Introduction:

While most of us have a vague notion as to the origins of the global financial crisis,
the detail remains a mystery to those outside the financial sector and not
conversant in economic speak. The documentary Inside Job by former Charles
Ferguson explains the background of the global financial crisis. It features profound
background research and several interviews with insiders of the financial world,
academics and politicians.In 2007, the collapse of the so-called housing bubble
caused massive problems within the United States banking system and triggered a
global financial crisis. This event led to a globally plummeting stock market and
several bank bailouts by the U.S. government.It is the worst financial crisis since the
Great Depression in the 1930s and has caused a loss of 30 million jobs worldwide.
The seriousness of this crisis and nefarious operations of the private financial sector
are brought forward in this documentary.
During the opening minutes of the film, Iceland is presented as a case study for the
US American financial crisis: Deregulation of the banking sector caused
unrestrained speculations that brought the former prosperous country close to a
national bankruptcy.The focus of the documentary then shifts to the 2008 bank
collapse in the United States to demonstrate that the same problems caused a
similar crisis though on a much larger scale in the US, ultimately leading to a global
economic crisis.
The documentary is divided into five parts Part-1: How We Got There, Part-2: The
Bubble (2001-2007), Part-3: The Crisis, Part-4: Accountability and Part-5: Where Are
We Now. The following sections will summarize each of these parts of the
documentary as well as analysis of the documentary as per the writers
understanding and some criticisms of the documentary itself.

Initial Case Study: Iceland

The story begins in Iceland, a stable democratic society that was possessed by the
demon of free radical finance. Multinational corporations such as Alcoa were then
allowed to come into Iceland andinstall their business thereby disrupting the
integrity of the system.This small, prosperous state of 320,000 people became a
basket case almost overnight when its three main banks were privatized and began
borrowing three times the countrys Gross Domestic Product with the capital mostly
accumulated to incredible levels by bankers. In a scenario repeated in Ireland,
Britain and the United States (US) the financial regulators failed to raise the alarm
or halt the reckless borrowing and, in the case of Iceland, one-third of the regulators
went to work for the banks.The story then moves to the US and the collapse of
Lehman Brothers in 2008 that sent shudders through the financial markets and
sparked a global downturn that would shed 30 million jobs.

Part-1: How We Got There

After the 1929 Great depression, banking industry was tightly regulated. The US
Financial sector was stable for the next 50 years. The main cause of this financial

crisis was deregulation in 1980s of Financial Institutions which include Banks,

Insurance Companies, Credit Rating Agencies etc. In 1982 the Regans
Administration allowed banking industry to making risky investment with the saving
deposit of public and by the end of decade several loan companies failed this cost
taxpayers $124 billion. By late 1990's financial sector consolidated into a few
gigantic global firms, each of them so large that their failure could threaten the
whole economic system. During the late 90's deregulation and advancement of
technology led to the explosive growth of complex financial products called
derivatives. In 1998, Citicorp and Travellers merged to form the world's largest
financial services firm. This merger violated the Glass-Steagal act, which prohibit
making risky investment with customer deposits. In 1999 Gramm- Leach - Bliley
Act overturned the Glass Stegal Act which protected the investors money from
risky investments. On the basis of this new act many other mergers took place,
which later became the cause of Financial Crisis. SEC and CFTC were in charge of
overseeing the investment banks and the regulation of derivative markets.

Enter the securitization food chain, the new system that birthed
extravagantmortgage lending and the incredible housing bubble.

