CLOCK INFO:

Title: THE FLAW

Texted Master

Production Company: Beak Street Films

Frame Size: 1920X1080

Frame Rate: 23.98

Dur: 81’36”

rx: 08/11/11

ch 1&2 Stereo Mix

ch 3&4 Stereo m&e

Time-codes & Captions

Dialogue

01:00:23:14

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A Studio Lambert Production

01:00:27:01

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in association with

01:00:29:08

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Dartmouth Films

01:00:32:10

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A David Sington Film

01:00:35:23

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Executive Producers

Stephen Lambert

Christopher Hird

Luke Johnson

01:00:41:24

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Associate Producers

Sarah Kinsella

Heather Walsh

Celine Fitzmaurice

01:00:48:03

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Archive Producer

Jacqui Edwards

01:00:53:20

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Consultant

Alex Crossman

01:00:59:24

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Graphic Designer

Peter J Richardson

01:01:06:04

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Original Music

Philip Sheppard

01:01:13:04

01:01:14:24

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Cinematography

Clive North

Reporter (Archive)

The bursting of the nation’s housing bubble adds up to.

01:01:16:15

Reporter (Archive)

It’s a shake up on Wall Street.  …bankruptcy protection.

01:01:21:14

01:01:25:09

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Film Editor

David Fairhead

Reporter (Archive)

… the government takeover of mortgage giants Fannie Mae and Freddie Mac.

01:01:25:21

Christine Romans (Archive)

Alan Greenspan calls it a once in a century financial crisis. 

01:01:29:20

01:01:30:17

CAPTION

Directed by

David Sington

Reporter (Archive)

Meltdown on Wall Street.  The worst since 911.  One giant collapses, another is bought.

01:01:34:07

Reporter (Archive)

[INAUDIBLE] economic generals warn in congress.

01:01:36:13

01:01:36:20

CAPTION

NEW DEVELOPMENTS

FEDS SUGGEST BAILOUT OR BUST

Reporter (Archive)

Approve a $700 billion bailout or face dire consequences.

01:01:41:07

Male (Archive)

The outlook for the economy and thus for credit quality remains uncertain.

01:01:45:19

Reporter (Archive)

I have talked to the heads of almost every single one of these firms in the last 72 hours and he has no idea what it’s like out there.  None.

01:01:53:00

01:01:53:15

CAPTION

ALAN GREENSPAN

Former Chairman

Federal Reserve Board, 1987-2006

Alan Greenspan (Archive)

Yes I found a flaw.  I don’t know how significant or permanent it is but I’ve been very distressed by that fact.

01:02:01:22

TITLE GRAPHIC

THE FLAW

01:02:06:16

TITLE GRAPHIC

MARKETS

MONEY

MORTGAGES

AND THE GREAT AMERICAN MELTDOWN

01:02:56:23

01:03:08:14

CAPTION

Andrew Luan

former mortgage bond trader

01:03:13:23

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now a Wall Street tour guide

01:03:31:16

CAPTION

NEXT

Financial Market Regulators

House Oversight & Government

Reform Committee

Andrew Luan

Welcome to New York City.  Financial capital of the world.  Welcome to Wall Street.  This is the heart of American capitalism.  Before I begin a few things about the tour.  One is, I’m not used to the camera in front of me.  One is let’s make this tour interactive.  Feel free to ask me questions.  One of the things I love the most is you guys getting the aha moments.  If you can walk away today with a better understanding of Wall Street, better understanding of the financial crisis I’ve done my job right? 

01:03:36:24

01:03:40:04

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Financial Market Regulators

House Oversight Committee

01:03:47:05

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ALAN GREENSPAN

Former Chairman

Federal Reserve Board, 1987-2006

01:03:49:01

CAPTION

REP. HENRY WAXMAN

D-California, Oversight & Gov’t

Reform Committee – Chairman

01:03:53:16

CAPTION

Financial Market Regulators

House Oversight Committee

Henry Waxman (Archive)

Committee will please come to order.  I will start the questioning.  Doctor Greenspan I want to start with you.  And my question for you is simple.  Were you wrong? 

01:03:54:08

Henry Waxman (Archive)

Be sure the mike is turned on. 

01:03:57:19

01:04:00:20

CAPTION

ALAN GREENSPAN

Former Chairman

Federal Reserve Board, 1987-2006

Alan Greenspan (Archive)

Partially but let’s separate this problem into its component parts. 

01:04:05:07

01:04:09:13

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Robert Shiller

Professor of Economics

Yale University

Robert Shiller

We’re talking about explaining history, major world historic events. 

01:04:12:11

01:04:18:03

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Louis Hyman

Economic Historian

Harvard University

Louis Hyman

This is as much a wealth crisis as a debt crisis.  It’s a problem of wages as much as investment. 

01:04:20:17

01:04:26:12

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George Cooper

Fund Manager

Blue Crest Capital

George Cooper

It’s a debt crisis but it’s also very much a crisis of economic theory. 

01:04:29:05

01:04:36:15

CAPTION

Robert Frank

Professor of Economics

Cornell University

Robert Frank

I think the income distribution was the initial step in the dynamic that drove the debt crisis.

01:04:39:13

01:04:47:07

CAPTION

Nell Minow

corporate watchdog

The Corporate Library

Nell Minow

It’s horrifying.  This is, you know, all the people that we trusted have turned out to be completely untrustworthy.

01:04:50:08

01:04:55:19

CAPTION

Joseph Stiglitz

Nobel Prize for Economics

Columbia University

Joseph Stiglitz

This crisis is a total failure of markets.

01:05:00:04

GRAPHIC

MARKETS

OR

THE PRICE IS RIGHT

01:04:57:24

Robert Shiller

So it’s not simple.

