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 in a five year period these three tiny banks which  never operated outside of iceland borrowed one hundred twenty billion dollars ten times the size of iceland's economy the result was one of the purest experiments in financial deregulation iceland's banks collapsed at the end of two thousand unemployment tripled in six months one third of iceland's financial regulators went to work for the banks but this is a universal problem  new york you have the same problem  essay you help these people of the world or you could say that why 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 did we do the regulators didn't do their job they did they had the power to do every case that i made when i state attorney general they just  we have so many economists coming on our air and saying this is a bubble and it's going to burst and this is going to be a relation for the economy could cause a recession at some point what is the worst case scenario if in fact we were just  prices come down substantially across the country well i guess i don't buy your premise it's a pretty unlikely possibility we've never had a decline in house prices without a nationwide nationwide basis ben bernanke he became chairman of the federal reserve board in february two thousand and six the top year for subprime lending but despite numerous warnings bernanke and the federal reserve board did nothing to met with ben bernanke and the federal reserve board three times after bernanke he became chairman only at the last meeting that there was a problem and that the government ought to look into it when serving under bernanke was frederick michigan who was appointed by president bush in two thousand and six did you participate in these semiannual meetings that robert going green lining had with the federal reserve board yes i did i was actually on the committee that that was involved involved with the consumer community affairs committee he warned in an extremely explicit manner about what was going on and he came to the federal reserve board with documentation of the kind of loans that were frequently being made people did we have people look we had a whole people looking at this for whatever reason can't be serious if you would have looked you would have found that out you know that's very very easy to say that you can always find it as early as two thousand and four the f b i was already warning about an epidemic of mortgage fraud they reported inflated appraisals doctored loan documentation and other fraudulent activity in two thousand and five the i m f chief economist  dangerous incentives could lead to a crisis then came nouriel roubini warnings in two thousand and six allan sloan articles in fortune magazine and the washington post in two thousand and seven and repeated warnings from the i presentation called who's holding the bag which described how the bubble would unravel and in early two thousand and eight charles morris published his book about the impending crisis you're just not sure what to do and you might have some suspicions that underwriting standards are being weakened but then the question is should you do anything about it by two thousand and eight home foreclosures were skyrocketing and the securitization food chain imploded lenders could no longer sell their loans to the investment banks and as the loans went bad dozens of lenders failed chuck prince of citibank famously said in loans c d o zz and real estate they couldn't sell when the crisis started but that with the bush administration and the and the federal reserve were totally behind the curve they did not understand the extent of it at what point do you remember thinking for the first time this is dangerous this is bad i remember very well it was a g seven meeting of february two thousand and eight and i remember should could have come in and put in place you know various kinds of measures that would reduce system risk the information i'm receiving from some entities is the end is not here that there are other anyway reflects the change of view of the housing correction or the strength of other u s financial institutions two days later lehman brothers announced record losses of three point two billion dollars and its stock collapsed the effects of lehmann in september still came as a surprise i mean this is even after july and fannie and freddie so clearly there was stuff that as of september major stuff when they were rescued citi group merrill all of them had investment grade ratings how can i be well that's a good question that's a great question and no point in this race never go to all the major institutions and say you know this is serious tell us what your positions are you know no bullshit where are you well first as with the regulators it's their job right their job is to understand the exposure across these different institutions and they have a very refined understanding that i think became more response more refined is the crisis proceeded so give me but that's clearly not true i mean what time we tories clear that earlier credit ratings were inaccurate because they had been downgraded substantially you know they had they're still there was still some downgrading in terms of the industry concerns this really this talk about all those firms were rated at least eight to until a couple of days before they were rescued but then you know then the answer is i just don't don't know enough to really answer your question on this particular issue governor is resigning effective august thirty one he says he plans to return to his teaching post at columbia's graduate school of business why did you leave the federal most i'm sure your text book is important widely read but in the two thousand and eight summit more important things were going on in the world don't you think by friday september twelfth lehman brothers had run out of cash and the entire investment banking industry was sinking fast the stability of the global financial system was in jeopardy that weekend henry paulson and timothy geithner president of the new york federal reserve called an emergency meeting with the o s of the major banks in an effort to rescue lehman lehman wasn't alone merrill lynch another major investment bank was also on the brink of failure and that sunday it was acquired by bank of america the only bank interested in buying lehman was the british firm barclays the british regulators demanded a financial guarantee from the u s government  and what was your reaction when you learned of it holy cow paulson and bernanke had not consulted with other governments and didn't understand