The Economic Crisis of 2008 (US Housing Bubble) - Inside Job Movie

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This document clearly narrates the events that led to the economic crisis of 2008 resulting in a global recession. In 2008, many global banks collapsed and had to be bailed out by the US government.

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The Economic Crisis of 2008 (US Housing Bubble) - Inside Job Movie

  1. 1. Movie Review: INSIDE JOB (Story of Global Recession - 2008) By Valliappan P MBA – NIT Warangal valliappan3@outlook.com 27/07/2013
  2. 2. Just finished it watching for the 2nd time. Wonderful Cinematography and awesome breathtaking shots of Iceland....!! Worth watching it twice or thrice . On September 15, 2008 at 1.50 A.M, Lehman Brothers filed for bankruptcy. I still remember that, It was my first day to the college for attending the B.E (ECE) orientation session with Vinod and Mythin Khan but that time I didn't know the impact of the 2008 crisis on the world economy. [Note: Lengthy Review Ahead] Inside Job is a documentary written, produced & directed by Charles Ferguson. Sony Pictures was the market distributor. The story unfolds in Iceland with the Internationalization of 3 large banks of Iceland. The interesting thing about Iceland is that with a population of 3,20,000 and a GDP of US $13 billion, they had a banking losses running into US $100 billion dollars. This was the starting point of recession. The Global economic crisis of 2008 costs tens of millions their savings, their jobs & their homes. THEME: The story of economic crisis of 2008. SHOOTING PLACES: Iceland, New York, London & France. MUSIC: The opening theme music is wonderful to listen and was composed by Alex Heffes. AWARD: It won the Academic Awards for the best documentary feature RUNNING TIME: 1hr and 45 minutes KEY CAUSE: Sub Prime Lending for buying houses. The term "subprime lending" means, lending to borrowers who don't have the capacity to repay it. (i.e.) Poor credit worthiness of the borrower. They do it to get higher interest rates which in turn will bring in more profits. Budget: US$ 2million
  3. 3. Box Office: US$ 7million IMDB Rating: 8.2/10 DRAWBACKS: Little bit of patience is needed to watch this film, It’s better to have your headset plugged in so that you can hear better. “If companies around the globe are unable to borrow, they'll begin to cut jobs, cease investment, and default on their debt in larger numbers. “ - Peter Coy BW, 3rd October, 2008 REASONS FOR THE CRISIS: 1) The housing bubble 2) Poor creditworthiness of borrowers 3)Home loan borrowers unable to pay the EMI's due to rising interest rates. 4) High leverage ratios of investment banks. 5)Speculation in the derivatives market 6) Collapse of major global banks in US & Iceland 7) Greediness & unethical practices of Investment Banks, Credit rating Agencies, Auditing Firms, Financial services firms, CEOs, CFOs, stock market traders, brokers , subprime lenders & Insurance Companies. 8) SEC (securities Exchange Commission failed in discharging its duty 9) Heavy speculation and betting in the derivatives market. 10) Complex financial products which were difficult to comprehend. MAJOR AFFECTED COMPANIES: 5 investment banks: Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch & Bears Stearn's 2 financial conglomerates: Citigroup & JP Morgan 3 Credit Rating Agencies: Moody's, Standard & Poor's and Fitch. 3 Securities Insurance: AIG, MBIA and AMBAC
  4. 4. AFTER CRISIS: The government bailed out the troubled firms by doling out a package of around US $700 billion dollars. This was done through TRAP (Troubled Assets Relief Program). KEY SPEAKERS: Dominque Strauss Khan, George Soros, Eliot Spitzer, Lagarde, Paul Volcker, Charles Morris, Nouriel Roubni, Ben Bernake, Satyajit Das & Robert Gnaizda
  5. 5. The film is divided into five parts: PART I: HOW WE GOT HERE? After the 1929 Great depression, banking industry was tightly regulated. The US Financial sector was stable for the next 50 years. By late 1990's financial sector consolidated into a few gigantic global firms, each of them so large that their failure could threaten the whole economic system. During the late 90's deregulation and advancement of technology led to the explosive growth of complex financial products called derivatives. In 1998, Citicorp and travellers merged to form the world's largest financial services firm. In 1999 Gramm- Leach - Bliley Act overturned the Glass Stegal Act which protected the investors’ money from risky investments. SEC and CFTC were in charge of overseeing the investment banks and the regulation of derivative markets. Trillions of dollars of mortgages were sold by lenders to the investment banks which in turn created CDO's (Collateralized Debt Obligation) and sold it to the investors. These mortgages mostly composed of subprime loans, but CDO's were given the highest rating (AAA) by the rating agencies such as S&P, Fitch & Moody's. It was rated on par with Govt. Securities. Pension Funds were also invested in the CDO's. Investors bought CDS (Credit Default Swaps) to insure themselves against the failure of CDO's. Even speculators could buy CDS to insure CDO's which they didn't own. This system was ticking time bomb in the financial system. Rating agencies had no liabilities, if their highly rated investments went burst.
