inside job

THE FILM THAT COST OVER $20,000,000,000,000 TO MAKE
THE GLOBAL ECONOMIC CRISIS OF 2008
COST TENS OF MILLIONS OF PEOPLE
THEIR SAVINGS, THEIR JOBS,
CANNES
AND THEIR HOMES.
FILM FESTIVAL
THIS IS HOW IT HAPPENED.
TORONTO
FILM FESTIVAL
FILM FESTIVAL
INSIDE JOB
TELLURIDE
FILM FESTIVAL
FILM FESTIVAL
NEW
YORK
FILM FESTIVAL
FILM FESTIVAL
THE OFFICIAL TEACHER’S GUIDE
A FILM BY CHARLES FERGUSON
DEVELOPED BY PROFESSOR FRANK PARTNOY, THE GEORGE E. BARRETT
PROFESSOR OF LAW AND FINANCE AT THE UNIVERSITY OF SAN DIEGO SCHOOL OF LAW
Note to Teachers
put it, “If you’re not enraged by the end of this movie,
you weren’t paying attention.” The people at Sony
Pictures Classics asked me to write this teacher’s guide
to help provide some content and lesson plans for
teachers interested in showing Inside Job as part of their
classes. I have included four lesson plans to be used in
conjunction with the film. These lessons will help your
students to connect the film to important
financial issues that touch their lives. They
are designed to assess several important
questions that your students inevitably will
confront in the future. The material is
designed to be flexible. The topics are
modular, and the lesson plans can build
on each other, or be used alone. They can
be used with the entire film, or just selections.
You should feel free to print and duplicate
these materials for your students and
colleagues. They are available for free on
this website: www.sonyclassics.com/insidejob.
Each lesson is designed for about 50 minutes
of class time, though you easily could devote
more or less time. I hope you and your students
enjoy watching Inside Job and that you find the
materials in this guide to be a provocative and useful way to engage your students in a conversation about
the past, present, and future of our economy.
Inside Job, the critically acclaimed movie
by Academy Award nominated filmmaker,
Charles Ferguson, is the definitive film
about the economic crisis of 2008 and the
role of Wall Street in modern society.
It is a substantive and entertaining film that
is ideal for educational purposes. I have shown
it to my class, and I encourage you to show
it to yours. The film is sweeping and
non-partisan in its critique, and covers
both the historical roots of the crisis and
the central flaws of global financial regulation. It includes comprehensive coverage
of the major financial players at the center of
the recent boom and bust. The film draws
heavily on interviews with a “Who’s Who”
of financial markets, including major financial
insiders, politicians, journalists, and academics.
(I have a very small part as well). These
interviews, and the film’s engaging and
provocative narrative by Matt Damon, will
introduce your students to key financial issues,
economic history, and current debates and
news about the markets. Inside Job is colorful
and comprehensive, and is guaranteed to generate
lively discussion among your students. As Time magazine
About Frank Partnoy
The University of Chicago Law Review, and The Journal
of Finance. His recent books include Infectious Greed:
How Deceit and Risk Corrupted the Financial Markets, a
leading corporate law casebook, and The Match King: Ivar
Kreuger, The Financial Genius Behind a Century of Wall
Street Scandals, about the 1920s markets and Ivar Kreuger,
who many consider the father of modern financial
schemes. Professor Partnoy also has been a consultant to
many major corporations, banks, pension funds, and
hedge funds regarding various aspects of financial markets
and regulation.
You can find out more about Professor Partnoy at his website, www.frankpartnoy.com, where there are descriptions
of his books and links to some of his recent articles and
media appearances (including his interviews with Jon Stewart on The Daily Show and Terry Gross on NPR’s Fresh Air).
Professor Frank Partnoy is the George E. Barrett Professor
of Law and Finance and the founding director of the Center
for Corporate and Securities Law at the University of San
Diego. He is one of the world’s leading experts on the
complexities of modern finance and financial market regulation. He worked as a derivatives structurer at Morgan
Stanley and CS First Boston during the mid-1990s and
wrote F.I.A.S.C.O.: Blood in the Water on Wall Street, a
best-selling book about his experiences there.
Since 1997, he has been a law professor at the University of San Diego, and an expert writing and speaking
about markets to Congress, regulators, academics, and investors. He has written numerous opinion pieces for The
New York Times and the Financial Times, and more than
two dozen scholarly articles published in academic journals
including The University of Pennsylvania Law Review,
1
Before Viewing the Film
Tell your students that although
the basic function of financial
markets is straightforward – to match
people who have money with people
who need money – the way finance
and Wall Street actually operate can
get very complicated.
Learning
about the financial crisis will be a
bit like learning a foreign language, so you should
talk about a few terms that are common in the markets,
and in Inside Job.
Some of these terms are defined on the lesson plan website at http://www.sonyclassics.com/insidejob/site/#/thejargon. You should give
the students a copy of
this list of terms, so they
can take notes about
their meaning and how
they are used while
watching the movie. At
first, the words, and
especially the acronyms,
might look like alphabet
2
soup. But assure your
students that soon they
will be saying “CDO”
and “CDS” as effortlessly as they say “ABC.”
You might start by telling students you are going to
explain some of the most important terms in the movie by
telling a brief story about how subprime mortgages were
transformed into complex bets that nearly brought down
the financial system. Although the film does a superb job
of explaining this transformation, it might be easier for
students to understand the details if they have a bit of background. The easiest place to begin is with the transaction
at the core of the crisis, something simple that most students have heard of: a home mortgage loan.
Ask your students if they know what a home mortgage
loan is. Do they know anyone who has borrowed money
to buy a house? Who lent them that money? Did the borrower have to make a downpayment? Why? If a borrower
has a bad credit history, as about one in four people do,
then their loans are known as subprime. Ask them why a
bank would make a subprime loan? (Answer: the interest
rate the bank receives is higher, to compensate for the
higher chance that a borrower will default.)
Historically, banks that loaned money to home buyers
kept those loans, and bore the risk of default. Thus, banks
2
had an incentive to make sure borrowers repaid them. This
is one reason why banks required a downpayment. It also
is why they charged subprime borrowers higher rates.
Over time, banks began bundling mortgage loans together
into pools known as residential mortgage backed securities
(RMBS). Large institutional investors, such as pension
funds, bought these RMBS. Because the RMBS included a
diverse pool of mortgage loans, they were deemed to be
safe investments. The credit rating agencies gave these
RMBS their highest ratings of “AAA.” Now, investors – not
the lending banks – bore the risk of default.
Next, banks began bundling these RMBS together in a
second kind of pool known as a collateralized debt obligations (CDO). The banks
and rating agencies
used complex computer
models to determine
what portion of a CDO
could be labeled AAA.
The rating agencies then
gave AAA ratings to
large portions of CDOs,
even though the mortgage loans backing the
CDOs were subprime.
Subprime-backed CDOs
were popular, because they had high credit ratings and
paid high returns.
Finally, as the number of CDOs grew, it became harder
to find enough new subprime loans to back new CDOs.
The credit default swap (CDS) was a tool to enable banks
and investors to bet on subprime RMBS and CDOs, without
actually owning anything. Instead, CDSs were side bets on
whether home borrowers would default. CDSs are one of
a type of financial instrument known as derivatives,
because their value is “derived” from the value of
the underlying asset (in this case, home mortgage loans).
Financial institutions used CDSs to place trillions of
dollars of bets.
For some students, this story will
seem difficult to understand – at
first.
One of the remarkably
valuable aspects of Inside Job is how
clearly it explains and illuminates this
daisy chain of risk. Still, a brief
discussion of vocabulary before
the movie will help your students
understand some of the details.
After Viewing the Film
1. Ask your students how angry they are about the events
5. Discuss whether your educational
depicted in the film. What in the film made them angry?
institution should have a policy re-
Which person depicted in the film offended them the most?
garding conflicts of interest. Ask what
the students thought of the professors
from Columbia and Harvard. What if
2. Ask for views about who is most to blame for the events
Sony Pictures Classics paid you (the in-
depicted in the film. Republicans or Democrats? Govern-
structor) money to show the film in
ment or financial services companies? Regulators who
class? Would that be ok? Should you
stuck by their free market beliefs or investors who carelessly
have to disclose all of the money you
took on too much risk? When a student mentions a person
make from outside activities? (Disclosure: Sony Pictures
or institution they blame, ask
Classics paid me to write this
what they should have done
teacher’s guide, though only
differently.
a small fraction of what the
professors in the film made
for their Iceland reports.)
3.
