The ‘Inside Job’ film (documentary film) draws parallel views to the referenced text “Impact on Accounting” of this course coupled with the associated research executed during the past weeks with respect to understanding the cause of the financial crisis.
The documentary film zeros in on the contributory factors of the financial crisis such as falling interest rates, securitization of home mortgages and credit default swaps (derivatives). Other stunning contributory factors expressed in the documentary film were greed in addition to the deregulation and an unsupervised financial industry by the Federal government.
Snyder (2011) reported that, “There have been several deregulations in the financial and housing markets over the past 30 years. Some of these include The Depository Institutions Deregulation and Monetary Control Act, the Federal Home Loan Bank Board establishing adjustable mortgages, the 1982 Garn-St Germain Depository Institutions Act establishing a secondary mortgage market, the repeal of the Glass-Stegall Act allowing commercial and investment banks to merge, and the 2004 SECs deregulation of investment banks, allowing investment banks to increase their leverage ratio from 12:1 to 30:1.” (pages 1-16)
After researching the cause of the financial crisis, though seemingly insignificant to some, one of the fastening screws that assisted in the great fall with respect to the financial industry was falling interest rates. During the early 2000s the United States economy began to slow down and in an effort to rejuvenate this downward condition the Federal Reserve introduced a stimulation project to cut interest rates to induce customer spending. Investors took advantage of this stimulus exercise as the return on mortgage backed securities was attractive and as a result there was a boost and desire to purchase such securities.
Consequently, lending institutions became very excited as the demand for mortgage backed securities increased and thus the quest began to write more mortgages. Hence, the qualifying standards for loan approvals were done away with allowing a prospective home owner getting approval with ‘zero-down’. The introduction of no payment down increased the likelihood of failure to pay by borrowers and this default risk thereof was disregarded.
Another supporting aspect of the documentary film with respect to the cause of the financial crisis was securitization. Historically during the safe age, a home mortgage was a loan contract between the borrower and financial institution which was supported by tangible property used as collateral. Such loans would be held until the full loan obligation has been satisfied in the long term. Conversely to the days of old, financial institutions sought new innovative means to generate income and came up with securitization of home mortgages.
In this sense, during the 1990’s, home mortgages were not held to maturity but instead the high risk home mortgages were, bundled, repackaged and resold creating mortgage backed securities whereby income is received when homeowners satisfied their home mortgage obligation. Despondently, when borrowers defaulted on their home mortgages, investors suffered dearly as losses were realized, consequently, financial institutions collapsed and unemployment rose above its usual average rate.
Other research has concluded that derivatives also played a chief role in the financial crisis. Derivatives are financial contracts between two parties of which the value can derived with not affiliation to the good or service. For example, a buyer can purchase an option agreement to buy a good or service in the future at an agreed price within a specified time frame.
Within the given period the buyer may exercise the right to purchase or chose not to upon weighing the benefits of the option contract with the current market conditions. One type of derivatives that aided in the financial crisis was credit default swaps (CDS) which allowed investors to participate in naked CDS purchases without having legal ownership of the insured property. CDS is an innovative and prevalent derivative which is similar to an insurance contract that permits investors to transfer risk to other parties who are more qualified and willing to bear it, thus making it
very attractive risk mitigation tool.
CDS became extremely popular and experienced an unprecedented demand up to the latter part of 2007. However, since the derivatives market was not regulated companies such as AIG which sold billions of swaps without collateral or reserves to satisfy potential losses. According to Hobbs (2011), at the end of 2007 AIG credit debt obligation totaled $562 billion which was shockingly ironic that an insurance company would fail to hedge such substantial risk.
Charles Ferguson’s award winning documentary film ‘Inside Job’ narrated by Matt Damon surveyed the deregulation of the financial industry and explored how the lack of good ethical banking practices assisted in creating the financial crisis.
This jaw dropping documentary in its fearless interviews and prying identified greed and deregulation by the Federal government as principle causes of the financial crisis. At the twilight of 1981 the Ronal Regan administration made the deregulation of the financial industry top priority and the highest order of business in an effort to restore economic prosperity. Froese (2011) stated that, “The campaign trend of deregulation was followed through by the Bill Clinton and George Bush administration team.” (p. 59-75). According to Maxwell (2011), “The documentary film sets out to prove the idea by first pointing to the 1980s, when deregulation of the financial industry in the US allowed banks and loan companies to begin taking bigger risks with depositors’ money.” (p.16)
The documentary film exposed the recycling of top bank executives being integrated into key government positions even after having full knowledge of misconduct and unethical behavior driven by greed. The greed for lavish lifestyle such as having six airplanes, helicopters, yachts, beachfront homes and penthouses was evident in the documentary film.
Apparently, the more money top bankers earned the more they seem to want. The root of this greed was driven by huge compensation and hefty bonuses. According to Ferguson (2010), Richard Fuld the CEO of Lehman Brothers actually was hardly ever seen on the trading floor as he went out of his way to avoid contact with other employees even to the extent of extent of installing a personal elevator that took him to his office undetected.
These chief top guns even went to the extent to cheat the government of taxes by understating their income. Sterngold (2011) reported that, “ Oliver Budde, a former lawyer for the financial services firm Lehman Brothers, has charged that the bankrupt company’s former Chief Executive Officer (CEO) Richard S. Fuld lied to Congress when stating the amount of his salary and other compensation from 2000-2007. Budde, whose duties included preparing Lehman’s financial statements on executive salaries, says that Fuld understated the amount of his earnings by hundreds of millions of dollars.” (p, 56-59).
