"The global economic crisis of 2008 costs tens of millions of people their savings, their jobs, and their homes." "This is how it happened." "Iceland" "Population: 320 000" "Gross domestic product: $13 billion" "Bank losses: $100 billion" "Iceland is a stable democracy with the high standard of living and until recently extremely low unemployment and government debt" "We had the complete infrastructure of a modern society:" "clean energy, food production, fisheries with a quote system to manage them" "Good healthcare and good education, clean air, the ?" "crime," "It's good place for families to life" "We had almost �end of history� status" "But in 2000 Iceland government began a broad policy of deregulation that would have disastrous consequences first for the environment and then for the economy" "They started by allowing multinational corporations like Alcova to build giant aluminum smelting plants and exploit Iceland�s natural geothermal and hydroelectric energy sources" "Many of the most beautiful areas in the highlands with the most spectacular colors are theothermal" "So nothing comes without consequences." "At the same time the government privatized Iceland�s three largest banks" "The result was one of the purest experiments in financial deregulation ever conducted" "Finance took over and ?" "wrecked the place" "In a 5 year period this three tiny banks which have never operated outside of Island borrowed $120 billion ten time the size of Iceland�s economy" "The bankers showered money on themselves each other and their friends" "There was a massive bubble stock prices went up ?" ", house prices more than doubled" "Iceland bubble gave rise to people like Jan Oskar Johannessen" "He borrowed billions from the banks to buy ?" "retail businesses in London" "He also bought a pinstriped private jet, a $40 million yacht and a Manhattan penthouse" "Newspapers always had headlines: this millionaire bought this company in UK or in Finland or in France or wherever" "Instead of saying this millionaire took a billion dollars loan to buy this company and it took it from your local bank" "The banks ?" "money market funds and the banks otherwise deposit holders to withdraw money and put them in a money market funds" "Deposit came needed everything it could" "American accounted firms like KPMG audit the Iceland�s banks and investment firms and found nothing wrong" "And American credit rating agencies sad Iceland was wonderful" "In February 2007 the rating agencies decided to upgrade the banks to a highest possible rate � AAA" "It went so far as the government here traveling with the bankers as a PR show" "When Iceland�s banks collapsed at the end of 2008 unemployment tripled in 6 months" "There is nobody unaffected in Iceland" " So a lot of people here lost their savings" " Yes that�s the case" "The government regulators who should�ve been protecting the citizens of Iceland had done nothing" "You have two lawyers from regulator company who're coming to a bank to talk about some issues" "When they approach the bank they would see nineteen SUVs outside the bank so you went to the bank and you have nineteen lawyers sitting in front of you that vary well prepared, ready to kill any argument you make" "and then if you do very well they offer you job" "One third of Iceland�s financial regulators went to work for the banks" "But this is universal problem, in New York you have the same problem, right?" "What do you think of Wall Street incomes this days?" "Excessive" "I've been told that it's extremly difficult for IMF to critisize United States" "I wouldn't say that" "We deeply regret outriches of US law" "There are amazing how much cocain these wallstreeters can use and get up and go to work the next day" "I didn't know what kind default swaps are" "I'm little bit old fashioned" "Has Larry Summers ever expressed remorse?" "I don't hear confessiones" "The government just write in and checks that's plan A, that's plan B and that's plan C" "Would you support legal controls on executive pay?" "I would not" "Are you comfortable with law of compensation in financial service industry?" "If they waranted, then yes, I am" " Do you think they waranted?" " I think they waranted." "And so you help this people blow the world up?" "You could say that" "They were having massive private games - a public loss" "When you start thinking you can create something all of nothing it's very difficult to resist" "I'm concerned that a lot of people want go back to the old way the way they were operating prior to the crisis" "I was getting a lot of anonymus e-mails from bankers saying "You can't quote me, but I really concerned"" "Why do you think there isn't a more systematic investigation being undertaking?" "Because then they would found culprits" "Do you think that Columbia Business School has any significant conflict of interest problem?" "Don't see that we do" "The regulators didn't