a stable democracy with a high standard of living and until recently extremely low unemployment and government  we had the complete infrastructure of a modern society clean energy food production facilities with a quota system to manage them good health care a good education you know clean air the most crime is good a good place for families to live we had almost end of history status but in two thousand iceland's government began a broad policy of deregulation that would have disastrous consequences first for the environment and then for the economy they started by allowing multinational corporations like alcoa to build giant aluminum smelting plants and exploit iceland's natural geothermal and hydroelectric energy sources many of the most beautiful livia's in the highlands with the most spectacular colors so nothing comes without co at the same time the government privatized iceland's three largest banks the result was one of the purest experiments in financial deregulation ever conduct over and more of this wrecked the place in a five year period these three tiny banks which had never operated outside of iceland borrowed one hundred twenty billion dollars ten times the size of iceland's economy the bankers showered money on themselves each other and their friends there was a massive bubble stock prices and when the but mind house prices more than doubled american accounting firms like audited the icelandic banks and investment firms and found nothing wrong and american credit rating agencies said iceland was wonderful in february two thousand the rating  when iceland's banks collapsed at the end of two thousand and eight unemployment tripled in six months but this is a universal problem in new york you have the same problem right do you think there isn't a more systematic investigation being undertaken because you would find the c you think that columbia business school has any significant conflict of interest problem he did we do the regulators didn't do their job they had the power to do every case that i made when i was state attorney general they just want to in september two thousand and eight the bankruptcy of the u s investment bank lehman brothers and the collapse of the world's largest insurance company triggered a global financial crisis hit with markets overnight with asian stocks  the result was a global recession which cost the world tens of trillions of dollars rendered thirty million people unemployed and doubled the national debt of the united states if you look at the cost of the action all that if you out of this crisis was not an accident it was caused by an out of control industry since the one nine hundred eighty s the rise of the us financial sector has led to a series of increasingly severe financial crises each crisis has caused more damage while the industry has made more and more money after the great depression the united states had forty years of economic growth without a single financial crisis the financial industry was tightly regulated most regular banks were local businesses and they were prohibited from speculating  the posit or savings investment banks which handled stock and bond trading were small private partnerships in their traditional banking partnership model the partners put the money up and obviously the partners watched that money very carefully they wanted to live well but they didn't want to bet the ranch on anything paul volcker served in the treasury department and was chairman of the federal reserve from one nine hundred seventy nine to  forty five thousand dollars a year or more he stanley in one thousand nine hundred two had approximately one hundred and ten total personnel one office and capital of twelve million dollars now morgan stanley has the thousand workers and has capital of several billion and has offices all over the world in the one nine hundred eighty s the financial industry exploded the investment banks went public giving them huge amounts of stockholder money people on wall street started getting rich i had a friend who was a bond trader merrill lynch and dollars and i thought it was because he was smart the highest order of business before the nation is to restore our economic prosperity in one thousand nine hundred one president ronald reagan chose his treasury secretary the c financial lobbyists started a thirty year period of financial deregulation in one thousand nine hundred two the reagan administration deregulated savings and loan companies allowing them to make risky investments with their deposit money by the end of the decade hundreds of savings and loan companies had failed this crisis cost taxpayers one hundred twenty four billion dollars and cost many people their life savings maybe the biggest bank investigating him hired an economist named alan greenspan in this letter to regulators greenspan praised keating sound business plans and expertise and said he saw no risk in allowing keating to invest his customers money  reportedly paid greenspan forty thousand dollars charles keating went to prison shortly afterwards as for alan greenspan president reagan appointed him chairman of america's central  federal reserve greenspan was reappointed by presidents clinton and george w bush during the clinton administration deregulation continued under greenspan and treasury secretary robert rubin the and the clinton administration help them grow even larger in one thousand nine hundred eighty citicorp and travelers merged to form citi group the largest financial services company in the world the merger violated the glass steagall act a law passed after the great depression which prevented banks with consumer deposits from engaging in risky investment banking activities it was illegal to acquire travelers greenspan said nothing the federal reserve ga exemption for a year and then they got the law passed in one thousand nine hundred nine at the urging of summers and reuben congress passed the gramm leach bliley act known to some as the citi group relief act it overturned glass steagall and cleared the way for future mergers in unstable or at least potentially on straight and appropriate metaphor is the oil tankers they're very big and therefore you have to put in compartments to prevent  compartments and deregulation has led to the end of c the next crisis came at the end of the ninety's the investment banks fuelled the massive bubble in internet stocks which was followed by a crash in two thousand and one that cost five trillion dollars in investment losses the securities and exchange commission the federal agency which had been created during the depression to regulate investment banking had done nothing in the absence of