Go back through the
terms you discussed before
viewing the film, to make
6. If your class has covered
sure your students under-
the 1920s-30s, compare the
stand them. Remind them of
events depicted in Inside Job
the discussion you had about
to the roaring ‘20s, the Great
how
Crash of 1929, and the De-
subprime
mortgage
loans were “pooled.”
Do
pression that followed. What
they think events would have
is
unfolded differently if the fi-
What is similar?
different
about
today?
nancial institutions that made subprime loans had kept
them instead of selling them?
7. Choose one or more of the activities and accompanying
handouts in this lesson plan to connect the film to specific
4. Ask students if they think someone should go to jail for topics, including topics you might be covering in your class.
the behavior depicted in the film. Who? Inside Job dis-
For each of the four activities, I have included both (1) a
cusses evidence that senior bankers on
teacher’s lesson plan page with some advice and informa-
Wall Street used prostitutes and illegal
tion about teaching the topic, and (2) a student handout
drugs,
with
page that you can distribute to students. For each activity,
company credit cards. If bringing a
you might want to look at (2) before you look at (1), to give
criminal fraud case related to sub-
the advice some context.
sometimes
paying
prime loans and CDOs would be too
difficult, should prosecutors go after
8. Refer your students to the resources at
this other behavior?
www.sonyclassics.com/insidejob.
3
TEACHER’S NOTES - Activity 1 “It’s Utterly Mad”
Replay the clip of Allan Sloan, senior editor of Fortune
magazine, describing the Goldman Sachs deal in which
home buyers borrowed 99.3% of the price of their houses,
and yet two-thirds of the deal backed by those loans was
rated AAA, as safe as government securities. (The clip is
available here http://www.youtube.com/watch?v=kzhWodFE7E0.)
Sloan concludes, “It’s utterly mad.” Activity 1 explores
how something so “mad” could have happened. The basic
question for students is this: how is it possible for
could be treacherous. After you have discussed David Li,
ask students what they think of this statement he made to
the Wall Street Journal in 2005, as subprime mortgage
lending was skyrocketing: “The most dangerous part is
when people believe everything coming out of it.”
Here is one “hands-on” activity you might
try in class. Ask the students to take a piece of paper
and cut or tear it into 10 equally sized strips. Imagine that
each of these strips represents a subprime mortgage loan.
Now suppose that your statistical model tells you that, on
average, just 1 of those loans will default, and that the
chances of 2 or 3 defaulting are extremely small. Separate
the loans into two groups, one with 7 strips (put that group
at the top) and one with 3 strips (put those at the bottom).
Those two groups represent two “tranches” of investments
in a CDO. If the group of 3 strips bears the first losses,
how safe is the group with 7 strips? (Do a couple of examples: tell them there has been 1 default, so they should remove 1 strip from the bottom group, and ask who loses?)
But what if your model was wrong, and when housing
prices decline all 10 of the loans will default? How safe is
the group with 7 strips now?
You might describe defaults as being like a flood, and
the strips as being like floors of a building. As long as there
are only a few defaults, the lower level floors will be the
only ones flooded and the top floors will be safe. But if
there are numerous defaults, even the top floors will be
flooded.
risky subprime mortgages to be pooled together and then, miraculously, to become
AAA-rated CDO investments?
Don’t worry: students don’t need to understand the
details of the complicated mathematical models in order to
get the basic point. The key insight is that the banks and
rating agencies vastly underestimated the correlation of
subprime mortgage defaults. Even students who hate math
might see an incentive to learn a bit about correlation (they
also might be enticed by the idea of a career in finance, or
just the desire to avoid losing money on their own future
investments).
Ask students what they think of David Li
(see Activity 1 handout), particularly given
the criticism of academic researchers in Inside Job. Many of the mathematicians who built CDO
models for banks and rating agencies understood the risks
of pooling subprime loans, and explained them to others.
In fact, Li warned numerous people that using his model
Here is a link to the article by Allan Sloan: Allan Sloan, Junk Mortgages
Under the Microscope, Fortune Magazine, Oct. 16, 2007,
http://money.cnn.com/2007/10/15/markets/junk_mortgages.fortune/index.htm
4
TEACHER’S NOTES - Activity 2 “It Was Clear He Was Stuck With His Ideology”
Alan Greenspan appears throughout Inside Job. The
film describes how Greenspan, as Federal Reserve chairman, led the deregulation and consolidation of the
financial sector, beginning in the 1980s. One of the
questions the film raises is about Greenspan’s ideology,
and this is the focus of Activity 2. In the film, Robert
Gnaizda, former director of the Greenlining Institute,
discusses a series of meetings in which Greenspan
recognized the complexity of subprime mortgages but
refused to change his mind about regulating them.
Gnaizda concluded, “It was clear he was stuck with
his ideology.”
views about the role of government in the
markets? How have those views changed
over time? What might lead them to change
in the future? Do your students think they
will become “set in their ways” as they grow
older? Why or why not? You might even expand this
Ask your students what they think
of Greenspan’s ideology. What are the
discussion beyond markets and regulation to other more
general beliefs.
benefits of free markets? To what extent
was Greenspan right? How was he wrong?
In addition to discussing the substance of Greenspan’s
views, you can use his ideology as a launching point for
questions about the students’ beliefs. What are their
5
TEACHER’S NOTES - Activity 3 “Sure, I’d Make That Bet”
Nothing motivates students to talk like money. Ask them
what they would be willing to do for $10 million a year.
Would they make secret bets that might lead their firms to
collapse? What if they worked at a bank in 2005 or 2006,
and genuinely believed the chances of a housing price
decline were zero – would they be willing to bet billions of
dollars of the bank’s money on subprime mortgages if it
would lead to an eight-figure bonus? What did they think
of the mansions and yachts in Inside Job?
much of the $32 billion of total compensation the bank
paid was for salaries paid to lower-level employees. But,
as the chart in the handout shows, Citigroup paid $5.3 billion of bonuses in 2008. A total of 738 people at Citigroup
received bonuses of $1 million or more. 44 people received more than $5 million. The “Senior Leadership Committee” got $126 million. And Citigroup paid these
bonuses even though it lost more than $27 billion that year
and had to be supported by the federal government with
$45 billion of TARP funds. What grade would your
More generally, why is Wall Street
compensation so high? Is it because Wall students give the Compensation Committee
Street banks are creating so much value? It of Citigroup’s board of directors, which set
certainly is true that financial markets are important and the pay policies for the bank?
valuable. It is good for companies to be able to
borrow money easily and at low cost, just as it is
good for us to be able to invest our money instead
of stuffing it under our mattresses (although in recent years the mattress would have performed better than bank stocks). But, as the film shows, there
is a downside to Wall Street’s actions as well.
Overall, how much are Wall Street bankers worth?
You might ask who else makes this kind of
money in our society. Should professional athletes,
popular actors, and rock stars be paid made more or less
than Wall Street bankers?
Remind students that these bonuses were extra
payments, in addition to salaries. How might
the prospect of such large bonuses
affect the behavior of employees? In
theory, people have an incentive to
perform well if they make more
money when their contribution to
their bank’s profits is greater. But
what happens to the employees
when the bank loses money or collapses? If
the banks still pay bonuses, and employees
know losses will be borne by investors and
Ask students what they expect to happen
taxpayers, will they take on too much risk?
to bonuses in the future. In 2009, Wall Street firms
Even after the financial crisis, employees got to keep their
bonuses. (Some of the bonus amounts were paid in stock
instead of cash. Employees who held stock through 2008
lost money. But bonuses for 2008 that were paid in stock
appreciated substantially during the following year.)
had revenue of approximately $433 billion, and paid
record compensation of $139 billion. The numbers for
2010 were about the same.
Consider focusing on Citigroup as one example.
Citigroup had more than 300,000 employees in 2008, and
6
TEACHER’S NOTES - Activity 4 “It’s a Wall Street Government”
In Inside Job, Robert Gnaizda calls President Barack
Obama’s administration “a Wall Street government.” This
activity asks students to describe the key players in the
administration and to list the positions they held before and
after the 2008 election. Once your students have filled in
the positions, you can discuss whether Gnaizda’s statement
was fair.
A “cheat sheet” for you is below. You also
might encourage students to do research
on these people, to describe their backgrounds and positions in greater depth.
For example, you might break students
into groups and assign each group one
person to research for a few days.
Alternatively, you might give students
the Activity 4 handout before you show
Inside Job and ask them to fill out the list
as they watch the film.