H o m L e n B d u Ie n y r v es e r (s B t I m an nve enk ts s )t o B r a s n k s
There are five positions, insequential order in the chain: (1) home buyers, (2)
lenders, (3) investment banks, (4)investors, and (5) insurance companies. A
single loan payment passes along this chain,earning material gain for each
position along the way. (1) Home buyers come to thelenders for a mortgage to
buy a home; (2) lenders extend the loan to the home buyersand home buyers
receive a home; (3) lenders sell the mortgage to investment banksand receive a
commission; (4) investment banks mix the mortgages with other debtssuch as
corporate buyout debts, car loans, student loans, and credit card debts and
thismix is named Collateralized Debt Obligations (CDOs), then they pay rating
agencies tograde the CDOs and then the investment banks sell the CDOs to
investors and receive acommission; (5) insurance companies, particularly AIG,
would earn commissions byselling insurance to investors for the CDOs they
purchased from the investment banks,which is named Credit Default Swapsif
there was a default on the CDO, then AIGwould cover the losses; furthermore,
AIG would also sell Credit Default Swaps tospeculators who did not own any
CDOs, therefore if there was a default on a singleCDO, then since an investor
and speculators have insurance on this same CDO, AIGwould have to pay money
to the investor who actually owned the CDO and thespeculators who did not own
the CDO

The bankers were greedy and unregulated. Trillions of dollars of mortgages were
sold by lenders to the investment banks which in turn created CDO's
(Collateralized Debt Obligation) and sold it to the investors. The reason many
CDOs were risky was because lenders still received their commissionwhether the
mortgage was repaid or not, because they sold the mortgage to theinvestment
banks. Since lenders were removed from risk, they could lend extravagantly and
receive a commission in return. These mortgages mostly composed of subprime
loans, but CDO's were given the highest rating (AAA) by the rating agencies
such as S&P, Fitch & Moody's. It was rated on par with Govt. Securities. Pension
Funds were also invested in the CDO's.

Part-2: The Bubble

The riskiest mortgages, termed subprime, were combined with other debts in
theCDO package and thereby received a high rating when the CDO received a
high rating,even though the subprime mortgages were the riskiest mortgages of
all.US $100 billion dollars were lent as subprime loans. So anybody could easily
get credit for buying a new house. 99.3% of the house price were given as loans
to the borrowers. So when the borrowers could not pay their EMI's, they walked
away resulting in foreclosures. Country Wide Financial Corp was the largest
subprime lender in the US and lent close to US $100 billion dollars. Because
subprime loans were riskier, they demanded higher interest rates tocompensate for
the likelihood the borrower would default on the loan; therefore,subprime loans
were in high demand because they would bring greater commissionswhen sold. This
led to predatory lending, which resulted in more borrowers than usual being
identified assubprime and having to pay higher interest rates and many borrowers
receiving loansthat they could not repay. Investment banks preferred subprime
loans because they carried higher interest rates. During bubble, investment
banks borrowed heavily to buy more loans & create more CDOs. Subprime loans
were at an all time high.

Initially, for every one dollar the investment bank invested from its own funds,
itinvested an additional three dollars of borrowed funds. On April 28, 2004 SEC
lifted leverage limits on the investment banks. With their own exposure thus
diluted, banks started selling mortgages with little regard for risk. It was like printing
money: the more mortgages they could generate, the greater the short-term gains.
Hence the housing bubble, built on mortgages sold to people who likely could never
pay them back.With such easy access to mortgage loans the demand for housing
increased exponentially and so did the housing prices, increasing by 194% in
2007.

At the same time derivatives called credit default swap, were issued by AIG to the
investors who purchased CDO.As the CDOs were insured by AIG, investors felt more
secure. Investors bought CDS (Credit Default Swaps) to insure themselves