do their job they had the power to do every case that I made when I was state attorney general they just didn't want it" "In september 2008 the bankruptcy of US investment bank Lehman Brothers and the collapse of the world largest insurance company AIG triggered the global financial crisis" "The result was the global recession which costs the world tens of trillions of dollars rendered 30 millions people unemployed and doubled the national debt of the US" "If you looked at the costs of it: the structure of equity welth, of housing wealth then the structure of income, of jobs," "15 million people globally could end up behind poverty line again" "This is just a hugely, hugely expensive crisis" "This crisis was no an accident" "It was caused by an out of control industry" "Since the 1980s the rise of US financial sector has led to a serious of increasingly severe financial crises" "Each crisis has caused more damage while the industry has made more and more money" "Part I. How we got here" "After the Great Depression United States have 40 years of economic growth without a single financial crisis the financial industry was tightly regulated most regular banks were local businesses and they were prohibited from speculating with depositors savings" "Investment banks which handle stock and bond tradings were small private partnerships" "In the traditional investment banking partnership model the partners put the money up and obviously the partners watch that money very carefully" "They wanted to live well but they didn't want to bend the wrench on anything" "Paul Volcker served on the treasury department and was chairman of the Federal Reserve from 1979 - 1987" "When I left Chase to go in Treasury in 1969" "I think my income was in the neighbour of $45000 per year" "Morgan Stanley in 1972 had approximately 110 total personnel" "One office and capital of $12 000 000" "Now Morgan Stanley has 50 000 workers and has capital of several billion and has offices all over the world" "In the 1980s the financial industry exploded" "The investment banks went public given them huge amount of stock holding money" "People on Wall Street started getting rich" "My friend was a bond trader at Merilyn Lynch in 1970s" "He had a job as a train conducter at night" "Because he had 3 kids and couldn't support with what bond trader made" "By 1986 he was making millions of dollars and I thought it was because he was smart" "The highest owe of business before the nation is to restore our economic prosperity" "In 1981 president Ronald Reagan choses Treasury Secretary the CEO of investment bank Merrill Lynch" " Donald Regan" "Wall Street and the President do see eye to eye" "I've talked to many leaders of Wall Street they also will be behind the President on 100%" "The Reagan administration supported by economists and financial lobbyist started the 30 years period of financial deregulations" "In 1982 the Reagan administration deregulated savings and loan companies allowing them to make risky investments for depositors money" "By the end of the decade hundreds of saving and loan compnies had failed" "This crises cost tax payers $124 billion and cost many people their savings" "It may be the biggest bank crisis in our history" "Thousands of saving and loan executives went to jail for looting their companies" "One of the most extreme cases was Charles Keating" "In 1985 when federal regulators began investigate him" "Keating haired an economist named Alan Greenspan" "In this latter to regulators Greenspan praised Keating "sound business plan, managerial expertise"" "and sad he saw no risk in allowing Keating to invest his customers money" "Keating reportedly paid Greenspan $40 000" "Charles Keating went to prison shortly afterwords" "As for Alan Greenspan" "President Reagan appointed him chairman of America's central bank" " The Federal Reserve" "Greenspan was reappointed by presidents Clinton and George W. Bush" "During the Clinton administration deregulation continued under Greenspan" "And Treasury Secretary Robert Rubin, the former CEO of the investment bank Goldman Sachs and Larry Summers" " Harvard economic professor" "The financial sector of Wall Street being powerfull, having lobbyist, having lots of money step by step captured the political system" "?" "democratic and republican side" "By the late 1990s the financial sector had consolidated into few gigantic firms" "Each of them so large that their failure can threaten wnole system" "And the Clinton administration helped them grow even larger" "In 1999 Citicorp and Travelers merged to form Citigroup" " the largest financial services company in the world" "The merger violated the Glass-Steagal act - a law past after Great Depression which prevented banks with costumer deposits from engaging in risky investment banking activities" "It was illegal to acquire Travelers" "Greenspan sad nothing" "The Federal Reserve gave him exemption