Timothy
Geithner: Treasury Secretary,
President of New York Federal Reserve
was
Gary Gensler: Head of the Commodity Futures
Trading Commission, was a Goldman Sachs Executive
Mary
Schapiro: Head of the Securities
and Exchange Commission, was the CEO
of FINRA, the Investment Banking
Industry’s Self-Regulation Organization
Larry Summers: Chief Economic
Advisor, was Treasury Secretary
Inside Job also mentions some other
players not listed on the handout,
such as Mark Patterson (William
Dudley’s chief of staff, who was a
lobbyist for Goldman Sachs), Louis
Sachs (a senior advisor to the NY Federal
Reserve, who was with Tricadia, a hedge fund
that allegedly bet against CDOs), and Laura Tyson and
Martin Feldstein (both of whom worked in previous
administrations and were appointed to President Obama’s
Economic Recovery Advisory Board). You might mention
these people as well.
Ben Bernanke: Chair of the Federal
Reserve, was chair of the Federal Reserve
under President George W. Bush
William C. Dudley: President of New York Federal
Reserve, was Chief Economist of Goldman Sachs
Rahm Emanuel: Chief of Staff, was on the Board
of Directors of Freddie Mac
7
HANDOUT - Activity 1 “It’s Utterly Mad”
piece (which would bear the first losses when loans in the
pool defaulted) and a safer piece (which would not lose
For centuries, scientists have searched for
ways to mix different materials to create
gold. In 1995, David Li, a thirty-something
math whiz from rural China, was doing
something similar with loans. Li was trying
to figure out how to mix risky loans together
to get risk-free ones.
any money unless more than one-third of the loans defaulted). Then, the safer piece would be rated AAA.
The CDO that Allan Sloan describes in Inside Job was
based on exactly this assumption. The banks and rating
agencies assumed that, although some of the mortgage
loans in the pool might default at the same time, the
likelihood of more than one-third defaulting together
was basically zero. In other words, they assumed the
correlation was low.
Historically, this correlation had been low, especially as
Surprisingly, his great insight came from death. Li knew
about the “broken heart” problem, in which people die
more quickly after their spouses die. Li saw an analogy to
loan defaults. When one borrower defaulted, others were
more likely to default. Not everyone defaulted at
the same time, but the defaults were correlated
– they moved together to some degree.
Li used the same math that statisticians used
housing prices rose. But what would happen if the
nature of the loans changed (they were made to
borrowers with bad credit who put virtually no
money down), and then housing prices fell? Even
a slight decline in housing prices would pull borrowers underwater, meaning the amount they had
borrowed was more than the value of their
houses. Then, the correlation would be high.
Everyone would default.
The experts who put together subprime CDOs vastly
underestimated the correlation of defaults. Why might they
have done this? Was it an innocent mistake, which
surprised the banks and rating agencies as much as it
surprised most investors? Or was it an intentional ruse,
which generated phantom profits and bonuses, even as it
sowed the seeds of financial destruction?
to model how people reacted when their spouses
died to model how different loans reacted when
one of them “died,” or defaulted. Li told the Wall
Street Journal, “Suddenly I thought that the problem I was trying to solve was exactly like the problem these
guys were trying to solve. Default is like the death of a
company, so we should model this the same way we model
human life.”
According to the math, huge amounts of risk
disappeared when you pooled risky assets together in a
CDO. The key assumption was that although some loans
might default at the same time, not all of them would default simultaneously. For example, if you assumed the
chances of two-thirds of the loans defaulting at the same
time were close to zero, you could split the CDO into a risky
How, exactly, was it “mad”?
8
HANDOUT - Activity 2 “It Was Clear He Was Stuck With His Ideology”
“Regulation of derivative transactions that are privately
negotiated by professionals is unnecessary.”
-Congressional Testimony of Alan Greenspan, July 1998
ideology was challenged in 1994, when the Federal
Reserve’s decision to raise interest rates sent shock waves
through the financial system. The culprit was hidden
derivative side bets on interest rates placed by hundreds of
companies. Three years later, Long Term Capital Management, a hedge fund, collapsed under the weight of $1.25
trillion of bad derivatives bets. Throughout the 1990s,
there were repeated examples of fraud in the private
derivatives market. Yet Greenspan continued to lobby for
deregulation of derivatives.
Many people believe that unregulated markets
are frequently preferable to government involvement. But Greenspan’s ideology was that markets
are always preferable to government. For example, consider Greenspan’s view of fraud. He told
one senior regulator that rules prohibiting fraud
were unnecessary, because participants in the
markets inevitably would discover fraud. He said,
“We will never agree on the issue of fraud, because I don’t
think there is a need for laws against fraud.” What are
Until recently, Alan Greenspan was one
of the most admired government officials in
the world. He was appointed and reappointed to
high-level positions, and served as chairman of the Federal
Reserve for nearly two decades. Before the financial crisis,
the dominant view was that Greenspan was a kind of
mystic savior – like the diminutive Yoda of Star Wars fame
– who could foretell the future and understood the forces
that would lead to prosperity and peace.
Fewer people admire Greenspan today. Much
of the criticism of him is that he formed an
ideology about markets and refused to budge
from his views, even when overwhelming
evidence showed that these views were wrong.
Greenspan’s ideology was an extreme version of
a widely held view about the benefits of markets.
He developed these views in his 20s, when he
joined the free-market Objectivist movement, dominated
by writer Ayn Rand, and he solidified his ideology as a
political advisor to President Richard Nixon’s presidential
campaign in 1967. By the time he became chair of the
Federal Reserve in the 1980s, his views of the markets
were fixed.
your own views and beliefs about the facts
presented in Inside Job? Do you have an
ideology in this area? Make a list of the
basic principles of “right and wrong” that
you believe to be true about markets. What
might lead you to change your views?
Greenspan especially opposed regulation
of derivatives, the side bets that were at the
core of the financial crisis. The basis of this
“Well, remember that what an ideology is, is a conceptual framework with the way people
deal with reality. Everyone has one. You have to -- to exist, you need an ideology. The
question is whether it is accurate or not. And what I’m saying to you is, yes, I found a flaw.”
-Congressional Testimony of Alan Greenspan, October 2008.
9
HANDOUT - Activity 3 “Sure, I’d Make That Bet”
Companies often award annual bonuses to
employees after a good year. But 2008 was hardly a
good year for Wall Street. Profits were down, stock
prices plummeted, and many banks nearly collapsed.
In 2008, the federal government implemented the
“Troubled Asset Relief Program,” known as
TARP, to support the banks. Some argued
TARP was unnecessary; others said major
banks would have been forced into
bankruptcy without it.
Below is a table of the net income (or
losses) for 2008 for several of the major
financial institutions mentioned in the film,
along with the total amount of bonuses those firms
paid that year, the number of employees who
received more than $1 million or $10 million in
bonuses, and the amount of TARP support each firm
received. The dollar amounts are in billions.
“You’re going to make an extra $2 million a year
– or $10 million a year – for putting your financial
institution at risk. Someone else pays the bill. You
don’t pay the bill. Would you make that bet? Most
people who worked on Wall Street said, ‘Sure, I’d
make that bet.’” - Frank Partnoy, Inside Job
Inside Job criticizes several Wall Street
executives who made tens of millions – or
hundreds of millions – of dollars, even as
their firms collapsed. For example, Joseph
Cassano, an officer of AIG’s Financial
Products division, received $315 million from
1987 until he retired in March 2008, six
months before AIG was rescued by the federal
government. Robert Rubin, the former Treasury
Secretary and head of Goldman Sachs, made $126
million during eight years as a board member and
advisor to Citigroup through 2009.
WHY DID THESE BANKS PAY SUCH LARGE BONUSES IN 2008?
WHAT GRADE WOULD YOU GIVE THE DECISION TO AWARD THESE BONUSES?
Bank
Net Income
Bonuses
$1 Million Bonuses
$10 Million Bonuses
TARP
Bank of America
$4.0
$3.3
172
4
$45
Citigroup
-$27.7
$5.3
738
3
$45
Goldman Sachs
$2.3
$4.8
953
6
$10
JPMorgan Chase
$5.6
$8.7
1,626
10
$25
Merrill Lynch
-$27.6
$3.6
696
14
$10
Morgan Stanley
$1.7
$4.5
428
10
$10
“I would give them about a B.”
-Scott Talbott, Financial Services Roundtable, grading the compensation decisions of Wall Street banks in Inside Job
“It is hard for us, without being flippant, to see a scenario within any kind of realm or reason
that would see us losing one dollar in any of those transactions.”
-Joseph Cassano, conference call with AIG investors, July 2007
10
HANDOUT - Activity 4 “It’s a Wall Street Government”
partisan – it is just as critical of the major players
in the administration of President Barack Obama.
Below is a list of seven of those players. For each
person, write down what their previous position was,
as well as their position under President Obama.
