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Summary - Inside Job - Full Version

Welcome, to the Inside Job Summary - Full Version. 1. I recently received and viewed Inside Job from Netflix. Inside Job is the Oscar-winning documentary by Charles Ferguson. Inside Job is about heads of high finance and government selling the world into the global financial crisis. Since creating this full Inside Job summary, I have created a condensed version of the Inside Job summary and this condensed version has become the most popular topic within The GFC Zone. Further, this condensed Inside Job summary is becoming so popular that at the present writing, it is one of the top three results in Google for the keyword - "inside job summary" - and recently it was ranked number one - above the Internet Movie Database (IMDB) - as the source for a summary of Inside Job. 2. This full Inside Job summary is reveals the entire documentary. If you would like to see the film with all surprises intact, then here is my quick summary for you - Inside Job is a documentary that uses charts, interviews, recording to explain the global financial crisis of 2008 by following a chain of cause and effect beginning in the 1970s. I Click here to acquire Inside Job through Amazon or Netflix. 3. Now on to the actual summary.

1 - Summary - Inside Job - Introduction 1)Inside Job opens with a case study of Iceland, a nation that was possessed by the cancer of free radical finance. 2)Iceland was stable low crime, strong education, strong stability in social and financial systems. 3)Multinational corporations such as Alcoa were then allowed to come into Iceland and install their business thereby disrupting the integrity of the system. 4)Three of their largest banks were privatised and in only five years, they combined to borrow a sum equal more than 10 times Icelands total GDP. Reckless borrowing and lax lending became commonplace.

5)A businessman named Jon Asgeir Johannesson, former head of the major retail company Bagur, is noted for taking out a loan amounting to billions of dollars. Jon used this money to purchase investments such as other top retail businesses and consumer goods such as a $40m yacht and a fashionably designed private jet. 6)Beginning with the introduction of Alcoa into Iceland, whose aluminum plants were colonizing some of the richest portions of Icelands greenery and continuing with various provisions of deregulation such as bank privatisation and lax requirements for bank loans some of which were massive the dominion of finance was interfacing Iceland. Gylfi Zoega, Professor of Economics at the University of Iceland, comments on this financial possession by stating simply, Finance took over, and uh, more or less wrecked the place. 7)Credit rating agencies analyzed a vastly overleveraged and indebted Iceland and, reflecting a pattern throughout the global financial system, gave Iceland a satisfactory or spectacular rating. Sigridur Benediktsdottir, member of the special investigative committee of the Icelandic Parliament says regarding the three Icelandic banks that combined to borrow over ten times Icelands entire GDP, In February 2007, the rating agency decided to upgrade the banks to the highest possible rating triple A. 8)In a word, due to the dominion of chaotic finance, Iceland was being drained of financial resources and other resources that are related to finance, such as the natural land, education, civil stability, personal quality of life, and trust in the system. Iceland began this journey into the dangerous power known as excess money, and has been struggling with incredible debts material and immaterial since the journey began. Perhaps the most important point about Icelands financial degeneration is that, analogous to a free radical escaping from order and wreaking havoc throughout the physical system, the excessive dominion of finance has spread as a cancer throughout the global financial system which Gylfi Zoega, our Icelandic Professor of Economics, sums up by saying, But this is a universal problem. In New York you have the same problem, right?

2 - Summary - Inside Job - Part I: How We Got Here 10)During the forty years of economic growth in the United States, investment banks were small. A prominent investment bank named Morgan Stanley, in 1972, had 110 employees and $12m in capital, and now, in 2009, has 50,000 employees and several billions in capital.

11)In the 1980s, the financial sector quantum leaped, because investment banks were going public, which brought them vast sums of stockholder capital in return. From 1978-2008, the average salary for workers outside of investment banking in the US increased from $40k to $50k a 25 percent salary increase - and the average salary in investment banking increased from $40k to $100k a 150 percent salary increase. (Source: Inside Job) Average Salary - Investment Banking v. Every Other Profession - the United States - 1978-2008 -

12)The Reagan administration of the United States in the early 1980s began a thirtyyear period of financial deregulation. By then end of the 1980s, many workers in the financial sector were going to jail for fraud and many people were losing their life savings. Large investment banks began merging and developing monopolies. 13)By the end of the 1990s, many internet companies dropped and massive investments in internet stocks amounting to $5t - were lost, and once again, financial regulators allowed the excessive betting and subsequent crisis to occur. Eliot Spitzer, Former Governor of New York and Former New York Attorney General, conducted an investigation into the internet crisis that revealed investment banks were promoting stocks they knew were likely to fail, because they earned commissions based upon how much business they brought in another pattern in the global financial crisis.