for a year and then they got the law past" "In 1999 at the urging of Summers and Rubin" "Congress past the "Glemm-Leach-Bliley Act"" "Known to some as the Citigroup Relive Act" "It overturned "Glass-Steagal" and clear the way for future mergers" "Robert Rubin would later make $126 million as Vice Chairman of Citigroup." "He declined to be interviewed for this film." "Why do you have big banks - because banks like monopoly power because banks like lobbying power, because banks know that when you too big they will be built" "Markets are inherently ustable or at least potentially unstable and appropriate metaphor is the old tankers they very big and therefore you have to put in compertments to prevent the sloshing around of oil from capsizing the boat the design of the boat has to take it into account" "and after the Depression the regulation actually introduced this very water tied compartments and deregulation has led to the end of compartmentalisation" "The next crisis came at the end of the 90s" "The investment banks fuel the mass of the bubble in internet stocks" "Which were followed by a crash in 2001 that caused $5 trillion dollars in investment loses" "The securities and exchange commission" " the federal agency that were being created during the depression to regulate investment banking had done nothing" "In the absence of meaning for federal action and there has been none and given the clear failure of self regulation It is become necessary to others to step in and adopt the protections needed" "Eliot Spitzers investigations revealed that the investments banks hed promoted internet companies they knew would fail" "Stock analysts were being paid based on how much business they brought in and what they say publicly - long term BUY- was quite different from what they say privately" "Infospace given the highest possible rating dismissed by the analysts as the "piece of junk"" "Excite - also highly rated - called "such a piece of crap"" "The defence that was proffered by many of the investment banks was not wrong, it was..." "Everybodies doing it and everybodies knew what's going on and therefore nobody should rely on this analysts anyway." "In december 2002 ten investment banks settle the case for a total of $1.4 billion and promised to change their ways" "Scott Talbott is the chief lobbyist for the Financial Services Roundtable one of the most powerfull groups in Washington which represents almost all of the world largest financial companies" "Are you comfortable with the fact that several of your member companies have engaged in large scale criminal activity?" "You'll have to be specific" " Ok..." " And first of all criminal activity shouldn't be accepted." "Since deregulation began the world's biggest financial firms have been caught laundering money, frauding customers and cooking thier books again, and again, and again" "JP Morgan Bribed Goverment Officials" "RIGGS BANK Laundered money for Chilean Dictator Augusto Pinochet" "CREDIT SUISSE Laundered money for Iran in violation of US Sanctions" "CREDIT SUISSE helped found money for Iran's nuclear programm and for the aero-space industry organisation of Iran which built ballistic missiles" "Any information that would identify it as Iranian would be removed" "The bank was fined $536 million" "Citi bank helped laund $1.5 million of drug money out of Mexico" "Did you comment that she "should loose any documents connected with the account"" "I sad that in a kidding maner it was at the early stages of this I did not mean it seriously" "Freddie Mac Accounted Fraud Fined $125 million" " Fannie Mae $400 million" "Between 1998 and 2003 Fannie Mae overstated its earnings by more than $10 billion" "This accounted standarts are highly complex" "And required determinations over which experts often disagree" "CEO Franklin Raines who used to be President Clinton's budget director recieved over $22 million and bonuses" "When UBS was caught helping wealthy americans evade taxes they refused to cooperate with US goverment" "Will you be willing to supply their names" " If there is a treaty framework..." "No treaty framework, you agreed you participated in a fraud hm..." "But while the company is faced an unprecedented fines the investment firms do not have to admit any wrong doing" "When you this large and you are dealing with this many products and this many customers mistakes happen" "The financial services industry seems to have of level of criminality that is, you know, somewhat distinctive." "When were the last time when CISCO or Intel or Google or Apple or IBM you know..." "I'm totaly agree with you about hightech versus financial services but hightech is fundamentally creative busness where value generation and income derive when you actually create something new and different" "Begining at 1990s deregulations and advances in technology led to an explosion of complex financial products called