naked capitalism

Tom Adams and I saw an advance screening of the Charles Ferguson film Inside Job, a documentary on the financial crisis, due for theatrical release in New York on October 8. Given how well each of us knows the subject matter, we’re not easily swayed, but I can speak for both of us in giving the picture high marks. It’s is a very smart, well framed indictment.

I’m generally struck by how TV coverage of finance and economics dumbs down their subject matter, which results in annoyingly sanitized, incomplete accounts. This picture demonstrates that the common excuse, that film isn’t well suited to complex material, is merely cover for laziness and low standards.

Inside Job an ambitious picture, clearly aiming to stir public anger and action by showing how criminally corrupt the financial services has become and how it has subverted government and the economics discipline. Despite minor errors and occasional oversimplification, overall Inside Job does an extremely effective job in covering a lot of ground in a compelling manner.

Ferguson got to top figures in government, finance, and academia, which also gives his picture added heft (Full disclosure: I was left on the cutting room floor). And he unearthed some new dirt, such as: Christine Lagarde recounting that Hank Paulson blew off her concerns about the risk of a crisis at a February 2008 G7 meeting, and that she found out about the Lehman bankruptcy only after the fact; Dominique Strauss-Kahn of the IMF saying that at a dinner of bankers, they were actually asking for more regulation because they recognized they couldn’t restrain themselves (this in the brief window when they feared for their own survival). The now infamous Frederick Mishkin clips, which show him squirming about a paid puff piece he did on behalf of the Iceland Chamber of Commerce not long before the country imploded, has as companion pieces Martin Feldstein saying he regretted none of his decisions as a board member of AIG and AIG FP (!) and Glenn Hubbard, Bush’s chief economic adviser and now Dean of Columbia Business School, getting snippy when grilled about conflicts of interest in his paid consulting work.

In addition to highlighting how the financial services industry has bought and paid for not only considerable political influence but academic endorsement of its favorite causes, it also calls to attention an overlooked factoid I’ve long considered damning: that there was no preparation on behalf of the officialdom for a Lehman bankruptcy. And by “no preparation” I mean not the foggiest understanding of what it meant. Andrew Ross Sorkin made it clear that no one in authority had spoken to a bankruptcy lawyer; Ferguson states they were completely unaware of how disruptive a bankruptcy filing would to Lehman’s London operation. Dean of the bankruptcy bar Harvey Miller (BTW who wears a simply gorgeous suit) recounts how as Lehman’s attorney he warned that a rapid filing would result in armageddon.

The story weaves in a large number of threads: some of the major moves forward in deregulation; Wall Street psychopathy; the heads I win, tails you lose deal the industry has managed to concoct, as well as its criminal activities; how growth in consumer credit was a sop to mask the impact of rising income disparity and stagnant worker wages; the extensive ties between Wall Street, particularly Goldman, and key government figures; discussion of how CDOs and credit default swaps contributed to the crisis (our pet bad actors Magnetar and Tricadia won mentions).

Now to the quibbles. Ferguson makes the crisis sound as if it started with Lehman, when it really began in August or even arguably July 2007. He says Bear was purchased for $2 a share. He mentions deregulation leading to bigger and more frequent crises but then discussed only the dot com bust (which destroyed wealth but was not a credit crisis; the 1994-5 derivatives meltdown and the LTCM crisis were far more relevant antecedents). He puts a lot of emphasis on the 2003 liberalization of investment bank capital rules, when the investment banks were as geared in 2007 as they were in 1997 (not that that was good either, but the idea that that rule change was a major culprit in the crisis doesn’t stand up) and major Eurobanks were just as highly geared. He makes it sound as if securitization produced only CDOs and didn’t finesse at all well how much of them came to be rated AAA. He also incorrectly (in a graphic) indicated that AIG sold CDS to speculators. But none of these miscues seriously undermine his account.

I highly recommend Inside Job. Ferguson clearly intends to rouse the public, and I sincerely hope he succeeds.