Inside Job is critical of the major players in the
administration of President George W. Bush, including
Hank Paulson, the former head of Goldman Sachs,
who was Secretary of the Treasury as the financial
crisis unfolded in 2007 and 2008. But the film is bi-
Ben Bernanke ______________________________________________________________________________________
_______________________________________________________________________________________________________
William C. Dudley __________________________________________________________________________________
_______________________________________________________________________________________________________
Rahm Emanuel _____________________________________________________________________________________
_______________________________________________________________________________________________________
Timothy Geithner___________________________________________________________________________________
_______________________________________________________________________________________________________
Gary Gensler ______________________________________________________________________________________
_______________________________________________________________________________________________________
Mary Schapiro ______________________________________________________________________________________
_______________________________________________________________________________________________________
Larry Summers______________________________________________________________________________________
_______________________________________________________________________________________________________
Why do you think President Obama appointed
these people to these positions?
Who would you have appointed?
Are these appointments like hiring a head sports
coach? Would you rather have an experienced coach
with a losing record or an inexperienced coach with
no record at all?
How would you balance the need for experience
and expertise against the benefits of having a
fresh perspective?
“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.”
-From Inside Job
11
Sony Pictures Classics Presents
INSIDE JOB
A film by Charles Ferguson
2010 Official Selections:
Cannes Film Festival | Toronto International Film Festival
Telluride Film Festival | New York Film Festival
Winner: Best Documentary, New York Film Critics Circle
Winner: Top 5 Documentaries of the Year, National Board of Review
Winner: Outstanding Directional Achievement in Documentary,
Directors Guild Award
Academy Award® Winner, Best Documentary Feature
www.insidejobfilm.com
TRT: 108 min | MPAA: Rated PG-13 | Release Date: (NY) 10/8/2010 | (LA) 10/15/2010
East Coast Publicity
Rubenstein Communications, Inc.
Jayna Zelman
1345 Avenue of the Americas
New York, NY 10105
Phone (212) 843-8000
West Coast Publicity
Block-Korenbrot
Ziggy Kozlowski
Melody Korenbrot
110 S. Fairfax Ave., Ste 310
Los Angeles, CA 90036
Phone (323) 634-7001
Distributor
Sony Pictures Classics
Carmelo Pirrone
Lindsay Macik
550 Madison Avenue
New York, NY 10022
Phone (212) 833-8833
SYNOPSIS
From Academy Award® nominated filmmaker, Charles Ferguson (“No End In Sight”), comes INSIDE
JOB, the first film to expose the shocking truth behind the economic crisis of 2008. The global financial
meltdown, at a cost of over $20 trillion, resulted in millions of people losing their homes and jobs.
Through extensive research and interviews with major financial insiders, politicians and journalists,
INSIDE JOB traces the rise of a rogue industry and unveils the corrosive relationships which have
corrupted politics, regulation and academia.
Narrated by Academy Award® winner Matt Damon, INSIDE JOB was made on location in the United
States, Iceland, England, France, Singapore, and China.
DIRECTOR’S STATEMENT
This film attempts to provide a comprehensive portrayal of an extremely important and timely subject:
the worst financial crisis since the Depression, which continues to haunt us via Europe’s debt problems
and global financial instability. It was a completely avoidable crisis; indeed for 40 years after the reforms
following the Great Depression, the United States did not have a single financial crisis. However, the
progressive deregulation of the financial sector since the 1980s gave rise to an increasingly criminal
industry, whose “innovations” have produced a succession of financial crises. Each crisis has been worse
than the last; and yet, due to the industry’s increasing wealth and power, each crisis has seen few people
go to prison. In the case of this crisis, nobody has gone to prison, despite fraud that caused trillions of
dollars in losses. I hope that the film, in less than two hours, will enable everyone to understand the
fundamental nature and causes of this problem. It is also my hope that, whatever political opinions
individual viewers may have, that after seeing this film we can all agree on the importance of restoring
honesty and stability to our financial system, and of holding accountable those to destroyed it.
2
“THE CAST”
William Ackman – Managing partner, founder, and CEO of
hedge fund Pershing Square Capital Management. He is
known as an activist investor whose 2007 presentation “Who
Is Holding the Bag?” was one of the first warnings about the
impending crisis.
Daniel Alpert – Founding Managing Director of Westwood
Capital with more than 30 years of investment banking
experience, and a frequent commentator on economic policy
and financial regulation.
Jonathan Alpert - Jonathan Alpert is a Manhattan
psychotherapist and advice columnist. He has a full time
practice where he sees, among others, Wall Street executives,
professionals, and women who formerly worked as escorts
and prostitutes.
.
3
Sigridur Benediktsdottir – Yale economics lecturer who was
tapped by the Icelandic government following the collapse of
their banking system to be one of the three members of the
Icelandic Parliament’s Special Investigation Commission
analyzing the causes and consequences of Iceland’s financial
and banking crisis. The Commission recently issued a 2,000
page report. Partly as a result of the Commission’s
investigation, several of Iceland’s senior banking and
investment group executives are now facing prosecution
and/or lawsuits. Jon Asgeir Johannesson, the former
investment group executive featured in the film, recently had
his assets frozen by British courts as the result of a lawsuit
filed by the new management of Glitnir bank.
Willem Buiter – Chief economist for Citigroup. Prior to this
appointment, Buiter was professor of European Political
Economy, London School of Economics and Political
Science; former chief economist of the European Bank for
Reconstruction and Development (EBRD), former external
member of the Monetary Policy Committee (MPC); advisor
to international organizations, governments, central banks
and private financial institutions. He has been published
widely on subjects including open economy
macroeconomics, monetary and exchange rate theory, fiscal
policy, social security, economic development and transition
economies. His Mavercon blog ran on FT.com until
December 2009.
John Campbell – Department chair of Harvard University’s
Department of Economics. Campbell has received various
honors including President, American Finance Association,
2006; Fellow, American Academy of Arts and Sciences,
2000-present; Fellow, Econometric Society, 1990–present,
Honorary Fellow, Corpus Christi College, University of
Oxford, 2008
4
Patrick Daniel – Former director of Ministry of Trade and
Industry for Singapore government’s Administrative Service.
Named editor-in-chief of the English and Malay Newspaper
Division of Singapore Press Holdings in 2007, is chairman of
three SPH subsidiaries and is president of the Singapore Press
Club.
Satyajit Das – Das is a former trader who worked for
CitiGroup and Merrill Lynch as well as a former corporate
Treasurer. He is a global authority on, and author of several
key reference works on, derivatives and risk management. He
is the author of Traders, Guns & Money: Knowns and
Unknowns in the Dazzling World of Derivatives – Revised
Edition (2006 and 2010, FT-Prentice Hall), an insider's
account of the financial products business filled with black
humor and satire, described by the Financial Times, London
as "fascinating reading … explaining not only the highminded theory behind the business and its various products
but the sometimes sordid reality of the industry". In the 2006
book and in subsequent public speeches and articles published
before the crisis, he pointed out the dangers of derivatives and
financial products and the risk they constituted to the
financial system.
.
Kristin Davis – Best known as the “Madam” to countless
investment bankers, Davis was convicted of promoting
prostitution and served 4 months on Riker’s Island.
5
Martin Feldstein – The George F. Baker Professor of
Economics at Harvard University and President Emeritus of
the National Bureau of Economic Research where he served
as President and CEO from 1977-1982 and 1984 – 2008. He
was chairman of the Council of Economic Advisors in the
Reagan Administration. Under George W. Bush’s
administration, he was appointed to the President’s Foreign
Intelligence Advisory Board. He served on the board of both
AIG and AIG Financial Products from 1988 -2009.
Jerome Fons –Served as Managing Director of Credit Policy
at Moody’s Investor Services, where he was also a member
of the Credit Policy Committee. He is currently a consultant
specializing in credit risk applications and litigation support.
Barney Frank – Democratic Representative for the state of
Massachusetts who has served in the 4th congressional district
since 1981. Frank became the Chairman of the House
Financial Services Committee in 2007 which oversees the
entire financial services industry including the securities,
insurance, banking, and housing industries.
Robert Gnaizda – General Counsel, Policy Director, and
former President of the Greenlining Institute in Berkeley,
California. A graduate of Columbia College and Yale Law
School, he has been known as an advocate of social justice for
over 40 years.
6
Michael Greenberger - Since July 2001, Michael Greenberger
has been a professor at the
University of Maryland School of Law where he teaches a
course entitled "Futures, Options and Derivatives." He serves
as the technical advisor to the Commission of Experts of the
President of the United Nations General Assembly on
Reforms of the International Monetary and Financial System.
