An inside job is defined as a crime committed with the assistance of someone associated with the victim, like for example an employee at a company. The documentary “The Inside Job” provides an in-depth analysis into the underhanded business practices that led to the financial crisis of 2008, of which the consequences are still experienced by many worldwide. Charles Ferguson, writer and director of the film, describes his movie to document “the systemic corruption of the United States by the financial services industry and the consequences of that systemic corruption.” His film is comprised of interviews with various prominent key figures and personalities from the political, financial, and academic sector. Ferguson goes into detail to describe the key issues plaguing the economy prior to its collapse.
The first issue is the extensive deregulation of the banking sector. The stability of America’s finances had normalized from 1940 to 1980, after emerging from the financial collapse of the Great Depression. This was a direct result of responsible and fundamental banking where it allowed banks and capital markets in America to prosper and gain solid foundation in the world’s economy. The safeguards that returned our country from the brink of economic collapse were removed during the Regan administration when President Reagan introduced deregulation policies and began a 30-year-period led by financial advisors whose influence continued into the Clinton and Bush administrations. The Reagan administration began easing back on government oversight and removing limitations placed on the financial sector to allow individuals to profit on risky investments with the public’s money. Progress of change and growth in the financial industry was marked by an influx of investment banks going public. However, this did not last long as deregulation resulted in hundreds of savings and loan companies shutting down. This refers to the Savings and Loan Crisis where 747 out of 3,234 financial institutions collapsed. The losses suffered by investors exceeded $124 billion with a majority belonging to depositors. No personal accountability or responsibility was given because the common attitude among investors was that since it was not their money, they had free rein with the public’s funds and if anything were to go wrong then taxpayers would absorb the burden.
The second issue is the blatant abuse of complex investment products such as derivatives. According to Investopedia.com, derivatives are defined as a “security whose price is dependent upon or derived from one or more underlying assets.” Furthermore, derivatives are a financial contract between two or more parties and its value derive from the performance in the underlying asset. Investors were able to take advantage of derivatives with deregulation still in effect. This permitted investors and investment banks to engage in higher risked ventures that returned larger profits. If the risk became too huge to manage then banks were able to escape the pitfalls of their risky behavior by hedging. Such investing strategy allows the investor to mitigate their losses by selling the value of their underlying asset through a transfer to another investor. This is not a permanent solution because famed investor Warren Buffet once referred to these transactions as ticking time bombs. When an investor is unable to compensate for money borrowed to buy derivatives, the eventual turnout of such an action led to the subprime mortgage fallout and its effect reverberates to affect lenders, investment banks, and investors. This consequently causes the secularization chain to implode, leaving the entire financial system bankrupted.
As one can see, there were many contributing factors to the financial crisis of 2008. Initially, I did not fully understand why our nation was in an economic crisis until I watched the film and would have chalked it up as another usual government failure had I not. Technically, it was in a way but there were more behind the scenes workings and the film does a wonderful job presenting the facts.