Inside Job Page #5

01:
27:34.12

REP. BARNEY FRANK: Thirty years ago, if you went to get a loan for a home, the

person lending you the money expected you to pay him or her back. You got a loan

from a lender who wanted you to pay him back. We've since developed securitization,

whereby the people who make the loan are no longer at risk if there is a failure to repay.

01:
27:51.21

NARRATOR:
In the old system, when a homeowner paid their mortgage every month,

the money went to their local lender. And since mortgages took decades to repay,

lenders were careful.

In the new system, lenders sold the mortgages to investment banks. The investment

banks combined thousands of mortgages and other loans — including car loans, student

loans, and credit-card debt — to create complex derivatives, called collateralized debt

obligations, or CDOs. The investment banks then sold the CDOs to investors.

Now, when homeowners paid their mortgages, the money went to investors all over the

world.

01:
28:33.11 The investment banks paid rating agencies to evaluate the CDOs, and

many of them were given a AAA rating, which is the highest possible investment grade.

This made CDOs popular with retirement funds, which could only purchase highly rated

securities.

01:
28:50.05 This system was a ticking time bomb. Lenders didn't care anymore about

whether a borrower could repay, so they started making riskier loans. The investment

banks didn't care, either; the more CDOs they sold, the higher their profits. And the

rating agencies, which were paid by the investment banks, had no liability if their ratings

of CDOs proved wrong.

01:
29:17.11

{GILLIAN TETT

U.S. MANAGING EDITOR

THE FINANCIAL TIMES}

GILLIAN TETT:
You weren't gonna be on the hook; and there weren't regulatory

constraints. Um, so it was a green light to just pump out more and more and more

loans.

Inside Job transcript – Sony Pictures – September 2010

24

NARRATOR:
Between 2000 and 2003, the number of mortgage loans made each year

nearly quadrupled.

NOURIEL ROUBINI:
Everybody in this, uh, securitization food chain, from the very

beginning until the end; they didn't care about the quality of the mortgage; they were

caring about maximizing their volume, and getting a fee out of it.

01:
29:46.05

NARRATOR:
In the early 2000s, there was a huge increase in the riskiest loans, called

subprime. But when thousands of subprime loans were combined to create CDOs,

many of them still received AAA ratings.

01:
30:03.06

CHARLES FERGUSON: Now it would have been possible to create derivative products

that don't have these risks –

GILLIAN TETT:
Um-hm.

CHARLES FERGUSON: – that carry the equivalent of deductibles, where there are

limits on the risks that can be taken on, and so forth. They didn't do that, did they?

01:
30:19.08

GILLIAN TETT:
They didn't do that; and in retrospect, they should have done.

CHARLES FERGUSON: So did these guys know that they were doing something

dangerous?

SAM HAYES:
I think they did.

{THE INVESTMENT BANKS ACTUALLY PREFERRED SUBPRIME

LOANS, BECAUSE THEY CARRIED HIGHER INTEREST RATES.

THIS LED TO A MASSIVE INCREASE IN PREDATORY LENDING.}

{BORROWERS WERE NEEDLESSLY PLACED IN EXPENSIVE

SUBPRIME LOANS, AND MANY LOANS WERE GIVEN

TO PEOPLE WHO COULD NOT REPAY THEM.}

01:
30:44.12

ROBERT GNAIZDA:
All the incentives that the financial institutions offered to their

mortgage brokers were based on selling the most profitable products, which were

predatory loans.

Inside Job transcript – Sony Pictures – September 2010

25

01:
30:55.00

{ERIC HALPERIN

DIRECTOR, CENTER FOR RESPONSIBLE LENDING

WASHINGTON, DC}

ERIC HALPERIN:
The banker makes more money if they put you in a subprime loan,

that's where they're gonna, that's where they're gonna put ya.

01:
31:00.00

{PART II:
THE BUBBLE

(2001-2007)}

NARRATOR:
Suddenly, hundreds of billions of dollars a year were flowing through the

securitization chain. Since anyone could get a mortgage, home purchases and housing

prices skyrocketed. The result was the biggest financial bubble in history.

MAN:
Real estate is real. They can see their asset; they can live in their asset; they can

rent out their asset.

01:
31:27.05

CHARLES MORRIS:
You had a huge boom in housing, that made no sense at all. The

financing appetites of the financial sector drove what everybody else did.

NOURIEL ROUBINI:
Last time we had a housing bubble was in the late '80s. In that

case, the increase in home price had been relatively minor. That housing bubble led to

a relatively severe recession.

From 1996 until 2006, real home prices effectively doubled.

01:
32:07.12

VOICE OVER:
At 500 dollars a ticket, they've come to hear how to buy their very own

piece of the American dream.

ROBERT GNAIZDA:
Goldman Sachs; Bear Stearns; Lehman Brothers; Merrill Lynch,

were all in on this. The uh, p-, sub-, subprime lending alone increased from 30 billion a

year in funding to over 600 billion a year, in 10 years. They knew what was happening.

01:
32:33.15

NARRATOR:
Countrywide Financial, the largest subprime lender, issued 97 billion

dollars’ worth of loans. It made over 11 billion dollars in profits as a result.

Inside Job transcript – Sony Pictures – September 2010

26

01:
32:46.22 On Wall Street, annual cash bonuses spiked. Traders and CEOs became

enormously wealthy during the bubble.

Lehman Brothers was a top underwriter of subprime lending; and their CEO, Richard

Fuld, took home 485 million dollars.

01:
33:05.04

NOURIEL ROUBINI:
On Wall Street, this housing and credit bubble was leading, uh, to

hundreds of billions of dollars of profits. You know, by 2006, about 40 percent of all

profits of S&P 500 firms was coming from financial institutions.

01:
33:20.09

{MARTIN WOLF

CHIEF ECONOMICS COMMENTATOR

THE FINANCIAL TIMES}

MARTIN WOLF:
It wasn't real profits, it wasn't real income; it was just money that was

being created by the system, and booked as income two, three years down the road.

There's a default; it's all wiped out.

I think this was, in fact, in retrospect, a great big national — and not just national, global

— Ponzi scheme.

01:
33:38.27

NARRATOR:
Through the Home Ownership and Equity Protection Act, the Federal

Reserve Board had broad authority to regulate the mortgage industry. But Fed

Chairman Alan Greenspan refused to use it.

REP. BARNEY FRANK: Alan Greenspan said, no, that's regulation; ideologically, I don't

believe in it.

NARRATOR:
For 20 years, Robert Gnaizda was the head of Greenlining, a powerful

consumer advocacy group. He met with Greenspan on a regular basis.

01:
34:04.17

ROBERT GNAIZDA:
We gave him an example of Countrywide, and 150 different

complex adjustable-rate mortgages. And he said: If you had a doctorate in math, you

wouldn't be able to understand them enough to know which was good for you and which

wasn't.

Rate this script:3.8 / 9 votes