Inside Job Page #6

Inside Job transcript – Sony Pictures – September 2010

27

So we thought he was gonna take action. But, as the conversation continued, it was

clear he was stuck with his ideology.

We met again with Greenspan in '05. Often we met with him twice a year, and never

less than once a year. And he wouldn't change his mind.

{ALAN GREENSPAN DECLINED

TO BE INTERVIEWED FOR THIS FILM.}

01:
34:45.02

{CHRISTOPHER COX

SEC CHAIRMAN:

JUNE 2, 2005}

CHRISTOPHER COX:
In this amazing world of instant global communications, the free

and efficient movement of capital is helping to create the greatest prosperity in human

history.

{THE SECURITIES AND EXCHANGE COMMISSION

CONDUCTED NO MAJOR INVESTIGATIONS OF THE

INVESTMENT BANKS DURING THE BUBBLE.}

01:
35:01.04

{OCTOBER 7, 2008}

REP. PETER WELCH: A hundred and forty six people were cut from the enforcement

division of the e-, SEC; is that what you also testified to?

{LYNN E. TURNER

FORMER CHIEF ACCOUNTANT

SECURITIES AND EXCHANGE COMMISSION}

LYNN E. TURNER:
Yes. Yeah, I, I think there has been a, a, a systematic gutting, or

whatever you want to call it, of the agency and its capability, through cutting back of

staff.

01:
35:20.03

REP. PETER WELCH: The SEC Office of, uh, Risk Management was reduced to a staff,

did you say, of one?

LYNN E. TURNER:
Yeah. When that gentleman would go home at night, he could turn

the lights out.

Inside Job transcript – Sony Pictures – September 2010

28

01:
35:33.17

NARRATOR:
During the bubble, the investment banks were borrowing heavily, to buy

more loans, and create more CDOs.

The ratio between borrowed money and the banks' own money was called leverage.

The more the banks borrowed, the higher their leverage.

In 2004, Henry Paulson, the CEO of Goldman Sachs, helped lobby the Securities and

Exchange Commission to relax limits on leverage, allowing the banks to sharply

increase their borrowing.

01:
36:05.14

{KENNETH ROGOFF

PROFESSOR OF ECONOMICS, HARVARD}

KENNETH ROGOFF:
The SEC somehow decided to let investment banks gamble a lot

more. That was nuts. I don't know why they did that, but they did that.

{ON APRIL 28, 2004, THE SEC MET TO CONSIDER

LIFTING LEVERAGE LIMITS ON THE INVESTMENT BANKS}

01:
36:21.20

COMMISSIONER HARVEY J. GOLDSCHMID: We've said these are the big guys and

clearly that's true. But that means if anything goes wrong, it's going to be an awfully big

mess.

[LAUGHTER]

DIRECTOR ANNETTE L. NAZARETH: At these levels, you obviously are dealing with

the most highly sophisticated financial institutions.

01:
36:37.13

COMMISSIONER ROEL C. CAMPOS: These are the firms that do most of the

derivative activity in the United States. We talked to some of them as to what their

comfort level was.

DIRECTOR ANNETTE L. NAZARETH: The firms actually thought that the number was,

uh, appropriate.

CHAIRMAN WILLIAM DONALDSON: Do the commissioners vote to adopt the rule

amendments and new rules as recommended by the staff?

Inside Job transcript – Sony Pictures – September 2010

29

ALL:
Yes.

WILLIAM DONALDSON: We do indeed. Unanimous.

And we are adjourned.

01:
37:03.00

{DANIEL ALPERT

MANAGING DIRECTOR

WESTWOOD CAPITAL}

DANIEL ALPERT:
The degree of leverage in the financial system, uh, became

absolutely frightening; investment banks leveraging up to the level of, you know, 33 to 1.

Uh, which means that a tiny, 3-percent decrease in the value of their asset base would

leave them insolvent.

01:
37:22.10

NARRATOR:
There was another ticking time bomb in the financial system: AIG, the

world's largest insurance company, was selling huge quantities of derivatives, called

credit default swaps.

For investors who owned CDOs, credit default swaps worked like an insurance policy.

An investor who purchased a credit default swap paid AIG a quarterly premium. If the

CDO went bad, AIG promised to pay the investor for their losses.

01:
37:52.23 But unlike regular insurance, speculators could also buy credit default

swaps from AIG in order to bet against CDOs they didn't own.

01:
38:04.13

SATYAJIT DAS:
In insurance, you can only insure something you own. Let's say you

and I own property; I own a house. I can only insure that house once. The derivatives

universe essentially enables anybody to actually insure that house. So you could insure

that; somebody else could do that. So 50 people might insure my house.

So what happens is, if my house burns down, now the number of losses in the system

becomes proportionately larger.

01:
38:31.01

NARRATOR:
Since credit default swaps were unregulated, AIG didn't have to put aside

any money to cover potential losses. Instead, AIG paid its employees huge cash

Inside Job transcript – Sony Pictures – September 2010

30

bonuses as soon as contracts were signed. But if the CDOs later went bad, AIG would

be on the hook.

NOURIEL ROUBINI:
People were essentially being rewarded for taking massive risks.

Uh, in good times, they generate short-term revenues and profits, and therefore

bonuses. But that's gonna lead to the firm to be bankrupt over time. That's a totally

distorted system of compensation.

01:
39:07.13

NARRATOR:
AIG's Financial Products Division in London issued 500 billion dollars

worth of credit default swaps during the bubble, many of them for CDOs backed by

subprime mortgages.

The 400 employees at AIGFP made 3.5 billion dollars between 2000 and 2007. Joseph

Cassano, the head of AIGFP, personally made 315 million dollars.

01:
39:34.00

{JOSEPH CASSANO ON AN AIG CONFERENCE CALL

WITH INVESTORS, AUGUST 2007.}

JOSEPH CASSANO:
It's hard for us, with, and with, without being flippant, to even see

a scenario, within any kind of realm of reason, that would see us losing one dollar in any

of those transactions.

01:
39:48.05

NARRATOR:
In 2007, AIG's auditors raised warnings. One of them, Joseph St. Denis,

resigned in protest after Cassano repeatedly blocked him from investigating AIGFP's

accounting.

REP. HENRY WAXMAN: Let me tell you one person that didn't get a bonus while

everybody else was getting bonuses:

{HENRY WAXMAN

CHAIRMAN, HOUSE OVERSIGHT COMMITTEE}

– that was St. Denis, Mr. St. Denis, who tried to alert the two of you to the fact that you

were running into big problems. He quit in frustration, and he didn't get a bonus.

01:
40:16.29

Inside Job transcript – Sony Pictures – September 2010

31

NARRATOR:
In 2005, Raghuram Rajan, then the chief economist of the International

Monetary Fund, delivered a paper at the annual Jackson Hole Symposium, the most

elite banking conference in the world.

CHARLES FERGUSON: Who was in the audience?

RAGHURAM RAJAN:

CHIEF ECONOMIST (2003-2007)

INTERNATIONAL MONETARY FUND (IMF)}

RAGHURAM RAJAN:
It was, uh, I guess, the central bankers of the world. Um, ranging

from Mr. Greenspan himself; Ben Bernanke; Larry Summers was there; Tim Geithner

was there.

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