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The biggest heist in history

Tue, 22nd Mar 2011

The strength of Charles Ferguson’s Oscar-winning documentary on the financial crash, the self-explanatorily entitled Inside Job, is its stone-cold soberness.

No stunts or showboating à la Michael Moore: just straightforward questions, politely asked, and the spectacle of his interlocutors blowing themselves to bits with their blustering evasiveness and inability to answer, the very matter-of-factness of the narrative (recounted by actor Matt Damon) contrasting with the enormity of the behaviour revealed.

I thought I knew quite a lot about the Great Financial Crisis. And, having viewed business up close for many years, I am more inclined to incompetence than conspiracy theories. But now I think I underestimated both the stupidity and the fraud, and the difficulty of doing anything about either.

Yeah, I knew about the hundreds, not tens, of millions pocketed by the likes of Dick Fuld, the CEO of bust Lehman Brothers ($484m, to be precise, none of which has been returned), who had a special lift to whisk him to the top floor of his office without ever having to come into contact with mere mortals; I knew about the cynical excesses of sub-prime mortgage lenders and the insane abrogation of accountability in turning them into derivatives and selling them on; and the equally bare-faced role of the credit-rating agencies in magically conjuring away the risk involved.

But other things I was less aware of. One revealing section of Ferguson’s film features Kristin Davis, an engagingly frank Wall Street madam, who recounts how firms which run ads in financial journals boasting of their probity and customer service kept $1,000-an-hour hookers and abundant cocaine on retainer for favoured traders and their clients. (The only person brought down by sexual scandal in the period was Eliot Spitzer, governor of New York state, who as attorney general had incurred to the wrath of Wall Street by prosecuting cases against corporate price fixing, stock price inflation by investment banks, predatory mortgage lending and the 2003 mutual fund scandal. Make of that what you will.)

Nor did I know quite how breathtakingly two-faced Wall Street had been with the so-called ‘Magnetar trade’: assembling and aggressively selling ‘shitty’ (their own word) poisoned CDO packages to clients with the sole intention of hedging against them – so the more the mortgages failed, the more money they made (the epitome, this, of Umair Haque’s ‘thin value’).

Perhaps most dismaying of all is the degree to which the fraud/stupidity is systemic.

Andrew Haldane, a director of the Bank of England, revealingly admitted recently that before the crisis, no one was looking at the banks as a system, only as individual nodes. But as we now know, it’s not just the investment banks and credit agencies that were conflicted and corrupted. The film shows prominent economics professors stuttering to explain not how they got it wrong (which is excusable) but how they could have taken large payments to write bigging up reports on, for example, the Icelandic banking system or smalling down ones on the risks attached to derivatives (which is not).

We know from other sources that similar hyping reports were written about Ireland, and critical ones suppressed. We know that auditors, as in the earlier case of Enron, condoned accounting practices among failed firms that may have speeded the crash and were on the very edge of legality.

We also know that representatives and ex-representatives of some of the very bluest-blooded management consultancies are under suspicion for insider dealing – which puts in jeopardy the whole confidential consultancy model – and that Monitor, the Boston group set up by eight founders with close links to Harvard Business School, including strategy uberguru Michael Porter, took a sizeable PR contract 'to enhance the profile of Libya and Muammar Qadhafi' – nothing to do with the crash, admittedly, but probably not a client that many large companies would want to be associated with.

As a coda, note that some on Wall Street, as a thoughtful recent article by William Cohan points out, pin its decline and eventual fall on the influx of clever, ideologically self-interested MBAs from the late 1970s who first persuaded the partnerships of the time to go public, then used their access to much greater amounts of capital to dream up ever more complicated financial instruments to gamble on their own account.

In other words, the entire management supply chain is implicated in the banking scandal: the economics and management disciplines and the business schools that teach them, accountancy, consultancy, the ratings agencies and insurance as well as the banks themselves. Of course, a whole system of corruption is much harder to unpick than than a few individual organisations however large. It’s no longer just a matter of reforming the banks: it’s a question of fundamentally reshaping the governance that links them all, across the whole rotten spectrum.

Is this likely? It would be hard enough even without the final, crowning keystone of this arch of doom – the fact that, as Robert Gnaizda, former director of the Greenling Institute, sums it up in Inside Job, ‘it’s a Wall Street government’.

It’s not just that the people who brought us this avoidable disaster are still running the Street, now by the way concentrated into even fewer, more powerful giant finance houses than before. It’s that almost every one of President Obama’s economic appointments and advisers has close links with the financial industry, and many helped push through the deregulation policies that contributed to the present crisis and are already stoking up the next one. ‘I think Britain is the only country where you don't have to be a Goldman partner to be finance minister’, Alistair Darling joked recently.

Except that it’s not a joke. Finance used to be a service industry to the rest of the economy. Inside Job makes plain that it has not just captured business and the economy, inverting the relationship to perverse, indeed catastrophic effect; the giant vampire squid ate everything on the menu, including government and the political parties too. Ferguson began his Oscar acceptance speech in February by bemoaning the fact that three years after the great fraud, ‘not a single financial executive has gone to jail.’ He's right. But I somehow don't think we shall see any financial felons behind bars any time soon.

 


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