Inside Job

INSIDE JOB

ALSO BY CHARLES FERGUSON

A Winner’s Tale of Greed and Glory in the Internet Wars

Iraq’s Descent into Chaos

Anatomy of a Market Failure and a Policy Dilemma

(coauthored with Charles Morris)

A Oneworld Book

First published in Great Britain and the Commonwealth by
Oneworld Publications Limited 2012

Copyright © 2012 by Charles Ferguson

The moral right of Charles Ferguson to be identified as the Author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988

All rights reserved
Copyright under Berne Convention
A CIP record for this title is available from the British Library

ISBN 978-1-85168-915-6
eISBN 978-1-78074-072-0

Cover illustration and design by Jamie Keenan

Book design by Nicola Ferguson

Printed and bound in the Great Britain
by Bell & Bain Ltd

Oneworld Publications Limited
185 Banbury Road, Oxford, OX2 7AR, England

To Athena Sofia and Audrey Elizabeth, two women who changed my life

CONTENTS

CHAPTER 1:
Where We Are Now

CHAPTER 2:
Opening Pandora’s Box: The Era of Deregulation, 1980–2000

CHAPTER 3:
The Bubble, Part One: Borrowing and Lending in the 2000s

CHAPTER 4:
Wall Street Makes a Bubble and Gives It to the World

CHAPTER 5:
All Fall Down: Warnings, Predators, Crises, Responses

CHAPTER 6:
Crime and Punishment: Banking and the Bubble as Criminal Enterprises

CHAPTER 7:
Agents of Pain: Unregulated Finance as a Subtractive Industry

CHAPTER 8:
The Ivory Tower

CHAPTER 9:
A Rigged Game

CHAPTER 10:
What Should Be Done?

Acknowledgements

Notes

Glossary

Index

CHAPTER 1

WHERE WE ARE NOW

M
ANY BOOKS HAVE ALREADY
been written about the financial crisis, but there are two reasons why I decided that it was
still important to write this one.

The first reason is that the bad guys got away with it, and there has been stunningly little public debate about this fact. When I received the Oscar for best documentary in 2011, I said:
“Three years after a horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail. And that’s wrong.” When asked afterwards about the
absence of prosecutions, senior officials in the Obama White House gave evasive nonanswers, suggesting that nothing illegal occurred, or that investigations were continuing. None of the major
Republican candidates for the US presidency have raised the issue at all.

As of early 2012 there has
still
not been a single criminal prosecution of a senior financial executive related to the financial crisis. Nor has there been any serious attempt by the US
government to use civil suits, asset seizures, or restraining orders to extract fines or restitution from the people responsible for plunging the world economy
into recession.
This is not because we have no evidence of criminal behaviour. Since the release of my film, a large amount of new material has emerged, especially from private lawsuits, that reveals, through
e-mail trails and other evidence, that many bankers, including senior management, knew
exactly
what was going on, and that it was highly fraudulent.

But even leaving this crisis aside, there is now abundant evidence of widespread, unpunished criminal behaviour in the financial sector. Later in this book, I go through the list of what we
already know, which is
a lot.
In addition to the behaviour that caused the crisis, major US and European banks have been caught assisting corporate fraud by Enron and others, laundering
money for drug cartels and the Iranian military, aiding tax evasion, hiding the assets of corrupt dictators, colluding in order to fix prices, and committing many forms of financial fraud. The
evidence is now overwhelming that over the last thirty years, the US financial sector has become a rogue industry. As its wealth and power grew, it subverted the political system (including
both
American political parties), government, and academic institutions in order to free itself from regulation. As deregulation progressed, the industry became ever more unethical and
dangerous, producing ever larger financial crises and ever more blatant criminality. Since the 1990s, its power has been sufficient to insulate bankers not only from effective regulation but even
from criminal law enforcement. The financial sector is now a parasitic and destabilizing industry that constitutes a major drag on economic growth.

This means that criminal prosecution is not just a matter of vengeance or even justice. Real punishment for large-scale financial criminality is a vital element of the financial re-regulation
that is, in turn, essential to the world’s economic health and stability. Regulation is nice, but the threat of prison focuses the mind. A noted expert, the gangster Al Capone, once said,
“You can get much further in life with a kind word and a gun than with a kind word alone.” If financial executives know that they will go to jail if they commit major frauds
that endanger the world economy, and that their illegal wealth will be confiscated, then they will be considerably less likely to commit such frauds and cause global financial crises.
So one reason for writing this book is to lay out in painfully clear detail the case for criminal prosecutions. In this book, I demonstrate that much of the behaviour underlying the bubble and
crisis was quite literally criminal, and that the lack of prosecution is nearly as outrageous as the financial sector’s original conduct.