against the failure of CDO's. However the AIG also issued these derivatives to
those who did not own CDO.Thus speculators could buy CDS to insure CDO's
which they didn't own.AIG was promising to cover the costs if there was a default
on the insured CDOs,although it did not have the money to do so. This system was
ticking time bomb in the financial system. Rating agencies had no liabilities, if
their highly rated investments went burst.Goldman Sachs sold more than US $3
billion dollars of toxic assets to the investors. They also bet on these toxic assets
by buying CDS from AIG, by this way they were actually piling risks onto the
AIG's books. Predicting the collapse of AIG itself, they spent US $150 million
dollars in protecting their CDS against the potential collapse of AIG. This way, if
their investors lost more money, Goldman Sachs would gain more profits.
Morgan Stanley was betting that their entire investments would fail. The rating
agencies like Moodys, Standard &Poors and Fitch made billions of profits by rating
these CDO as AAA rating.
When executives of Goldman Sachs testified before Congress regarding it
sellingsecurities that it bet against, the executives generally show that they do not
see this asan issue.When executives of the credit rating agencies that graded risky
CDOs as stellar testifiedbefore Congress, they emphasized the fact that their ratings
are merely opinions andthe agencies assume no responsibility for the securities
they rate.

Part-3: The Crisis

The Federal Reserve System ignored repeated warnings of a major crisis from
globalfinancial analysts such as Raguram Rajan of the IMF, Domnique Strauss-Kahn
of theIMF, NourielRoubini of New York University, and Allan Sloan of Fortune
Magazine. However, in 2008, the debts are coming due. As the links passed on
from one stage to another in the Securitization Food Chain, the magnitude of risk
in the chain grew exponentially.Those risky mortgages are now ripening into
foreclosures and bankruptcies. Mortgage loan holders failed to payback their loan to
lenders, as a result the Securitization Food Chain imploded.
Bear Stears ran out of money in March 2008 and is acquired by J.P. Morgan for two
dollars per share. Fannie Mae and Freddie Mac, two major mortgage lenders are
acquired by the US government.Lehman Brothers reports recorded losses and a
stock collapse and in September 2008, Lehman Brothers was taken over by Bank
of America. This bankruptcy caused major disruption in the global financial
markets.On September 16(2008) 5000 people belonging to the London office of
Lehman Brothers lost their jobs. At the same time and on September, 17 2008,
the AIG was taken over and bailed out by the Government; $14 billion were only
paid to Goldman Sachs out $160 billion total paid by AIG through Government
bailed out.

Also the Commercial Paper Markets collapsed. They are used by companies for
operating expenses such as payroll. In just four months it fell from $1800 billion
to less than $1450 billion.

Foreclosures rose to 6 million by the year 2010. People in US started living in

tents.

On October 14, 2008, the President Bush signed $ 1400 billion bailed out package,
but the market continued to fall. This crisis did not only hit US but it hit major
economies of the world. Investment firms are bailed out with $700b from the US
government whileforeclosures and job losses grow around the globe, because
people were refusing tospend their money, in order to prepare for the possibility of
major crisis and to keeptheir money out of the hands of risky or fraudulent
investment gamblers.As businesses hold money, jobs are cut, and as consumers
hold money, trade is cut; therefore, everyones finance is depressed.

Part-4: Accountability
The narrator puts it best, The men who destroyed their own companies and
plunged theworld into crisis, walked away with their fortunes intact. Most of the
people and institutions involved in the crisis went Scot free. SEC, CFTC & Federal
Reserve Board which were in charge of regulating the investment banks and
other associated institutions failed in their duties. Top executives of the insolvent
companies walked away with their private properties intact. Top five executives
of Lehman Brothers made millions of dollars during the Bubble period and were able
to retain their earnings. For most of the period from 1990 - 2010, Academicians
played a key role in shaping the financial regulatory policies and banking
practices.Many economists academics and professors were in favor of deregulation
and they were appointed as advisors in economic affairs of the country and many
were elected as directors of major financial institution and as such had conflict of
interest due to their presence as consultant in investment banks. Again no one
was held accountable. It would seem that this global financial crisis was no ones
fault.

