‘Inside Job’ blames bankers for crisis

Directed by Charles Ferguson and narrated by Matt Damon, Inside Job is a fascinating two-hour documentary investigating the financial crisis backed by interviews with prominent individuals ranging from U.S. Representative Barney Frank to economists from Columbia, Harvard and the International Monetary Fund (IMF). While Ferguson’s political line and moral outrage can come across as somewhat heavy-handed, the film’s tight editing, neat charts and revealing interviews make Inside Job a worthwhile viewing for concerned citizens and economists alike.

The basic narrative of Inside Job is relatively lucid. Banks gave out subprime mortgage loans, or mortgages to unqualified homebuyers. Many of these banks then repackaged various mortgages as residential mortgage-backed securities (RMBS) that were then sold to institutional investors. Credit rating agencies rated many of these RMBS very highly – often AAA, the same as government securities. In turn, banks used these RMBS to create collateralized debt obligations (CDOs), many of which were also assigned AAA ratings. To complicate the story, credit default swaps (CDS) were used by investors to insure against investments defaulting. In other words, when homeowners were unable to pay their loans, the entire financial system was destabilized, resulting in the collapse of giants such as Lehman Brothers, Bear Stearns and Merrill Lynch. As millions lost their savings and credit dried up, economic growth slowed, and the U.S. and much of the world slid into recession.

Inside Job puts much of the blame on bad incentives for credit rating agencies and banks. Analysts at credit rating agencies were paid based on the number of high ratings they produced, a practice Ferguson likens to paying reporters an extra sum for writing positive news stories. Bank compensation increased with increasing sales of CDOs and CDS, regardless of the quality of their product. Ferguson quotes, for example, editor Allan Sloan of Fortune magazine, that some homeowners borrowed 99 percent of the value of their homes; yet when bundled into RMBS, these loans were rated as AAA.

But more fundamentally, Ferguson seems to condemn Wall Street bankers and financial institutions on a moral level. The outrage at banker bonuses is predictable from the idyllic opening scenes of Iceland, a country Ferguson argues was corrupted by the greed of bankers realized through deregulation. Ferguson interviews Kristin Davis, a former madam of a high-class prostitution ring whose clients included bankers paying for $1000 per hour escorts with company cards. In another interview, a therapist hints to many bankers at their desires for risk and thrills, whether through prostitutes or cocaine use. Such demonization of bankers seems at least somewhat gratuitous, and flyover views of houses in the Hamptons may be distracting from a more constructive understanding of the crisis and possible solutions.

At the same time, the documentary places little blame on homeowners who took out subprime loans. Banks are undoubtedly accountable for giving out loans responsibly, but arguably homeowners are also responsible for their personal finances. The story is not just one of homeowners being misled – when securing a loan is akin to “winning the lottery,” perhaps the individual buyer should also reconsider.

Ferguson is clearly a smart man – in addition to receiving a Ph.D. in political science from M.I.T., he is a noted consultant to high-tech companies and the U.S. government as well as an entrepreneur who sold his internet software start-up to Microsoft for $133 million. Inside Job is a cleverly constructed film and one with the potential for great educational value. Nonetheless, Ferguson makes insinuations that are more akin to demagoguery than critique, and in this deeply troubled economy, such rhetoric seems counterproductive at best. Inside Job is certainly an entertaining film and an important one, but it is a film that should be endorsed with caveats.