derivatives" "Economists and bankers claimed they make market safer" "But instead they made it unstable" "Since the end of Cold War a lot of former physicist and mathematicians decided to apply their skills not on Cold War technology but on financial markets." "And together with investment bankers and" " Create a different weapons?" " Absolutely" "As Warren Buffett sad: "Weapons of mass destruction"" "Regulators, politicians and business people did not take seriously the threat of financial innovation on the stability of the financial system." "Using derivatives bankers could gamble on virtually anything" "They could bet on rise or fall of oil prises the bankruptcy of the company, even the whether" "By the late 1990s derivatives were a $15 trillion unregulated market" "In 1998 someone tried to regulate them" "Brooksley Born graduated first in her class in Stanford Law School and was the first woman to edit the Major Law Review" "After running derivatives practice at Arnold  Porter Born was appointed by president Clinton to chair the Commodity Futures Trading Commission which oversaw the derivatives' market" "Brooksley Born ask me if I would come work with her" "We decided that this was a serious, potentially destabilizing market" "In may of 1998 the CFTC issued a proposal to regulate derivatives" "Clinton Treasury department had an immediate response" "I happened to go into Brooksley's office and she was just putting down a reciever of her telephone" "And the blood had drained from her face" "And she looked at me and sad: "That was Larry Summers." "He had 13 bankers in his office"" "He conveyed in a very bullying fashion" "Sort of directing her to stop." "The banks were now heavily reliant for earnings on this toss of activities and that led to titanic battle to prevent this set of instruments from been regulated" "Shortly after the phone call from Summers" "Greenspan, Rubin and SEC chairman Arthur Levitt issued a joint statement condemning Born and recomended legislation to keep derivatives unregulated" "Regulations of derivatives transactions that are privately negotiated by professionals is unnecessary" "?" "overruled it unfortunately first by the Clinton administration and then by the Congress in 2000 Senator Phil Gramm took a major role and getting a bill passed that pretty much exempted derivatives from regulation" "They are unifying markets they are reducing regulatory burden" "I believe that we need to do it" "After leaving the Senate, Phill Gramm became Vice-Chairman of UBS." "Since 1993, his wife Wendy had served on the board of Enron." "But its our very great hope that it would be possible to move this year on legislation in a suitable way goes to create legal certainty for OTC derivatives" "Larry Summers later made $20 million as a consultant to a hedge fund that relied heavily on derivatives." "I wished to assosiate myself with all of the remarks of secretary Summers" "In december 2000 Congress passed the The Commodity Futures Modernization Act" "Written with a help of financial industry lobbyists it banned the regulation of derivatives" "Once that's was done it was off to the races" "And use of derivatives and financial innovation exploded dramatically after 2000" "So help me God" "So help me God" "By the time G.W. Bush took office in 2001" "The US financial sector was vastly more profitable, concentrated and powerfull then ever before" "Dominating this industry were 5 investment banks" "Two financial conglomerates" "Three securities insurance companies and three rating agencies" "And linking them all together was a securitization food chain, a new system which connected trillion of dollars, mortgages and other loans with investors all over the world" "30 years ago if you wanted get a loan for a home the person lending you a money expecting 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 thereby" "people who made the loan are no loger at risk of failure to repay" "In old system when home owner paid their cheks every months the money went to their local lender" "And since mortgages took decades to repay lenders were carefull" "In a 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 obligation, or 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 were given a AAA rating which is highest possible investment rate" "This made CDOs popular with retirement funds which can only purchase highly rated securities" "This system was a ticking time bomb" "Lenders didn't care anymore about whether a borrower can 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" "You were getting to be on the hook and there weren't regulationly constraints so there were a green light to just pump out more and more loans" "Bentween 2000 and 2003 the number of mortgage loans made each year nearly quadrupled" "Everybody in this securitization food chain from the very beggining until the end didn't care about quality of the mortgage they caring about maximazing