01:05:11:13

Andrew Luan

In a short span of time between March 2008 to September 2008 so many things happened.  Fear was in the market place.  And if someone was going to tell you in six months two of the top investment banking would fail and they would tell you the top US insurance company would fail.  And they’d tell you Fannie and Freddie, top mortgage issuers, bankrupt.  Oh Iceland bankrupt.  Bankers around the world.  If someone would tell you this would happen in a short six months you’d think they were crazy.  But that’s essentially what happened. 

01:05:47:11

01:05:50:09

CAPTION

Financial Market Regulators

House Oversight Committee

01:05:57:02

CAPTION

REP. HENRY WAXMAN

D-California, Oversight & Gov’t

Reform Committee – Chairman

Henry Waxman (Archive)

Doctor Greenspan you had an ideology.  You had a belief that free competitive markets are by far the unrivalled way to organise economies.  We’ve tried regulation.  None meaningfully worked.  That was your quote.  Do you feel that your ideology pushed you to make decisions that you wish you had not made?

01:06:11:01

01:06:13:06

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Financial Market Regulators

House Oversight Committee

01:06:26:23

CAPTION

ALAN GREENSPAN

Former Chairman

Federal Reserve Board, 1987-2006

Alan Greenspan (Archive)

Well remember that whether or not ideology is, it’s a conceptual framework with a way people deal with reality.  Everyone has one.  You have to exist you need an ideology.  The question is whether it is accurate or not.  And what I’m saying to you is yes I found a flaw.  I don’t know how significant or permanent it is but I’ve been very distressed by that fact. 

01:06:37:10

Henry Waxman (Archive)

You found a flaw in the reality.

01:06:40:10

Alan Greenspan (Archive)

A flaw in the model that I perceived is the critical functioning structure that defines how the world works so to speak. 

01:06:59:09

CAPTION

It’s Everybody’s Business 1954

01:07:07:04

01:07:27:17

IN-SCREEN TEXT

FREEDOM OF WORSHIP (on archive footage)

Narrator (Archive)

It wasn’t so long ago in the history of man’s voyage to a better world that ships were carrying eager passengers towards the shores of a new nation that was just in the building.  Our forefathers were constructing the foundation of this nation by interlocking inseparably the blocks of our political and economic freedom. 

01:07:31:12

01:07:37:14

IN-SCREEN TEXT

THE RIGHT TO GO INTO BUSINESS (on archive footage)

01:07:45:11

CAPTION

Dan Ariely

Professor of Psychology

and Behavioral Economics

Duke University

Dan Ariely

In some sense economics, standard economics is a very optimistic view of human nature right?  Everybody’s wonderful.  Everybody’s great.  Every person is a perfect calculator.  And that’s basically what it means is that we have lots of actors each of them doing the best thing for them and that creates some kind of social benefit for everybody. 

01:07:56:07

01:08:11:12

IN-SCREEN TEXT

FREEDOM TO WORK IN JOB OF OWN CHOICE (on archive footage)

Narrator (Archive)

The way of life our forefathers established on this foundation of freedom drew people from the far corners of the earth and all those who set foot on these shores had the opportunity to build a better life for themselves.  Even young Jonathan, an unskilled lad from across the sea hoped to find a job where he could progress according to his ability and enterprise. 

01:08:19:17

01:08:26:09

CAPTION

Robert Shiller

Professor of Economics

Yale University

Robert Shiller

Well there’s many factors that ultimately underlie the current financial crisis but one thing that comes across in my mind is the intellectual change.

01:08:30:18

Narrator (Archive)

An idea.  Mm an idea. 

01:08:33:22

Robert Shiller

In the 1970s the so-called efficient markets hypothesis began to be received doctrine in the universities. 

01:08:45:11

Dan Ariely

The simple version of the efficient market hypothesis is that you have a value of something in the market whatever it is.  If it’s too low people would recognise it and then you would bid the price up.  If it’s too high people would recognise it and then they’ll bid the price low.  So you might have one opinion.  I might have the other opinion.  But the opinion of all of us in average is going to be kind of the correct opinion.  What’s called the wisdom of crowd. 

01:09:07:12

Robert Shiller

This is a hypothesis that all financial asset prices are correct at all time.  Well correct in the sense that they accumulate all of the information, pool the information and then become wiser than any one individual so that it would be foolhardy to ever question a market price. 

01:09:29:16

Narrator (Archive)

While the main street of today doesn’t look much like the main street of Jonathan’s time the principles about business system remain the same.  But businessmen still compete with one another for the consumers supply of spendable dollars.  And Mrs Consumer is still mighty critical of everything she buys. 

01:10:32:00

IN-SCREEN TEXT

Yale University

(on sign)

01:09:47:15

01:09:54:21

CAPTION

George Cooper

Fund Manager

Blue Crest Capital

George Cooper

So under that thesis prices are always at the correct price.  You can’t have an asset price bubble in the efficient market hypothesis.

01:09:59:21

Andrew Luan

So let me tell you a bit more about myself.  After MIT I went to Silicon Valley and so I was there before the bubble, during the bubble and slightly after the bubble, the internet bubble that is.  And so you know, after the bubble I was like looking around and I was like wow you know, what I’m doing is really risky, I’ve got to find something more stable.  What I became is I became a bond trader. Of essentially subprime mortgages bonds. 

01:10:36:13

Robert Shiller

I think we know what a bubble is.  It’s a phenomenon that has been repeating many times in history.  If you look at the Oxford English dictionary I think it says something like, a speculative price increase that’s not justified.  It’s filled with air like a bubble and it eventually bursts. 

01:10:58:18

Robert Shiller

Economists would like to come up with a good explanation.  Why did we have a stock market bubble in the 1990s and then a real estate bubble in the 2000s? 

01:11:09:21

01:11:13:20

CAPTION

Robert Shiller

Professor of Economics

Yale University

Robert Shiller

I like to give explanations that sound right to me and maybe a little disreputable in our own profession.  And they’re cultural explanations.  One thing that strikes me as having been very formative for people’s thinking was the explosion of capitalism.