meaningful action and there has been and given the clear failure of self regulation it has become necessary for others to step in and adopt the protections needed eliot spitzer's investigation revealed that the investment banks had promoted internet companies they knew would fail stock analysts were being paid based on how much business they brought in and what they said publicly was quite different from what they said privately space given the highest possible rating dismissed by an analyst as a piece of that site also highly rated called such a piece of crap defense that was by many of the investment banks was not you're wrong it was everybody's doing it and everybody knows it's going on and therefore nobody should rely on these analysts anyway in december two thousand  ten investment banks settled the case for a total of one point four billion dollars and promised to change their ways scott talbott is the chief lobbyist for the financial services roundtable one of the most powerful groups in washington which represents nearly all of the world's largest financial companies are you comfortable with the fact that several of your member companies have engaged in large scale criminal activity you have to be specific ok first of all criminal activity shouldn't be accepted  since deregulation began the world's biggest financial firms have been caught laundering money defrauding customers and cooking their books again and again and again six million dollars citibank helped funnel one hundred million dollars of drug money out of mexico did you comment that she should quote lose any documents connected with the account i said that in a kidding manner it was a b early stages of this i did not  between one nine hundred ninety eight and two thousand and three fannie mae overstated its earnings by more than ten billion dollars these accounting standards are highly complex and require determinations over which experts often disagree c e o franklin raines who used to be president clinton's budget director received over fifty two million dollars in bonuses when u b s was caught helping wealthy americans evade taxes they refused to cooperate with the u s government would you be willing to supply the names if there's a treaty framework treaty framework you've agreed to participate in a fraud  but while the companies face unprecedented fines the investment firms do not have to admit any wrongdoing when you're this large and you're dealing with this many products in this many customers mistakes happen the financial services industry seems to have a level of criminality that is you know somewhat distinctive you know when was the last time that cisco or intel or google or apple or i b m you know i totally agree with you about high tech versus financial services but high tech how come what i take is a fundamentally creative business where the value generation and the income derives from actually creating something new and different beginning in the one nine hundred ninety s deregulation and advances in technology lead to an explosion of complex financial products called derivatives economists and bankers claim they made markets safer but instead they made them unstable since the end the cold war a lot of  decided to apply their skills not on you know cold water knology but on financial markets and to go investment bankers and different weapons absolutely you know as warren buffett said you know weapons of mass destruction regulators politicians and business people did not take seriously the threat of financial innovation on the stability of the financial system using derivatives bankers could gamble on virtually anything they could bet on the rise or fall of oil prices the bankruptcy of a company even the weather by the late one nine hundred ninety s there riveted were a fifty trillion dollar unregulated market in one nine hundred ninety eight someone tried to regulate them brooksley born graduated first in her class at stanford law school and was the first woman to edit a major law review after running the derivatives practice at arnold and porter bourne was appointed by president clinton to chair the commodity futures trading commission which oversaw the derivatives market brooksley born asked me if i would come work with her we decided that this was a serious potentially destabilizing market in may of one thousand nine hundred eight the issued a proposal to regulate derivatives clinton's treasury department had an immediate response i happened to go lee's office and she was just putting down the receiver on her telephone and the blood had drained from her face and she looked at me and said that was larry summers  and that led to a battle to prevent set of instruments from being regulated shortly after the phone call from summers greenspan ruben and s c c chairman arthur levitt issued a joint statement markets they're reducing regulatory burden and i believe that we need to do it e derivative i wish to associate myself with all of the remarks of secretary summers in december of two thousand congress passed the commodity futures modernization act written with the help of financial industry lobbyists it banned the regulation of derivatives once that was done it was off to the races and the use of derivatives and financial innovation exploded dramatically after two thousand  and by the time george w bush took office in two thousand and one the us financial sector was vastly more profitable concentrated and powerful than ever before dominating this industry were five investment banks two financial conglomerates three securities insurance companies and three rating agencies and linking them all together was the securitization food chain a new system which connected trillions of dollars in mortgages and other loans with investors all over the world thirty years ago if you want to get along for the home the persian lending you the money expected you to pay him or her back you got a home from a lender who wanted you to and since mortgages took decades to repay lenders were careful in the new system lenders sold the mortgages to investment banks the investment banks combined thousands of mortgages and other loans including car loans loans and credit card debt to create complex derivatives called collateralized debt obligations or c d o the investment banks then sold the c d o to investors now when homeowners pay their mortgages the money went to investors all over the world the investment banks paid rating agencies to evaluate the c d o and many of them were given a aaa rating which is the highest possible investment grade this made c d o is popular with retirement funds which could only purchase highly rated securities