Part-5: Where Are We Now

The aftermath of the magnitude of global financial crisis can be understood by
the following few examples of financial institution write downs: Citigroup (USA) $24.1 bln Merrill Lynch (USA) - $22.5 bln UBS AG (Switzerland) - $16.7 bln
Morgan Stanley (USA) - $10.3 Credit Agricole (France) - $4.8 bln HSBC (United
Kingdom) - $3.4 bln Bank of America (USA) - $5.28 blnCIBC (Canada) $3.2
blnDeutsche Bank (Germany) - $3.1 bln Total Write downs and losses were
around $300 - $350 billion US dollars.European Union imposed stricter banking
regulations. Most of the investment banks had to pay penalties running into
millions of dollars.
In the USA tens of thousands of workers lost their jobs. The United States is
declining, as shown through wealth gaps and outsourcing.Manufacturing jobs are
diminishing and information technology jobs are becoming more abundant,
although these jobs typically require an education that most Americans cannot
afford.Tax policies in the United States are increasingly favoring the wealthy, such
as the elimination of the estate tax.Wealth inequality is the highest in the United
States of all the developed nations.The Brack Obama in 2008 election campaign
promised changed and assured the regulation of financial industry so such financial
crisis could not take place again.Although the Presidential administration of the
United States has officially changed,the same Wall Street players who were
responsible for the financial crisis are now economic advisors in the new
administration.

Conclusion and Criticisms:

Through exhaustive research and extensive interviews with key financial insiders,
politicians, journalists, and academics, the film traces the rise of a rogue industry
which has corrupted politics, regulation, and academia.Furthermore, Inside Job uses

examples of previous financial crises to demonstrate that the 2008 banking collapse
was not only predictable but also avoidable.
In a little less than two hours, Ferguson showsthe roots of the near-collapse of 2008,
examines the steps that were taken that brought it about, pointsfingers (with
evidence) at the various corporate and financial sector villains who made it possible
andthose who benefitted most -- and offers a fairly bleak assessment of what the
future may hold under anObama administration grossly infected with the same
players who helped it all happen in the first place.
The witnesses interviewed are both a strength and weakness. Its useful to hear
from the horses mouths how this catastrophe unfolded with helpful analysis from
politicians, authors and economic specialists. What is lacking, however, are more
perspectives from outsiders who have a greater ideological distance from those
working within the economy. Inside Job does not question the fundamentals of
capitalism and how they can result in boom and bust cycles that derail generations
of young lives and exacerbate social inequalities. This is a film appealing for a
return to sounder economic stewardship and tighter regulation rather than
searching for alternative models of managing our economies. Indeed, such is the
range of perspectives offered by Inside Job that the International Monetary Fund
(IMF), the co-author of the debt crisis in many developing countries since the 1970s,
is proffered as a voice of sanity and financial soundness amidst the surrounding
madness. Indeed, former IMF chief executive Dominique Strauss-Khan and his
successor Christine Lagarde are among the witnesses interviewed.
The film also needed to offer more of a voice to those who have been rendered
homeless and penniless by the banks. We see a tented city in Florida now home to
many Americans left homeless after six million foreclosures in 2010. Inside Job is
undoubtedly at its best when probing the banking sector and the type A
personalities that led it to collapse. These impulsive and risk-taking Wall Street tyros
often extended their amoral behavior to using prostitutes and cocaine believing
themselves to be invulnerable to any form of legal or moral accountability. This
ultimately proved to be the case with not a single criminal prosecution reported of
any of the financial executives complicit in the financial collapse. The legacy of the
collapse is that inequality is higher in the US than any other developed society and
many of the banks, like JP Morgan, are bigger now than before the crisis through a
process of consolidation. Meanwhile, President Obamas treasury team is almost
entirely drawn from the financial sector and is headed by Timothy Geitner, who, as
President of the Federal Bank Reserve during the crisis, ensured that Goldman
Sachs received 100 cents in the dollar for all the bets it lost speculating against
mortgages.
It doesn't cover either the responsibility or culpability of Congress (that subject is
glossed over in presumption of congressmen being "paid off" by Wall Street in the
form of campaign contributions) in writing the laws, and in approving the
government officers who ran (or didn't run) the regulatory agencies.And then
there's the issue of the Government Sponsored Enterprises: Fannie Mae and Freddie
Mac, which is clearly Congress' fault. The documentary also lets the investors pretty