01:11:27:16

Ronald Reagan (Archive)

Government is not the solution to our problem.  Government is the problem. 

01:11:35:22

Robert Shiller

It started with the Margaret Thatcher and Ronald Reagan revolutions that brought free markets to more prominence. 

01:11:45:03

Robert Shiller

And then it moved on with the breakup of the Soviet Union. 

01:11:59:00

Robert Shiller

The advent of capitalism in China.  It seemed like there was an intellectual revolution.  That people believed in markets.  And so people thought that we’re in a new world, private property reigns.  It struck a tone of fear in people that I better get on this or I will be left behind.  I’d call it a gold rush mentality.  And it led to people changing their self-image.  They thought that I have to change to become part of this, to be smart and stay afloat in this world.  I’m going to be an investment genius. 

01:12:38:14

Narrator (Archive)

Play your hand at hotjobs.com. 

01:12:40:07

Narrator (Archive)

Dot com.

01:12:40:24

Narrator (Archive)

Dot com. 

01:12:41:17

01:12:43:08

CAPTION

Louis Hyman

Economic Historian

Harvard University

Louis Hyman

It looked like the dot com, all those tech stocks were a great way to invest your money and so money flooded in. 

01:12:48:03

01:12:48:07

CAPTION

Glove Puppet/Pets.com/TWBA/Chiat/Day

01:12:49:13

CAPTION

‘dot com’ commercials broadcast January 2000

Narrator (Archive)

Today I’m talking to some city pets.  Ooh, ooh, hey poodles did you know that pets.com delivers food, treats and toys?

01:12:56:10

Louis Hyman

And lo and behold you can’t make money selling pet food on the internet. 

01:13:00:10

Louis Hyman

But people thought it was this new opportunity for investment. 

01:13:04:10

Doctor (Archive)

Doctor I think you should see this.

01:13:06:07

Lady (Archive)

Why what it is?

01:13:08:06

Doctor (Archive)

He’s got money coming out the wazoo.

01:13:10:12

Doctor (Archive)

What do we have?

01:13:10:22

Doctor (Archive)

Money out the wazoo.

01:13:13:01

01:13:15:04

CAPTION

You should be so lucky. 

Doctor (Archive)

Move this man to a private room.

01:13:16:10

Narrator (Archive)

It’s time for e-trade. 

01:13:17:08

Robert Shiller

Unfortunately we were embarrassed by the fall in stock prices so we had to turn to some way of maintaining the ego we had just developed. 

01:13:30:12

Robert Shiller

I think we had a smart response called sector rotation.  Rotate out of the, that’s a little bit of jargon.  Rotate out of the equity sector into the property sector.

01:13:40:03

Narrator (Archive)

Introducing the world’s fastest money making system.  John Alexander’s Real Estate Riches in 14 days! 

01:13:45:13

01:13:48:01

CAPTION

John Alexander, LLC and Family Products, LLC

Robert Shiller

It accelerated largely through media.  Television shows that focused on the bubble and ad campaigns that reinforced notions that seemed to support the bubble.

01:13:55:22

01:13:59:09

CAPTION

STAY TUNED TO FIND OUT HOW!

John Alexander (Archive)

Wouldn’t you like to learn how to make a fortune in real estate without needing any money?

01:14:01:02

Robert Shiller

People were so pleased that they had found this smart, at home, investment that they understood and knew and that they were very confident about. 

01:14:09:23

John Alexander (Archive)

There’s no reason that you can’t be living the same life I am in no time at all. 

01:14:20:10

01:14:33:09

CAPTION

Ed Andrews

Economics Correspondent

New York Times

01:14:36:14

CAPTION

Delinquent Borrower

Ed Andrews

It’s humiliating.  I am an economics correspondent for the New York Times and I’m 10 months past due and in extended discussions with the lender.  I’m kind of amazed actually that I’m still in this house. 

01:14:42:02

01:14:54:17

CAPTION

Anotinette Coffi-Ahibo

Optician

01:14:57:01

CAPTION

in foreclosure

Antoinette Coffi-Ahibo

That deal that I got is not a good deal and I cannot keep the house with this deal.  All the bad mortgage you can ever imagine in this planet that the kind of mortgage I have. 

01:15:03:15

01:15:12:01

CAPTION

Steve Nahas

Real Estate Investor

01:15:16:23

CAPTION

underwater

01:15:22:19

CAPTION

Clifton, Virginia

Steve Nahas

I’m a working stiff.  I’m a regular guy.  I have a job.  I’m trying to get ahead.  And I thought this was a smart way to do it. 

01:15:23:07

Steve Nahas

Here’s how it started for me.  I got married 6 years ago.  And about a year into our marriage my wife was saying at home and decided now I want to do something so she looked around and thought she’d try to sell real estate and she took the course, passed the test, went to work for a pretty large Century 21 office in our area and the broker there, that was maybe 2 years into the boom, and he said to her, he said, I would recommend everybody that owns a house borrow as much as you can against it.  Take out every nickel that you can and invest it in real estate.  You just can’t lose. 

01:16:01:08

Man (Archive)

You can always tell can’t you a town with good real estate people is a more substantial community because more people own their own homes.

01:16:10:06

Man (Archive)

That’s right. 

01:16:22:15

Steve Nahas

You can look at a house that was 2 years ago 300,000 and now they’re 600,000.  They’re just astronomical.  And you see it happening all around you.  Everybody’s getting in on it so I’d been in my house 12 years or something like that and I’d built up equity and I thought wow he’s right, I should do that.  So that’s what I did. 

01:16:46:09

01:16:57:23

CAPTION

George Cooper

Fund Manager

Blue Crest Capital

George Cooper

The efficient market hypothesis is built on a simple idea.  That as the price of a good goes up we tend to demand less of it.  So the supply and demand matches.  That’s what gives us the stability in the system. 

