Inside Job

<i>AIG's Financial Products division in London</i> 593 00:39:12,258 --> 00:39:16,627 <i>issued $500 billion worth of credit default swaps during the bubble,</i> 594 00:39:17,329 --> 00:39:21,789 <i>many of them for CDOs backed by subprime mortgages.</i> 595 00:39:21,967 --> 00:39:24,401 <i>The 400 employees at AIGFP</i> 596 00:39:24,570 --> 00:39:28,597 <i>made $3.5 billion between 2000 and 2007.</i> 597 00:39:29,375 --> 00:39:32,105 <i>Joseph Cassano, the head of AIGFP,</i> 598 00:39:32,278 --> 00:39:35,475 <i>personally made $315 million.</i> 599 00:39:35,648 --> 00:39:37,209 It's hard for us, 600 00:39:37,216 --> 00:39:41,880 and without being flippant, to even see a scenario 601 00:39:42,054 --> 00:39:44,352 within any kind of realm of reason 602 00:39:44,523 --> 00:39:49,426 that would see us losing one dollar in any of those transactions. 603 00:39:49,762 --> 00:39:53,926 <i>NARRATOR: In 2007, AIG's auditors raised warnings.</i> 604 00:39:54,100 --> 00:39:56,193 <i>One of them, Joseph St. Denis,</i> 605 00:39:56,368 --> 00:39:59,997 <i>resigned in protest after Cassano repeatedly blocked him</i> 606 00:40:00,172 --> 00:40:03,107 <i>from investigating AIGFP's accounting.</i> 607 00:40:03,275 --> 00:40:05,231 Let me tell you one person that didn't get a 608 00:40:05,244 --> 00:40:07,210 bonus while everybody else was getting bonuses. 609 00:40:07,378 --> 00:40:11,371 That was St. Denis. Mr. St. Denis tried to alert the two of you 610 00:40:11,549 --> 00:40:14,211 to the fact you were running into big problems. 611 00:40:14,753 --> 00:40:18,018 He quit in frustration, and he didn't get a bonus. 612 00:40:18,389 --> 00:40:21,153 <i>In 2005, Raghuram Rajan,</i> 613 00:40:21,326 --> 00:40:24,818 <i>then the chief economist of the International Monetary Fund,</i> 614 00:40:24,996 --> 00:40:27,624 <i>delivered a paper at the Jackson Hole symposium,</i> 615 00:40:27,799 --> 00:40:30,461 <i>the most elite banking conference in the world.</i> 616 00:40:30,635 --> 00:40:32,125 INTERVIEWER: Who was in the audience? 617 00:40:32,303 --> 00:40:37,138 It was the central bankers of the world, 618 00:40:37,308 --> 00:40:40,675 ranging from Mr. Greenspan himself, 619 00:40:40,845 --> 00:40:42,039 Ben Bernanke 620 00:40:42,213 --> 00:40:43,339 Larry Summers. 621 00:40:43,615 --> 00:40:45,480 Tim Geithner was there. 622 00:40:45,650 --> 00:40:47,618 The title of the paper was essentially: 623 00:40:47,919 --> 00:40:51,514 "Is Financial Development Making the World Riskier?" 624 00:40:51,689 --> 00:40:55,056 And the conclusion was, it is. 625 00:40:57,095 --> 00:40:59,825 <i>Rajan's paper focused on incentive structures</i> 626 00:40:59,998 --> 00:41:04,230 <i>that generated huge cash bonuses based on short-term profits,</i> 627 00:41:04,402 --> 00:41:07,667 <i>but which imposed no penalties for later losses.</i> 628 00:41:07,839 --> 00:41:10,774 <i>Rajan argued that these incentives encouraged bankers</i> 629 00:41:10,942 --> 00:41:14,537 <i>to take risks that might eventually destroy their own firms</i> 630 00:41:14,712 --> 00:41:17,943 <i>or even the entire financial system.</i> 631 00:41:20,518 --> 00:41:24,750 It's very easy to generate performance by taking on more risk. 632 00:41:24,923 --> 00:41:29,451 So what you need to do is compensate for risk-adjusted performance. 633 00:41:29,627 --> 00:41:31,891 And that's where all the bodies are buried. 634 00:41:32,063 --> 00:41:35,191 Rajan, you know, hit the nail on the head. 635 00:41:35,366 --> 00:41:37,357 What he particularly said was: 636 00:41:37,535 --> 00:41:39,935 "You guys have claimed you've found a way" 637 00:41:40,103 --> 00:41:42,571 to make more profits with less risk. 638 00:41:42,739 --> 00:41:45,936 I say you've found a way to make more profits with more risk. 639 00:41:46,109 --> 00:41:47,474 "There's a big difference." 640 00:41:47,644 --> 00:41:50,238 Summers was vocal. 641 00:41:50,581 --> 00:41:52,776 He basically thought 642 00:41:52,950 --> 00:41:58,217 that I was criticizing the change in the financial world 643 00:41:58,388 --> 00:42:01,687 and was worried about, you know, regulation, 644 00:42:01,859 --> 00:42:03,884 which would reverse this change. 645 00:42:04,061 --> 00:42:06,461 Essentially he accused me of being a Luddite. 646 00:42:07,531 --> 00:42:11,092 He wanted to make sure that we didn't bring in 647 00:42:11,268 --> 00:42:13,065 a whole new set of regulations 648 00:42:13,237 --> 00:42:15,728 to constrain the financial sector. 649 00:42:19,843 --> 00:42:23,973 You're gonna make an extra $2 million a year, or $10 million a year, 650 00:42:24,147 --> 00:42:26,741 for putting your financial institution at risk. 651 00:42:26,917 --> 00:42:29,044 Someone else pays the bill, you don't. 652 00:42:29,219 --> 00:42:30,65...