in the world banking became a fishing contest no mine's bigger than yours that kind of stuff it was all men that read it incidentally 50 billion

dollar deals were not large enough so we do 100 billion dollar deals these people are Risk Takers they're impulsive [Music] it's part of their behavior it's part of their personality and that manifests outside of work as well quite typical for the guys to go out to go to strip bars to use drugs I see a lot of cocaine use a lot of use of prostitution foreign [Music] recently neuroscientists have done experiments where they've taken individuals and put them into an MRI machine and they have them play a game where the prize is money and they

notice that when these subjects earn money the part of the brain that gets stimulated is the same part that cocaine stimulates a lot of people feel that they need to really participate in that behavior to make it to get promoted to get recognized according to a Bloomberg article business entertainment represents five percent of revenue for New York derivatives Brokers and often includes strip clubs prostitution and drugs a New York broker filed a lawsuit in 2007 against his firm alleging he was required to retain prostitutes to entertain Traders there's just a blatant disregard for the impact

that their actions might have on on Society on family they have no problem using a prostitute and going home to their wife how many customers about ten thousand at that point in time what fraction were from Wall Street um of the higher end clients probably 40 to 50 percent and we're all the major Wall Street firms represented Goldman Sachs Lehman Brothers no they're all in there Morgan Stanley was a little less of that uh I think Goldman was was pretty pretty big with that a lot of clients would call me and say can you get

me a Lamborghini for the night for the girl these guys were spending corporate money I had many black cards from you know the various Financial firms what's happening is services are being charged to computer repair trading research you know Consulting for Market compliance dad just usually gave them a piece of letterhead and said make your own invoice so this pattern of behavior you think extends to the Senior Management of the firm absolutely does yeah I know for a fact that it does it extends to the very top a friend of mine Who's involved in a

company that has a big Financial presence said well it's about time you learned about subprime mortgages so he set up a session with his trading desk and me and and the techie who who did all this gets very excited runs through his computer pulls up in about three seconds verse Goldman Sachs the issue of Securities it was a complete disaster but our words had borrowed on average 99.3 percent of the price of the house which means they have no money in the house if anything goes wrong they're gonna walk away from the mortgage this is

not a loan you'd really make right you've got to be crazy but somehow you took 8 000 of these loans and by the time the guys were done at Goldman Sachs and the rating agencies two-thirds of the loans were rated AAA which meant they were rated as safe as government securities it's utterly mad Goldman Sachs sold at least 3.1 billion dollars worth of these toxic cdos in the first half of 2006. the CEO of Goldman Sachs at this time was Henry Paulson the highest paid CEO on Wall Street good morning welcome to the White House

I'm pleased to announce that I will nominate Henry Paulson to be the Secretary of the Treasury he's a lifetime of business experience he has an intimate knowledge of financial markets he's earned a reputation for Candor and integrity you might think it would be hard for Paulson to adjust to a meager government salary but taking the job as treasury secretary was the best financial decision of his life Paulson had to sell his 485 million dollars of Goldman stock when he went to work for the government but because of a law passed by the first President Bush

he didn't have to pay any taxes on it it saved him 50 million dollars [Music] and in October of 2007. already a third of the mortgages defaulted now uh most of them are going one group that had purchased these now worthless Securities was the public employees retirement system of Mississippi which provides monthly benefits to over 80 thousand retirees they lost millions of dollars and are now suing Goldman Sachs [Music] by late 2006 Goldman had taken things a step further it didn't just sell toxic cdos it started actively betting against them at the same time it

was telling customers that they were high quality Investments by purchasing credit default swaps from AIG Goldman could bet against cdos it didn't own and get paid when the cdos failed I asked if anybody called the customers and said you know we don't really like this kind of mortgage anymore and we thought you want to know and you know they didn't really say anything but you know you just feel the laughter coming over the phone Goldman Sachs bought at least 22 billion dollars of credit default swaps from AIG it was so much that Goldman realized that