01:17:02:05

George Cooper

If you imagine for example something like a refrigerator.  If its price rises dramatically people are going to make do with the refrigerator they’ve already got.  When they start to treat a good as a financial asset as people started to do with houses in the boom. 

01:17:22:23

George Cooper

That’s when you get into a very unstable market. 

01:17:33:09

01:17:38:23

CAPTION

Robert Frank

Professor of Economics

Cornell University

Robert Frank

Asset markets are dramatically less stable than goods markets.  You don’t see the price of Chevrolets skyrocket and then plunge. 

01:17:44:11

George Cooper

The key difference between an asset and a good is when you buy a good you want to use it.  You’re not going to resell it.  When you’re buying an asset you’re buying it in the hope of being able to sell it in the future for a higher price.  So if we see that its price is rising we then tell ourselves that we’re very smart and we go out and buy some more of that asset.  So in goods markets when prices rise demand falls.  In asset markets when prices rise demand often rises as well.

01:18:19:09

Robert Frank

In the asset market the very fact of its having grown in price fuels demand for additional purchases of the asset.  It also fuels additional purchasing power because people can borrow more against the value of the assets they own that went up in price. 

01:18:45:05

George Cooper

Most of these assets are bought financed with debt. 

01:18:53:20

George Cooper

When we buy a house we buy it with a mortgage so it’s debt financed.  If one of those assets goes up you’re able to borrow more money against that asset so your spending power for new assets rises as the prices go up. 

01:19:15:05

Steve Nahas

I bought several investment properties.  I buy one and I took equity out of my house or I’d buy one and then go look at another one, take equity from the one I’d just bought, in order to buy as much as I could.

01:19:31:14

Steve Nahas

I bought at exactly the wrong time.  I went on a buying spree right at the peak. 

01:19:39:23

Steve Nahas

In fact the most expensive property I bought in Hawaii is still today the highest price in that development 3½ years later.  I was the peak.  And to buy around the peak I was the highest one.  Immediately after that the next one was less. 

01:19:56:10

Interviewer

How does that make you feel?

01:19:57:19

Steve Nahas

Great. 

01:20:04:13

01:20:06:06

CAPTION

Financial Market Regulators

House Oversight Committee

Henry Waxwell (Archive)

Doctor Greenspan your view of the world, your ideology was not right.  It was not was working.

01:20:10:14

Alan Greenspan (Archive)

Precisely.  No that’s precisely the reason I was shocked because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well. 

01:20:24:16

George Cooper

Greenspan had been working to the assumption that the financial system was a self-stabilising system.  It meant that he took a view of asset price bubbles, which was that it really wasn’t in his remit to do anything about them. 

01:20:50:18

George Cooper

He had this idea that the Central Bank should never question asset prices.  It should only take action when asset prices started to fall.  So whenever there was the tiniest slowdown he’d be leaping in with monetary stimulus cutting interest rates and trying to boost activity again.  And of course boosting economic activity is just a euphemism for trying to encourage the economy to borrow even more.  Creating a credit boom or a credit bubble.  So we’re in this crisis in large part because our Central Banks have, for the last two or three decades, encouraged us to borrow more and more and more and eventually got us into this unsustainable state. 

01:21:43:13

George Cooper

Now if the Central Banks operating its interest rate policy in a way to encourage asset prices to keep inflating obviously that’s going to benefit that portion of society that owns assets which is typically the wealthy end of the spectrum already. 

01:22:04:07

GRAPHIC

MONEY

THE RICH

THE FILTHY RICH

AND THE REST

01:22:10:11

01:22:16:01

CAPTION

It’s Everybody’s Business 1954

Narrator (Archive)

In 1900 many men had to work 10 hours a day, 6 days a week, to earn enough money to provide their families with the bare essentials.  And labour was the rule in the home as well as the factory.  A half century later we had invested enough in our business system to provide the average worker with efficient and expensive buildings and machinery to enable him to produce enough in a 40 hour week to earn twice as much as the 1900 worker earned in a 60 hour week.  This shorter work week gives us all more leisure time to enjoy a standard of living beyond the wildest dreams of anyone who lived a half century ago.  The more we earn the more our families have to spend for the things they need and want. 

01:23:05:14

01:23:14:21

CAPTION

Louis Hyman

Economic Historian

Harvard University

Louis Hyman

You ask an American when was America most prosperous in the 20^th century?  Most Americans outside of financiers on Wall Street will tell you the 1950s.  It’s thought of as this time of perfection.  This golden age of capitalism with big fin cars and houses and anybody, any guy, could get a job and support his wife and kids.  And this kind of lifestyle isn’t possible for most people today. 

01:23:33:23

Narrator (Archive)

And fortunately we have been able to raise our standard of living without sacrificing the spiritual side of life which means so much to the American family. 

01:23:44:16

01:23:53:11

GRAPHICS ON SCREEN

Graph showing income and equality

01:24:03:07

TEXT ON GRAPH

SHARE OF U.S NATIONAL INCOME EARNED BY THE TOP 1% OF TAXPAYERS (on horizontal axis)

Louis Hyman

Now this is also the moment in America that has the least income inequality in our history.  And I don’t think that’s a coincidence. 

01:23:58:12

Louis Hyman

Before the sort of World War II period income inequality was very high.

01:24:06:06

01:24:13:03

CAPTION

Robert Wade

Professor of Political Economy

London School of Economics

Robert Wade

The share of total American income going to just the top 1% peaked in 1929 at about 22%.  Which is an extraordinary figure.

01:24:22:22

Louis Hyman

And then as you go into World War II income inequality falls from 1945 to 1970. 

01:24:29:10

Robert Wade

In the 1970s the top 1% were getting only 9%.  That was a huge fall. 

01:24:38:08

Louis Hyman

And then in the 1970s you start to see it rise again.  Accelerating in the 1980s. 