their volume and getting a fee out of it" "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" "Now it wouldn't have been possible to create derivative products that don't have this risks that carry the equivalent of deductibles where there are limits on risks that can be taken on and so forth they didn't do that, did they" "They didn't do that and in retrospect they shouldn't have done" "So these guys knew they were doing something dangerous?" " I think they did" "The investment banks actally prefer subprime loans, because they carried higher inerest rates." "This led to a massive increase in predatory lending." "Borrowers were needlessly placed into expensive subprime loans, and many loans were given to people who could not repay them." "All incentives that the financial institutions offered to the mortgage brokers were based on sawing the most profitable products which were predatory loans" "The bankers makes more money if they put you on subprime loan" "That's what they gonna put you" "Part II:" "The bubble (2001-2007)" "Suddenly hundreds of billions of dollars a year were flowing through securitization chain" "Since anyone can get a mortgage home purchases and house's prises skyrocketed" "The result was the biggest financial bubble in history" "Real estate is real, they can see their houses, their can live in their houses, they can rent out their houses" "You had huge boom in housing that had no sense at all financing appetites out of financial sector droved what everyboby else did" "Last time we had a housing bubble was in the late 80s" "In that case the increasing home praises were relatively minor" "That housing bubble led to relatively severe recession" "From 1996 until 2006 real home praises effectively doubled" "At $500 a ticket they come to here how buy their very own piece of American dream" "Goldman Sachs, Bear Stearns, Lehman Brothers, Merrill Lynch were all in on this subprime lending alone increase from $30 billion a year in funding to over six hundred billion a year in ten years they new what was happening" "Countrywide Financial - the largest subprime lender - issued $97 billion worth of loans" "It made over %11 million dollars in profits as a result" "On Wall Street annual cash bonuses spiked traders and CEOs became enormously wealthy during the bubble" "Lehman Brothers was the top uderwriter of subprime lending" "And their CEO Richard Fuld took home $485 million" "On Wall Street this housing and credit bubble was leading to hundreds of billions of dollars of profits" "By 2006 about 40% of all profits of SP 500 firms was coming from financial institutions" "It wasn't real profits, it wasn't real income" "It was just money that was been created by the system and booked as income to 3 years down the road this a default it's all wiped out" "I think it was in fact, in retrospect, a great big national, and not just national global poncy scheme" "Through the home ownership and equality protection act the Federal Reserve Board had brought authority to regulate mortgage industry but Federal Chairman Alan Greenspan refuse to use it" "Alan Greenspan sad no that regulation: "I don't even believe in it"" "For 20 years Robert Gnaizda was the head of Greenlining a powerfull consumer advocacy group" "He met with Greenspan on a regular basis" "We gave him an example of country wide 150 different complex adjustable rate mortgages" "He sad if you'd 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" "So we thought he was gonna take action but as the conversation continues it was clear he was stuck with his ideology" "We met again with Greenspan at '05 often we met with him 2 a year never less than 1 a year and he wouldn't change his mind" "Alan Greenspan declined to be interviewed for this film." "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." "146 people were cut from the enforcement division of SEC is that what you also testified to" "Yes I think that has been systematic ?" "or whatever you wanna call it of the agency and its capability through cutting back a stuff" "The SEC office of risk managment was reduce to stuff, did you say, of 1?" "Year, when that gentelman would go home at night he can turn lights out" "During the bubble the investment banks were borrowing heavily to buy more loans and create more CDOs" "The ratio between borrowed money and bank's own money was called leverage" "The more 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" "The SEC somehow decided to let investment bank gamble a lot more" "The SEC somehow decided to let investment bank gamble a lot more" "That was nuts !" "I don't know why they did that but they did that" "We've send this to the big guys to clear if it was true" "But that means if anything goes wrong, it's gona be a awfully big mess" "At these levels, you obviously are dealing with the most highly sophisticated financial