He was a partner for more than 20 years in the Washington,
D.C. law firm, Shea & Gardner, where he served as lead
litigation counsel before courts of law nationwide, including
the United States Supreme Court. In the Clinton
Administration, Greenberger was Director of Trading &
Markets for the Commodity Futures Trading Commission,
reporting to its Chairwoman, Brooksley Born, when Born
attempted to regulate derivatives.
Eric Halperin – Special Counsel for Fair Lending at the U.S.
Department of Justice and former director of the Washington
Office and Litigation at Center for Responsible Lending.
Samuel Hayes – Hayes holds the Jacob H. Schiff Chair in
Investment Banking Emeritus at the Harvard Business
School. He has taught at Harvard since 1970, prior to which
he was a tenured member of the faculty at Columbia
University Graduate School of Business. His research has
focused on the capital markets and on the corporate interface
with the securities markets. He has consulted for a number of
corporations, financial institutions and government agencies,
including the Justice Department, the Treasury Department,
the FTC and the SEC, where he served on the Tully
Commission in 1994-1995 to examine the compensation
arrangements for stock brokers.
7
Glenn Hubbard – Chief Economic Advisor during the Bush
Administration and current Dean of the Columbia University
Business School. A supply-side economist, Hubbard was
instrumental in the design of the 2003 Bush Tax cuts. The
design was heavily opposed by economists. Hubbard is on
the board of Met Life, was previously on the board of
Capmark, and has consulted to many financial services firms.
He has written many articles advocating deregulation of
financial services.
Simon Johnson – An expert on financial and economic crises,
Johnson is the Ronald A. Kurtz Professor of Entrepreneurship
at the MIT Sloan School of Management and a senior fellow
at the Peterson Institute for International Economics in
Washington DC. From March 2007 – August 2008, he was
Chief Economist at the International Monetary Fund (IMF).
He is co- of the book 13 Bankers: The Wall Street Takeover
and The Next Financial Meltdown and a co-founder of
baselinescenario.com.
Christine Lagarde – The French Minister of Finance,
Economic Affairs, Industry and Employment. She has also
served as France’s Minister of Agriculture and Fishing, as
well as Trade Minister. She was the first woman to ever
become the Economic Minister of a G8 nation.
8
Jeffrey Lane – CEO of Modern Bank, and former Chairman
and CEO of Bear Stearns Asset Management. Former VP of
Lehman Brothers, a member of the Office of the Chairman,
Co-Chairman of Lehman Brothers Asset Management and
Alternatives Division, and Chairman and CEO of Neuberger
Berman, Inc.
Andrew Lo – Harris & Harris Group Professor of Finance at
the MIT Sloan School of Management and the director of
MIT’s Laboratory for Financial Engineering. He is the author
of Hedge Funds: An Analytic Perspective and co-author of
The Econometrics of Financial Markets and A Non-Random
Walk Down Wall Street.
Lee Hsien Loong – The current Prime Minister of Singapore,
a position he has held since 2004. Previously, he was the
Chairman of the Monetary Reserve of Singapore and he also
served as Deputy Prime Minister, Minister of Trade and
Industry, and Minister of Finance.
9
Andri Magnason – An Icelandic filmmaker and the author of
Dreamland: A Self-Help Manual for a Frightened Nation, and
producer of “Dreamland,” a documentary about Iceland’s
environmental and financial problems.
David McCormick – Former Under Secretary for
International Affairs at the U.S. Department of Treasury from
2007-2009. Prior to that, he served as Deputy National
Security Advisor to the President for International Economic
Affairs. Before that, he had been the Under Secretary of
Commerce for Industry and Security, and he is currently on
the faculty of Carnegie Mellon's Heinz College as a
Distinguished Service Professor of Information Technology,
Public Policy and Management at the Washington, DC
campus. He graduated from West Point, served in the first
Gulf War, and then became a software executive before
entering government.
Lawrence McDonald - McDonald is a co-writer of “A
Colossal Failure of Common Sense,” a book on the fall of
Lehman Brothers. From 2004 to 2008, McDonald served as
Vice President of Distressed Debt and Convertible Securities
Trading at Lehman Brothers.
10
Harvey Miller – Called “the most prominent bankruptcy
lawyer in the nation” by the New York Times, Miller is a
partner at Weil, Gotshal and Manges, LLC, where he created
the firm’s Business Finance and Restructuring Department
specializing in distressed business entities.
Frederic Mishkin – American economist and professor at
Columbia Business School, Mishkin was a member of the
Board of Governors at the Federal Reserve from 2006 to
2008. In 2006, he was paid $124,000 by the Icelandic
Chamber of Commerce to write a report praising Iceland’s
financial sector.
Charles Morris – Author of The Trillion Dollar Meltdown:
Easy Money, High Rollers and the Great Credit Crash, which
analyzes the sub-prime mortgage crisis and the economy as a
whole. He was the one of the people who predicted the crisis
before it happened.
11
Frank Partnoy – Professor of Law at the University of San
Diego specializing in corporate law, corporate finance and
financial market regulation. Partnoy previously worked as an
investment banker at Credit Suisse First Boston and Morgan
Stanley. He is the author of The Match King: The Financial
Genius Behind a Century of Wall Street Scandals.
Raghuram Rajan – An economist and Eric J. Gleacher
Distinguished Service Professor of Finance at the Booth
School of Business, University of Chicago. In 2005, while
serving as chief economist of the International Monetary
Fund (IMF), he delivered a controversial paper criticizing the
financial sector entitled “Has Financial Development Made
the World Riskier” which argued that disaster loomed. The
paper, which proved accurate, was aggressively criticized by
Larry Summers, then the president of Harvard, and currently
director of the National Economic Council in the Obama
Administration.
Kenneth Rogoff - Thomas D. Cabot Professor of Public
Policy and Professor of Economics at Harvard University and
the co-author of Foundations of International
Macroeconomics. Rogoff has previously worked as
Economic Counselor and Director of the Research
Department of the International Monetary Fund and served as
an economist on the Board of Governors of the Federal
Reserve System.
12
Nouriel Roubini – Professor of Economics at the Stern
School of Business at New York University and chairman of
Roubini Global Economics, an economic consultancy firm.
Once called “Dr. Doom” by The New York Times, Roubini
first predicted the forthcoming economic crisis back in 2006.
He is the author of Crisis Economics, an analysis of the
global financial crisis.
Andrew Sheng – Chief Advisor to the China Banking
Regulatory Commission. He was the former Deputy Chief
Executive responsible for both the Reserves Management and
External Affairs Departments at the Hong Kong Monetary
Authority. He also worked at senior levels in the World
Bank.
Allan Sloan – Journalist who wrote for Fortune Magazine
about the market, the crisis, and the wrongdoing that led to
the financial crisis.
13
George Soros- is a Hungarian-American currency speculator,
stock investor, businessman, philanthropist, and political
activist. He became known as "the man who broke the bank
of England" after he made a reported $1 billion during the
1992 Black Wednesday UK currency crisis. He is founder
and chair of the Open Society Institute / Soros Foundation.
Eliot Spitzer – Lawyer and former politician. He served as
the 54th Governor of New York (Democrat) from January
2007 until his resignation on March 17, 2008. Prior to being
elected governor, Spitzer served as New York State Attorney
General. While serving as attorney general, Spitzer initiated
a series of major lawsuits against all of the major U.S.
investment banks, alleging fraud in their handling of stock
recommendations, which resulted in settlements totaling $1.4
billion.
Dominique Strauss-Kahn – Current Managing Director of the
International Monetary Fund and former Minister for
Finance, Economy and Industry, France.
Scott Talbott – Top lobbyist for the Financial Services
Roundtable. The Roundtable lobbies on behalf of 100 of the
top banks, credit card companies, insurance and securities
firms operating in the U.S. Its membership includes many
bailed-out banks including Citigroup, JP Morgan Chase,
Bank of America, Wells Fargo and PNC.
14
Gillian Tett – British and award-winning journalist at the
Financial Times, where she is the U.S. managing editor. She
is the author of Fool’s Gold, which traced the development of
the CDO market and its role in the financial crisis.
Paul Volcker – An American economist who served as
Chairman of the Federal Reserve under Presidents Carter and
Reagan from 1979 – 1987. He currently serves as Chairman
of the Economic Recovery Advisory Board under President
Obama.
Martin Wolf – Associate Editor and Chief Economics
Commentator at the Financial Times.
Gylfi Zoega – Faculty Chairman of the Department of
Economics at the University of Iceland.