01:24:49:07

01:24:52:22

CAPTION

Robert Frank

Professor of Economics

Cornell University

01:24:56:14

GRAPHICS ON SCREEN

Graph

TEXT ON GRAPH

SHARE OF INCOME TOP 1% (title)

SHARE OF U.S NATIONAL INCOME EARNED BY THE TOP 1% OF TAXPAYERS (on horizontal axis)

Robert Frank

There’s been a big shift in the way income growth has occurred in the United States certainly but also in other countries as well but not to the same degree.

01:25:00:14

Robert Frank

What we’ve seen is that unlike the three decades right after World War II when incomes grew at about the same rate for everyone starting in the early 70s roughly income growth started accumulating only at the top.

01:25:23:24

01:25:34:22

GRAPHICS ON SCREEN

Graph

TEXT ON GRAPH

SHARE OF INCOME TOP 1%

(title)

SHARE OF U.S NATIONAL INCOME EARNED BY THE TOP 1% OF TAX PAYERS (on horizontal axis)

Robert Wade

The share of the top 1% went shooting up like a July the 4^th skyrocket back up to about the same as in 1929. 

01:25:40:03

George Cooper

And partly that can be explained by the credit boom or the credit bubble. 

01:25:43:11

Man (Archive)

You were okay up to that credit business, couldn’t you make that a bit clearer? 

01:25:47:22

Louis Hyman

To really understand it you have to go back to the 1920s. 

01:25:54:06

Louis Hyman

There was increasingly inequality but there was also increasing debt. 

01:26:00:03

01:26:04:04

IN-SCREEN TEXT (Archive)

Buy an Electric Refridgerator

Robert Wade

The US was developing great productive capacity in consumer goods industry such as refrigerators, such as radios, such as automobiles. 

01:26:13:01

George Cooper

And these were very expensive for the average worker at the time. 

01:26:17:22

Louis Hyman

And so over the mid 20s to late 20s there’s an incredible explosion of instalment credit in America.  People could borrow to pay for all the new modern electric appliances. 

01:26:28:11

George Cooper

And you had a rapid rise in credit in the economy to the point at which we got too much credit, too much indebtedness and then eventually the system collapsed. 

01:26:45:00

01:26:53:14

GRAPHICS ON SCREEN

Graph

TEXT ON GRAPH

TOTAL US DEBT AS A PERCENTAGE OF GDP (title)

TOTAL US DEBT AS A PERCENTAGE OF GDP (on horizontal axis)

Robert Wade

So the 1920s can actually be seen as a kind of precursor of what happened in the 2000s. 

01:27:03:04

Robert Wade

So you have a very pronounced U shape curve just as we have seen happening with income distribution. 

01:27:12:22

George Cooper

And that’s because economic activity, profit growth and credit creation are all intimately linked. 

01:27:19:12

Shop Assistant (Archive)

Ah yes dear lady.  High, high quality at a low, low price.

01:27:26:16

George Cooper

If the banks are more willing to lend it becomes easier for companies or for households to spend because they can borrow money and they can then spend it. 

01:27:36:24

Narrator (Archive)

Sales dollars from satisfied customers once again.

01:27:40:08

George Cooper

So as credit rises corporate profits rise.

01:27:44:11

Narrator (Archive)

The remainder of the profit is paid out as dividends. 

01:27:48:06

01:28:06:09

GRAPHICS ON SCREEN

Graph showing share of income earned by top 1% of taxpayers over years

(from  01:25:34:22)

And

Graph showing total US debt as a percentage of GDP over the years

(from 01:26:53:14)

George Cooper

But who tends to own the shares in the corporate and the shares in the bank?  Generally it’s the wealthier people that own the capital stock of an economy.  So if profitability is being boosted then there’s a natural tendency to polarise wealth distribution within the economy as well.

01:28:12:19

George Cooper

That’s a symptom of a credit cycle. 

01:28:17:13

Man (Archive)

Say that sure was a neat job. 

01:28:23:02

IN-SCREEN TEXT

Wall Street

01:28:24:07

Andrew Luan

That building across is the most important building of Wall Street.  That building is the House of Morgan Building.  That’s where JP Morgan’s original bank was. 

01:28:37:04

George Cooper

The institutions that are going to make the most profit from that credit creation process are of course the banks.  Every time a loan is made they take a margin on it.  Every time a bond is traded they take a margin on that as well.  So the credit bubble creates a system where you boost financial profitability more than profitability in the rest of the economy. 

01:29:02:14

CAPTION

IN 1983,

01:29:04:17

CAPTION

THE FINANCIAL SECTOR EARNED

01:29:06:20

CAPTION

15% OF U.S. CORPORATE PROFITS

01:29:10:15

CAPTION

IN 1993,

THE FINANCIAL SECTOR EARNED

25% OF U.S. CORPORATE PROFITS

01:29:17:01

CAPTION

IN 2003,

THE FINANCIAL SECTOR EARNED

40% OF U.S. CORPORATE PROFITS

01:29:20:01

George Cooper

So if there’s a boost of profitability for the banking sector it tends to drop quite quickly through to pay for bankers, through to the bonuses.  

01:29:31:09

01:29:33:06

CAPTION

Jim O’Neill

Chief Economist

Goldman Sachs

Jim O’Neill

Ha! Here we go. 

01:29:35:15

Jim O’Neill

I think the compensation strategy that we’ve had for many years is in line with best practices to encourage long term incentives. 

01:29:44:19

01:29:45:16

CAPTION

Andrew Luan

former mortgage bond trader

Andrew Luan

The closer you are to the money the more of it you make.

01:29:49:21

Dan Ariely

If I took anybody and I paid them $10 million for their job, I took you and I started paying you $10 million for your job, in 2 weeks you will think you will deserve it.

01:29:58:04

Man (Archive)

I’m looking forward to my next million. 

01:30:00:14

Jim O’Neill

We want to hire and retain the smartest people in the world.  And so we have to offer them incentives which can compete with those that are trying to attract the best and the smartest people in the world too. 