The second reason that I decided to write this book is that the rise of predatory finance is both a cause and a symptom of an even broader, and even more disturbing, change in the economy and
political system that governs the US and the rest of the world. The American financial sector is the core of a new oligarchy that has risen to power over the past thirty years, and that has
profoundly changed our way of life. The later chapters of this book are devoted to analysing how this happened and what it means.

Starting around 1980, American society began to undergo a series of deep shifts. Deregulation, weakened antitrust enforcement, and technological changes led to increasing concentration of
industry and finance. Money began to play a larger and more corrupting role in politics. The shifts could be felt in education, in infrastructure, and in the performance of many major industries.
Inequality increased. As a result of these and other changes, America was turning into a rigged game—a society that denies opportunity to those who are not born into wealthy families, one
that resembles a third-world dictatorship more than an advanced democracy. And others are mimicking these changes, by plan or by accident.

The “Occupy” protests that began in New York City in September 2011, and then rapidly spread around the world, were initially somewhat unclear in their goals. But the protesters were
deeply right about one thing: over the last thirty years, their nations have been taken over by an amoral financial oligarchy. In particular, the American dream of opportunity, education, and
upward mobility is now largely confined
to the top few percent of the population. US government policy is increasingly dictated by the wealthy, by the financial sector, and by
powerful (though sometimes badly mismanaged) industries such as telecommunications, health care, car manufacturing, and energy. These policies are implemented and praised by these groups’
willing servants, namely the increasingly bought-and-paid-for leadership of America’s political parties, academia, and lobbying industry.

If allowed to continue, this process will engender a declining, unfair society with an impoverished, angry, uneducated population under the control of a small, ultrawealthy elite. Such a society
would be not only immoral but also eventually unstable, dangerously ripe for political extremism. And this will have consequences far beyond America’s shores, as the 2008 financial crisis
demonstrated with great pain.

Thus far, both American political parties have been remarkably clever and effective in concealing this new reality. In fact, the two parties have formed an innovative kind of cartel—an
arrangement I have termed America’s political
duopoly,
which I analyse in detail below. Both parties lie about the fact that they have each sold out to the financial sector and the
wealthy. So far both have largely got away with the lie, helped in part by the enormous amount of money now spent on deceptive, manipulative political advertising. But that can’t last
indefinitely; people are getting angry, and even when they’re misguided or poorly informed, people have a deep, visceral sense that they’re being screwed. The Occupy movement is one
early, small symptom of this, but so is the Tea Party.

So I’m not going to spend much time describing ways to regulate naked credit default swaps, improve accounting standards for off-balance-sheet entities, implement the “Volcker
rule”, increase core capital, or measure bank leverage. Those are important things to do, but they are tactical questions, and relatively easy to manage if you have a healthy political
system, economy, academic environment, and regulatory structure. The real challenge is figuring out how ordinary citizens can regain control from the new economic oligarchy. For if we don’t,
the current pattern of great concentration of wealth and power
will worsen, and we may face the steady immiseration of most of the population.

Before getting into the substance of these issues, I should perhaps make one comment about where I’m coming from. I’m not against business, or profits, or becoming wealthy. I have no
problem with people becoming billionaires—if they got there by winning a fair race, if their accomplishments merit it, if they pay their fair share of taxes, and if they don’t corrupt
their society. The people who founded Intel became very rich—and that’s great. They got PhDs in physics. They worked very hard. They treated their employees fairly. And they gave us a
thousand times more than they took. Within a decade of its being founded, Intel invented microprocessors and the three most important forms of semiconductor memory. One of Intel’s
founders—Robert Noyce, whom I once had the honour to meet—
personally
coinvented the integrated circuit. I have no problem at all with the fact that Bob Noyce, Gordon Moore, and
Andy Grove made a lot of money. Same for Larry Ellison at Oracle, Steve Jobs and Steve Wozniak of Apple, the founders of Google, eBay, Craigslist, Amazon, and Genentech, and, for that matter, the
famed investor Warren Buffett.

But that’s not how most of the people mentioned in this book became wealthy. Most of them became wealthy by being well connected and crooked. And they are creating a society in which they
can commit hugely damaging economic crimes with impunity, and in which only children of the wealthy have the opportunity to become successful.

That’s
what I have a problem with. And I think most people agree with me.

THE 2008 FINANCIAL
crisis was the worst global economic setback since the Great Depression. In 2007, when the financial bubble ended, US economic growth
slipped to an anaemic 1.9 percent. In 2008 the nation’s GNP actually declined 0.3 percent—followed by a decline of 3.5
percent in 2009. The year 2010 finally saw a
“recovery” for the US, with 3 percent GNP growth. But this hasn’t helped much. The recovery on both sides of the Atlantic has been weak and nearly jobless; in the US, GNP growth
was achieved largely through investments in technology, not by hiring people, and in the UK, growth never even reached that height.
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