Spitzers case resulted in ten investment banks - Citigroup, Goldman Sachs, UBS, Morgan Stanley, Merrill Lynch, Lehman Brothers, J.P. Morgan, Deutsche Bank, Credit Suisse, and Bear Stearns paying a total of $1.4b as punishment. 14)Financial engineering became a new field of study and derivatives were developed. Derivatives are basically bets, various types of bets. A well-known derivative is an option. When investing in an option rather than a stock, I am investing in the opportunity to buy or sell a stock rather than the stock itself thus, the option is a spinoff of the stock, and is derived from the stock, hence the name derivative. I can invest in options and I can trade options, as if they were stocks. With derivatives, there are all sorts of bets speculators can make derivatives can include bets on a companys stock, commodities prices, the likelihood of a companys bankruptcy, and even the weather. An issue with derivatives is that if I choose to make a bet with my personal funds, then that is okay, although if I choose to make a bet with the equity in my business, then I am betting with other peoples money and lives. In the current financial system, I can make these bets on investments other than derivatives, although derivatives are special simply because their existence makes pool of possible bets much larger. 15)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 derivatives. 16)Enter the securitization food chain, the new system that birthed extravagant mortgage lending and the incredible housing bubble. There are five positions, in sequential order in the chain (1) home buyers, (2) lenders, (3) investment banks, (4) investors, and (5) insurance companies. A single loan payment passes along this chain, earning material gain for each position along the way. (1) Home buyers come to the lenders for a mortgage to buy a home; (2) lenders extend the loan to the home buyers and home buyers receive a home; (3) lenders sell the mortgage to investment banks and receive a commission; (4) investment banks mix the mortgages with other debts such as corporate buyout debts, car loans, student loans, and credit card debts and this mix is named Collateralized Debt Obligations (CDOs), then they pay rating agencies to grade the CDOs and then the investment banks sell the CDOs to investors and receive a commission; (5) insurance companies, particularly AIG, would earn commissions by selling insurance to investors for the CDOs they purchased from the investment banks, which is named Credit Default Swaps if there was a default on the CDO, then AIG would cover the losses; furthermore, AIG would also sell Credit Default Swaps to speculators who did not own any CDOs, therefore if there was a default on a single CDO, then since an investor and speculators have insurance on this same CDO, AIG

would have to pay money to the investor who actually owned the CDO and the speculators who did not own the CDO. 17)The rating agencies grading the CDOs that investment banks sold to investors often gave the CDOs triple A ratings the highest possible which means investors often purchased these CDOs as secure investments. CDOs made their way into retirement funds, which needed to be secure because people were depending on these funds for their retirement money, although CDOs were generally graded inaccurately and extremely risky. The reason many CDOs were risky was because lenders still received their commission whether the mortgage was repaid or not, because they sold the mortgage to the investment banks. Since lenders were removed from risk, they could lend extravagantly and receive a commission in return. The investment banks and the rating agencies were also able to receive commissions regardless of how the CDOs performed. Gillian Tett, United States Managing Editor for The Financial Times summarizes the extravagant mortgage lending, You werent going to be on the hook and there werent regulatory constraints, so it was a green light to just pump out more, and more and more loans. The number of mortgage loans made each year from 2000-2003 nearly quadrupled. 18)The riskiest mortgages, termed subprime, were combined with other debts in the CDO package and thereby received a high rating when the CDO received a high rating, even though the subprime mortgages were the riskiest mortgages of all. Also, because subprime loans were riskier, they demanded higher interest rates to compensate for the likelihood the borrower would default on the loan; therefore, subprime loans were in high demand because they would bring greater commissions when sold. The sweet nectar of subprime loans the forbidden fruit sparked a wave or predatory lending, which resulted in more borrowers than usual being identified as subprime and having to pay higher interest rates and many borrowers receiving loans that they could not repay. Robert Gnaizda, Former Director of the Greenlining Institute explains the situation, All the incentives that the financial institutions offered to their mortgage brokers were based on selling the most profitable products, which were predatory loans.

3 - Summary - Inside Job - Part II: The Bubble (2001 2007) 20)Since anyone could get a mortgage, home sales and housing prices exploded, creating the largest financial bubble in history.

Notably, Countrywide Financial issued nearly $100b in mortgage loans. Investment firms that traded debts in the securitization chain were earning massive sums of money and their CEOs were receiving huge bonuses. The CEO of the investment bank Lehman Brothers, Richard Fuld, received nearly $500m in bonuses. Nouriel Roubini, Professor of Economics at New York University, comments on the significance of growth of the financial sector in the global financial market, By 2006, about forty percent of all profits of S&P 500 firms was coming from financial institutions. Martin Wolf, Chief Economics Commentator for The Financial Times adds, It wasnt real profits, it wasnt real income.Two, three years down the road theres a default its all wiped out. I think, in retrospect, its been a great bigglobal ponzi scheme. 21)Once again, regulators allowed the financial extravagance to ensue. Investment banks were seeking to borrow more money to trade more debt and earn more profits. Early on, for every one dollar the investment bank invested from its own funds, it invested an additional three dollars of borrowed funds. Daniel Alpert, Managing Director of Westwood Capital comments on the growth of excessive leverage, The degree of leverage in the financial system became, absolutely frightening. Investment banks leveraging up to level thirty-three to one which means that a tiny three percent decrease in the value of their asset base would leave them insolvent. 22)Remember AIG, the company that provided insurance on CDOs? Well, AIG was promising to cover the costs if there was a default on the insured CDOs, although it did not have the money to do so. Rather than setting aside the income from selling insurance on CDOs, it divided that income between its higher level managers paying over $3b in corporate bonuses during this period. Since firms were able to earn profits upfront and worry about paying for their bets later, there was an incentive to take bets that could put their entire firm and even the global financial system at risk in exchange for large immediate bonuses. 23)Investment bankers were spending bonuses on luxury items such as jets, yachts, mansions, and vacation homes, as well as drugs and prostitutes. Often, the bankers used corporate funds for these purchases and identified them as common business expenses such as computer repair or routine cleanings.