AIG itself might go bankrupt so they spent 150 million dollars insuring themselves against aig's potential collapse then in 2007 Goldman went even further they started selling cdos specifically designed so that the more money their customers lost the more money Goldman Sachs made 600 million dollars of Timberwolf Securities is what you sold before you sold them this is what your sales team were telling to each other boy that Timberwolf was one shitty deal this was an email to me in late June right and you sold Timberwolves action no no you sold Timberwolf after as well we

did trades after that yeah okay the next email take a look July 107 tells the sales force the top priority is Timberwolf your top priority to sell is that shitty deal if you have an adverse interest to your client you have the duty to disclose that to your client to tell that client of your adverse interest that's my question sure Mr chair I'm just trying to understand no I think you understand that I don't think you want to answer do you believe that you have a duty to act in the best interests of your clients

again I uh Senator I will repeat you know we have a duty to to serve our clients by showing prices on transactions that they ask us to show prices for what do you think about selling securities which your own people think or crap does that bother you I think they would again as a hypothetical no this is real well then I don't we heard it today well we heard it today this is a shitty deal this is crap I I heard nothing today that makes me think anything um went wrong is they're not a conflict

when you sell something to somebody and then are determined to bet against that same security and you don't disclose that to the person you're selling it you see a problem in the context of Market making that is not a conflict when you heard that your employees and these emails said God what a shitty deal God what a piece of crap do you feel anything I I think that's very unfortunate to have on email are you I think it's very unfortunate for anyone to have said that in any form is it your understanding that your competitors

were engaged in similar activities uh yes and and to a greater extent than us in most cases hedge fund manager John Paulson made 12 billion dollars betting against the mortgage Market when Paulson ran out of mortgage Securities to bet against he worked with Goldman Sachs and Deutsche Bank to create more of them Morgan Stanley was also selling mortgage Securities that it was betting against and it's now being sued by the government employees retirement fund of the Virgin Islands for fraud the lawsuit alleges that Morgan Stanley knew that the cdos were junk although they were rated

AAA Morgan Stanley was betting they would fail a year later Morgan Stanley had made hundreds of millions of dollars while the investors had lost almost all of their money [Music] you would have thought that Pension funds would have said those are subprime why am I buying them and they had these guys at Moody's in standard employers who said that's a triple A none of these Securities got issued without the imprimatur you know the Good Housekeeping seal of approval of the rating agencies the three rating agencies Moody's s p and Fitch made billions of dollars giving

high ratings to risky securities Moody's the largest rating agency quadrupled its profits between 2000 and 2007. Moody's and s p get compensated based on putting out ratings reports and the more structured Securities they gave a triple A rating to the higher their earnings were going to be for the quarter imagine if you went to the New York Times and you say look if you write a positive story I'll pay five hundred thousand dollars but if you don't I'll give you nothing the radio agencies could have stopped the party and said we're sorry you know we're

going to tighten our standards this is and and immediately cut off a lot of the flow of funding to risky borrowers AAA rated instruments mushroomed from just a handful to thousands and thousands hundreds of billions of dollars were being rated um you know and per year per year oh yeah I've now testified before both houses of Congress on the credit rating agency issue and both times they Trot out very prominent First Amendment lawyers and argue that when we say something is rated AAA that is merely our opinion you shouldn't rely on it s P's readings

express our opinion our ratings are uh our opinions their opinions opinions and those are they are just opinions I think we are emphasizing the fact that our ratings are uh uh our opinions they do not speak to the market value for security the volatility of its price or its suitability as an investment [Music] we have so many economists coming on our air and saying oh this is a bubble and it's going to burst and this is going to be a real issue for the economy some say it could even cause a recession at some point

what is the worst case scenario if in fact we were to say prices come down substantially across the country well I guess I don't buy your premise it's a pretty unlikely possibility we've never had a decline in house prices at a nationwide a nationwide basis Ben Bernanke became chairman of the Federal Reserve Board in February 2006. the top year for subprime Lending but despite numerous warnings Bernanke and the Federal Reserve board did nothing Robert ganizeda met with Ben Bernanke and the Federal Reserve board three times after Bernanke became chairman only at the last meeting did

he suggest that there was a problem and that the government ought to look into it when when was that what year it 2009 March 11th this year this year we met yes and so for the two previous years you met him even in 2008 yes one of the six Federal Reserve board Governors serving under Bernanke was Frederick Michigan Who was appointed by President Bush in 2006. did you participate in the assemi-annual meetings that Robert ganizeda and and green lining had with the Federal Reserve board yes I did I was actually on the committee that uh

that was involved involved with that the consumer Community Affairs committee Hugh warned in an extremely explicit manner about what was going on and he came to the Federal Reserve board with loan documentation of the kind of loans that were frequently being made and he was listened to politely and nothing was done right so I I don't know the details in terms of of uh of um in fact I I just don't I I whatever information you provide I'm not sure exactly uh uh it's it's actually to be honest with you I can't remember this kind