institutions." "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." "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." "The firms actually thought that the number was, uh, appropriate." "Do the commissioners vote to adopt the rule amendments and new rules as recommended by the staff?" "Yes." "We do indeed." "Unanimous." "And we are adjourned." "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." "which means that a tiny, 3-percent decrease in the value of their asset base would leave them insolvent." "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" "But unlike regular insurance speculators could also buy credit default swaps from AIG" "in order to bet against CDOs they didn't own" "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" "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 bonuses as soon as contracts were signed." "But if the CDOs later went bad, AIG would be on the hook." "People were essentially being rewarded for taking massive risks 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." "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" "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." "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" "Let me tell you one person that didn't get a bonus while everybody else was getting bonuses" "– 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" "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." "Who was in the audience?" "It was, I guess, the central bankers of the world ranging from Mr. Greenspan himself" "Ben Bernanke" "Larry Summers was there" "Tim Geithner was there" "The title of the paper was, essentially" "Is Financial Development Making the World Riskier?" "And the conclusion was, it is." "Rajan's paper focused on incentive structures that generated huge cash bonuses based on short-term profits" "but which imposed no penalties for later losses" "Rajan argued that these incentives encouraged bankers to take risks that might eventually destroy their own firms or even the entire financial system" "It's very easy to generate performance by taking on more risk" "And so what you need to do is compensate for risk-adjusted performance" "And that's where all the bodies are buried" "Rajan wa-, you know, hit the nail on the head" "What he particularly said was you guys have claimed you have found a way to make more profits with less risk" "I say you've found a way to make more profits with more risk, and there's a big difference." "Summers was, was vocal" "He basically thought that" "I was criticizing the change in the financial world" "and was worried about you know, regulation which would reverse this whole change" "So essentially,he accused me of being a Luddite" "He wanted to make sure that we didn't bring in a whole new set of regulations" "to constrain the financial sector at that point" "You're gonna make an extra 2 million dollars a year" "— or 10 million dollars a year for putting your financial institution at risk" "Someone else pays the bill - you don't pay the bill." "Would you make that bet?" "Most people who worked on Wall Street said, sure, I'd make that bet" "It never was enough" "They don't want to own one home; they want to own five homes and they want to have an expensive penthouse on Park Avenue" "and they want to have their own private jet" "You think this is an industry where high, very high compensation levels are justified?" "Well I think I would, I would take caution, or take heed, or take exception at your word very high I mean, it's all relative" "You have a 14-million-dollar oceanfront home in Florida you have a summer vacation home in Sun Valley, Idaho you and your wife have an art collection filled with million-dollar paintings" "Richard Fuld never appeared on the trading floor" "There was art advisors up there all the time" "You know, he had his own private elevator he went out of his way to be disconnected." "I mean, his elevator – they hired technicians to program it, you know so that his driver would call in in the morning, and a security guard would hold it" "And there's only like a two- or three-second window where he actually has to see people" "And he hops into this elevator, and goes straight to 31" "Lehman owned a bunch of corporate jets." "Do you know about this?" " Yes" "How many were there?" "Well, there were six, including the 767s." "They also had a helicopter" "I see." "Isn't that kind of a lot of planes to have, for..." "You're dealing with Type A personalities, and" "Type A personalities know everything in the world" "Banking became a pissing contest, you know mine's bigger than yours; that kind of stuff" "It was all men that ran it, incidentally." "Fifty-billion-dollar deals were not large enough so we do hundred- billion-dollar deals" "These people are risk-takers; they're impulsive." "It's part of their behavior, it's part of their personality" "And that manifests outside of work as well" "It's quite typical for the guys to go out, to go to strip