24)Prominent investment bank, Goldman Sachs, began betting against the CDOs it was issuing. Goldman Sachs knew those risky CDOs were primed for default and figured it could profit from trading the CDO and then profit when there was a default on that same CDO. Goldman Sachs also purchased Credit Default Swaps from AIG in order to bet against CDOs it did not own. Goldman realized AIG was itself primed for bankruptcy and began betting against AIGs collapse, therefore, the more bets Goldman purchased through AIG, the more unlikely AIG would be able to follow through on its insurance, the more likely Goldman would profit from AIGs collapse. 25)Although Goldman Sachs saw it reasonable to bet against the CDOs, they continued to trade the CDOs as if they were safe. Further, Goldman began trading CDOs that paid them more when their clients lost more. 26)When executives of Goldman Sachs testified before Congress regarding it selling securities that it bet against, the executives generally show that they do not see this as an issue. When executives of the credit rating agencies that graded risky CDOs as stellar testified before Congress, they emphasized the fact that their ratings are merely opinions and the agencies assume no responsibility for the securities they rate. 4 - Summary - Inside Job - Part III: The Crisis 28)The Federal Reserve System ignored repeated warnings of a major crisis from global financial analysts such as Raguram Rajan of the IMF, Domnique Strauss-Kahn of the IMF, Nouriel Roubini of New York University, and Allan Sloan of Fortune Magazine. 29)Now it is 2008, and the debts are coming due. Those risky mortgages are now ripening into foreclosures and bankruptcies. Bear Stears runs out of money in March 2008 and is acquired by J.P. Morgan for two dollars per share. Fannie Mae and Freddie Mac, two major mortgage lenders are acquired by the US government. Lehman Brothers reports recorded losses and a stock collapse. 30)Numerous investment firms were still rated double and triple A shortly before their collapse.

31)AIG owed $13b to investors and did not have the money. AIG was acquired by the US government. 32)Investment firms are bailed out with $700b from the US government while foreclosures and job losses grow around the globe, because people were refusing to spend their money, in order to prepare for the possibility of major crisis and to keep their money out of the hands of risky or fraudulent investment gamblers. 33)As businesses hold money, jobs are cut, and as consumers hold money, trade is cut; therefore, everyones finance is depressed.

5 - Summary - Inside Job - Part IV: Accountability 35)The narrator says, The men who destroyed their own companies and plunged the world into crisis, walked away with their fortunes intact. 36)The CEOs of major investment firms received millions of dollars in bonuses, despite their companies collapse. 37)Investment firms enlisted advisors from academia through companies such as Compass Lexicon, to speak in the media and write papers on their behalf. Academia does not comment on academic conflicts of interest.

6 - Summary - Inside Job - Part V: Where We Are Now 39)The United States is declining, as shown through wealth gaps and outsourcing. Manufacturing jobs are diminishing and information technology jobs are becoming more abundant, although these jobs typically require an education that most Americans cannot afford. Tax policies in the United States are increasingly favoring the wealthy, such as the elimination of the estate tax. Wealth inequality is the highest in the United States of all the developed nations. 40)Although the Presidential administration of the United States has officially changed, the same Wall Street players are now economic advisors in the new administration. 41)The narrator concludes: For decades, the American financial system was stable and safe, but then something changed. The financial industry turned its back on society, corrupted our political system, and plunged the world economy into crisisthe men and institutions that caused the crisis are still in power and that needs to change.

They will tell us that we need them, and that what they do is too complicated for us to understand. They will tell us it wont happen again. They will spend billions, fighting reform. It wont be easy, but some things, are worth fighting for.

7 - Summary - Inside Job - Selected Quotes 42)Narrator - When Icelands banks collapsed at the end of 2008, unemployment tripled in six months. 43) Charles Ferguson and Gylfi Zoega - So, a lot of people here lost their savings?" "Yes, thats the case. 44)Jonathan Alpert - Theyre amazed at how much cocaine these Wall Streeters can use and get up and go to work the next day. 45) Lee Hsien Long - When you start thinking that you can create something out of nothing, its very difficult to resist. 46)Narrator - This crisis, was not an accident. 47)Charles Morris - I had a friend - he was a bond trader with Merrill Lynch in the 1970s. He had a job as a train conductor at night, because he had three kids and couldnt support them with what a bond trader makes. By 1986, he was making millions of dollars and thought it was because he was smart. 48)Eliot Spitzer - High-tech is a fundamentally creative business where value generation and the income is derived from actually creating something new and different. 49)Andrew Sheng - Why should a financial engineer be payedfour times more than a real engineer? A real engineer builds bridges, a financial engineer builds dreams. And those dreams turn out to be nightmares other people pay for them.