of discussion but certainly uh there there were issues that were uh uh coming up but then the question is how pervasive are they why didn't you try looking I think the people did we have people look we had a whole group of people looking at this for whatever reason you can't be serious if you would have looked you would have found this you know that's very very easy to always say that you can always find it as early as 2004 the FBI was already warning about an epidemic of mortgage fraud they reported inflated appraisals doctored

loan documentation and other fraudulent activity in 2005 the imf's chief Economist ragurum Rajan warned the dangerous incentives could lead to a crisis then came nuriel rabini's warnings in 2006. Alan Sloan's articles in Fortune Magazine and the Washington Post in 2007. and repeated warnings from the IMF I stated on behalf of the institution the crisis which is in front of us is a huge crisis who did you talk to in government treasury fed everybody in May of 2007 hedge fund manager Bill Ackman circulated a presentation called who's holding the bag which described how the bubble would

unravel and in early 2008 Charles Morris published his book about the impending crisis you're just not sure what do you do and you you might have some suspicions that underwriting standards are being weakened but then the question is should you do anything about it by 2008 home foreclosures were skyrocketing and the securitization food chain imploded lenders could no longer sell their loans to the investment Banks and as the loans went bad dozens of lenders failed Chuck Prince of Citibank famously said that uh we have to dance until the Music Stops actually music has stopped already

when he said that the market for cdos collapsed leaving the investment Banks holding hundreds of billions of dollars in loans cdos and real estate they couldn't sell when the crisis started both the Buddha Bush Administration and the and the Federal Reserve were totally behind the curve they did not understand the extent of it at what point do you remember thinking for the first time this is dangerous this is bad I remember very well uh Bree 2008 and I remember discussing the issue with with hunk Polson and I clearly remember telling hunk we are watching this

tsunami coming and you just proposing that we ask which swimming costume we're going to put on what was his response what was his feeling things are pretty much under control yes we are looking at this situation carefully and uh yeah it's under control we're going to keep growing okay and obviously I'll say it if if you keep if you're growing you're not in recession right I mean we we all know that oh in a matter of days one of the pillars of Wall Street in March of 2008 the Investment Bank bear Stearns ran out of

cash and was acquired for two dollars a share by JPMorgan Chase the deal was backed by 30 billion dollars in emergency guarantees from the Federal Reserve that was the time when the administration could have come in and put in place you know various kinds of measures that would have reduced system risk the information I'm receiving from some entities is the end is not here that there are other shoes to fall I I've seen those investment Banks working with the the FED of the SEC strengthened their liquidity strengthened their uh their their Capital positions I get

reports all the time our Regulators are are very vigilant on September 7th 2008 Henry Paulson announced the federal takeover of Fannie Mae and Freddie Mac two giant mortgage lenders on the brink of collapse nothing about our actions today in any way reflects a changed view of the housing correction or the strength of other U.S financial institutions two days later Lehman Brothers announced record losses of 3.2 billion dollars and its stock collapsed the effects of layman and AIG in September still came as a surprise I mean this is even after July and Fannie and Freddie so

clearly there was stuff that as of September major stuff that nobody knew about I think that's I think that's fair bear Stearns was rated AAA like a month before it went bankrupt uh more likely A2 A2 yeah okay A2 is still not bankrupt no no no no it's a high investment grade solid investment grade rating Lehman Brothers A2 within days of failing um AIG double A within days of being bailed out um uh Fannie Mae and Freddie Mac were Triple A when they were rescued Citigroup Merrell all all of them had investment grade ratings how

can that be well that's a good question that's a great question at no point did the administration ever go to all the major institutions and say you know this is serious tell us what your positions are you know um no where are you um well first that's what the regulators just their job right their job is to understand the exposure across these different institutions and they have a very refined uh understanding that I think became more response more refined is the crisis um preceded so forgive me but that's clearly not true that's not true in

August of 2008 were you aware of the the credit ratings held then by Lehman Brothers Merrill Lynch AIG and did you think that they were accurate well uh certainly by that time Victoria's clear that earlier credit ratings weren't accurate because they had been downgraded substantially no they hadn't uh there's still there was still some downgrading in terms of the the industry and concerns and certainly the stock price all those firms were rated at least A2 until a couple of days before they uh were rescued well then you know then the answer is I just don't

don't know enough to really answer your question on this particular issue Governor Fred mishkin is resigning effective August 31. he says he plans to return to his teaching post at Columbia's Graduate School of Business why did you leave the Federal Reserve in August of 2008 I mean in in the middle of the worst sexual crisis so uh that uh I had to revise a textbook his departure sure leaves the FED board with three of its seven seats vacant just when the economy needs it most well I'm sure your textbook is important and widely read but

in August of 2008 you know some somewhat more important things were going on in the world don't you think by Friday September 12th Lehman Brothers had run out of cash and the entire investment banking industry was sinking fast the stability of the Global Financial system was in jeopardy that weekend Henry Paulson and Timothy Geithner president of the New York Federal Reserve called an emergency meeting with the CEOs of the major banks in an effort to rescue Lehman but Lehman wasn't alone Merrill Lynch another major Investment Bank was also on the brink of failure and that

