FINANCIAL INSTITUTIONS AND MARKETS

QUIZ # 01

MUHAMMAD UMAIR ABID

FA22-BAF-106

BAF-4A
SUMMARY OF INSIDE JOB 2010

SUBMITTED TO
Mr. Ali Raza
Inside Job 2010 is a documentary movie that is directed by Director Charles Ferguson. The
movie is of narrative nature and is being narrated by Matt Damon. The film covers extensive
research and interviews with major financial insiders, journalists, and politicians.
The movie covers several interviews and traces the story from United States, Iceland, England,
France, Singapore, and China.

Abstract:

The plot of the Inside Job revolves around the major global financial breakdown in year 2008.
Inside Job states a detailed explanation of the various aspects that led towards the global
financial crisis, and how this financial breakdown caused millions of people to be jobless and
lowers the standard of living around the globe.

Inside Job provides a comprehensive analysis of the global financial collapse 2008. This movie
explains how this collapse dive US into the deep into a deep economic recession. The film states
the changes and innovations in the financial market that led to these crises. It unfolds the
conflicts of interest in the financial sector and provides a detailed understanding of how these
conflicts of interests badly affected the credit rating firms. It also unveils the facts regarding
financial auditors and consultants who failed to report critical financial information accurately.

This movie states the political movement toward deregulation, and the development of complex
markets in the industry e.g. derivatives market cause large increases in risk taking. These evaded
existing restrictions designed to control systemic risk.

Subprime lending introduced a greater risk to the derivatives market, which spread from one
investor to the next. As these changes were new to the investors many investors thought the
investments were safe, even though they were risky because of the poor rating process. This
made lenders give out mortgages without considering the risk and leaning out of loans with
higher interest rates as when these mortgages were bundled together it made the risk smaller.
Moreover, according to the movie these bundles often got the highest rating (AAA), just like
U.S. government bonds (T-bills) this made investors seems super save and it got attention of
many investors to invest in this fortuitous offer.

This movie further exposes the truth that how the financial industry influenced public officials
and politicians to avoid regulations. This influence caused a revolving door, and regulators
joined the financial sector and tried to earn a lot of money. Furthermore, the pay in the financial
industry has drawn wide attention from people towards it. As the movie demonstrates how bank
executives made hundreds of millions of dollars in the years leading up to the crisis, even at the
banks that failed.

The film concludes that even if there have been new regulations regarding money, the core
structure has not truly changed and the reason for making is still the same. And no single
executive is responsible solely for this financial breakdown. Banks are still around and have even
got a bigger picture. The financial industry is introducing new changes every day. The reasons
for trading and finance are still the same for the world.

INSIDE JOB

CHAPTER 01

ICELAND

The movies start with the Iceland where the interviewees and narrator gave a brief overview of
Iceland and this financial collapse. It’s a story of the times when Iceland had population of
320,000 people with GDP of 13 billion $ and had bank losses of around 100 billion dollars.

The narrator first talked about the time before these crises when Iceland was a stable democracy
and had high living standards with low unemployment rates and low debt ratios.

The interviewees further expressed it was the time when Iceland had complete infrastructure of
modern society. It mainly includes clean energy resources, excellent food and fisheries system,
good healthcare, education and almost zero crime rate.

But the story changed in 2000’s when the government took a stupid step. The government started
a broad policy of deregulation that had disastrous consequences, first for the environment and
then for the economy.

The real environmental destruction began when the government allowed corporations like Alcoa
to build giant aluminum-smelting plants. These plants exploit Iceland’s geothermal and
hydroelectric energy sources.
Meanwhile, the government took another stupid initiative it privatized the three largest banks of
the country. These include Íslandsbanki, Kaupthing and Glitnir, this causes a major financial
deregulation in the history of the country. So, in just 5 years these three banks that never had a
chance to operate internationally took loans of around 120 billion $ that was 10 times greater
than the overall country’s economy. This borrowed money got wasted by the banks on
themselves and their private needs. As Gylfi Zoega explained that Hreioar Mar Sigurossan
former deputy CEO of Kaupthing borrowed billions. He bought high end retail businesses in
London, a private jet, a yacht of around 40 million and Manthattan Penthouse.