this system was a ticking time bomb lenders didn't care any more about whether a borrower could repay so they started making riskier loans the investment banks didn't care either the more c d o as they sold the higher their profits and the rating agencies which were paid by the investment banks had no liability if their ratings  number of mortgage loans made each year nearly quadrupled everybody in this segment is a shut in food chain from the very beginning until the end lending care about the quality of the mortgage they were caring about maximizing their volume and getting a fee out of it in the early two thousand there was a huge increase in the risky loans called subprime but when thousands of subprime loans were combined to create c d o many of them still received aaa ratings would have been possible to create derivative products that don't have these risks that carry the equivalent of deductibles where there suddenly hundreds of billions of dollars a year were flowing through the securitization chain anyone could get a mortgage and housing prices skyrocket and the result was the biggest financial bubble in history prime lending alone increased from thirty billion a year to over six hundred billion in ten years they knew what was happening countrywide financial the largest subprime lender issued ninety seven billion dollars worth of loans it made over eleven billion dollars in profits as a result on wall street annual cash bonuses spiked traders and c e o s became enormously wealthy during the bubble lehman brothers was a top underwriter of subprime lending and their c e o richard fuld took home four hundred eighty five million dollars on a last trade to these housing and credit bubble was leading to hundreds of billions of dollars of profits and you know by two thousand and six about forty percent of the profits of s and p five hundred firms was coming from financial institutions wasn't real profits it wasn't really  it was just money that was being created by the system i'm booked to three years down the road there's a default it's all wiped out i think it's was in fact in retrospect a great big national and not just national global ponzi scheme through the homeownership in equity protection act the federal reserve board had broad authority to regulate the mortgage industry but fed chairman alan greenspan refused to use it alan greenspan no ideological i don't believe in it for twenty years robert denies to was the head of green lining a powerful consumer advocacy group he met with greenspan on a regular basis we gave them an example of country wide nine hundred fifty different complex adjustable rate mortgages he said if you had a doctorate in math you wouldn't be able to understand them enough to know which was good for you and which w so we thought he was going to take action but as the conversation continued was clear he was stuck with his ideology we met again with greenspan and five often we met with him twice a year never less than once a year and he wouldn't change his mind this amazing world instant global communications the free and efficient movement of capital is helping to create the greatest prosperity in human history agency and its capability through cutting back a staff the f c c office of risk management was reduced to a staff that you say of one yeah when that gentleman would go home at night he could out during the bubble the investment banks were borrowing heavily to buy more loans and create more c d o the ratio between borrowed money and the bank's own money was called leverage the more the banks borrowed the higher their leverage in two thousand and four henry paulson the c e o of goldman sachs helped lobby the securities and exchange commission to relax limits on leverage allowing the banks to sharply increase their borrowing the s e c somehow decided to let investment banks gamble a lot more that was not i don't know why they did that but they did that i would leave it there was another ticking time bomb in the financial system the world's largest insurance company was selling huge quantities of derivatives called credit default swaps for investors who owned c d o those credit default swaps worked like an insurance policy an investor who purchased a credit default swap paid a quarterly premium if the c d o went bad and promised to pay the investor for their losses but unlike regular insurance speculators could also buy credit default swaps from in order to bet against c d o as they actually insure that house so you could insure that somebody else could do that's a fifty people might insure my house so what happens if my house but now the number of losses in the system becomes proportionately logic since credit default swaps were unregulated didn't have to put aside any money to cover potential losses instead paid its employees huge cash bonuses as soon as contracts were signed but if the c d o was later went let me tell you one person the didn't get a bonus while everybody else was getting bonuses that was mr st denis which tried to alert the two of you to the fact that you were running into big problems he quit in frustration you didn't get a bonus in two thousand and five then the chief economist of the international monetary fund delivered a paper at the annual jackson hole symposium the most elite banking conference in the world who is in the audience  financial devil making the world risky and the conclusion was it is paper focused on incentive structures that generated huge cash bonuses based on short term profits but which imposed no penalties for later losses on argued that these incentives encouraged bankers to take risks that might eventually destroy their own firms or even the entire financial system particularly sad was you guys have claimed he had found a way to make more profits with less rest i say you found a way to make more profits with more risk and there's a big difference  he basically thought that i was criticizing the change in the financial world and was worried about you know regulation which would provide us this whole change so  he wanted to make sure that we didn't bring in a whole new set of regulations to constrain the financial sector at that point you're going to make an extra two million dollars a year or ten million dollars a year for putting your financial institution at risk someone else pays the bill you don't pay the bill would you make that that most people who worked on wall street said sure i m valley idaho you and your wife have an art collection filled with million dollar paintings richard fuld never appeared on the trading floor there are devices out there all the time you know he had his own private elevator and that he