Sunday it was acquired by Bank of America the only Bank interested in buying Lehman was the British firm Barclays but British Regulators demanded a financial guarantee from the U.S government Paulson refused we all jumped into a Yellow Cab and went down to the Federal Reserve Bank they wanted the bankruptcy case commenced before midnight of September 14th we kept pressing that this would be a terrible event and at some point I used the word Armageddon and they fully consider the consequences of what they were proposing the effect on the market would be extraordinary you said this

yes they just said they had considered all of the comments that we had made and they were still of the belief that in order to calm the markets and move forward it was necessary for Lehman to go into democracy calm the markets yes when were you first told that layman in fact was going to go bankrupt after the fact after the fact wow okay um and what was your reaction when you learned of it holy cow Paulson and Bernanke had not consulted with other governments and didn't understand the consequences of foreign bankruptcy laws Lehman Brothers

London continued to empty that under British law Lehman's London office had to be closed immediately all transactions came to Halt and there are thousands of thousands and thousands of transactions the hedge funds who had had assets with Lehman in London discovered overnight to their complete horror that they couldn't get those asses back one of the points of the Hub failed and that had huge knock-on effects around the system the oldest of money market fund in the nation rode off roughly three quarters of a billion dollars in bad debt issued by the now bankrupt Lehman Brothers

Lehman's failure also caused a collapse in the commercial paper Market which many companies depend on to pay for operating expenses such as payroll that means maybe they have to lay off employees they can't buy parts it stops business in its tracks suddenly people stood and said listen what can we believe in there's nothing we can trust anymore that same week AIG owed 13 billion dollars to Holders of credit default swaps and it didn't have the money AIG boss another Hub if AIG had stopped you know all planes may have to be you know stopped flying

on September 17th AIG is taken over by the government and one day later Paulson and Bernanke asked Congress for 700 billion dollars to bail out the banks coming together they warned that the alternative would be a catastrophic Financial collapse I was scary you know the entire system froze up every part of the financial system every part of the credit system nobody could borrow money there was like a cardiac arrest of the Global Financial system and playing the hand that was to help me a lot of what I'm dealing with you know I'm dealing with the

consequences of things that were done often many years ago secretary Paulson spoke throughout the fall and all the potential root causes of this and there are plenty he called them uh so I'm I'm not sure not being serious about that I am being serious what would you have expected what were you looking for that you didn't see he was the C senior advocate for prohibiting the regulation of credit default swaps and also lifting The Leverage limits on the investment Banks so again he mentioned those things I never heard him mention those things could we turn

this off for a second when AIG was bailed out the owners of its credit default swaps the most which was Goldman Sachs were paid 61 billion dollars the next day Paulson Bernanke and Tim Geithner forced AIG to pay 100 cents on the dollar rather than negotiate lower prices eventually the AIG bailout cost taxpayers over 150 billion dollars 160 billion dollars went through AIG 14 billion went to Goldman Sachs at the same time Paulson and Geithner forced AIG to surrender its right to sue Goldman and the other banks for fraud isn't there a problem when the

person in charge of dealing with this crisis is the former CEO of Goldman Sachs someone who had a major role in causing it well I think it's fair to say that the financial markets today are incredibly complicated the supply urgently needed money on October 4th 2008 President Bush signs a 700 billion dollar bailout bill but World stock markets continue to fall amid fears that a global recession is now underway the bailout legislation does nothing to stem the tide of layoffs and foreclosures unemployment in the United States and Europe quickly Rises to 10 percent the recession

accelerates and spreads globally I began to get really scared because I hadn't foreseen the whole world going down at the same rate at the same time by December of 2008 General Motors and Chrysler are facing bankruptcy and as U.S consumers cut back on spending Chinese manufacturers see sales plummet over 10 million migrant workers in China lose their jobs at the end of the day the poorest as always paid the most here you can earn a lot of money like 70 80 US dollar per month as a farmer in the countryside you cannot earn so much