The interviewee Gylfi Zoega further states that the situation becomes a massive in the country
stock prices increased by factor of 9, house prices rose up double. People found it hard to live in
a house or to get invested in the banks.

At the same time the country experienced a Ponzi scheme bank introduced money market funds
this urge people to withdraw their money from banks and to get it invested in the money market
funds.

KPMG audited Icelandic banks and financial businesses and discovered no problems. American
credit rating firms ranked Icelandic banks to triple-A status and even assisting the government
with public relations.

At the end of year 2008 island’s bank collapsed and this cause unemployment tripled in just six
months. People lost their savings and the public regulators done nothing for the public. The
situation got massive Gylfi Zoega states if two lawyers from the government agency went to a
bank to discuss a problem. But instead of resolving the issue 19 lawyers already waiting for
them, all well-prepared to challenge any argument they made. If they do a good job, the bank
might offer them a job. Due to this one-third of Iceland's financial regulators went to work for
the banks.

CHAPTER 02

THE FINANCIAL BUBBLE

The movie uncovers the housing bubbles and their collapse in the USA. September 2008 US
Investment bank Lehman Brothers and the collapse of the world's largest insurance company
AIG triggered a global crisis.

The aftermath of the Lehman collapse resulted global recession, which cost the world about tens
of trillions of dollars and rendered 30 million people unemployed. United States national debt
doubled.

The 2008 financial bubble was sparked by a breakdown in the "securitization food chain," which
involved borrowers obtaining loans and repaying them to financial institutions. Following
Reagan's deregulation, investment banks sold loans to investors who gambled in the uncontrolled
market. Offloading debts to the private sector created a 'ticking time bomb' in the US financial
sector, with loans growing exponentially and banks irresponsibly purchasing unpaid loans

According to the Narrator this crisis was not an accident. It was caused by an out-of-control
industry.

The film follows a narrative that is split into 5 parts. Let’s get delve into each:

PART 1:

HISTORICAL CONTEXT:

From the 1980’s with the rise of US financial industry the industry made a huge amount of
money, but nothing comes with consequences this rise had led the industry towards a series of
increasingly severe financial crises.

In the 1980s, investment banks became publicly listed corporations, they offered shares of
ownership to the public and raised a large sum of money from shareholders. As a result, people
in the Wall Street became richer.

PART 2

FINANCIAL DEREGULATION
In 1981, President Ronald Reagan chose Donald Regan, the CEO of Merrill Lynch, to be the
Treasury secretary. In Ronald presidency 30-year financial deregulation began. In 1982 the
Reagan government deregulated the rules for savings-and-loan companies allowing them to take
more risks with the money individuals deposit into their accounts. Many of these businesses
failed by the late 1980s. This posed a significant problem, costing taxpayers $124 billion and
causing many people to lose money they had saved for their entire lives.

Next comes the Clinton administration the deregulation continued under the Greenspan and
Treasury secretaries. The financial sector grew up so large that step by step it captured the whole
political system.

In the late 1990s, the financial sector consolidated into a few huge firms; some firms were so
enormous that their failure threatened the entire system. Then, in 1998, Travelers and Citicorp
merged to become Citigroup, the biggest financial services firm globally. The merger was against
the Glass-Steagall Act, a post-Great Depression rule that forbade banks holding consumer
deposits from taking in hazardous investment-banking ventures. In 1999, at Summers' and
Rubin's insistence, the Gramm-Leach-Bliley Act was passed by the Congress. That not only
overturned Glass-Steagall but also made room for other mergers.

PART 3

COMPLEX INNOVATION IN MARKET

In the 1990s, technological advancements and deregulation introduced advanced financial

products known as derivatives. Economists and bankers claimed that they made markets safer.
However, they made them unstable. Regulators, politicians, and industry leaders did not believe
that innovation had the potential to seriously disrupt the financial system. No one was ready to
accept the fact that the bankers could use derivatives to wager on almost anything, including
whether oil prices would rise or fall, if a company would go bankrupt, or even the weather. By
the late 1990s, the derivatives market had grown to be worth approximately $50 trillion, and
regulators were not paying close attention to it.
The end of the 1990s saw a major Internet stock bubble and a crash in 2001, resulting in $5
trillion in investor losses. The Securities and Exchange Commission failed to regulate investment
banking, requiring others to take the appropriate precautions. The inquiry conducted by Eliot
Spitzer found that investment banks encouraged Internet startups they knew would fail.

