Roger Thome's Summary of Charles Ferguson's Inside Job

Roger Thome’s Summary of Charles Ferguson’s Inside Job After the Great Depression, banks were tightly controlled, as they should have been. All mortgages were made between the buyer and his bank. The banks then had a direct interest in how the loan would be repaid. They, therefore, took due diligence with each and every loan to make sure the borrower could repay the loan. Also, the banks at that time were not allowed to make speculative investments. Then (God bless his soul) Pres Reagan came along and deregulated the banks in the early 1980s. Because of deregulation of both savings and loans and banks, they all (S&Ls first) began making stupid investments and began to fail, thereby risking their customers’ money. Many people lost everything they had because of it. Just for reference purposes, the investments bank culprits were Citigroup, Goldman Sachs, UBS, Morgan Stanley, Merrill Lynch, Lehman Brothers, J.P. Morgan, Deutsche Bank, Credit Suisse, and Bear Stearns. The financial conglomerates were AIG, MBIA, and AMBAC. The rating companies were Moody’s, Standard & Poor’s, and Fitch. These are all the main players that were greedy and squandered investors’ money with bad investments. The government people involved were Greenspan, Leveitt, Rubin, and Summers. The only government person that tried to warn us was Brooksley Born. More about her later. By the end of the 1990s, many internet companies dropped massive investments in internet stocks, amounting to 5 trillion, and it was all lost because the value of those stocks was grossly overpriced. Once again, financial regulators allowed the excessive “betting” and subsequent crisis to occur. Financial engineering became a new field of study and “derivatives” were born. Derivatives are basically bets of various types. The large financial institutions would bet on anything from mergers, to bankruptcies, to the weather. Serious. Although derivatives were dangerous to the stability of the financial system because of their risk, regulators allowed derivatives investing to be unregulated and even denied attempts to regulate derivates. Brooksley Born (a brilliant mind). You can read more about her here: http://www.readthebill.org/cases/commodity. She was the chairman of the Commodity Futures Trade Commission (CFTC) Brooksley Born issued a first call for her regulatory commission to have power to oversee financial derivatives. While previous legislative attempts had been made earlier, Born’s efforts were the most direct and threatening to the financial industry. During an April 1998 meeting of the President’s Working Group on Financial Markets, Federal Reserve chairman Alan Greenspan, Clinton Treasury Secretary Robert Rubin (and later Secretary Larry Summers), and Securities and Exchange Commission (SEC) chairman Arthur Levitt opposed Born’s efforts and attempted to derail her. Her opponents were successful in getting the Commodity Futures Modernization Act passed, which, in essence, said hands off regulating the investment bankers. See http://www.readthebill.org/cases/commodity. After derivates were allowed, along came a new term and a new way to make money. It was called “securitization,” or “the securitization food chain.” This is what gave birth to the extravagant mortgage lending and the incredible housing bubble. There are five positions in the food chain: 1) home buyers, 2) lenders, 3) investment banks, 4) investors, and 5) insurance companies. A single loan payment passes along the chain, earning material gain for the seller along the way. Securitization means that the investment banks would mix the mortgages with other debts such as corporate buyout debts, car loans, student loans, credit card debt, and this mix is named Collateralized Debt Obligation (CDOs). Then the investment banks “pay” rating agencies to grade the CDOs, and then the investment banks sell the CDOs to investors and received a commission. Insurance companies (AIG in particular) would earn commissions by selling insurance to investors for the CDOs they purchased from the investment banks, which is named Credit Default Swaps. (Starting to stink yet?) Now, because there was no longer any risk to the banks for making bad mortgage loans, the subprime mortgage was born. This was the beginning of the end. In simplistic terms this whole thing was nothing more than a very fancy and complicated ponzi scheme, whereby you take money from one source to pay another source. It all works fine until something goes wrong. The thing that went wrong in this scenario was the people began to go into foreclosure on their homes because they could not afford them. Thus began the crash of 2008. In short, the people of the United States were "screwed" by their government, their banks, their investment banks, their financial conglomerates, their insurance companies, and their rating companies. Why? Greed. All of the great brilliant minds in all of these industries figured out a way to package debt, and pass it along with no risk to themselves, make a commission on each sale along the way, and they all made millions and millions of dollars. And then, if that’s not bad enough, when the banks began to fail, our government bailed them out with our money. Bear Sterns runs out of money in March 2008 and is acquired by J.P. Morgan for 3.00 per share. Fannie Mae and Freddie Mac were acquired by the U.S. government. Lehman Brothers reported record losses and a stock collapse. Numerous investment firms were rated double and triple A shortly before their collapse. AIG owed 13 billion to investors and did not have the money. AIG was acquired by the U.S. government. Investment firms are bailed out with 700 billion from the U.S. Government. And the men who destroyed their own companies and plunged the world into crisis walked away with their fortunes intact. And, although the administration changed at the end of the crisis, the same Wall Street players are now economic advisors in the new administration. Does all of this seem too hard to believe? Yes. But is it all true? Yes.