01:30:15:19

01:30:17:15

CAPTION

Nell Minow

corporate watchdog

The Corporate Library

Nell Minow

You know we just want one thing from Wall Street; we’d like them to be able to do the maths.  That’s all we want.  We just want them to be able to do arithmetic.  And they got it completely wrong. 

01:30:24:13

01:30:25:05

CAPTION

George Cooper

formerly of Goldman Sachs,

JPMorgan et al

George Cooper

If they were that good we wouldn’t have been in this mess.

01:30:27:17

Andrew Luan

Alright so our next stop’s going to be Deutsche Bank where I used to work.  Alright.  Let’s go. 

01:30:43:08

Robert Frank

So it’s been an enormous pyramiding of income and wealth in the last 30 years.  If you look at the people in the top deciles, the lion’s share of the growth that occurred there was in the top 1%.  Slice that up and you’ll see the lion’s share of the growth in the top 1% occurring in the top 1/10^th of 1% and so on as far as we’ve managed to go up and find data to check.  

01:31:07:06

CAPTION

IN 2007,

01:31:08:10

CAPTION

THE TOP 10% EARNED

01:31:10:17

CAPTION

50% OF ALL U.S. INCOME

01:31:14:02

CAPTION

IN 2007,

THE TOP 1% EARNED

24% OF ALL U.S. INCOME

01:31:17:23

CAPTION

IN 2007,

THE TOP 0.1% EARNED

12% OF ALL U.S. INCOME

01:31:22:05

CAPTION

IN 2007,

THE TOP 0.01% EARNED

6% OF ALL U.S. INCOME

01:31:26:06

CAPTION

IN OTHER WORDS,

01:31:27:07

CAPTION

15,000

AMERICANS

01:31:29:12

CAPTION

EARNED

$700

BILLION

BETWEEN THEM

01:31:33:05

CAPTION

HALF THE GDP OF

BRAZIL

01:31:43:08

Louis Hyman

For everybody else this new inequality meant a bunch of things. 

01:31:50:15

01:31:50:15

CAPTION

Going Places 1948

Narrator (Archive)

Only a business operating at a steady profit can give its workers security.

01:31:54:12

Louis Hyman

From World War II until about 1970 wages grew very steadily.  There was a widespread well-paid manufacturing economy.  Good steelwork, good car work.

01:32:05:23

Narrator (Archive)

Higher wages and steady employment. 

01:32:09:09

01:32:20:03

GRAPHICS ON SCREEN

Showing US National Income Earned by the bottom 90%

TEXT ON GRAPH

SHARE OF INCOME BOTTOM 90% (title)

SHARE OF INCOME EARNED BY BOTTOM 90% OF TAXPAYERS (horizontal axis)

Louis Hyman

All this changed after 1970.  With double whammies of the rise of globalisation and the industrialisation beginning to hit the American workforce. 

01:32:25:13

01:32:36:04

GRAPHICS ON SCREEN

Graph showing share of US income earned by bottom 90% of taxpayers over years

TEXT ON GRAPH

SHARE OF INCOME BOTTOM 90% (title)

SHARE OF INCOME EARNED BY BOTTOM 90% OF TAXPAYERS (horizontal axis)

Robert Wade

Through the 1950s, 60s, 70s, the bottom 90% of the American population was getting roughly 65% of national income. 

01:32:41:01

Robert Wade

That share fell to above 50% in the last few years. 

01:32:51:00

Louis Hyman

Adjusted for inflation the medium wages stagnated from the early 1970s except for a small blip in the early 90s until today.

01:33:08:12

CAPTION

Meanwhile...

01:33:11:03

CAPTION

...back with the Top 0.1%

01:33:13:12

CAPTION

on Westhampton Beach, Long Island

01:33:21:13

Rose Alfano

Well there are certainly primary residences here in Westhampton Beach.  But for the most part they’re secondary.  Some of these homes are third and fourth homes for some of the people here. 

01:33:37:23

01:33:40:14

CAPTION

Rose Alfano

Realtor

Rose Alfano

You can certainly get a small cottage here somewhere in $500,000 to $1 million but the lower end properties are rare and you generally need to really put some money into them to make them liveable. 

01:33:54:14

Rose Alfano

With that said you can certainly afford a house here around $900,000 or way up to $10, $12, $20 million.  So depending on how much money you have in your back pocket. 

01:34:15:03

Lawrence Citarelli

So we’re about 2 weeks away from being complete.  Homeowners taking possession in about 2 weeks time.

01:34:21:09

Rose Alfano

It’s stunning.

01:34:21:16

Lawrence Citarelli

Thank you.  Right now we’re just doing a final punch list and walkthrough and final touch ups as you can see.  Great raised panel detail.  Custom kitchens.

01:34:34:24

Rose Alfano

It’s really coming along amazingly.

01:34:37:01

Lawrence Citarelli

Thank you. 

01:34:37:24

01:34:40:02

CAPTION

Lawrence Citarelli

Real Estate Developer

Lawrence Citarelli

The gentleman who bought the house is a chief operating officer of a hedge fund in Manhattan.  And this is their summer home here in the Hamptons.  They have another home up in West Chester, Upper New York. 

01:34:49:02

Lawrence Citarelli

Here’s your home audio control for system.  Again he’s able to control the house anywhere in the country or anywhere in the world as a matter of fact.

01:34:57:06

Lawrence Citarelli

It used to be that more was better.  More was more impressive.  More was everything.  I think what we have in Westhampton Beach is what most people are looking for which is simpler.  It used to be the 10,000, 15,000 square foot house had to be.  Today that smart money is saying I want to simplify my life. 

01:35:22:05

Lawrence Citarelli

People are keen to want to scale down.  That’s what Westhampton Beach offers to people.  It offers them a simpler life.  Do I need the 17,000 square foot home or really can I survive with the 8,000 square foot home?  There’s plenty here. 