PART 4

INVESTMENT BANKS

Investment banks were significantly involved in mortgage origination, either directly through
their own mortgage lending sections or indirectly through joint ventures with mortgage brokers.

These banks combined hundreds of individual mortgages into mortgage-backed securities

(MBS), converting illiquid loans into tradable securities. Investment banks promoted and
supported riskier lending practices, such as subprime and Alt-A mortgages, which provided
higher interest rates to applicants with bad credit histories or little paperwork.

In search of larger profits, investment banks relaxed lending restrictions, resulting in an influx of
borrowers who were unlikely to repay their debts.

PART 5

CREDIT RATING AGENCIES

Investment banks then sold the CDOs to investors. When homeowners paid their mortgages, the
proceeds went to investors all around the world. Investment banks paid rating agencies to
examine CDOs, and many received triple-A ratings, the highest investment grade. CDOs were
popular among retirement funds, which could only purchase high-rated assets.

They began making riskier loans. Investment banks also did not care. Selling more CDOs led to
bigger earnings. Rating agencies were paid by investment banks. They had no culpability if their
ratings of CDOs proved incorrect. There were no regulatory constraints, so you wouldn't be held
responsible. So, it was a green light to pump out more loans.
Credit rating agencies, driven by revenues from investment banks, frequently awarded inflated
ratings to these instruments without fully considering the risks. This system was a ticking time
bomb. Lenders didn't care anymore about whether a borrower could repay.

PART 6

GOLDMAN SACHS AND AIG A BURST TO FINANCIAL BUBBLE

Through the sale of credit default swaps (CDS), which were contracts on mortgage-backed
securities that resembled insurance, AIG had a significant amount of exposure to the housing
market. Upon the collapse of the housing market and the default of mortgage-backed assets, AIG
was left with enormous losses on its CDS contracts.

Because of its interdependence with other financial institutions, AIG's failure posed a threat to
the stability of the whole financial system. In the end, the United States government provided a
substantial taxpayer-funded rescue package to AIG to avert its failure and maintain the stability
of the financial system.

Goldman Sachs misled investors about the quality of these assets by bundling risky mortgages
into complex financial contracts. Furthermore, Goldman Sachs used a tactic known as "short
selling" to wager against the assets it was providing to investors.

Furthermore, because Goldman Sachs favored some clients over others and placed bets against
its own products, it was accused of having conflicts of interest. Although the documentary was
unable to pinpoint the precise amount of fraud associated with Goldman Sachs, the company's
actions throughout the crisis resulted in major legal issues as well as damage to its reputation.
 CHAPTER 03

THE CRISIS

PART 1

THE PROBLEM THAT MUST BE LOOK IN TO

In February 2006 Ben Bernanke was appointed Federal Reserve chairman. Despite widespread
warnings, Bernanke and the Federal Reserve Board did nothing in the year with the most
dangerous loans. Robert Gnaizda spoke with Bernanke and the Federal Reserve Board three
times after Bernanke became chairman. Only at the last meeting did he suggest that there was a
problem, and that the government ought to investigate it.

PART 2

WARNINGS

Back in 2004, the FBI began discussing a major problem with mortgage fraud. They discovered
that people were inflating house values and falsifying loan documents.

Then, in 2005, Raghuram Rajan, the IMF's senior economist, warned that some hazardous
incentives could trigger a crisis. In 2006, Nouriel Roubini expressed concerns. In 2007, Allan
Sloan reported about it in Fortune magazine, and The Washington Post also covered it. The IMF
warned against it repeatedly.