15
TIMELINE
How Deregulation and the Evolution of Wall Street Culture Led to the Financial Crisis
A chronological re-ordering of the events and arguments of INSIDE JOB
1930s (post-Great Depression)-1979: Traditional American finance
1933-35: Motivated by financial abuses that contributed to the Great Depression, new laws such as the
Glass-Steagall Act and the Securities and Exchange Act place limits on financial risk-taking and require
extensive disclosure of financial information
• Bankers/traders earned salaries in line with other professionals; tightly regulated financial sector
1980s: The Reagan Era: laissez-faire and trickle-down economics
• Substantial deregulation, especially the Garn-St. Germain Act which deregulates Savings and Loan
companies, leading to the later S&L crisis
• Oliver Stone’s Wall Street immortalized financial sector greed and immorality
• S&L scandal: loose regulations, lax enforcement lead to massive fraud; hundreds of S&Ls fail lax
enforcement lead to massive fraud; hundreds of S&Ls fail; $124 billion taxpayer-funded bailout
• Neil Bush approves $100 million of bad loans to business partners through Silverado S&L, which
subsequently fails
• 1989: Keating Five: Four senators and CEO Charles Keating accused of improper influence in
advocating against investigating Lincoln S&L, which collapses and Keating is convicted of fraud
• 1987-1990: Michael Milken, Ivan Boesky and other Wall Street executives convicted of fraud and
insider trading
1990s: Clinton era: increasing revolving door between Washington and Wall Street
• 1999: Clinton administration members with Wall Street backgrounds help pass the Gramm-LeachBliley Act, aka the “Citigroup Relief Act,” repealing Glass-Steagall and allowing mergers that create
Citigroup
• 1994: A new law gives the Federal Reserve power to regulate the mortgage industry, but Alan
Greenspan refuses to enact any regulations, on the grounds that regulation was unnecessary
• 2000: Clinton Administration, particularly Larry Summers, Alan Greenspan and key Congress members
including Senator Phil Gramm help enact the Commodity Futures Modernization Act, which bans all
regulation of financial derivatives and exempts them from anti-gambling laws
• 2000: Dot-com bubble bursts
• 2000-2002: Eliot Spitzer sues 8 investment banks for conflict of interest and recommending dot-com
stocks they thought were junk; reaches settlements totaling $1.4 billion in fines
2000s: George Bush pushes for further deregulation and relaxed enforcement
• 2000-2005: Investigations of Fannie Mae and Freddie Mac reveal massive accounting fraud
• 2002: Arthur Andersen, auditor, convicted of obstruction of justice for shredding Enron documents
• 2003: Worldcom revealed to have inflated assets by $11 billion
16
2000s: (con’t)
• 2000s: new crops of highly complex financial innovations flourish: securitization of mortgages, credit
default swaps, synthetic CDOs
• 2000-2007: Fed by the investment banking industry, a massive housing and mortgage credit bubble
sweeps the United States; mortgage lending quadruples, housing prices double
• 2004: After intense lobbying by investment banks, the SEC lifts the leverage limits on the investment
banking industry, allowing them to borrow more
• 2005: IMF chief economist Raghuram Rajan warns of dangerous incentives and risks in the financial
system; Larry Summers dismisses him as a “Luddite”
• 2005-2008: Goldman Sachs, Morgan Stanley, Deutsche Bank and other investment banks begin using
credit default swaps to bet against the same mortgage securities that they are selling as extremely safe
• 2006: Hank Paulson, CEO of Goldman Sachs, becomes Treasury Secretary
• 2007: The housing bubble bursts, as the financial sector runs out of people willing to borrow and
purchase more housing; home ownership reaches an all-time high, while savings rates are at historic
lows
2008: Great Recession begins
• Collapse of Bear Stearns (March) and then Lehman Brothers (September)
• AIG rescued with $85 billion one day after Lehman declares bankruptcy
• Housing prices drop by 32 percent over three-year period
• Record foreclosures
• Unemployment rises from 5% to 10% in one year
• Tens of billions in bailout money go to AIG and Goldman Sachs
• $700 billion emergency bailout for the financial industry
2010s: The Obama era: Business as usual?
• Timothy Geithner becomes Treasury Secretary
• Larry Summers becomes director of the National Economic Council
• President Obama re-appoints Ben Bernanke
• Obama appoints many Wall Street executives to senior regulatory and economic policy positions
17
CHARLES FERGUSON (Director)
Charles Ferguson, the founder of Representational Pictures and the director of Inside Job, is a filmmaker,
writer, and political scientist. A native of San Francisco, California, Ferguson obtained a B.A. in
mathematics from the University of California, Berkeley in 1978 and a Ph.D. in political science from
M.I.T. in 1989. Following his Ph.D., Ferguson was a postdoctoral researcher at M.I.T. for three years,
focusing on interactions between high technology, globalization, and government policy, and frequently
consulting to U.S. government agencies including the White House staff, the Defense Department, and
the U.S. Trade Representative. Then from 1992 to 1994 Ferguson was an independent consultant to high
technology companies including Apple, Xerox, Motorola, Intel, and Texas Instruments. In 1994
Ferguson founded Vermeer Technologies, a software company which developed FrontPage, the first enduser Web site development tool, which he sold to Microsoft in 1996. Subsequently he spent several years
as a Senior Fellow at the Brookings Institution and a visiting scholar at M.I.T. and U.C., Berkeley.
In mid-2005, Ferguson formed Representational Pictures and began production of his first film, No End
In Sight: The American Occupation of Iraq, which premiered at the Sundance Festival in 2007. No End
In Sight won the Special Jury Prize at Sundance, the Best Documentary prizes of the New York and Los
Angeles Film Critics circles, and was nominated for an Academy Award for Best Documentary.
Ferguson has authored several books including High Stakes, No Prisoners: A Winner’s Tale of Greed and
Glory in the Internet Wars, and Computer Wars: The Post-IBM World (co-authored with Charles Morris).
AUDREY MARRS (Producer)
Audrey Marrs is the producer of Inside Job, a documentary about the global financial crisis and No End
In Sight, a documentary about U.S. policy in Iraq, for which she was nominated for an Academy Award
along with director Charles Ferguson. Marrs obtained her master's degree in curatorial practice from
California College of the Arts in San Francisco. After completing her graduate degree, she worked as a
freelance curator prior to becoming a film producer. Marrs is the C.O.O. of Representational Pictures and
divides her time between Berkeley, California and New York City.
18
FILM GLOSSARY
Asset Backed Security (ABS)
An asset-backed security is a financial security backed by a loan, lease or receivables against assets other
than real estate and mortgage-backed securities. For investors, asset-backed securities are an alternative to
investing in corporate debt. An ABS is essentially the same thing as a mortgage-backed security, except
that the securities backing it are assets such as loans, leases, credit card debt, a company's receivables,
royalties and so on, and not mortgage-based securities.
Bank Holding Company
Bank holding company is broadly defined as any company that controls one or more banks. Becoming a
bank holding company makes it easier for the firm to raise capital than as a traditional bank. The holding
company can assume debt of shareholders on a tax free basis, borrow money, acquire other banks and
non-bank entities more easily, and issue stock with greater regulatory ease. It also has a greater legal
authority to conduct share repurchases of its own stock. The downside includes responding to additional
regulatory authorities, such as the Federal Reserve and the Securities and Exchange Commission.
NOTE: Goldman, Sachs and Morgan Stanley became Bank Holding Companies during the 2008 crisis in
order to benefit from the federal government’s Troubled Assets Relief Program (TARP).
Capital Structure
This refers to the way a company finances its assets and operations through a combination of equity
(stock), debt (loans), or hybrid securities. A company's capital structure is then the composition or
'structure' of its risks and liabilities. The company’s ratio of debt to total financing is referred to as its
leverage.
Collateralized Debt Obligation (CDO)
CDOs are a type of structured asset-backed security whose value and payments are derived from a
portfolio of fixed-income underlying assets. CDOs are split into different risk classes, or tranches,
whereby "senior" tranches are considered the safest securities. Interest and principal payments are made
in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower
prices to compensate for additional default risk.
NOTE: Each CDO is made up of hundreds of individual residential mortgages. CDOs that contained
subprime mortgages or mortgages underwritten because of predatory lending were at greatest risk of
default. They are blamed for precipitating the global crisis and have been called “weapons of mass
destruction.”
Commercial mortgage-backed security (CMBS)
CMBS are a type of asset-backed security that is secured by commercial and multifamily properties
(such as apartment buildings, retail or office properties, hotels, schools, industrial properties and other
commercial sites). The properties of these loans vary, with longer-term loans (5 years or longer) often
being at fixed interest rates and having restrictions on prepayment, while shorter-term loans (1–3 years)
are usually at variable rates and freely pre-payable.
19
NOTE: Commercial loans are often predicted as the next security class to default. Fitch, one of the three
largest ratings agencies, estimates that defaults on the loans behind U.S. CMBs will continue to rise
through 2010 and the overall rate of default for deals it has rated to exceed 11 percent by year-end.