01:35:42:06

Rose Alfano

And you still get the Hampton address.

01:35:54:04

Louis Hyman

As you go up the income distribution scale what people spend their money on changes.  So that consumer goods relatively decrease. Housing increases a lot.  But then when you finally get to the top of the economy they’re spending most of their money on assets rather than manufactured goods. 

01:36:16:19

Robert Wade

And so this upwards income redistribution in itself tends to ignite asset bubbles. 

01:36:24:02

Robert Frank

That process of income distribution created a bidding for houses indirectly.  The people at the top of the income ladder buy mansions.  People in the middle don’t seem offended by that in America.  They want to see pictures of the mansions.  But what does happen is that when the people at the top build bigger their bigger houses shift the frame of reference for people who are near them in the income distribution.  People have a lot of money but not quite at the top.

01:37:07:04

Robert Frank

So you get a cascade one stage at a time that drifts down through the income distribution. 

01:37:15:06

Robert Frank

The medium family now if it wants to buy the medium priced new house for its area it’s got to buy one that’s now 2400 square feet in size.  In 1970 it was about 1600 square feet.  So 50% larger house you have to buy if you want to match the spending of people at your income level if you’re in the middle.  Well maybe you shouldn’t because you don’t have any more money, you can’t afford that house but then you say well if I don’t match the spending of people in my area it’ll be my kids who go to the inferior schools because there’s a very tight link between how good the schools are in the area and how much the houses cost.  So it’s really a dilemma for the family in the middle. 

01:38:00:18

01:38:02:14

CAPTION

Where the Heart Is 1957

Man (Archive)

Oh I don’t know what to do Jenny.  I want that house so bad I can taste it.  Maybe we ought to wait. 

01:38:10:15

01:38:22:04

CAPTION

Robert Shiller

Professor of Economics

Yale University

Robert Shiller

My colleague Carl Case and I we wanted to find out what were the dynamics of home prices and there was surprisingly little academic or scholarly literature on it.  Someone would publish a paper in you know, 1953 or something and then it would just be forgotten.

01:38:28:19

01:38:33:01

IN-SCREEN TEXT

GROWTH (on animated book)

01:38:41:02

GRAPHICS ON SCREEN

Graph showing United States home price index 1890 to 2009

TEXT ON GRAPH

HOUSE PRICES (vertical axis)

UNITED STATES HOME PRICE INDEX 1890 – 2009 (horizontal axis)

Robert Shiller

I’d find them in dusty volumes.  And I thought well I’ll link them together.  So I created for the United States a home price index from 1890 to the present. 

01:38:44:20

Robert Shiller

And when I corrected these for inflation, consumer price index inflation, to my surprise there was no increase in home prices from 1890 to 1990. 

01:38:58:23

Robert Shiller

It was just the same. 

01:39:04:00

Robert Shiller

And then there was this huge bubble in the US starting in 2000. 

01:39:15:22

Robert Shiller

And that was the only one. 

01:39:22:13

Narrator (Archive)

[INAUDIBLE] and homeowners are capitalists.  They’ve worked and saved to make the biggest single purchase in their lifetimes.  They have a share of America’s wealth.  They’ve seen capitalism work and they’ve made it work at home and at their own communities. 

01:39:39:07

Louis Hyman

On the one hand you have homebuyers struggling to make ends meet, looking for the only way they know how to make money in our economy.  They can’t make money through their labour so but maybe they can make it through buying a house and seeing the value of that house increase. 

01:39:54:02

Louis Hyman

So people look to mortgages, these easy to get mortgages as a way to finally get their share of the American dream.  And on the other hand the income inequality produced a ready supply of capital at the top to be invested as well in these kinds of mortgages so while the top was not willing to pay the bottom wages they were willing to lend them money. 

01:40:17:18

CAPTION

MORTGAGES

01:40:19:04

CAPTION

FINANCING

THE AMERICAN

DREAM

01:40:24:19

CAPTION

What Makes Us tick 1952

01:40:25:18

Narrator of movie

In a typical city or town, on a typical residential street, we find a typical home occupied by a typical America family.

01:40:37:05

Narrator of movie

Like millions of his fellow Americans, John Q Public earns enough money to keep up the payments on a new car.

01:40:49:03

Narrator of movie

He takes great pride in owning a fine, new, long-term mortgaged home, that was built to last a lifetime.

01:40:59:03

Louis Hyman

The way in which mortgages have been sold has changed tremendously over the 20^th century.

01:41:03:00

Cartoon mortgage lender

Sign right here.

01:41:04:04

Cartoon man

Mmm, mind if I read it first.

01:41:07:01

01:41:07:19

CAPTION

Louis Hyman

Economic Historian

Harvard University

Louis Hyman

In the 1920s, there were a variety of ways to borrow for a mortgage. Things that seem as though they were just invented a few years ago were actually commonplace, like balloon mortgages, or interest-only mortgages for houses.

01:41:18:10

01:41:18:20

IN-SCREEN TEXT

MODEL HOME (on sign)

Narrator on movie

Thousands of people get a big thrill out of looking at model houses, and a much bigger thrill when they buy one.

01:41:23:11

Louis Hyman

They can be amortised, or unamortised. They can be three years. They can be ten years.

01:41:26:17

Narrator on movie

…going to a model house now. Suppose we follow them.

01:41:32:08

Narrator on movie

The husband apparently isn’t very keen about it all, but you know how wives are.

01:41:36:23

Louis Hyman

So they would borrow some large fraction of the house and then refinance it in three to five years.

01:41:43:04

Louis Hyman

It’s a part of what causes the mortgage crisis of the Great Depression is that suddenly not just that everyone lost their job, because a lot of people obviously lost their job, but that investors fled the mortgage investment market. So in response to this, the Federal Government developed the FHA…

01:42:02:01

IN-SCREEN TEXT

BETTER HOUSING PROGRAM (circular logo)

FEDERAL HOUSING ADMINISTRATION

(inside logo)

01:42:05:13

Louis Hyman

…the Federal Housing Administration.