Under the Regan administration CEO of the treasury, ML Donald deregulated the Savings and Loans which created a platform for unsafe investments by allowing hundreds of financially dead institutions to continue to operate while making more risky loans. Within 10 years hundreds of Savings and Loans companies became insolvent which resulted in 124 billion dollars of tax payers’ money. Greenspan supported Charles Keating’s business plans verifying that they were sound, proficient and without risk.
It was later discovered that Keating who owned one of the Savings and Loans companies in California, used investors’ money to support his personal company and eventually went to prison as a result. While on the other hand, Greenspan was promoted appointed as president of the Federal Reserve by Ronald Ragan and was reappointed by Clinton and Bush administration to police the big bucks. It was also alleged that Greenspan received a kickback of 40,000 for validating Keating’s report Keating afloat in the industry.
Deregulation continued under the Clinton administration congress overturned the Glass-Steagall Act by passing the Gramm-Leach Bliley Act which facilitated the Citigroup merger. Further, despite the cries to regulate the derivatives industry, Alan Greenspan in addition to other congressmen brought about the Commodity Futures Modernization Act banning all regulation in the derivatives market.
Other new theories that developed from the documentary film were economists, credit rating agencies and top executives have all contributed to the financial crisis. It was unthinkable that reputable economists failed miserably to disclose any conflict of interest regarding their economic research report concerning economic trend. According to Ferguson (2010), economist Frederic Mishkin stated in his economic research report that Iceland’s economy had already adjusted to financial liberalization and that while prudential regulation and supervision was quite strong, however, the banking industry in Iceland exploded shortly after the report.
Frederic was paid $124,000 by the Iceland government to write the report even though the report proved to be very wrong. Another economist, Robert Glenn Hubbard former head of President Bush council of economic advisors, when asked whether there is and conflict of interest of economists he avoided the question and stated that most economist are not wealthy people. The documentary exposed him for having an annual salary of $150,000 as a board member of Met Life and that he formally served on the board of Capmark Financial Corporation, a mortgage institution that went bankrupt during the bubble.
The documentary film brought the curtains down on credit rating agencies as it provided undeniable evidence of their involvement in the financial crisis . The three credit agencies namely, Standard & Poor, Moody’s, and Fitch misrepresented the credit rating of companies such as Lehman Brother, Merrill Lynch, AIG and Bear Sterns as they were all given credit rating of AA and above just weeks prior to becoming bankrupt.
Questions were put to the governor of the Federal Reserve, Frederic Mishkin whether he was aware of excellent credit ratings and as in the past he danced around the question without providing clear answer. In 2008 Frederic Mishkin resigned in the height of the economic crisis and said that this coward move was owed to him reviewing some university book. Investors depend heavily on security rating for decision making. Clearly if a security has been classified as AAA and AA ratings, they appear to be as safe as government bonds.
Instead, investors were deceived into investing in insolvent companies as a result of the ratings provided thereof.
Continuing, top executives were also woven in the fabric of the financial crisis whereby top Chief Executive Officers walked away with top dollars. It is said that follow the money to solve the crime. The documentary film listed top guns such as Lehman Brothers CEO, Richard Fuld who reaped in 485 million, AIG’s CEO went smiling with earnings of 315 million and Merrill Lynch raked in 161 million of severance bonus.
Other culprits named were
Bear Sterns CEO and especially Goldman Sachs top executives. Apparently, these top executives had much knowledge of their falling companies and cooked the books so that investors would believe otherwise. What come out of the documentary film was that executives were rewarded for selling subprime mortgage investments as if it was top priority.
Below are exhibits A and B and key players in the financial crisis:
Major Players identifies in Week 2
Major Players in Inside Job Film
2. Financial / lending institutions
3. Wall Street
4. Federal Government
5. Securities Exchange Commission
2. Financial / lending institutions
3. Wall Street
4. Federal Government
5. Securities Exchange Commission
7. Credit Rating Agencies
8. Top Executives
The new players pulled from the documentary film are economists, credit agencies and top banking executives. Economists were apparently paid handsomely to produce favorable reports of which most did not disclose their connected conflict of interest. Credit rating agencies also provided falsified rating to dying institutions and as a result investors were misinformed and consequently realized losses which could have been prevented. Lastly top banking officials were recycled throughout the government and other top ranking banks.
They were driven by greed and received compensation of up to 485 million dollars. Bringing it all together, I strongly believe that they were all in it together with the object to rape the economy of its finances and so they did successfully without being prosecuted.
APA Format References
Global Economic Crisis Resource Center (2010). Global economic crisis: Impact on accounting. Mason, OH: South-Western Cengage Learning
Snyder, T. (2011). How did deregulation and financial innovations impact housing, wealth, and output?. Journal Of Finance & Accountancy,
Hobbs, J. (2011). Financial Derivatives, the Mismanagement of Risk and the Case of AIG. CPCU Ejournal, 1-8.
Ferguson, C. (Director) & Marrs, A. (Producer). (2010) Inside Job [Motion Picture]. United States: Sony Picture Classics
Froese, R. (2011). THE LIMITS OF INSIDE JOB: CRISIS, IDEOLOGY, AND THE BURDEN OF CAPITALISM. Studies In Political Economy: A Socialist Review, (88), 59-75.
Sterngold, J. (2010). Who Cares About Another $200 Million?. Bloomberg Businessweek, (4177), 56-59.
Maxwell, C. (2011). Inside the crash. Director (00123242), 65(4), 16.