1.Looking at the history and progression of the US financial sector – from a highly regulated system of simple borrow/lender relations, to the complicated system of high-risk loans and derivatives it is today, Ferguson uses 6 time frames that serve as the documentary's “chapters”. The first time frame is given below, including what happened then.
Explain any 4 (four) of the other 5 time frames briefly (no more than 3 sentences) what happened in those phases. Indicate clearly which time frames you choose.
1930s – 1979 – Post-Depression era of “Traditional American finance.”
A look at all the safeguards put in place in wake of the Depression that kept financial services resigned to a simple system of borrowers and lenders (banks) who actually had the money to lend. Bankers and traders earned income that matched most working Americans.
· 1980s – Reagan era of laissez-faire business and trickle-down economics.
The deregulation of Wall Street and the savings and loan industry leads to less oversight, and soon after multiple cases of fraud, insider trading and bad loans/investments that lead to massive losses.
1990s – Clinton era and the bridge between Washington and Wall Street.
More and more Wall Street CEOs infiltrate the government, taking up administrative positions. Depression era safeguards are repealed, allowing for huge Wall Street mergers and new laws favoring the financial services industry. The derivatives industry is created, which Wall Street government administrators refuse to regulate . Bankers/traders now make huge commissions off “junk deals” that lead to the Dot-com bubble burst. The financial sector is ultimately given a slap on the wrist.
2000s – The Bush era of further deregulation and relaxed enforcement.
With lax laws on regulation and oversight, more and more cases of heavy lobbying, fraud, inflated speculation and unethical practices arise. Complex systems of investment are created, which tie everything from mortgages to credit up in the risky practices of the financial services industry. The result: inflated speculation and unethical practices by the nation's leading finance, insurance and credit rating agencies, leading to the 2008 economic collapse.
· 2008 – The Great Recession.
A look at the fall of dominoes that brought down America's biggest financial, insurance and credit rating agencies. Corrupt CEOs and their cohorts still walk away with massive fortunes, and more than a few of them still hold government positions.
· 2010 – The Obama era: Business as usual.
A look at how – despite all the campaign promises of “Change we can believe in” – the Obama administration is in fact employing the very same Wall Street execs-turned-government administrators who have pitched the US into multiple financial crises over multiple decades of unethical practice.
2. A big revelation in the Inside Job documentary: some of the people responsible for the “academic stamp of approval” that legitimizes many fraudulent reports published by Wall Street are the same people heading up America's leading business schools today (Yale, Harvard, Columbia, etc…). Name 2 of these esteemed academic names and briefly mention (no more than 3 sentences each) their unethical behavior questioned.
Ferguson notes that many of the leading professors and leading faculty members of the economics and business school establishments often derive large proportions of their incomes from either engaging as consultants, or speaking engagements.
For example, current dean of the Columbia Business School, Glenn Hubbard received a large percentage of his annual income from either acting as a consultant or through speaking engagements.
Hubbard was also affiliated with KKR and BlackRock Financial.
Hubbard as well as current chair of Harvard's department of economics, John Y. Campbell, deny the existence of any conflict of interest between academia and the banking sector.
Frederic Mishkin of Columbia Business School wrote tendentious/questionable reports (about Iceland sector for instance)..
Larry Summers has also a questionable economic legacy (Harvard, Econ advisor to Clinton++ ao)
3. In the Charles Ferguson documentary banking Inside Job, the “ securitization
food chain” is shown and explained. CDOs played a big role in it.
a) Explain what CDOs are, and explain why they became so popular under investment banks.
Analysis: - CDOs (Collaterized Debt Obligations) are a derivative; mix of all kinds of loans (mortgage/student loans/credit card debts), often sold to investment funds and pension funds because of AAA ratings ...
Banks could lower their risk and make their loans more liquid; intermediaries bought CDOs because they were rated AAA and thus seemed a good and secure investment. So CDOs make illiquid assets more liquid, and spread risk for mortgage lender ..
4. What could the Federal Reserve have done to prevent the credit crunch in 2008 from happening?
Analysis: Regulate the derivatives.
5. The role of AIG in offering CDSs, and of the rating agencies in valuing CDOs and CDSs, was “questionable” to say the least; describe the role of AIG here, and explain why this had to lead to “disaster”. Mention the role of rating agencies as well
Analysis: CDS (credit default swap) = = insurance ; check reasoning ...
AIG insured the very questionable and high risks “toxic” subprime mortgages and sold these as a package to other investors, thus increasing the system risk in a hugh and irresponsible manner.
AIG was “helped” in this process by rating agencies who gave this derivative the rating AAA.
check reasoning ...
Standard and Poors, Moody's, Fitch; they rated many CDOs as AAA, because they were paid by the companies who supplied them these; they claimed their ratings were a mere “opinion”. (rating agencies : Standard and Poors, Moody's, Fitch; they claimed their ratings were a mere “opinion”.)
6. In the Inside job documentary the current president of The National Bank of India, Raghuram Rajan, was one of the people interviewed in the movie . Why was he interviewed (ie what was he famous for?)
Answer: Prof. Rajan, chief economist at the IMF and Chicago Univ. Professor, presented a paper in 2005 warning of a “catastrophic meltdown”; he was mocked for his gloomy analysis. (Larry Summers was very vocal in fighting the wish to regulate ..)
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