Last night, “Inside Job” won “Best Documentary” at the Oscars.
But does it fairly depict what caused the crisis? Is everything it says true? No one can believe it does – “is inside job accurate” is the 5th most-searched topic on Google for “Inside Job” right now (see the image at right).
The movie makes a lot of claims, like suggesting that Wall Street caused 30 million job losses worldwide, that Wall Street creates nothing of value, and that it profits more off creating investments that will lose money than investments that will make money. Are any of them true?
To find out, we fact-checked the crap out of “Inside Job,” and the following are the arguments we were able to come up with for or against “Inside Job’s.”
On the other hand: The origins of the crisis can be traced back even further, to the implosion of two Bear Stearns hedge funds run by Ralph Cioffi and Matthew Tannin, the Bear Stearns High Grade Structured Credit Strategies Fund and the Bear Stearns High Grade Structured Credit Strategies Enhanced Fund.
Cioffi and Tannin invested the funds' $1.4 billion in CDOs backed by highly rated (meaning that they were meant to be safe, investment-grade) mortgages, aka the top tranch CDOs. In the last two weeks of June 2007, rising defaults by the least credit-worthy borrowers spread from the bottom tranches of CDOs to the top, triggering massive losses in the funds.
Many on Wall Street were surprised that the top tranches were affected, and they became aware of a crisis brewing in the mortgage market. Sophisticated investors became wary of investing in even AAA-rated mortgages, and firms that held them on their books began trying to offload them quickly before they went bad.
On the other hand: Financial firms don't want to fail, ever. Getting bailed out is obviously better than failing however, which is perhaps why the movie suggests that financial firms want to get bailed out. But that's a simplified explanation.
What a firm wants is to prosper and profit at all times. The more money a firm has, the more they can leverage and thus, profit. Becoming 'Too Big To Fail' also refers to a firm that is interconnected with the rest of the financial industry. A firm aims to find money, and plainly, other financial firms have it. That is why they want to become interconnected. It's not because they *want* to get bailed out in case they ever fail. They just want to profit as much as possible.
In the movie, deregulation is synonymous with the Gramm-Leach Bliley Act and the consolidation of the financial industry.
George Soros, for example, likens the consolidation to an oil rig that doesn't hold oil in a number of separate compartments that will contain an oil spill to one compartment and help prevent draining of the whole supply.
On the other hand: Deregulation is an odd word to use to describe an act that allowed insurance firms, investment banks, and commercial banks to operate as one unit.
Deregulation implies that they're not regulated as stringently as they were before. Financial firms need more regulation, but there was nothing in the GLB act that said to decrease regulation of these units. The only thing the GLB did about regulation was to establish the Federal Reserve as the regulator of all financial holding companies.
According to the film, in 2009, Wall Street firms had revenue of approximately $433 billion, and paid record compensation of $139 billion. It might have counted more financial firms than the five we used: Bank of America, Goldman Sachs, Morgan Stanley, JPMorgan, and Citigroup.
According to Bloomberg, the five Wall Street firms profited $127.8 billion in 2009, which is more than the then-record $119.4 billion revenues in 2006 posted by the seven Wall Street firms (Including Bear Stearns Cos., purchased by JPMorgan in 2008, and Merrill Lynch, which Bank of America bought last year, but not Lehman Brothers, because it's since gone bankrupt).
Claim: The merger of Citi and traveller's was illegal, but Greenspan said nothing and the repeal of Glass Steagall largely effected the crisis.
Accurate. Inside Job says that the merger of Citi and traveller's in 1998 violated the Glass Steagall Act, which prohibited any one institution from acting as any combination of a bank holding company and any other financial institution, like an investment bank or an insurance company (like traveller's).
But on the other hand: The Citi travellers merger didn't combine an investment bank and a commercial bank. It combined an insurance company (traveller's) with a commercial bank (Citi). Citi had owned insurance companies before, when it merged with Farmers Loan and Trust Co in 1929.
Inside Job provides anecdotal evidence of Wall Street analysts promoting companies while writing emails that called those same companies, 'junk.'
On the other hand: Analysts were accused of lying to clients based on edited emails that don't tell the whole story. When taken in context, the full emails might have provided evidence that actually indicated that the analysts were analysing the shape of the market and new research. And that might have been all they were doing in those emails: reacting to new research that said, this thing is 'junk.' After which, they moved on to finding new evidence by doing their own research and proving it wrong. And THEN they promoted the companies.
Inside Job argues that derivatives have no value of its own because its value is derived from another asset.
On the other hand: A Reuters special report on derivatives has a good argument: Big companies regularly use derivatives as a form of insurance to guard against jumps in the price of everything from cocoa to interest rates. An airline will buy jet fuel derivatives so that if prices spike, the contract helps to make up the difference in price, enabling the carrier to budget and plan ahead. If jet fuel prices fall, the loss made on the derivatives contract is canceled out by savings from cheaper refueling bills. It's the same with barley for beer or aluminium for cans, or any other commodity you can think of.
Also, the OTC market is a $600 trillion industry, so if you're going to take issue with something that should be regulated, you might want to take it up with OTC.
The Commodity Futures Modernization Act bans all regulation of financial derivatives and exempts them from anti-gambling laws, according to the movie.
On the other hand: S. 3217, which divides the regulation of OTC derivatives between the SEC and the CFTC, assigning the SEC regulatory authority over some -- but not all -- securities-related derivatives and the CFTC authority for others, such as indexes of those securities, passed the Senate this summer.
But there's a counterpoint: These new regulations may not even pass, and a senior policy advisor at the SEC says 'these regulations are begging to be gamed.' Click here to read more >
On the other hand: Fuld says his total compensation from 2000 through 2007 was less than $310 million, not $485 million. He explained 85% of his pay was in Lehman stock that had become worthless. 'I never sold my shares,' Fuld said at one point. At another, he said he had not sold the 'vast majority' of them.
Claim: AIG's Joe Cassano made $315 million after the company took at least $85 billion from taxpayers.
On the other hand: That's an overstatement. It's true that in past years, many employees of financial firms had contracts with their firm that entitled them to profit-sharing agreements. The contracts stipulated that they would earn a share of the profits they earned for the firm that year (encouraging short term profits).
However since the crisis, many firms have increased the proportion of an employee's bonus that is paid in stock while decreasing the portion that is paid annually. Many employees must now wait around 3-5 years before cashing in their stock.
Research from Harvard, a school which the movie claims is perpetuating the culture of greed by employing teachers and Presidents whom are paid handsomely by the financial services sector via consultancies, suggests that rewarding employees with profits that pay out over the long-term are most beneficial.
Counterpoint: 'Clawbacks,' when an executive has had to give back their bonus, have almost never happened. Click here to see 9 execs who had to give back their bonuses >
Financiers knew they were selling junk, and knew they would ultimately come out on top and leave the rest of the world in a recession.
On the other hand: There is no proof that it was an accident (and no proof that it wasn't).
There is a conspiracy theory we've heard that says that in the early 1990s, people on Wall Street discovered that triggering a bubble and then going 'short' before it blew up could outearn any long-term investment, even investing in Coca-Cola or McDonald's 50 years ago.
It remains a conspiracy theory for now, and the movie (thankfully) doesn't touch on it.
When in the opening credits of 'Inside Job,' the documentary that last year came out blasting the financial industry, it says,
The Global economic crisis of 2008 cost tens of millions of people their savings, their jobs, and their homes, This is how it happened.
One couple in the theatre we were watching in got up and left.
The remaining 50 people in the theatre stayed, laughed, and shook their heads countless times.
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