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Title: Inside Job Type: Documentary
Focus: Economics
Year: 2010
Length: 1 hour 48 minutes
Host: Matt Damon
Producer: Charles Ferguson
Association: Sony Pictures Classic, Representational Pictures & Screen Pass Pictures
Director: Charles Ferguson
"All this makes you wonder why those so called 'Financial Engineers' get paid 100 times more than 'Real Engineers'? Real Engineers build bridges. Financial Engineers build dreams. However, when the dream turns into a nightmare, other people pay for it. Financial Industry turned its back on society, corrupts the political system and plunges the world into economic crisis."
INANCIAL instruments replace opium in destroying people's lives. In a small modern country of 320,000 population in the North, its banking losses went up to USD100 billion, a figure well beyond its economic capability of only USD13 billion Gross Domestic Products per year. With such a messed up position, Iceland had collapsed into bankruptcy. Who would have thought that a developed country that boasts clean energy, good education services and impeccable health system would be on their knees? It all started when the Icelandic Government adopted the policies of deregulation in the year 2000 allowing the privatisation of its three largest banks, namely, Islandbanki, Kaupping and Glitnir. These banks borrowed USD120 billion via debt instruments issuance to the public which allowed the general public to obtain financing for realty properties and the share markets. Housing market then experienced inflations of up to 200% in the price hike up. Share market showed even shocking percentages of 900%. It had to end up in a bubble burst in 2008. A burst that collapsed those three banks, increased unemployment threefold in three months and paralysed the entire economy. Despite the ratings of AAA by rating agencies and a clean opinion from a Big Four Accounting Firm, no consultants we blamed.
Now, what happened to Iceland was just a tiny portion of a bigger disaster, the United States of America (USA). This documentary, Inside Job, uncovers the underlying machine that created one of mankind's worse recession, if not the worst. That machine is 'Financial Instruments'. Similar to Iceland, the American story also involved the realty properties but in a much more creative manner. It was as if the Devil had turned into a Banker. Bankers with 666 on their Balance Sheet. In 2008, Lehman Brothers and AIG collapsed. Investors who had bet their monies with these corporations find the white ball stopping in the wrong section of the roulette table. Their monies were frozen. Financial transactions also froze resulting in a global domino effects of significant fall in trading, exports, projects, economic activities, employment and social lives. 30 million people lost their jobs. The USA debt had suddenly went doubled. Like Iceland, the USA too had started deregulations. Theirs was in the 80's. Financial institutions were allowed to use depositors' monies to invest in risky investment activities.
Many natural warnings manifested itselves via the bubble burst. One of them is the internet industry bubble burst where Investment Bankers channelled too much of investors' monies into businesses that had no substantial form. In the 90's a new form of opium had emerged. A new financial instrument mechanism called Financial Derivatives. Bankers now gamble for upside in the tradings of the secondary markets of fundamental economics. Instead of investing in the core businesses, they had invested in options that bet for or against those businesses. Instruments such as swaps and futures found themselves into existence. A new opium. A new weapon of mass destruction. A new gambling game. A new beast that accounted for USD50 trillion of the market's transaction. What was more devastating was that they (USA) even passed a parliamentary bill to ban regulations surrounding the Financial Derivatives transactions by the market particularly by the Investment Bankers. Without regulation, the world was surely doomed to face a definite future of a pervasive disaster - a hell sure to break loose - which it did in 2009.The fall of the financial markets caused many companies to close. More people lost jobs locally and internationally as consumption expenditure and import and export activities significantly curtail.
So what happened in 2009? The Financial Derivatives come in many forms. 2009 was the year CDO, a form of derivative, made its way to the headlines. CDO are Collateralised Debt Obligations, a form of asset backed securitisation that unfortunately, was also being treated as a derivative. It became the reason for greed and gambling by the bankers. Traditionally home buyers seek loans from lenders with the expectation of repaying back the lenders at an agreed interest rate. And that was all it was. Now it went further. The lenders sell these loan assets to Investment Bankers. These loans, from various underlying transactions not limited to home buyers only, are packaged into portfolios of assets, i.e. future income generating loans. The purchase of these portfolios of assets are funded by monies invested by various investors who put their trusts in Investment Banks. It is just like investors putting monies into unit trusts hoping that the shares that those unit trusts invest in can make profits. In this case, it is called CDO. The original lenders took the money and off they went with their profits. The new owners of the loans, i.e. the purchasers of the portfolios of assets, now are entitled to get the future streams of cash payments from home buyers that consist of both principal and interests.
