Reaction Paper on Inside Job

A Reaction Paper on Inside Job

Part I: Summary/Synopsis

Inside job is a film about the global financial crisis of 2008 which resulted in millions of people losses their jobs and homes in the worst recession since the great depression. It features research and extensive interviews with financers, politicians, journalists and academists. The documentary is split into five parts. It begins by examining how Iceland was highly deregulated in 2000 and the privatization of its banks. When Lehman Brothers went bankrupt and AIG collapsed, Iceland and the rest of the world went into a global recession. The film ends by contending that despite recent financial regulation, the underlying system has not changed, rather the remaining banks are only bigger, while all the incentives remains the same, and not a single top executive has been prosecuted for their roles in the global financial meltdown.

Part II: Analysis/Evaluation

The film emphasizes on the evolution in the financial industry in the decade leading up to the crisis. Beginning in 1990's, deregulation have advances in technology letting explotion of complex financial products called derivatives. The economist and bankers claimed that they made the market safer but instead they made them unstabled. Regulators, politicians and business people did not take seriously the threat of financial innovation on the stability of financial system. Using derivatives, bankers could gambled on virtually anything they could bet on rise and fall of oil prices, the bankrupcy of the company and even the weather.

In 2001, under the administration of George W. Bush, the US financial sector was blastly more profitable, concentrated and powerful than ever before. The administration composed of 5 investment banks, 2 financial conglomerate, 3 securities insurance company and 3 rating agencies. Linking them all together, they developed a new system which connected trillion of dollars of mortgage and other loans with investors all over the world called Securitization Food Chain. In the new system, lenders sold the mortgages to investment banks. 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 Obligation (CDO). The investment banks then sold the CDOs to investors. Now, when home owners paid their mortgages, the money went to investors all over the world. The investment banks paid rating agencies to evaluate the CDOs and many of them would give an AAA ratings which is the highest possible investment rate. This made the CDO popular with retirement fund which could only purchased highly rated securities. This system was a ticking time bond. Lender 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 rating from CDO proved wrong. Since deregulation begun, the worlds biggest financial firms have been caught laundering money, defrauding customers and cooking their books again and again. By 2002, 10 investment banks settled the case in a total of $1.4 billion and promised to change their ways.

Hundreds of billions of dollars a year were flown into the securitization chain since anyone can get a mortgage, home purchases and housing prices. The result was the biggest financial bubble in history. During the bubble, the investment banks were borrowing heavily to buy more loans and create more CDOs. The Securities and Exchange Commissoin (SEC) somehow let investment banks gambled a lot more. The worlds largest insurance company, the AIG was selling huge quantity of derivatives called Credit Default Swap. By late 2006, Goldman Sachs taken things and step further. It didn't just sell toxic CDOs, it started actively betting against them at the same time telling customers that there were high quality investments. In 2007, Goldman went even further, they started selling CDOs specifically design so that the more money their customer loss, the more money Goldman Sachs made.

The market for CDOs collapsed and investment banks were left with hundres of billio dollars in loans, CDOs and real estate they could not unload. The great recession begun in November 2007 and in March 2008, Bear Strearns ran out of cash. In September, the federal government took over Fannie Mae and Fresdie Mae, which had been on the brink of collapse. Two days later, Lehman Brothers collapsed. The global financial system became paralyzed. Top executives of the insolvent companies walked away with their personal future intact. Academic economists had for decades advocated for deregulation and helped shape U.S policy. They still opposed reform after the 2008 crisis. Tens of thousands of U.S factory workers were laid off. The new Obama administration's financial reforms have been weak and there was no significant proposed regulation of the practices of rating agencies and lobbyists.