bars, to use drugs" "I see a lot of cocaine use, a lot of use of prostitution" "Recently, neuroscientists have done experiments where, they've taken individuals and put them into an MRI machine." "And they have them play a game where the prize is money." "And they noticed that when these subjects earn money the part of the brain that gets stimulated is the same part that cocaine stimulates is the same part that cocaine stimulates" "A lot of people feel that they need to really participate in that behavior to make it, to get promoted, to get recognized" "According to a Bloomberg article business entertainment represents 5 percent of revenue for New York derivatives brokers and often includes strip clubs, prostitution, and drugs." "A New York broker filed a lawsuit in 2007 against his firm alleging he was required to retain prostitutes to entertain traders." "There's just a blatant disregard for the impact that their actions" "They have no problem using a prostitute and going home to their wife." "How many customers?" "About 10,000 at that point in time" "What fraction were from Wall Street?" "Of the higher-end clients, probably – 40 to 50 percent." "And were all the major Wall Street firms represented?" "Goldman Sachs." "Lehman Brothers; yeah, they're all in there." "Morgan Stanley was a little less of that." "I think Goldman was, was pretty, pretty big with that" "A lot of clients would call me, and say can you get me a Lamborghini for the night for the girl?" "These guys were spending corporate money" "I had many black cards from, you know, the various financial firms." "What's happening is services are being charged to computer, repair" "Trading research; you know;" "consulting for market compliance." "I just usually gave them a piece of letterhead, and said, make your own invoice." "So this pattern of behavior, you think extends to the senior management of the firm" "Absolutely does, yeah" "I know for a fact that it does." "It extends to the very top." "A friend of mine, who, who's involved in a company that has a big financial presence, said" "Well, it's about time you learned about subprime mortgages" "So he set up a session with his trading desk and me and, and a techie, who, who did all this – gets very excited runs to his computer; pulls up, in about three seconds this Goldman Sachs issue of securities" "t was a complete disaster." "Borrowers had borrowed, on average 99.3 percent of the price of the house" "Which means they have no money in the house" "If anything goes wrong, they're gonna walk away from the mortgage." "This is not a loan you'd really make, right?" "You've gotta be crazy" "But somehow, you took 8,000 of these loans and by the time the guys were done at Goldman Sachs and the rating agencies two-thirds of the loans were rated AAA, which meant they were rated as safe as government securities" "It's, it's utterly mad." "Goldman Sachs sold at least 3.1 billion dollars' worth of these toxic CDOs in the first half of 2006" "The CEO of Goldman Sachs at this time was Henry Paulson the highest-paid CEO on Wall Street." "Good morning, welcome to the White House I am pleased to announce that I will nominate Henry Paulson to be the secretary of the Treasury" "He has a lifetime of business experience he has an intimate knowledge of financial markets markets he has earned a reputation for candor and integrity" "You might think it would be hard for Paulson to adjust to a meager government salary" "But taking the job as Treasury secretary was the best financial decision of his life." "Paulson had to sell his 485 million dollars of Goldman stock when he went to work for the government." "But because of a law passed by the first President Bush he didn't have to pay any taxes on it." "It saved him 50 million dollars." "The article came out in October of 2007" "Already, a third of the mortgages defaulted." "Now, uh, most of them are goin'." "One group that had purchased these now-worthless securities was the Public Employees Retirement System of Mississippi" "which provides monthly benefits to over 80,000 retirees" "They lost millions of dollars, and are now suing Goldman Sachs" "By late 2006, Goldman had taken things a step further" "It didn't just sell toxic CDOs it started actively betting against them at the same time it was telling customers that they were high-quality investments" "By purchasing credit default swaps from AIG" "Goldman could bet against CDOs it didn't own and get paid when the CDOs failed." "I asked them if anybody called the customers and said, you know, we don't really like this kind of mortgage anymore, and we thought you ought to know, you know" "They, they didn't really say anything; but, you know, you could just feel the laughter coming over the phone." "Goldman Sachs bought at least 22 billion dollars of credit default swaps of AIG" "It was so much that Goldman realized that AIG itself might go bankrupt" "so they spent 