the consequences of foreign bankruptcy laws even discovered every night to that complete hora that they couldn't get those assets back one of the points of the hub and that had huge knock on effect around the system the oldest of money market fund in the nation roughly three quarters of a billion dollars and bad debt issued by the now bankrupt and lehman brothers lehman's failure also caused a collapse in the commercial paper market which many companies depend on to pay for operating expenses such as payroll i mean  lawyers they can't buy parts it stops business in its tracks suddenly people stood and said listen what can we believe and there's nothing we can trust anymore that same week thirteen billion dollars to holders of credit default swaps and it didn't have the money was another help if you had stopped you know all planes may have to be you know still flying on september seventeenth a i g is taken over by the government and one day later paulson and bernanke asked congress for seven hundred billion dollars to bail out the banks coming together they warned that the alternative would be a catastrophic financial collapse it was scary you know the entire system froze up every part of the financial system every part of the see he was the senior advocate for prohibiting the regulation of credit default swaps and also lifting the leverage limits on the investment banks so i guess when he mentioned those things i cents on the dollar rather than negotiate lower prices eventually the bailout cost taxpayers over one hundred fifty billion dollars one hundred sixty billion dollars went through fourteen billion went to goldman sachs at the same time paulson and geithner forced a i g to surrender its right to sue goldman and the other banks for fraud isn't there a problem when the person in charge of dealing with this crisis is the former c e o of goldman sachs someone who had a major role in causing it well i think it's fair to say that the financial markets today are incredibly complicated supply urgently needed money on october fourth two thousand  president bush signs a seven hundred billion dollar bailout bill but world stock markets continue to fall amid fears that a global recession is now under way the bailout legislation does nothing to stem the tide of layoffs and foreclosures unemployment in the united states and europe quickly rises to ten percent the recession accelerates and spreads globally i began to get really scared because for the whole world going down at the same rate at the same time by december of two thousand general motors and chrysler are facing bankruptcy so we just took a hit you know fell off a cliff but even as that crisis unfolded we didn't know why it was going to spread the house of it was going to be and we were still hoping that there would be some way for us to have a shelter and every time a home goes into foreclosure it affects everyone let's around us that property goes on the market it's going to be sold at a lower price maybe before it goes on the market it won't be well maintained we estimate another nine miners will ease the wounded vast majority i've seen lately unfortunately are people who've just been hurt by the economy they were living you know day to day paycheck to paycheck and unfortunately that ran out and an employment isn't going to pay mortgage it's not going to pay a car bill was a large truck driver and they there's just no jobs right now when the company did well we did well when the company did not do sure we did not do well the men who destroyed their own companies and plunged the world into crisis walked away from the wreckage with their fortunes intact the top five executives at lehman brothers made over a billion dollars between two thousand and two thousand and seven and when the firm went bankrupt they got to keep all the money the system works it doesn't make any sense for us to make the loans going to fail because we lose they lose the bar loses their community loses and we lose countrywide c e o angelo mozilo made four hundred seventy million dollars between two thousand and three and two thousand and eight one hundred forty million came from dumping his countrywide stock in the twelve months before the company collapsed directors and the compensation committees are the two bodies best situated to determine the pay packages for executives how do you think they've done over the past ten years well i think that if you look at those i would give  of merrill lynch received ninety million dollars in two thousand and six and two thousand and seven alone after driving his firm into the ground merrill lynch's board of directors allowed him to resign and he collected one hundred sixty one million dollars in s instead of being fired dan o'neill has allowed to resign and takes away one hundred fifty one million dollars that's a decision that the board of directors made at that point and what grade you give that decision that's a tougher one i don't know if i would give that one to be as well o'neill successor john thing was paid eighty seven million dollars in two thousand and seven and in december of two thousand and eight two months after merrill was bailed out by us taxpayers thing and meryl's board handed out billions  bonuses in march of two thousand and eight financial products division lost eleven billion dollars instead of being fired joseph cassano the head of ai g f p was kept on as a consultant for a million dollars a month and you want to make sure that the key players in the key key employees within i g f p you know we retain that intellectual knowledge and i attended a very interesting organized behind post a little more than one year fine and then that would turn into the treasury secretary of the treasury and say you should regulate more because we're too greedy would come avoid it the one way to avoid this is to have more regulation i have spoken to many bankers about this question including very senior ones and this is the first time that i've ever heard anybody say that they actually wanted their compensation to be regularly that it was at the moment where they were afraid and after  lobbyists more than five for each member of congress do you think the financial services industry has excessive political influence in the united states you know i think that every person in and in the country is represented here in washington and you think that all segments of american society have equal and fair access to a system that you can walk into any hearing room that you would like yes  walk into any hearing room one cannot necessarily write the kind of lobbying checks that your industry writes or engage