The issue with CDO would be those assets. How good are they? They consist of various loans for which credit ratings may not be of sufficient quality. To address this, rating agencies were asked to give ratings on the those CDOs, which they did, and they did with flying colours boosting the morale of investors when ratings such as AAAs are produced. Of course these agencies do not bear any liabilities of misrepresentation in respect of their ratings because they protect themselves behind the veil of classifying their ratings as mere "opinions" only and not valuations that can be relied upon. When the underlying assets, i.e. the home buyers, face difficulty in paying the loans in a wide spread manner, the entire cycle collapses. How would this happen? Well when the property market faces a bubble burst, the home buyers find themselves unable to pay the loans which means the CDOs are unable to pay the investors the return they had expected. In the end the investors lose. Was there a bubble burst? The property market in the USA experienced a 100% inflationary growth from 1996 to 2006 until it reached the peak before it burst. The Investment Banks were highly leveraged at 33:1 where they themselves borrowed 33 times the value of their assets. When Investment Bankers operated at such a high leverage and the USA Government did not put any regulations on it, it was a time bomb for sure. To make things worse, the insurance industry that covers the tradings of CDOs faced significant losses paying of the investors who had insured their CDO investments. So we heard - AIG collapsed.
AIG, with all its creativity, saw opportunity to make money by issuing insurance products to back up the CDOs. They called it Credit Default Swaps (CDS). Investors were paying high premiums to them (AIG) to insure their CDO investments. When CDOs collapse, AIG naturally finds itself jumping into an inferno of hell paying the recovery monies to the investors. A toxic asset (CDOs) leading to another toxic asset (CDSs). What they had not expected was the unethical conduct of Investment Bankers who were trying to make gains from CDSs even to the extent of going against the CDOs that they (Investment Bankers) had created. Goldman Sachs bought CDSs against their CDOs. So when Goldman Sachs issued CDOs collapsed, Goldman Sachs could get the recovery monies from AIG at a higher return rate than the CDO itself. The Investment Bankers make money leaving behind the investors and the insurance company facing doomsday. The professionals in the Investment Banks created all this risky mess on behalf of the Investment Banks for short term significant profits that earned them handsome bonuses. When the Investment Banks collapse, they (those individual professionals) do not owe the banks anything. They can gladly resign with those bonuses still in their hands. 
Now let's talk about the rating agencies who claimed that their opinions shouldn't be taken seriously. How can professionals that charge millions of Dollars providing 'opinion' services on ratings of assets disclaim reliability of their opinion? They had rated those CDOs at AAA ratings. The highest standards that gave investors the confidence to invest. The issue here is the conflict of interests. Those rating agencies practically get more fees for higher ratings. How dumb is that for a highly evolved society that preaches independence, ethical values and conflict of interests? Who were the culprits? They were Moody's, Standard and Poor's; and Hitch. With such con job, no wonder the assets went bad when the economy hits a recession. Many borrowers couldn't pay their loans. As a result, lenders face bankruptcy. Fannie Mae and Freddie Mac, two of the largest home lenders in the USA, collapsed. Shortly afterwards, working its way up the value chain, the Investment Bankers that bought loans also collapsed. Next was of course the insurance company AIG. At the side, many hedge funds who had monies invested with Investment Banks also faced losses when assets were frozen not to be recovered. It basically caused cardiac arrest of the global financial system. The USA Government had to bail out the industry costing tax payers USD700 billion of which, USD160 billion went to save AIG.We have learnt that the financial market in Iceland resulted in the collapse of the entire country. In the case of the USA, it had the same effect. The fall of the financial markets caused many companies to close. More people lost jobs locally and internationally as consumption expenditure and import and export activities significantly curtail. China for example experienced 10 million job losts when the Americans significantly reduced their imports from China. Other countries also experienced the same negative impact particularly those with significant direct tradings with the Americans. To conclude the frustration, an interviewee in the documentary said, "All this makes you wonder why those so called 'Financial Engineers' get paid 100 times more than 'Real Engineers'? Real Engineers build bridges. Financial Engineers build dreams. However, when the dream turns into a nightmare, other people pay for it. Financial Industry turned its back on society, corrupts the political system and plunges the world into economic crisis."
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