much totally off the hook, despite their irrationality and not doing their own due
diligence and investing in the junk bonds that Wall Street was selling, i.e. Mortgagebacked Securities (MBS) constructed out of sub-prime mortgages.
Finally, the documentary attacks the economics academics. It can be argued that it
is HIGHLY unlikely that it would have made a bit of difference how much the
academic economists made for writing a paper for the Icelandic Chamber of
Commerce, their conclusions would not have changed much, if at all, had they been
writing for free. These academics have managed to convince themselves that
economic deregulation was a good idea. They are true believers. As such their
stance in favor of deregulation and a free economy would in most likelihood have
resulted in similar conclusions, whether they were paid for it or not.

Authors Remarks
Inside Job was an eye opener and provided a deeper look on the financial crisis.From
watching the documentary, we conclude that the global impact of the crisis are:
1) Investors lost confidence in the stock market.
2) Consumer spending slowed down due to lack of cash/ unwillingness.
3) U.S.As economic condition affected the global economy.
4) World economy slipped into recession.The first issue that the film shed new
light on was that an AAA rating can be disguised by pooling together investments
from high risk firms to stable firms. In all our analysis of a company, be it course
work of in the professional setting, an AAA rating was the safest way to tell if the
company is safe to invest in.However the film proved that assumption
wrong.Secondly and most surprising was that those who are in the academe are the
ones who advise companiesregarding their economic activities. So what are being
taught in the universities may very well be biasedlessons, one that would benefit
the companies in the end.Finally it was shocking that a lot of people lost their jobs
yet their board of trustees/ directors weregetting increased bonuses. The common
sayingThe rich become richer and the poor becomepoorer was exemplified.Those
who have been proven guilty of crime were absorbed back into the private sectors.
As skillful as they may be, this act of allowing individuals hold the reigns of the
financial system that they almost destroyed provides a bleak forecast of the future
of financial sector.
Finally, we present an alternative explanation of the financial Crisis. The
conventional wisdom on the 2008 financial crisis is that finance industry insiders on
Wall Street deceived nave, uninformed mortgage borrowers into taking out
unaffordable mortgages and mortgage-backed security (MBS) investors into
purchasing securities backed by bad loansmortgages and securities that had not
been properly vetted and that would eventually default. Our alternative hypothesis
for the financial crisis is that overly optimistic views about house prices, not poorly
designed incentives on Wall Street, are the better explanation for the crisis. This
alternative theory holds that investors lost money not because they were deceived
by financial market insiders, but because they were instead misled by their own
belief that housing-related investments could not lose money because house prices
were sure to keep rising. A recent paper by (Cheng, Raina, & Xiong, 2014) show that

there is no evidence that mortgage insiders believed there was a housing bubble in
the 200406 period. In fact, mortgage insiders were actually more aggressive in
increasing their personal exposure to housing at the peak of the boom. The increase
in insider exposure contradicts the claim that insiders sold securities backed by
loans that they knew would eventually go bad when the housing bubble burst.The
results of their empirical tests show very little evidence to support the inside-job
theory of the financial crisis. The authors conclude that there is "little systematic
evidence that the average securitization exhibited awareness through their home
transactions of problems in overall house markets and anticipated a broad-based
crash earlier than others." Thus like the rest of the market, agents working at those
firms believed that housing prices would continue to rise so that even the riskiest
mortgages would continue to perform well.

References
Cheng, I.-H., Raina, S., & Xiong, W. (2014). Wall Street and the Housing Bubble.
American Economic Review, 27972829.
Ferguson, C. (Director). (2010). Inside Job [Motion Picture].
Ferguson, C. (2012). Inside Job. Oxford: Oneworld Publications Limited.