in the level of political contributions that your industry engages in between one nine hundred ninety eight and two thousand and eight the financial industry spent over five billion dollars on lobbying and campaign contributions and since the crisis they're spending even more money the financial industry also exerts its influence in a more subtle way one that most americans don't know about the economics profession was the main source of that since the one nine hundred eighty s academic economists have been major advocates of deregulation and played powerful roles in shaping u s government policy very few of these economic experts warned about the crisis and even after the crisis many of them opposed reform the guys who taught these things tend to get paid a lot of money  business school professors don't live on a faculty salary they do very very well over the last decade the financial services industry has made about five billion dollars worth of political contributions in the united states it's kind of a lot of money that doesn't bother you know martin feldstein is a professor at harvard and one of the world's most prominent economists as president reagan's chief economic advisor he was a major architect of deregulation and from one thousand nine hundred eighty eight until two thousand and nine he was on the board of directors of both a i g and a i g financial products which paid him you have any regrets about you know geez decisions i cannot say anything more about a i g taught it northwestern chicago harvard and columbia glenn hubbard is the dean of columbia business school firms who declined to be interviewed for this film is a professor at the university of california berkeley of the council of economic advisers and then director of the national economic council in the clinton administration shortly after leaving government she joined the board of morgan stanley which pays her three hundred fifty thousand dollars a year ruth simmons the president of brown university makes over three hundred thousand dollars a year on the board of goldman sachs larry summers who as treasury secretary played a critical role in the deregulation of derivatives became president of harvard in two thousand and one while at harvard he made millions consulting to hedge funds and millions more in speaking fees much of it from investment banks according to his federal disclosure of summer's net worth is between sixteen point five million and thirty nine point five million dollars frederick michigan who returned to columbia business school after leaving the federal reserve reported on his federal disclosure report that his net worth was between six million and seventeen million dollars in two thousand six you coauthored a study of iceland's financial system right iceland is also an advanced country with excellent institutions low corruption rule of law our economy has already adjusted to financial liberalization while prevention regulation supervision is generally quite strong and that was the mistake that turns out that that the prudential regulation and supervision was not strong in iceland and particularly if you think that it was i think that you're going with the information you had and generally the view was that that that iceland had very good institutions it was a very advanced country and they were not  did you do you do you talk to people you have faith in the central bank which actually did fall down on the job that clearly at this point you have faith in a central bank well that's faith because you go with the anybody does research topic that they disclose if they have any financial conflict with that but if i recall there is no policy to that effect i can't imagine anybody not doing  in terms of putting it on a paper you would it would be significant professional sanction for failure to do that i didn't see any place in study where you indicated that you had been paid by the icelandic chamber of commerce to produce it  k richard porter's the most famous economist in britain and a professor at london business school was also commissioned by the icelandic chamber of commerce in two thousand and seven to write a report which praised the icelandic financial sector disclose his payment from the icelandic chamber of commerce is harvard required disclosures of financial conflict of interest in publications not to my knowledge do you require people to report the compensation they've received from outside if you don't think that's a problem i don't see why martin feldstein being on the board of the g laura tyson going on the board of morgan stanley larry summers making ten million dollars a year consulting to financial services firms irrelevant you know basically irrelevant you've written a very large number of articles about a very wide array of subjects you never saw fit to investigate the risks of unregulated credit i never did same question with regard to executive compensation the regulation of corporate governance the effective political contribution and i don't know that i would have anything to add to those discussions i'm looking at your resume now it looks to me as if the majority of your outside activities are consulting and directorship arrangements with the financial services industry is that would you not agree with that characterization n knowledge i don't think my consulting clients are even on my c v who are your consulting clients i don't believe i have to discuss that with you ok you have a few more minutes interviews over do you c lt for any financial services firms the answer is i do and and i don't want to go into details about that do they include other financial services firms possibly you don't remember this isn't a deposition so i was polite enough to give you time foolishly i now see you have three more months give it your best shot in two thousand and four at the height of the bubble glenn hubbard coauthored a widely read paper with william volatility in the economy and stated that recessions had become less frequent and milder credit derivatives were protecting banks against losses and helping to distribute risk for medical research an article saying treat this disease you should prescribe this drug turns out doctor makes eighty percent of personal income from manufacture this drug does not bother you i think it well i think that's also a little different from cases that we're talking about here because  the rising power of the us financial sector was part of a wider change in america since the one nine hundred eighty s the united states has become a more unequal society and its economic dominance has declined companies like general motors chrysler