went out of his way to be disconnected i mean i elevator they hired technicians that program it you know so that his driver would call in the morning the security guard would hold it there's only like a two or three second window where he actually has to see people and he hops in this elevator goes straight to thirty one laymen owned a bunch of corporate jets you know about this yes how many were there when i was six including the seven six seven was a helicopter and that kind of a lot of planes  work as well it's quite typical for the guys to go out to go to strip bars to use drugs i see a lot of cocaine use a lot of use of prostitution recently neuroscientists i've done experiments where they've taken individuals and put them into an m r i machine and they have them play a game where the prize is money and they noticed that when the subjects in money the part of the brain that gets stimulated is the same part that cocaine stimulates a lot of people feel that they need to really participate in the behavior to make it to get promoted to get recognized according to a bloomberg article business entertainment represents five percent of revenue for new york derivatives brokers and often include strip clubs prostitution and drugs a new york broker filed a lawsuit in two thousand and seven against his firm alleging he was required to retain prostitutes to entertain traders there's just a blatant disregard for the impact that their actions might have on on society and family they have no problem using a prostitute and going home to their it was a little less of them i think goldman was pretty pretty big with a lot of clients would get me a lamborghini for the night for the girl these guys were spending corporate money i had many black cards from you know the various financial firms what's happening is services are being charged to computer repair trading research you know consulting for market compliance  letterhead and make your own invoice so this pattern of behavior you think extends to the senior management of her absolutely does and i know for a fact that it does it extends to the very top a friend of mine who is involved at a company that is a big financial president said well it's about time you learned about subprime mortgages so he set up a session with his trading desk and mate and the techie who did all this gets very excited runs through his computer pulls up at about three seconds this goldman sachs issue of securities it was a complete disaster bar words had borrowed on average ninety nine point three percent of the price of the house which means they have no money in the house if anything goes wrong they're going to walk away from the mortgage this is not alone everyone baker right you've got to be crazy but somehow you took eight thousand of these loans and by the time the guys were thought of goldman sachs and the rating agencies through thirds of the loans were rated aaa which meant they were rated as safe as government securities it's utterly mad goldman sachs sold at least three point one billion dollars worth of these toxic c d o in the first half of two thousand and six the c e o of goldman sachs at this time was henry paulson the highest paid c e o on wall street good morning welcome to the white house i'm pleased to announce that i will nominate henry paulson to be the secretary of the treasury is a lifetime of business experience he is an intimate knowledge of financial markets he's earned a reputation for candor and integrity you might think it would be hard for paulson to adjust to a meager government salary but taking the job as treasury secretary was the best financial decision of his life paulson had to sell his four hundred eighty five million dollars of goldman stock when he went to work for the government but because of a law passed by the first president bush he didn't have to pay any taxes on it it saved him fifty million dollars securities was the public employees retirement system of mississippi which provides monthly benefits to over eighty thousand retirees they lost millions of dollars and are now suing goldman sachs by late two thousand and six goldman a taken things a step further it didn't just sell toxic c d o it started actively betting against them at the same time it was telling customers that they were high quality investments said you know we don't really like this kind of mortgage anymore and we thought you want to know you know really say anything but you know you just feel the laughter coming over the phone goldman sachs bought at least twenty two billion dollars of credit  fault swaps from it was so much that goldman realized that a i g itself might go bankrupt so they spent one hundred fifty million dollars insuring themselves against a potential collapse then in two thousand seven goldman went even further they started selling c d o specifically designed so that the more money their customers lost the more money goldman sachs made six hundred million dollars timberwolf securities which you so for you sold this is what your sales team were telling to each other boy that timberwolf was one shitty deal this was an email to me in late june right and you know adult temper well action no no you sold temper wolf after his well we did trades after that yeah ok the next e mail take a look to seven tells the sales force the top priority is timberwolf your top priority to sell is that shitty deal if you have an adverse interest your client you have a duty to disclose that you're going to tell that client of your advers i think they would again as a hypothetical know this is regal more than i don't we heard it today well we heard it today is a shitty deal this is crap i heard nothing today that makes me think anything went wrong is there not a conflict when you sell something to somebody and then are determined to bet against that same security and you don't disclose that to the person you're selling in the queue see a problem in the context of market making that is not a conflict when you heard that your employees in these emails said god would or should be to god what a piece of crap you feel anything i  think that's very unfortunate out on email or you and very unfortunate i don't i mean he emails and i take out all the feeling that way i think it's very unfortunate for anyone to have said that in any form as a juror understanding the a lot of the flow of funding to aaa rated instruments mushroom from just a handful to thousands and thousands hundreds of billions of dollars  were being raided and i have and per year per year i've now testified before both houses of congress on the credit rating agency issue and both times they trot out very prominent first