money workers they're just Wireless salary today hometown to to give them family the crisis started in America we are now it will be coming to China some of faculties try to cut off some workers and some people get a pool because they lose the job the house get the lives get harder [Music] growing at about 20 percent it was a super year and then we suddenly went to minus nine this quarter exports collapsed and we're talking like 30 percent so we just took a hit you know and fell off a cliff boom even as the

crisis unfolded we didn't know how wide it was going to spread or how severe it was going to be and we were still hoping that there would be some way for us to have a shelter and be less battered by the storm but it is not possible it's a very globalized world the economies are all linked together [Music] thank you [Music] every time a home goes into foreclosure it affects everyone who lives around that house because when that property goes on the market it's going to be sold at a lower price maybe before it goes

on the market it won't be well maintained we estimate another 9 million homeowners will lose their homes foreign [Music] [Music] foreign [Music] [Music] the vast majority I've seen lately unfortunately are people who've just been hurt by the economy they were living you know day to day paycheck to paycheck and unfortunately that ran out and unemployment isn't going to pay a house mortgage it's not going to pay a car bill well I was a long truck driver and they shut down they shut down all the logging systems up there sat down the Sawmills and everything so

I moved down here on a construction job and a construction job got shut down too so things are so tough there's a lot of people out there and pretty soon you're gonna be seeing more camps like this around because there's just no jobs right now [Music] when the company did well we did well when the company did not do well sir we did not do well the men who destroyed their own companies and plunged the world into crisis walked away from the wreckage with their fortunes intact the top five Executives at Lehman Brothers made over

a billion dollars between 2000 and 2007 and when the firm went bankrupt they got to keep all the money the system worked it doesn't make any sense for us to make a loan it's going to fail because we lose they lose the borrower loses the community loses and we lose Countrywide CEO Angelo mozillo made 470 million dollars between 2003 and 2008. 140 million came from dumping his Countrywide stock in the 12 months before the company collapsed ultimately I hold the board accountable when a business fails because the board is responsible for hiring and firing the

CEO and overseeing big strategic decisions the problem with board composition in America is the way boards are elected and the boards are pretty much in many cases picked by the CEO the board of directors and the compensation committees are the two bodies best situated to determine the pay packages for executives how do you think they've done over the past 10 years well I think that if you look at those the in I would give about a b yes not an F not an F not an F Stan O'Neill the CEO of Merrill Lynch received 90

million dollars in 2006 and 2007 alone after driving his firm into the ground Merrill Lynch's board of directors allowed him to resign and he collected 161 million dollars in severance instead of being fired Stan O'Neill is allowed to resign and takes away 151 million dollars that's a decision that that board of directors made at that point and what grade do you give that decision that's a tougher one I don't know if I would give that one a b as well O'Neill's successor John thain was paid 87 million dollars in 2007 and in December of 2008

two months after marrow was bailed out by U.S taxpayers Thane and Meryl's board handed out billions in bonuses in March of 2008 aig's financial products division lost 11 billion dollars instead of being fired Joseph Cassano the head of aigfp was kept on as a consultant for a million dollars a month and you want to make sure that the key players and the key key employees within aigfp we retain that intellectual knowledge I attended a very interesting dinner organized by Hank Paulson a little more than one year ago some officials and a couple of CEOs from

the biggest banks in the U.S and uh surprisingly enough all these gentlemen were arguing we were too greedy so we have power responsibility fine and then they were turning to the treasure to six three of the treasury and say you should regulate more because we're too greedy we can avoid it the only way to avoid this is to have more regulation I have spoken to many Bankers about this question including very senior ones and this is the first time that I've ever heard anybody say that they actually wanted their compensation to be regulated yeah because

it was at the moment where they were afraid and after when solution to The Crisis began to appear then probably that changed their mind in the U.S the banks are now bigger more powerful and more concentrated than ever before there are fewer competitors a lot of smaller banks have been taken over by big ones JP Morgan today is even bigger than it was before JP Morgan took over first the birthstones and then WaMu Bank of America took over Countrywide at Mary Lynch Wells Fargo took over vachovia after the crisis the financial industry including the financial

services Roundtable worked harder than ever to fight reform financial sector employs three thousand lobbyists more than five for each member of Congress do you think the financial services industry has excessive political influence in the United States no I think that every person in the in the country is represented here in Washington and you think that all segments of American society have equal and fair access to the system the you can walk into any hearing room that you would like yes I do one can walk into any hearing room one cannot necessarily write the kind of