PART 3

DANCE UNTIL THE MUSIC STOPS

Now the time had come when this performance started reaching to its end. According to the
interviewee Chuck Prince of Citibank famously said, “WE HAVE TO DANCE UNTIL THE
MUSIC STOPS!”. But the time had come when this bubble had to burst.
 THE FALL

By 2008, many people had lost their homes because they couldn't pay their mortgages. This
generated significant issues in the system, as debts were bundled together and sold to investors.
Lenders were unable to sell their loans, and many went out of business because of unpaid loans.

The CDO market collapsed, leaving investment banks with hundreds of billions of dollars in
unsellable loans, CDOs, and real estate.

In March 2008, the investment bank Bear Stearns didn't have enough money and was bought by
JPMorgan Chase for $2 per share. This deal was supported by $30 billion emergency funding
from the Federal Reserve.

On September 7th, 2008, Henry Paulson announced the federal takeover of Fannie Mae and
Freddie Mac, giant lenders on the brink of collapse. Two days later, Lehman Brothers announced
record losses of $3.2 billion, and their stock collapsed. The effects of Lehman and AIG in
September came as a shock to everyone. Because in August these were rate to triple A by credit
ratings. September 12th, Lehman Brothers had run out of cash and the entire investment-banking
industry was sinking fast. The stability of the global financial system was in jeopardy.

Henry Paulson and Timothy Geithner, president of the New York Federal Reserve, convened an
emergency conference with the CEOs of the major banks to save Lehman. But Lehman was not
alone. Merrill Lynch was also on the verge of collapse. That Sunday, it was purchased by Bank
of America. The only bank interested in acquiring Lehman was the British business Barclays.
But British regulators needed a financial guarantee from the United States, but Paulson refused.
Lehman's failure caused a collapse in the commercial paper market, which many companies
depend on to pay for expenses such as payroll. That means they must lay off employees, they
can't buy parts. It stops business in its tracks.

That same week, AIG owed $13 billion to holders of credit default swaps, and it didn't have the
money. Likewise, Lehmen’s AIG was another hotspot. On September 17th, AIG was taken over
by the government. Paulson and Bernanke ask Congress for $700 billion to bail out the banks.
AIG was bailed out, resulting in $61 billion for its credit default swap owners, including
Goldman Sachs. Paulson, Bernanke, and Geithner forced AIG to pay 100 cents on the dollar,
costing taxpayers over $150 billion, and forcing AIG to surrender fraud suing rights.
 PART 4

WORLD GLOBAL MARKET

Bush signed $700 billion bailout bill, but stock markets fall, global recession begins,
unemployment rises to 10% in US and Europe, and recession spreads globally. In December
2008, General Motors and Chrysler faced bankruptcy, leading to a decline in Chinese
manufacturing sales and job losses for over 10 million migrant workers in China, ultimately
affecting the poorest.

The problem began in America, and everyone was aware that it would eventually spread to
China. certain factories aim to lay off certain staff. People fell into poverty because of job loss.
Life grew harder.

PART 5

MARKETS DROPDOWN

SINGAPORE: Growing rate was about 20 percent. It was a super year. Then suddenly it went to
minus-nine. Exports collapsed upto 30 percent.

LEE HSIEN LOOG Prime Minister of Singapore states: Even when the problem started, we
didn't realize how big it would get or how bad it would be. We were still hopeful that we could
find some way to protect ourselves and suffer less from the situation. But that wasn't possible.

The world is very connected now. The economies of different countries are all tied together.
When one home is foreclosed upon, it affects everyone in the neighborhood. The value of nearby
homes goes down when a foreclosed home is sold at a lower price. And often, before it's sold, the
home isn't well taken care of. We predicted that about 9 million more homeowners lost their
homes.

PART 6
 THE FALL IS IN THE SHOES OF OTHERS

With the burst of this bubble made people lives hand to mouth around the globe. People lost their
jobs, employment, houses, and all lifetime savings. People started living in the tent houses.
Poverty was around the globe.

CHAPTER 04

ACCOUNTIBILITY

Despite significant fraudulent behavior in the banking industry before to the crisis, very few
individuals faced criminal charges or were held personally accountable for their acts. Regulatory
authorities, such as the Securities and Exchange Commission (SEC), were chastised for failing to
adequately monitor and control Wall Street activities. This part of the movie discusses the
regulatory capture, in which regulators prioritize the interests of the industries they regulate over
the public interest.