150 million dollars insuring themselves against AIG's potential collapse" "Then, in 2007, Goldman went even further" "They started selling CDOs specifically designed so that the more money their customers lost the more money Goldman Sachs made." "Six hundred million dollars, Timberwolf Securities is what you sold." "Before you sold them, this is what your sales team were tellin' to each other." "" Boy, that Timberwolf was one shitty deal."" "This was an e-mail to me in late June " "Right." "And you're callin' Timberwolf" "After the transaction." " No no; you sold Timberwolf after as well." "we did trades after that" "The next e-mail; take a look;" "July 1, '07; tells the sales force" ""the top priority is Timberwolf."" "Your top priority to sell is that shitty deal if you have an adverse interest to your client do you have the duty to disclose that to your client to tell that client of your adverse interest?" "That's my question." "Mr. Chairman, just tryin' to understand " "No, I think you understand it;" "I don't think you want to answer it." "Do you believe that you have a duty to act in the best interests of your clients?" "Again..." "Senator, I, I will repeat you know, we have a, a duty to, to serve our clients by showing prices on transaction where they ask us to show prices for." "What do you think about selling securities which your own people think are crap?" "Does that bother you?" "I think they would, again, as a hypothetical?" "No." "This is real" "Well then I don't" "We heard it today: this is a shitty deal, this is crap." "I heard nothing today that makes me think anything, um, went wrong." "Is there not a conflict when you sell something to somebody and then are determined to bet against that same security" "and you don't disclose that to the person you're selling it" "Do you see a problem?" "In the context of market-making, that is not a conflict" "When you heard that your employees, in these e-mails, said god, what a shitty deal; god, what a piece of crap; do you feel anything?" "I think that's very unfortunate to have on e-mail." "On e-mail?" "How about feeling that way?" "I think it's very unfortunate for anyone to have said that, in any form." "Is it your understanding that your competitors were engaged in similar activities?" "yes." "And, and to a greater extent than us, in most cases" "Hedge fund manager John Paulson made 12 billion dollars betting against the mortgage market" "When John Paulson ran out of mortgage securities to bet against he worked with Goldman Sachs and Deutsche Bank to create more of them" "Morgan Stanley was also selling mortgage securities that it was betting against, and it's now being sued by the government employees retirement fund of the Virgin Islands" "for fraud" "The lawsuit alleges that Morgan Stanley knew that the CDOs were junk" "Although they were rated AAA, Morgan Stanley was betting they would fail" "A year later" "Morgan Stanley had made hundreds of millions of dollars while the investors had lost almost all of their money." "You would have thought that pension funds would have said those are subprime; why am I buying them?" "And they had these guys at Moody's and Standard and Poor's who said, that's a AAA" "None of these securities got issued without the imprimatur you know the Good Housekeeping Seal of Approval, of the rating agencies." "The three rating agencies — Moody's, SP, and Fitch made billions of dollars giving high ratings to risky securities" "Moody's, the largest rating agency, quadrupled its profits between 2000 and 2007." "Moody's and SP get compensated based on putting out ratings reports" "And the more structured securities they gave a AAA rating to the higher their earnings were gonna be for the quarter." "Imagine if you went to the New York Times, and you said, look, if you write a positive story, I'll pay you 500,000 dollars." "But if you don't, I'll give you nothing." "The rating agencies could have stopped the party, and said:" "We're sorry – you know – we're gonna tighten our standards." "This is – a-, and, and immediately cut off a lot of the flow of funding to risky borrowers." "AAA-rated instruments mushroomed from just a handful to thousands and thousands." "Hundreds of billions of dollars, uh, were being rated." "You know – and" "Per year ?" "Per year; oh, yeah." "I've now testified before both houses of Congress on the credit rating agency issue" "And both times they trot out very prominent First Amendment lawyers" "and argue that when we say something is rated AAA that is merely our opinion; you shouldn't rely on it." "SP's ratings express our opinion." "Our ratings are, uh, are our opinions." "But they're opinions." "Opinions, and those are, they are just opinions." "I think we are emphasizing the fact that our ratings are... are opinions." "They do not speak to the market value of a security the volatility of its price, or its suitability as an investment."