Credit Default Swap (CDS)
A CDS is an insurance contract in which the buyer of the CDS makes a series of payments to the
protection seller and, in exchange, receives a payoff if a security (typically a bond or loan or a collection
of loans such as a CDO) goes into default.
NOTE: CDOs are widely thought to have exacerbated the financial crisis, by allowing investors who did
not own a security to purchase insurance in case of its default. AIG almost collapsed because of these
bets, as it was left on the hook for tens of billions of dollars in collateral payouts to some of the biggest
U.S. and European financial institutions. AIG paid Goldman Sachs $13 billion in taxpayer money as a
result of the CDSs it sold to Goldman Sachs.
Credit Rating Agency (CRA)
A CRA is a company which assigns credit ratings for issuers of certain types of debt securities (such as
bonds, ABS and CDOs) as well as the debt instruments themselves. In most cases, the issuers of the debt
securities are companies, special purpose entities, state and local governments, non-profit organizations,
or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market.
A credit rating for an issuer includes the CRA’s opinion of the issuer's ability to pay back the loan. (In
contrast to CRAs, a company that issues credit scores for individual credit-worthiness is generally called a
credit bureau or consumer credit reporting agency.)
NOTE: The three largest and most influential credit ratings agencies are Moody’s, Standard & Poor’s
and Fitch. The 2008 crisis highlighted the inadequacies of the ratings agencies when troubled companies
retained their investment grade ratings until days before their collapse.
Deposit Taking Institution
Banks, building societies, credit unions and other organizations which accept customers' funds, either at
call or for fixed periods, and pay interest on the amounts. Deposit-taking institutions are identified with
'savings' and differ in purpose from investment institutions which actively manage their customers' funds
in the pursuit of profits, or from corporations which 'borrow' money from the public by issuing debentures
or bonds.
Deregulation
Deregulation is the removal or simplification of government rules and regulations that constrain
the operation of market forces. Deregulation does not mean elimination of laws against fraud, but
eliminating or reducing government control of how business is done and securities are regulated.
Tools of deregulation include the reduction of laws and regulations pertaining to taxation of
securities transactions and removing restrictions around mergers and acquisitions within
industries. Deregulation supports the efficient market theory in economics that states that
financial markets are "informationally efficient" with prices accurately reflecting the value of a
company of stock, the less taxes and regulation the more accurately price reflects value.
NOTE: This began in the Reagan Administration and it became known as Reaganomics which refers to
20
the economic policies promoted by the U.S. President Ronald Reagan during the 1980s. The four pillars
of Reagan's economic policy were to:
1.
2.
3.
4.
Reduce government spending,
Reduce income and capital gains marginal tax rates,
Reduce government regulation of the economy,
Control the money supply to reduce inflation.
Derivatives
A derivative is an agreement between two parties that is contingent on a future outcome. In finance, a
derivative is a financial contract with a value linked to the expected future price movements of the asset it
is linked to - such as a share, currency, commodity or even the weather. Derivatives allow risk about the
price of the underlying asset to be transferred from one party to another. Options, futures and swaps,
including credit default swaps, are types of derivatives.
NOTE: A common misconception is to refer to derivatives as assets. This is erroneous, since a derivative
is incapable of having value of its own as its value is derived from another asset.
Fixed Income
Fixed income refers to any type of investment that makes a predetermined or “fixed” return at recurring
intervals, such as bonds or annuities. Fixed income securities are a loan to the entity that issues the bond.
Investors are repaid their interest through interest payments at set intervals and the face value of the loan
is repaid at the maturity date. The term fixed income can be misleading because some bonds have interest
rates that are linked to an index, such as inflation or the US Federal Funds Rate. Examples of bonds
include simple securities such as sovereign bonds issued by national governments, municipal bonds
issued by local governments and corporate bonds issued by companies. More complex fixed income
securities include preferred bonds, hybrid securities, asset backed securities and collateralized debt
obligations.
NOTE: Fixed-income securities can be contrasted with variable return securities such as stocks that have
no guarantee of a return for the investor.
Gramm-Leach-Bliley Act (GLBA):
This has also come to be known as the Financial Services Modernization Act of 1999. This Act allowed
commercial banks, investment banks, securities firms, and insurance companies to consolidate.
Historically, these industries have been known collectively as the "financial services industry".
NOTE: This act repealled the Glass-Steagall Act which prohibited any one institution from acting as any
combination of an investment bank, a commercial bank, and an insurance company. This Act was also
known as the Citigroup Act as it allowed the merger of Citicorp, a commercial bank holding company,
and Travelers Group, an insurance company, in 1998.
Hedge Fund
An aggressively managed portfolio of investments that uses advanced investment strategies such as
leveraged, long, short and derivative positions in both domestic and international markets with the goal of
generating high returns (either in an absolute sense or over a specified market benchmark). Legally, hedge
funds are most often set up as private investment partnerships that are open to a limited number of
investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as
21
they often require investors keep their money in the fund for at least one year. Because hedge fund
managers make speculative investments, these funds can carry more risk than the overall market.
NOTE: Hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors
who are thought to have more resources in making investment decisions. In the U.S., laws require that the
majority of investors in the fund be accredited. That is, they must earn a minimum amount of
money annually and have a net worth of more than $1 million, along with a significant amount of
investment knowledge. Hedge funds are considered to be mutual funds for the super rich. They are
similar to mutual funds in that investments are pooled and professionally managed, but differ in that the
fund has far more flexibility in its investment strategies.
Hedging
To hedge is to make an investment to reduce the risk of adverse price movements in an asset. Normally, a
hedge consists of taking an offsetting position in a related security, such as a futures contract.
NOTE: While it is important to note that hedging is actually the practice of attempting to reduce risk, the
goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first
hedge funds tried to hedge against the downside risk of a bear market by shorting the stock market
(mutual funds generally can't enter into short positions as one of their primary goals).
Investment Bank
A financial institution that assists corporations and governments in raising capital by underwriting and
acting as the agent in the issuance of securities. An investment bank also assists companies involved in
mergers and acquisitions, divestitures, etc. For traditional investment banking services such as
underwriting, securities issuance and mergers and acquisitions, investment banks receive a fee, usually a
percentage of the transaction. They also provide ancillary services such as market making and the trading
of derivatives, fixed income instruments, foreign exchange, commodity, and equity securities. The largest
investment banks include Goldman Sachs, JP Morgan Chase, Bank of America, Morgan Stanley and
Deutsche Bank.
NOTE: Unlike commercial banks and retail banks, investment banks do not take deposits. By 1998, the
largest investment banks went public and changed from a private partnership ownership structure to an
exchange traded company with thousands of shareholders. This dislocation between the firm managers
and the owners of the company was one of the reasons investment banks took larger risks and exotic
securities were issued without appropriate risk assessments.
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Investment Grade Ratings
A bond is considered investment grade or IG if its credit rating is BBB- or higher by Standard & Poor's,
Baa3 or higher by Moody's or BBB- or higher by Fitch. The credit rating agency rate the bond based
upon its likelihood of meeting its payment obligations.
NOTE: Mutual funds, pension funds and sovereign funds are often limited by their prospectus to
investment grade securities. When Lehman declared bankruptcy, their bonds were downgraded below
investment grade causing a mass sell-off by mutual funds legally restricted to investment grade securities
in their portfolio.
Moody's
Long
Short
Term
Term
Aaa
Aa1
Aa2
P-1
Aa3
A1
A2
A3
P-2
Baa1
Baa2
P-3
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa
Not Prime
Ca
C
/
/
/
S&P
Long
Term
AAA
AA+
AA
AA−
A+
A
A−
BBB+
BBB
BBB−
BB+
BB
BB−
B+
B
B−
CCC+
Fitch
Short
Term
A-1+
A-1
A-2
A-3
B
Long
Term
AAA
AA+
AA
AA−
A+
A
A−
BBB+
BBB
BBB−
BB+
BB
BB−
B+
B
B−
Short
Term
Prime
A1+
A1
Upper Medium
grade
A2
A3
Lower Medium
grade
Non Investment
grade
speculative
B
Highly Speculative
C
CCC
C
Substantial risks
Extremely
speculative
In default with little
prospect for
recovery
/
DDD
DD
D
/
In default
CCC
CCC−
D
High grade
23
Leverage
Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the
potential return of an investment. Leverage is also used to describe the amount of debt used to finance a
company's assets. Leverage helps both the investor and the firm to invest or operate. A company with
significantly more debt than equity is considered to be highly leveraged. Leverage can be created through
options, futures, margin and other financial instruments. Leverage is most commonly used in real estate
transactions through the use of mortgages to purchase a home.