lobbying checks that your industry writes or engage in the level of political contributions that your industry engages in between 1998 and 2008 the financial industry spent over 5 billion dollars on lobbying and campaign contributions and since the crisis they're spending even more money the financial industry also exerts its influence in a more subtle way one that most Americans don't know about it has corrupted the study of Economics itself the regulation had a tremendous financial and intellectual support because if people argue that for their own benefit the economics profession was the main source of that illusion

since the 1980s academic economists have been major Advocates of deregulation and played powerful roles in shaping U.S government policy very few of these economic experts warned about the crisis and even after the crisis many of them opposed reform the guys who taught these things tended to get paid a lot of money being Consultants business school professors don't live on a faculty's salary they do very very well over the last decade the financial services industry has made about five billion dollars worth of political contributions in the United States it's kind of a lot of money that

doesn't bother you no Martin feldstein is a professor at Harvard and one of the world's most prominent economists as President Reagan's chief economic advisor he was a major architect of deregulation and from 1988 until 2009 he was on the board of directors of both AIG and AIG financial products which paid him millions of dollars you have any regrets about having been on aig's board no comments no I have no regrets about being on aig's board that I can say absolutely not absolutely not okay um you have any regrets about aig's decisions I cannot say anything

more about AIG I've taught at Northwestern and Chicago Harvard and Columbia Glenn Hubbard is the dean of Columbia business school and was the chairman of the Council of economic advisors under George W bush do you think the financial services industry has too much political power in the United States I don't think so no I certainly you certainly wouldn't get that impression by the drubbing that they regularly get in Washington many prominent academics quietly make fortunes while helping the financial industry shape public debate and government policy the analysis group Charles River Associates Compass lexicon and the

law on economics Consulting Group manage a multi-billion dollar industry that provides academic experts for hire two Bankers who use these Services were Ralph chiafi and Matthew Tannen Barrister's hedge fund managers prosecuted for Securities fraud after hiring the analysis group both were acquitted Glenn Hubbard was paid one hundred thousand dollars to testify in their defense do you think that the economics discipline has a conflict of interest problem I'm not sure I know what you mean do you think that a significant fraction of the economics discipline number of economists have Financial conflicts of interest that in some

way might call into question or color I see what you're saying I doubt it you know most academic economists uh you know aren't wealthy business people Hubbard makes 250 000 a year as a board member of MetLife and was formerly on the board of capmark a major commercial mortgage lender during the bubble which went bankrupt in 2009. he has also advised no more Securities KKR Financial Corporation and many other Financial firms Laura Tyson who declined to be interviewed for this film is a professor at the University of California Berkeley she was the chair of the

Council of economic advisors and then director of the National Economic Council in the Clinton administration shortly after leaving government she joined the board of Morgan Stanley which pays her 350 000 a year Ruth Simmons the president of Brown University makes over three hundred thousand dollars a year on the board of Goldman Sachs Larry Summers who has treasury secretary played a critical role in the deregulation of derivatives became president of Harford in 2001. while at Harvard he made Millions Consulting to hedge funds and millions more in speaking fees much of it from investment Banks according to

his Federal disclosure report Summer's net worth is between 16.5 million and 39.5 million dollars Frederick mishkin who returned to Columbia business school after leaving the Federal Reserve reported on his Federal disclosure report that his net worth was between 6 million and 17 million dollars in 2006 you co-authored a study of Iceland's Financial system right Iceland is also an advanced country with excellent institutions low corruption rule of law the economy has already adjusted to financial liberalization while Prudential regulation supervision is generally quite strong yeah and that was the mistake that turns out that uh that the

Prudential regulation and supervision was not strong in Iceland and particularly to think that it was I think that you're going with the information you had and generally uh the view was that that uh that Iceland had very good institutions it was a very Advanced country what kind of research did you do do you talk to people you have faith in in the central bank which actually did fall down on the job that clearly it this uh why do you have faith in a central bank well that phase because you go with the information you have

how much were you paid to write it I was paid uh I think the number was uh it's public information on your CV the title of this report has been changed from Financial stability in Iceland to financial instability in Iceland oh well I don't know which whatever it is is the other thing if it's a typo there's a typo I think what should be publicly available is whenever anybody does research on a topic that they disclose if they have any Financial conflict with that research but if I recall there is no policy to that effect

