Exposed: The Financial Crisis of 2008

On September 15, 2008, Lehman Brothers, one of the largest investment banks in the United States, filed for Chapter 11 bankruptcy. This was the beginning of a global economic crisis of massive proportions with devastating effects. Millions of individuals lost their jobs, savings, and homes. Ultimately the main question that became apparent was, “how did we get here?” There were many culprits and fingers were pointed at various forces. Charles Ferguson’s insightful documentary, “Inside Job,” strategically chronicles and exposes the realities that led to this colossal global economic crisis.

Narrated by Matt Damon, the documentary discloses the fact that this crisis was “no accident” and was caused by an “out of control industry,” the U.S. Financial Sector.

The documentary is divided into five segments: How We Got Here, The Bubble (2001-2007), The Crisis, Accountability, and Where We Are Now.

Alan Greenspan

After the Great Depression, the financial sector was tightly regulated. Local banks were prohibited from speculating with customers’ savings. Investment banks were small private partnerships, where the partners invested their own capital. However in the 1980s, the financial sector soared when the investment banks went public. The Reagan administration started a 30-year period of “deregulation.” Allowing Savings and Loan companies to make risky investments with investors’ deposits cost U.S. taxpayers $124 billion dollars by the end of the 1980s. Executives like Charles Keating were arrested for “looting their companies.” However Reagan appointed economist Alan Greenspan who praised Keating, chairman of the Federal Reserve. Presidents’ Clinton and George W. Bush also reappointed Greenspan.

 The next crisis emerged at the end of the 1990s when investment banks were promoting Internet companies that they knew would fail. The cost of this crisis was estimated at 5 trillion dollars. The Securities and Exchange Commission, created during the Depression to regulate investment, did not take any action. In 2002, 10 major investment firms were fined for 1.4 billion dollars and promised “to change their ways.”

By the time George W. Bush became president, the U.S. financial sector had grown substantially. Securitization had linked home buyers, lenders, investment banks, and investors through loan payments. In the old system when someone purchased a home, they made mortgage payments directly to the lender. Since a mortgage had a long life span, lenders were careful with their loans. However in the new system,

 “lenders sold the mortgages to the investment banks, the investment banks  combined thousands of mortgages and other loans, including car loans, student loans, and credit card debt, to create complex derivatives called collateralized debt obligation or CDO’s. The investment banks then sold the CDO’s to investors. Now when homeowners paid their mortgages the money went to investors all over the world. The investment banks paid rating agencies to evaluate the CDO’s. Many of them were given a AAA rating, which is the highest possible investment grade… This system was a ticking time bomb…”

At this point, lenders were not concerned if borrowers would be able to repay, and started to make riskier loans. Investment banks were not concerned as well, due to the fact that the more CDO’ s they sold, the higher they profited. Rating agencies, which were paid by the investment banks, were not liable for their ratings and boldly stood by the investment banks. 

This unregulated market, along with the financial innovation, which allowed derivatives to be traded globally, resulted in the ultimate economic crisis of 2008.  As the housing bubble burst, millions of individuals defaulted on their homes, lost their jobs, and lifetime savings.

The question that I immediately posed was, who are the guilty parties in this scenario? Were they reprimanded for their fraudulent actions? What is the current policy of the government when it comes to regulation of the financial sector? The film reveals that no one has been prosecuted and the current attempts to regulate and reform would be considered “weak.”

The Oscar winning documentary (Best Documentary, Features), Inside Job, was an eye opening film. It laid out the financial crisis in a clear and concise manner. Though it was upsetting and shocking, it exposed the harsh realities that exist within our financial system.