PART 1

CONFICTS OF INTREST:

This part of the documentary reveals the revolving door between Wall Street and Washington,
where people work in the financial industry and regulatory agencies. This revolving door can
lead to conflicts of interest and regulatory capture, reducing the effectiveness of oversight.

PART 2

GOVERNMENT BAILOUTS

Many people were looking closely at how the government handled the crisis, especially the big
bailouts for banks and other financial companies that were in trouble. Some folks say these
bailouts were bad because they rewarded companies for doing risky things and made them think
they wouldn't have to face the results of their actions.
People were upset because no one was held accountable for what transpired, and they wanted
things to change. Many people believed that those who caused the crisis should have been
penalized, either legally or financially.

CHAPTER 5

WHERE WE ARE?

(FROM THE PRESPECTIVE OF YEAR 2008-2010)

PART 1

AMERICAN INDUSTRY

The United States' financial sector became more powerful, which was part of bigger changes in
America. Since the 1980s, America has become more unequal, and its economic dominance has
decreased.

Big companies like General Motors, Chrysler, and U.S. Steel, which used to be crucial to the
U.S. economy, were poorly managed and fell behind companies from other countries. As
countries like China opened their economies, American companies moved jobs overseas to save
money. For a long time, people in developed countries were shielded from the extra competition
in the world labor market.

PART 2

JOBS

Many American factory workers lost their jobs in large numbers over a short period of time. This
led to a decline in our manufacturing industry. However, other sectors like information
technology grew, offering well-paying jobs. Yet, these jobs often require a college education,
which is becoming increasingly expensive for average Americans. While prestigious universities
have huge amounts of money, public universities are getting less funding, and their fees are
going up.

For example, in California, public university fees rose from $650 in the 1970s to over $10,000 in
2010. The main factor determining whether people can attend college is if they can afford it.
Meanwhile, tax policies in America started favoring the rich more. During President Bush's
administration, there were significant tax cuts on investment gains, stock dividends, and the
estate tax. These cuts resulted in around $1.1 trillion staying in the hands of American workers,
families, investors, and small-business owners.

For the first time in history, average Americans have less education and are less prosperous than
their parents.

PART 3

President OBAMA

“The era of greed and irresponsibility on Wall Street and in Washington has led us to a
financial crisis as serious as any that we've faced since the Great Depression.”

The financial crisis occurred before the 2008 election. Barack Obama cited Wall Street greed.
And illustrated the regulatory failures as the need for change in America. Obama spoke of the
need to reform the industry.

PART 4

WALLSTREET GOVERNMENT:

Obama enacted a reform in the mid 2010’s the administration’s financial reforms were so much
weak in many critical areas, including the rating agencies, lobbying and compensation, not so
much significant was even proposed.

Obama chose those people for his administration that has directly or indirectly part in the wall
street crisis.
 PART 5

EUROPEN REGULATION ACT AND OBAMA’S ADMINISTRATION

The finance ministers of Sweden, the Netherlands, Luxembourg, Italy, Spain, and Germany
urged G20 nations, including the US, to impose tight regulations on bank compensation. And in
July 2010, the European Parliament enacted those measures. The Obama administration provided
no response.

In 2009 Obama reappointed Ben Bernanke. As of mid-2010, no prominent financial executives

were criminally charged or detained. No special prosecutor has been appointed. No firms were
convicted criminally. For securities or accounting fraud. The Obama administration has made no
attempts. To reclaim any recompense. Presented to financial executives during the bubble.

PART 6

A HAPPY ENDING FOR THE FRAUDULANTS?

Throughout decades, the American financial system was solid and secure. Then something
changed. The banking industry turned away from society, corrupted the political system, and led
to a global economic crisis. Despite significant costs, all the things avoided calamity. The
individuals and organizations responsible for the disaster continue to hold power. And this is
what needs to be changed.

Inside ends on a note that power really lies in highlighting the human cost, which includes not
only monetary losses but also lost hopes, a feeling of justice, and a persistent worry that it could
all happen again.