I can't imagine anybody not doing that in terms of putting it in a paper you would it would be significant professional sanction for failure to do that I didn't see any place in the study where you indicated that you had been paid by the Icelandic Chamber of Commerce to produce it um you know okay Richard Portis the most famous economist in Britain and a professor at London Business School was also commissioned by the Icelandic Chamber of Commerce in 2007 to write a report which praised the Icelandic financial sector the banks themselves are highly liquid they've

actually made money on the fall of the Icelandic krona these are strong Banks they're funding their Market funding is assured for the coming year these are well run Banks Richard thank you so much like Michigan portis's report didn't disclose his payment from the Icelandic Chamber of Commerce does Harvard require disclosures of financial conflict of interest in Publications um not to my knowledge do you require people to report the compensation they've received from outside activities no don't you think that's a problem I don't see why Martin feldstein being on the board of AIG Laura Tyson going

on the board of Morgan Stanley uh Larry Summers making 10 million dollars a year Consulting to financial services firms irrelevant yep uh yeah basically irrelevant you've written a very large number of articles about a very wide array of subjects you never saw a fit to investigate the risks of unregulated credit fault swaps I never did same question with regard to executive compensation the regulation of corporate governance the effect of political contribution I don't know that I would have anything to add to those discussions I'm looking at your resume now it looks to me as if

the majority of your outside activities are Consulting in directorship arrangements with the Financial Services Industries that would you not agree with that characterization no to my knowledge I don't think my Consulting clients are even on my CV so who are your Consulting clients I don't believe I have to discuss that with you okay uh Jack you have a few more minutes and interviews over do you consult for any Financial Services firms uh the answer is I do and and but I do not want to go into details about that do they include other Financial Services

firms possibly you don't remember this isn't a deposition sir I was polite enough to give you time foolishly I now see but you have three more minutes give it your best shot in 2004 at the height of the bubble Glenn Hubbard co-authored a widely read paper with William C Dudley the chief Economist of Goldman Sachs in the paper Hubbard praised credit derivatives and the securitization chain stating that they had improved allocation of capital and were enhancing Financial stability he cited reduced volatility in the economy and stated that recessions had become less frequent and Milder credit

derivatives were protecting Banks against losses and helping to distribute risk for medical researcher writes an article saying treat this disease you should prescribe this drug turns out doctor makes 80 percent of personal income from manufacturer of this drug does not bother you I think it's certainly important to disclose the um the um well I think that's also a little different from cases that we're talking about here because um um so uh what do you think this says about the economics discipline it has no relevance to anything really and and see indeed I think um it's

a part of it it's just important part of the problem the rising power of the U.S financial sector was part of a wider change in America since the 1980s the United States has become a more unequal Society its economic dominance has declined companies like General Motors Chrysler and U.S steel formerly the core of the U.S economy were poorly managed and falling behind their foreign competitors and as countries like China opened their economies American companies sent jobs overseas to save money for many many years the 660 million people in developed world were effectively sheltered from all

of this additional labor that existed on the planet suddenly the bamboo curtain and the Iron Curtain are lifted and you have 2.5 billion additional people American Factory workers were laid off by the tens of thousands our manufacturing base was destroyed literally over the course of a few years as manufacturing declined other Industries Rose the United States leads the world in Information Technology where high-paying jobs are easy to find but those jobs require an education and for average Americans college is increasingly Out Of Reach while top private universities like Harvard have billions of dollars in their

endowments funding for public universities is shrinking and tuition is rising tuition for California's public universities Rose from 650 in the 1970s to over ten thousand dollars in 2010. increasingly the most important determinant of whether Americans go to college is whether they can find the money to pay for it meanwhile American tax policy shifted to favor the wealthy when I first came to office I thought taxes were too high and they were the most dramatic change was a series of tax cuts designed by Glenn Hubbard who at the time was serving as President Bush's chief economic

advisor the Bush Administration sharply reduced taxes on investment gains stock dividends and eliminated the estate tax we had a comprehensive plan that when acted has left nearly 1.1 trillion dollars in the hands of American workers families investors and small business owners most of the benefits of these tax cuts went to the wealthiest one percent of Americans and by the way it was really the Cornerstone in many ways of our economic recovery policy inequality of wealth in the United States is now higher than in any other developed country American families responded to these changes in two

ways by working longer hours and by going into debt as the middle class Falls further and further behind there is a political urge to respond by making it easier to get credit you don't have to have a lousy home the low-income home buyer can have just as nice a house as anybody else American families borrowed to finance their homes their cars their health care and their children's educations people in the bottom 90 percent lost ground between 1980 and 2007. it all went to the top one percent for the first time in history average Americans have

