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 privatized and in only five years, they combined to borrow a sum
equal more than 10 times Iceland’s 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 Iceland’s 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 Iceland’s 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 Iceland’s 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.

12)The Reagan administration of the United States in the early 1980s began a thirty-year 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.

Spitzer’s 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
company’s stock, commodities prices, the likelihood of a company’s 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 people’s
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 weren’t going to be on the hook and there weren’t 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 wasn’t real profits, it
wasn’t real income….Two, three years down the road there’s a default – it’s all wiped out. I think, in
retrospect, it’s been a great big…global 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 AIG’s 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 AIG’s 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,
everyone’s 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 crisis…the 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 won’t happen again. They will spend billions, fighting reform.

It won’t be easy, but some things, are worth fighting for.”

42)Narrator - “When Iceland’s 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, that’s the
case.”

44)Jonathan Alpert - “They’re 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, it’s 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 couldn’t 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
payed…four 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.”

The main cause of financial crisis was deregulation and to give financial industry afull freedom, as a
result, they acted in their own interest and made millions ofdollars at the cost of taxpayers and general
public investment. So It isrecommended that strong actions are need to be taken against those who
areresponsible for this crisis, but it is unfortunate to see that those people andinstitutions are still in
power. The Government need to bring reforms in financialindustry.