and u s steel formerly the core of the u s economy were poorly managed and falling behind their foreign competitors and as countries like china opened their economies american companies send jobs overseas to save money for many many years the six hundred sixty million people in developed world were effectively sheltered from all of this additional labor that existed on the planet suddenly the bamboo curtain and the iron curtain are lifted and you have two point five billion additional people american factory workers were laid off by the tens of thousands manufacturing base was destroyed literally over the course of a few years as manufacturing declined other industries rose the united states leads the world in information technology where high paying jobs are easy to find but those jobs require an education and for average americans college is increasingly out of reach while top private universities like harvard have billions of dollars in their endowments funding for public universities is shrinking and tuition is rising tuition for california's public universities rose from six hundred fifty dollars in the one nine hundred seventy s to over ten thousand dollars in two thousand and ten increasingly the most important determin whether americans go to college is whether they can find the money to pay for it meanwhile american tax policy shifted to favor the wealthy when i first came to office i thought taxes were too high and they were the most dramatic change was a series of tax cuts designed by glenn hubbard who at the time was serving as president bush's chief economic adviser the bush administration sharply reduced taxes on investment gains stock dividends and eliminated the estate tax we had a comprehensive plan that one actually has left nearly one point one trillion dollars in the hands of american workers families investors and small business owners most of the benefits of these tax cuts went to the wealthiest one percent of americans and by the way it was really the cornerstone in many ways of our economic recovery policy any quality of wealth in the united states is now higher than in any other developed country american families respond to these changes in two ways by working longer hours and by going into debt and the middle class falls further and further behind there is a political courage to respond by making it easier to get credit you don't have to have a lousy home the low income home buyer can have just as nice a house as anybody else american families all went to the top one percent for the first time in history average americans have less education and are less prosperous than their parents air of greed and irresponsibility on wall street and in washington has led us to a financial crisis as serious as any that we've faced since the great depression when the financial crisis struck just before the two thousand and eight election barack obama pointed to wall street greed and regulatory failures as examples of the need for change in america a lack of oversight in washington and on wall street is exactly what got us into this mess after taking office president obama spoke of the need to reform the financial industry we want to systemic risk when you later increase capital requirements we need a consumer financial protection agency and we need to change wall street's culture but when finally enacted in mid two thousand and ten the administration's financial reforms were weak and in some critical areas including the rating agencies lobbying and compensation nothing significant was even proposed addressing  and quote regulatory reform my response was one word would be ha there's very little room for how come it's a wall street government was testifying to be confirmed as treasury secretary he said i have never been a regulator that's said to me he did not understand his job as president of the new york  the new president of the new york fed is william dudley the former chief economist of goldman sachs whose paper with glenn hubbard praised derivatives chief of staff is mark paterson a former lobbyist for goldman and one of the senior advisors is lewis sachs who oversaw a company heavily involved in betting against the mortgage securities it was selling to head the commodity futures trading commission obama picked gary gensler a former goldman sachs executive who had helped ban the regulation of derivatives to run the securities and exchange commission obama picked mary shapiro the former c e o of the investment banking industry's self regulation body obama's chief of staff rahm emanuel made three hundred twenty thousand dollars serving on the board of freddie mac both martin feldstein and laura tyson are members of obama's economic recovery advisory board and obama's chief advisors going to be status quo the obama administration resisted regulation of bank compensation even as foreign leaders took action i think the financial industry is a service industry it should serve others serves itself in september of two thousand and nine christine legarde and the finance ministers of sweden the netherlands luxembourg italy spain and germany called for the g twenty nations including the united states to impose strict regulations on bank compensation and in july of two thousand and ten the european parliament and acted those very regulations the obama administration had no response they of mid two thousand and ten not a single senior financial executive had been criminally prosecuted or even arrested no special prosecutor had been appointed not a single financial firm had been prosecuted criminally for securities fraud or accounting fraud the obama administration has made no attempt to recover any of the compensation given to financial executives during the bubble i certainly would think of criminal action against some of but i think they could do it if they got underlings to tell the truth in an industry in which drug use prostitution and fraudulent billing of prostitutes is a business expense a car on an industrial scale it wouldn't be hard to make ability that you don't use people's personal vices in the context of wall street cases necessarily to get them i think maybe it's after the cataclysms that we've been through maybe people will for decades the american financial system was stable and safe but then something changed the financial industry turned its back on society corrupted our political system and plunged the world economy into they will tell us that we need them and that what they do is too complicated for us to understand they will tell us it won't happen again they will spend billions fighting reform  but some things are worth fighting for