less education and are less prosperous than their parents the era of greed and irresponsibility on Wall Street and in Washington has led us to a financial crisis as serious as any that we faced since the Great Depression when the financial crisis struck just before the 2008 election Barack Obama pointed to Wall Street greed and Regulatory failures as examples of the need for change in America a lack of oversight in Washington and on Wall Street is exactly what got us into this mess after taking office President Obama spoke of the need to reform the financial industry

we want a systemic risk regulator increased Capital requirements we need a Consumer Financial Protection Agency that we need to change wall Street's culture but when finally enacted in mid-2010 the administration's Financial reforms were weak and in some critical areas including the rating agencies lobbying and compensation nothing significant was even proposed addressing Obama and quote regulatory reform my response was one word would be ha there's very little reform how come it's a Wall Street government Obama chose Timothy Geithner as treasury secretary Geithner was the president of the New York Federal Reserve during the crisis and one

of the key players in the decision to pay Goldman Sachs 100 cents on the dollar for its bets against mortgages when Tim Geithner was testifying to be confirmed as treasury secretary he said I have never been a regulator now that said to me he did not understand his job as president of the New York fed the new president of the New York fed is William C Dudley the former Chief Economist of Goldman Sachs whose paper with Glenn Hubbard praised derivatives geithner's chief of staff is Mark Patterson a former lobbyist for Goldman and one of the

senior advisors is Louis Sachs who oversaw tri-cadia a company heavily involved in betting against the mortgage Securities it was selling to head the commodity Futures Trading commission Obama picked Gary Gensler a former Goldman Sachs executive who had helped ban the regulation of derivatives to run the Securities and Exchange Commission Obama picked Mary Shapiro the former CEO of finra the investment banking industry's self-regulation body Obama's Chief of Staff Rahm Emanuel made 320 thousand dollars serving on the board of Freddie Mac both Martin feldstein and Laura Tyson are members of Obama's economic recovery Advisory Board and Obama's

chief economic advisor is Larry Summers the most senior economic advisors are the very people who are there who built the structure building Summers and geisner are going to play major roles as advisors first I knew this was going to be status quo the Obama Administration resisted regulation of Bank compensation even as foreign leaders took action financial industry is a service industry it should serve others before it serves itself in September of 2009 Christine Lagarde and the finance Ministers of Sweden the Netherlands Luxembourg Italy Spain and Germany called for the G20 Nations including the United States

to impose strict regulations on Bank compensation and in July of 2010 the European Parliament enacted those very regulations the Obama administration had no response their view is a temporary blip and things will go back to normal and that is why I am reappointing him to another term as chairman of the Federal Reserve thank you so much in 2009 Barack Obama reappointed Ben Bernanke thank you Mr President as of mid-2010 not a single senior Financial executive had been criminally prosecuted or even arrested no special prosecutor had been appointed not a single Financial firm had been prosecuted

criminally for Securities fraud or accounting fraud the Obama Administration has made no attempt to recover any of the compensation given to financial Executives during the bubble I certainly would think of criminal act action against some of countrywide's top leaders like mozillo I'd certainly look at Bear Stearns Goldman Sachs and Layman brothers and Merrill Lynch for criminal prosecutions yes to win but I think they could do it if they got enough underlings to tell the truth in an industry in which drug use prostitution and fraudulent billing of prostitutes is a business expense occur on an industrial

scale it wouldn't be hard to make people talk if you really wanted to they gave me a plea bargain and I I took it they were not interested in any of my records they weren't interested in anything they were not interested in your records that's correct that's correct there's a sensibility that you don't use people's personal vices in the context of Wall Street cases necessarily to get them to flip I think maybe it's after the cataclysms that we've been through maybe people will reevaluate that I'm not the one to pass judgment on that right now

[Music] you come to us today telling us we're sorry we didn't mean it we won't do it again trust us well I have some people in my constituency that actually robbed some of your Banks and they say the same thing they're sorry they didn't mean it they won't do it again in 2009 as unemployment at its highest level in 17 years Morgan Stanley paid its employees over 14 billion dollars and Goldman Sachs paid out over 16 billion in 2010 bonuses were even higher why should a Financial engineer be paid for four four times to 100

times more than a real engineer a real engineer Bill Bridges a financial engineer build built dreams and you know when those dreams turn out to be nightmares other people pay for it for decades the American Financial system was stable and safe but then something changed the financial industry turned its back on society corrupted our political system and plunged the world economy into crisis at enormous cost we've avoided disaster and our recovery but the men in institutions that caused the crisis are still in power and that needs to change they will tell us that we need

them and that what they do is too complicated for us to understand they will tell us it won't happen again they will spend billions fighting reform it won't be easy but some things are worth fighting for