NOTE: Leverage comes with greater risk. If an investor uses leverage to make an investment and the
investment moves against the investor, his or her loss is much greater than it would've been if the
investment had not been leveraged - leverage magnifies both gains and losses. In the business world, a
company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest
expense and credit risk of default destroys shareholder value.
Mortgage Backed Securities (MBS)
A MBS is a type of asset-backed security that is secured by a mortgage or collection of mortgages.
These securities must also be grouped in one of the top two ratings as determined by an accredited credit
rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the
mortgage must have originated from a regulated and authorized financial institution.
NOTES: Investors in a mortgage-backed security are essentially lending money to a home buyer or
business. An MBS is a way for a bank to lend mortgages to its customers without having to worry about
whether the customers have the assets to cover the loan. Instead, the bank acts as a middleman between
the home buyer and the investment markets.
Residential mortgage-backed securities (RMBS)
A RMBS is a type of security whose cash flows come from residential debt such as mortgages, homeequity loans and subprime mortgages. This is a type of mortgage-backed securities that focuses
on residential instead of commercial debt. Holders of an RMBS receive interest and principal payments
that come from the holders of the residential debt. The RMBS comprises a large amount of pooled
residential mortgages.
Security
An instrument representing ownership (stocks), a debt agreement (bonds) or the rights to ownership
(derivatives). A security is a negotiable instrument representing financial value. The company or other
entity issuing the security is called the issuer. A country's regulatory structure determines what qualifies
as a security. For example, private investment pools may have some features of securities, but they may
not be registered or regulated as such if they meet various restrictions.
Securitization
Securitization is the process through which an issuer creates a financial instrument by combining other
financial assets and then marketing different tiers of the repackaged instruments to investors. The process
can encompass any type of financial asset and promotes liquidity in the marketplace. Securitization
distributes risk by aggregating debt instruments in a pool, then issues new securities backed by the pool.
24
Short Selling
Short selling, also known as shorting or going short, is the practice of selling assets, usually securities,
that have been borrowed from a third party (usually a broker) with the intention of buying identical assets
back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the
assets between the sale and the repurchase, as the seller will pay less to buy the assets than the seller
received on selling them. Conversely, the short seller will incur a loss if the price of the assets rises.
NOTE: Selling short is the opposite of going long. That is, short sellers make money if the stock goes
down in price. In the summer of 2008, Morgan Stanley’s CEO John Mack was vocal in his attack of short
sellers in contributing to the fall in share prices on financial services stocks. The low market
capitalization of investment banks the week of September 15, 2008, diminished their valuation in the eyes
of potential investors and was a contributor to their conversion into bank holding companies.
Subprime
Subprime is a classification of borrowers with a tarnished or limited credit history. Lenders will use a
credit scoring system to determine which loans a borrower may qualify for. Subprime loans are usually
classified as those where the borrower has a credit score below 640. Subprime loans carry more credit
risk, and as such, will carry higher interest rates as well. Approximately 25% of mortgage originations are
classified as subprime. Subprime lending encompasses a variety of credit types, including mortgages, auto
loans, and credit cards.
Synthetic CDO
In technical terms, the synthetic CDO is a form of collateralized debt obligation (CDO) that invests in
credit default swaps (CDSs) or other non-cash assets to gain exposure to a portfolio of fixed income
assets. Synthetic CDOs are a modern advance in structured finance that can offer extremely high yields to
investors. Synthetic CDOs are typically divided into credit tranches based on the level of credit risk
assumed. Initial investments into the CDO are made by the lower tranches, while the senior tranches may
not have to make an initial investment. All tranches will receive periodic payments based on the cash
flows from the credit default swaps. However, synthetic CDOs enable potentially unlimited bets on the
performance of other securities, without any new real loans being created. Each synthetic CDO, unlike a
real CDO, requires that one party take the “short side,” i.e., must be betting that the referenced investment
will fail. In the bubble preceding the financial crisis, several investment banks including Goldman Sachs
and Morgan Stanley are known to have created synthetic CDOs with the explicit intention, in advance, of
betting against their customers. It is also known that in at least some cases, the investment banks did not
disclose this fact to the customers to whom they sold these synthetic CDOs, many of which received
AAA ratings. These instruments are the focus of the SEC’s fraud case against Goldman Sachs, several
private lawsuits, and also, it is believed, several ongoing criminal investigations.
Tranche
A tranche is a piece, portion or slice of a deal or structured financing. This portion is one of several
related securities that are offered at the same time but have different risks, rewards and/or maturities.
"Tranche" is the French word for "slice". Tranche also describes a specific class of bonds within an
offering wherein each tranche offers varying degrees of risk to the investor. For example, a partitioned
25
MBS portfolio might have mortgages (tranches) that have one-year, two- year, five-year and 20-year
maturities. It can also refer to segments that are offered domestically and internationally.
CREDITS
PRODUCED, WRITTEN, AND DIRECTED BY Charles Ferguson
PRODUCED BY
Audrey Marrs
EXECUTIVE PRODUCERS
Jeffrey Lurie
Christina Weiss Lurie
ASSOCIATE PRODUCERS
Kalyanee Mam
Anna Moot-Levin
EDITORS
Chad Beck
Adam Bolt
CO-WRITTEN BY
Chad Beck
Adam Bolt
GRAPHICS BY
Bigstar
RESEARCH
Kalyanee Mam
DIRECTORS OF PHOTOGRAPHY
Svetlana Cvetko
Kalyanee Mam
MUSIC SUPERVISOR
Susan Jacobs
MUSIC BY
Alex Heffes
NARRATED BY
Matt Damon
26
ADDITIONAL RESEARCH & ARCHIVAL ACQUISITION
Carola Mamberto
Christopher Murphy
Rosemary Rotondi
SECOND UNIT DIRECTOR OF PHOTOGRAPHY
Mariusz Cichon
AERIAL CINEMATOGRAPHY
Gray Mitchell
HELICOPTER PILOT
Al Cerullo
LOCATION SOUND MIXERS
David Hocs
Michael Jones
David Mendez
DIGITAL IMAGING TECHNICIANS
Mariusz Cichon
Artur Dzieweczynski
Tomasz Gryz
Matthew Schroeder
GAFFERS
Arthur Aravena
John Frisbie
Jason Hubert
Stephen Kaye
Geir Magnússon
Robert McKenna
GRIPS
Carter Bissell
Bill Dixon
John Dunkin
Sam Krueger
Adam Macbeth
Aaron Randall
Seth Uhlin
27
ADDITIONAL LOCATION SOUND
Richard Fleming
John Levy
Brenda Ray
Nelson Stoll
POST-PRODUCTION SUPERVISOR
Alan Oxman
FIRST ASSISTANT EDITORS
Eugene Yi
John Woo
ASSISTANT EDITOR
Sheila Shirazi
POST-PRODUCTION INTERN
Isaac Urwin
DIGITAL INTERMEDIATE COLORIST
Will Cox
DIGITAL INTERMEDIATE ONLINE EDITOR
Ben Laffin
Joseph Lee
DIGITAL INTERMEDIATE PRODUCER
Caitlin Tartaro
POST-PRODUCTION FACILITY
Final Frame
SOUND SUPERVISOR & RE-RECORDING MIXER
Tom Efinger
SOUND DESIGN
Abigail Savage
Rich Bologna
ASSISTANT SOUND EDITOR
Jeff Seelye
DIG IT IN-HOUSE PRODUCER
Alicia Loving
28
AUDIO POST FACILITY
Dig It Audio, Inc.
RECORDING FACILITY FOR NARRATION
Sync Sound, Inc.
RECORDING ENGINEER
John Bowen
MACHINE ROOM OPERATOR
Matt Stanford
SET DESIGN
Mariko Marrs
STILL PHOTOGRAPHY
Mariusz Cichon
LOCATION SCOUT
Jeffrey King
PRODUCTION ASSISTANT
Chris Knight
ADDITIONAL PRODUCTION ASSISTANTS
Kristin Bye
Andrew Houchens
Brittany Kaplan
Stacy Mandel-Sonner
Alec Modzeleski
Marvin Ruffin
29
Links for the “Inside Job” presentation www.treasurydirect.gov – National Debt and Deficit information www.treasury.gov/iniatives/financial‐stability/results/Pages/TarpTracker.aspx ‐ TARP progress www.usdebtclock.org – Real‐time and Near‐time information on government spending, federal and state, as well as international (lots of information to make you mad) www.wolframalpha.com – computational knowledge base (really smart search engine that is the guts of the new iPhone 4S Siri technology) www.sonyclassics.com/insidejob ‐ all the background information on the movie, cast, and general financial information