  6. 6. PART II: THE BUBBLE (2001 - 2007) US $100 billion dollars were lended as subprime loans. So anybody could easily get credit for buying a new house. 99.3% of the house price were given as loans to the borrowers. So when the borrowers could not pay their EMI's, they walked away resulting in foreclosures. Country Wide Financial Corp was the largest subprime lender in the US and lended close to US $100 billion dollars. During 2003 - 2008, traders and CEO's became enormously wealthy. Investment banks preferred subprime loans because they carried higher interest rates. This led to massive increase in predatory lending. During bubble, investment banks borrowed heavily to buy more loans & create more CDOs. On April 28, 2004 SEC lifted leverage limits on the investment banks. In Raghuram . G . Rajan, former Chief Economist (IMF) published the paper titled “Has financial improvements made the world riskier. Goldman Sachs sold more than US $3 billion dollars of toxic assets to the investors. They also bet on these toxic assets by buying CDS from AIG, by this way they were actually piling risks onto the AIG's books. Predicting the collapse of AIG itself, they spent US $150 million dollars in protecting their CDS against the potential collapse of AIG. The logic was that if their investors lost more money, Goldman Sachs would gain more profits. Morgan Stanley was betting that their entire investments would fail.
  7. 7. PART III: THE CRISIS The securitization of food chain happened. The link was connected as follows: Borrowers -- >Lenders-->Investment Banks -->Investors (Retail, Corporates, Institutions, Pension Funds, etc.)
  8. 8. As the links passed on from one stage to another, the magnitude of risk in the chain grew exponentially. In September 2008, Lehman Brothers was taken over by Bank of America. On September 16(2008) 5000 people belonging to the London office of Lehman Brothers lost their jobs. Also the Commercial Paper Markets collapsed. They are used by companies for operating expenses such as payroll. Foreclosures rose to 6 million by the year 2010. People in US started living in tents.
  9. 9. PART IV: ACCOUNTABILITY Most of the people and institutions involved in the crisis went Scot free. SEC, CFTC & Federal Reserve Board which were in charge of regulating the investment banks and other associated institutions failed in their duties. Top executives of the insolvent companies walked away with their private properties intact. For most of the period from 1990 - 2010, Academicians played a key role in shaping the financial regulatory policies and banking practices. Some people had conflict of interest due to their presence as consultant in investment banks.
  10. 10. PART V: WHERE ARE WE NOW? (note: year 2010) Tens of thousands of US workers lost their jobs. European Union imposed stricter banking regulations. Most of the investment banks had to pay penalties running into millions of dollars. Merrill Lynch and Countrywide Financial Corp gets eventually taken over by Bank of America. Financial Institutions – Write-Downs Citigroup (USA) - $24.1 bln Merrill Lynch (USA) - $22.5 bln UBS AG (Switzerland) - $16.7 bln Morgan Stanley (USA) - $10.3 Credit Agricole (France) - $4.8 bln HSBC (United Kingdom) - $3.4 bln Bank of America (USA) - $5.28 bln
  11. 11. CIBC (Canada) – $3.2 bln Deutsche Bank (Germany) - $3.1 bln Total Write downs and losses were around $300 - $350 billion US dollars. Global Impacts of the Crisis: 1)Investors lost confidence in the stock market. 2) Consumer spending slowed down due to lack of cash/ unwillingness. 3) U.S.A’s economic condition affected the global economy. 4) World economy slipped into recession. 5) Exports from China, Korea, Taiwan and India decreased. Impact on India: 1) FIIs pulled out of money from the Indian stock market 2) Public Sector Banks, viz State Bank Of India, Bank Of Baroda, Canara Bank, Punjab National Bank etc did not have major exposure to credit derivatives market due to their limited overseas operations. 3) Stock market Crashed and BSE sensex crashed from 24000 level to 8000 level. 4) ICICI Bank incurred a loss of close to Rs.1000 Crores because of exposure to international securities market CLIMAX: There is a sufficiency in the world for man's need but not for man's greed. BOTTOM LINE: The story of economic crisis of 2008 has been explained in an elegant manner with no glitches. Charles Ferguson has once again proved his mettle with the representational skills. A movie worth watching and I would personally rate it as 9/10. E-Mail ID: valliappan3@outlook.com

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