Inside Job Documentary - Movie Review Example

Name: Tutor: Course: Date: Written Critique of “Inside Job” The Inside Job is a documentary released in 2010 by Charles Ferguson that analyzes the late 2000s global financial crisis looking at the people and parties that triggered the event and the mistakes that financial firms made leading up to it. I watched the Inside Job on 28 October at 9:30 A.M. and I found it to be an intriguing movie that acts as a revelation towards the rot in America’s financial system. The Inside Job is correct in its argument that the financial crisis was the result of the corrupt activity of officials in America’s major finance firms and the government’s own incompetence. The documentary, Inside Job, points out that Congress passed the Glass-Steagall act in 1933 as a reaction to the great depression. This act separated commercial and investment banks to make sure that the former did not engage in risky investments with their clients’ money. The law was supposed to protect normal Americans from banks. The repeal of the Glass-Steagall Act saw a reduction in the existing differences between commercial and investment banks. Lead by Citicorp and Travelers, investment and commercial banks began to merge. This was one of the factors that caused the recession. Derivatives are financial instruments that investors can use to make profit from fluctuations in interest rates, equity markets and currency exchange rates, along with supply and demand in commodities. One type of derivative used in the buildup to the crisis was the collateralized debt obligation (CDO). The fact that derivatives make profits from fluctuations means that investors holding them will be enticed to gamble in different entities. This encourages them to bet on the stock market and on loans (as was seen in the use of CDOs) not caring whether the stocks or loans will do well. The documentary points out that the derivatives are complex and dangerous, with one interviewee even calling them weapons of mass destruction. Regulating them could prevent banks from engaging in risky investments. The Inside Job also looks at the behavior of several investment banks in the years leading to the financial collapse. In the events leading up to the economic meltdown, several investment banks issued mortgages and loans to individuals and homeowners who they suspected or in some cases knew they could not pay. These banks then brought the loans and mortgages together under collateralized debt obligations (CDOs). They sold these CDOs to investors to generate more revenue for the investment banks. Some of these firms then used Credit Default Swaps (CDSs) to insure the CDOs that they had sold. Goldman Sachs was one of the investment banks that engaged in this activity. The documentary, Inside Job, estimates that in the first half of 2006, Goldman Sachs sold three billion dollars worth of CDOs. The firm proceeded to bet on the low-value CDOs paying rating agencies to rate them highly. Goldman Sachs behavior was highly unethical for several reasons. Firstly, the firm secured loans and mortgages that were unsafe, compounded them in CDOs and then colluded with credit rating agencies such as Moodys and Fitch to have the CDOs rated highly. This gambling in CDOs encouraged lenders to issue loans and mortgages to borrowers who would not be able to pay and this made many people lose their houses. The firm then sold these CDOs to unwitting investors who later lost their money when the CDOs lost their value after loan defaults. Finally, Goldman Sachs, along with other investment banks, insured their loans with CDSs secured from firms such as AIG Insurance. When the housing bubble burst, the insurers had to pay billions of dollars to the investment banks. The subsequent collapse of AIG Insurance was one of the factors that lead to the crisis. For the investment banks to sell CDOs to investors, they needed to make the investors believe that the CDOs were safe. Compounding these mortgages allowed investment banks to hide the risk behind them. Ratings firms working in collusion with the banks then assigned AAA ratings to the CDOs. The film points out that in 2006, the top rated entities more than doubled because of this collusion. These high ratings made it possible for the banks to sell these CDOs to unwitting investors and to take out CDSs on them. Ratings agencies like Moodys, Fitch and Standard and Poors play an important role in the financial market. Credit rating agencies are supposed to assign credit ratings, which indicate a borrower’s ability to repay their debts and make their interest payments on time. Agencies normally rate the borrower and the instruments and assets that are used to borrow. These agencies are responsible for informing investors and lenders of the credibility of the potential borrower so that the lender can make a smart investment. Inside Job points out that the collapse of Lehman Brothers triggered the financial crisis, giving the case of how Iceland first went into recession followed by the rest of the world. The collusion of these investment banks with rating agencies meant that they all had high ratings. These ratings drew in many unwitting investors who put their money in companies like the Lehman Brothers. When the Lehman Brothers collapsed, they announced losses of $3.2 billion. The firm had an A2 rating right before its meltdown. The collapse of the Lehman Brothers led to a panic that saw stocks in different markets in the world plummet. The 2008 financial crisis affected the whole world. The first part of the movie explains how the crisis hit Iceland hard following years of government experimentation with the deregulation of the country’s industries and the privatization of the banking sector. The documentary also points out the crisis cost the world tens of trillions of dollars and resulted in the unemployment of more than thirty million people. Additionally, more than fifty million people were left at risk of sliding into poverty. Countries such as Greece and Cyprus are still feeling the effects of the global economic crisis. Individual investors who lost their money are also still recovering. The documentary argues that the government should not allow banks to engage in risky investment activities using deposits made by clients. This follows the regulations set by the Glass Steagall act of 1933. The savings crisis of 1982 gives this argument credibility. The trend established in the movie is that whenever banks have been allowed to use their clients’ money on unsecured investments; they have ended up losing money that did not belong to them. I strongly agree with this argument. Banks should never use the deposits they receive for any investment that the clients have not expressly allowed. Ten groups dominate the lobbying in Washington on behalf of financial services firms. Clark Lytle heads the list representing twenty clients. Some of the group’s clients are the Financial Services Roundtable and the American Bankers Association. Brownstein Hyatt Farber Schrek is the second largest entity with nineteen clients. Other prominent groups include Rich Feuer Group and Quinn Gillespie & Associates. The American middle class bore the brunt of the financial crisis. The documentary claims that the people in this class had borrowed money to pay for a range of assets and services like their homes, cars and education. Within the current economic climate, the middle class lags further and further behind American’s one percent, with the country experiencing one of the highest income inequalities of any country in the world. Read More