Inside Job (2010)

The film Inside Job (2010), directed by Charles Ferguson, delves into the financial crisis of the late-2000s. It received high praise from critics for its well-paced storytelling, thorough research, and clear explanation of complex concepts. The documentary was even showcased at the prestigious Cannes Film Festival in May 2010 and went on to win Best Documentary Feature at the 83rd Academy Awards on February 27, 2011. Through examining the effects of Iceland’s government deregulation in 2000, including privatizing its banks, the film sheds light on how the bankruptcy of Lehman Brothers and collapse of AIG led to a widespread global recession.

Part I: How We Got Here. From 1941 to 1981, the American financial industry had regulations in place. However, these regulations were later lifted and a major crisis arose in the late 1980s. It cost taxpayers a staggering $124 billion due to a savings and loan crisis. By the late 1990s, the industry had consolidated into just a few large companies. Unfortunately, in March 2000, the notorious Internet Stock Bubble burst, leading to investor losses of up to $5 trillion. During this same time period, derivatives gained popularity within the industry but also contributed to its instability.

Part II: The Bubble (2001–2007). During the housing boom, investment banks borrowed large amounts of money relative to their own assets. This allowed speculators to purchase credit default swaps (CDSs), similar to insurance policies, in order to gamble against CDOs they did not possess. Many CDOs were backed by subprime mortgages. In fact, in just the first half of 2006, Goldman-Sachs sold over $3 billion worth of CDOs. Interestingly enough, Goldman also placed bets against these low-value CDOs and reassured investors that they were high-quality. Additionally, the three major ratings agencies played a role in the issue by giving AAA ratings to an immense number of instruments – from only a handful in 2000 to more than 4,000 in 2006.

Part III: The Crisis. Due to the collapse of the CDO market, investment banks were left with a significant amount of unpaid loans and unsold real estate. This led to the Great Recession, starting in November 2007. Bear Stearns faced a shortage of cash in March 2008, followed by the federal government taking over Fannie Mae and Freddie Mac, which were on the brink of failure. Subsequently, Lehman Brothers collapsed just two days later. Despite having AA or AAA ratings shortly before being bailed out, these entities failed. Merrill Lynch was also close to collapse but was acquired by Bank of America. As a solution, Henry Paulson and Timothy Geithner made the decision for Lehman to file for bankruptcy, resulting in a decline in the commercial paper market.

Part IV: Accountability. Despite facing insolvency, high-ranking executives of certain companies were able to keep their personal fortunes untouched and evade legal consequences. These executives had personally selected the members of their board of directors, who then distributed billions in bonuses following the government’s bailout. As a result, major banks gained even more influence and redoubled their efforts against regulatory reform. Interestingly, many academic economists who had long promoted deregulation and played a significant role in shaping U.S. policies continued to oppose reform even after the 2008 crisis. Notably, firms such as Analysis Group, Charles River Associates, Compass Lexecon, and the Law and Economics Consulting Group (LECG) were implicated in these events.

Part V: Where We Are Now. Following the layoff of tens of thousands of U.S. factory workers, the Obama administration’s financial reforms proved to be inadequate. Despite concerns about the practices of ratings agencies, lobbyists, and executive compensation, no significant regulations were proposed. Timothy Geithner assumed the role of Treasury Secretary, while Martin Feldstein, Laura Tyson, and Lawrence Summers served as top economic advisors to Obama. Additionally, Ben Bernanke was reappointed as Chair of the Federal Reserve. In contrast to European nations’ strict regulations on bank compensation, the U.S. chose not to implement similar measures.