01:42:07:10

Narrator on movie

Do you know how far your pay will go in buying a house? It may surprise you to learn that you can become a homeowner even on a small salary with a National Housing Act insured mortgage.

01:42:16:24

01:42:23:09

IN-SCREEN TEXT

$40 PER MONTH

(on archive footage)

Louis Hyman

The FHA standardised the criteria for a good mortgage, by banking its standard it made it into a commodity that could be resold anywhere in America. It enabled investors in New York to be able to invest in Texas or California.

01:42:30:03

01:42:34:20

IN-SCREEN TEXT

AMORTIZED MORTGAGE

GOVERNMENT INSURED

(on archive footage)

Narrator on movie

Home ownership is the basis of a happy, contented family life. And now, through the use of a National Housing Act insured mortgage, is brought within the reach of all citizens on a monthly payment…

01:42:40:07

Louis Hyman

The FHA underwriters’ manual had very explicit criteria for what made for a good investment. So 20%, for instance, of whether a mortgage should be approved or not depended on whether or not there was class and race mixing in a neighbourhood. And so if there were restrictive deeds to keep out Jews, Asians and, most importantly African-Americans, it was considered a good investment.

01:43:05:20

Narrator on movie

Under these roofs Americans can live as Americans should. These pleasant, helpful surroundings provide the background that young Americans need and deserve.

01:43:13:09

Louis Hyman

through this policy there was the co-creation of both the ghetto and the suburb, and the consequence was that mortgage capital flooded from basically New York City into suburbs around the country. It made it very difficult for people who lived in the city, particularly areas that were multiracial or multiethnic, to get mortgage loans. And over time, over 30 / 40 years, those kinds of markets and the housing deteriorated… and it helped bring about what we see as the urban crisis.

01:44:18:16

01:44:33:23

CAPTION

Sarah Ludwig

Co-director, NEDAP

(Neighbourhood Economic Development

Advocacy Project)

Sarah Ludwig

This is Bedford-Stuyvesant in Brooklyn in New York City. There are something like 2.3 / 2.4 million people living just in Brooklyn alone. This is a very vibrant community. There is a lot of immigrants who live here and a lot of old time New Yorkers, Brooklynites, families that have lived here through the generations.

01:44:47:19

Sarah Ludwig

The work that I do, I started doing it in the early 1990s and the work was about getting access to loans in neighbourhoods that had been historically redlined, which means they were cut off from access to banking services. Bank branches either weren’t there or long abandoned the community. So we were working with community groups to try to get banks to make loans in neighbourhoods that had been cut off from financial services.

01:45:21:13

Sarah Ludwig

By the mid 1990s, the picture was just changing right in front of us, because these same neighbourhoods were suddenly flooded with credit.

01:45:34:18

Sarah Ludwig

Consumer finance companies and other lenders had realised that there was a lot of money to be made by making mortgages in neighbourhoods that had been cut off from mainstream banking.

01:45:51:03

Louis Hyman

So much money was being made during the eighties and nineties that investors had to put it somewhere. And not just money being made in the United States, but all over the world. I mean, with oil you know, with the rise of China, there’s a lot of money that’s sloshing around the world. Capitalism works. And it’s because capitalism works that there’s more money to invest than ever before, so people began to invest a lot in mortgages.

01:46:40:00

01:46:55:20

CAPTION

Jim Finkel

Chief Executive Officer

Dynamic Credit Partners

Jim Finkel

Dynamic Credit’s a specialist investment manager. We manage portfolios of financial products called mortgage securities. It really began in the late 1980s. Banks, who made mortgage loans, didn’t wanna sit and hold those mortgage loans for their full term. But they were ten year, 15 year or 30-year loans, they were clogging up the capacity of the bank. You’d lend out the money and it would take all that time to get it back in. You’re far better off originating the mortgage and selling it off.

01:47:12:10

Jim Finkel

The origins of securitisation were to take those mortgages on a pooled basis and form CDOs out of them, Collatorised Debt Obligations. CDO is that kind of conglomeration of mortgage [UNSURE OF WORD] securities that can be sold into the capital markets.

01:47:33:04

Andrew Luan

Have you guys heard about toxic asset, yeah? I’m gonna show you guys what a toxic asset looks like. I’m gonna let you guys touch and feel this toxic asset. Be careful when you handle this because it’s toxic, right? So this is a first page of a legal document of a CDO – Collaterised Debt Obligation. And the actual document itself is an inch thick. What it does it tells you how the CDO works. You basically take a pool of any regular cash-producing instruments, like a mortgage, credit card, corporate loans, you pull it together, you tronch it up, layer it and risk, different risk layers, and then you sell that to investors around the world. OK? That’s essentially what a CDO is. It’s sort of like a Frankenstein sort of security, that’s what it is.

01:48:35:21

Jim Finkel

There are a lot of attractions to doing CDOs on the money management side, you get paid anywhere from one tenth of one percent per annum on the balance on multiple billions of dollars, which could mean a couple of million dollars a year fees, to a half a percent per annum on a couple of hundred million perhaps corporate credit portfolio, which again could mean a couple of million dollars a year fees. And the best part of that was, most of the work went into selecting a portfolio on day one, then you were paid over years of time for I’d say doing a little bit more than babysitting.

01:49:06:17

Cartoon man

Ow!

01:49:08:11

Jim Finkel

I would start with a nice clean portfolio of triple A, double A and perhaps some single A mortgage backed securities, but I’d have to add something else, what we all juice.

01:49:22:06

Jim Finkel

It’s an extra element of risk which would pay a higher yield.

01:49:28:22

CAPTION

Silver Spring, Maryland

01:49:33:12

Ed Andrews

At the time, there was a lot of talk about Liars Loans. The kind of loan that Patty and I got was one step further down on the credibility ladder which was called a no-ratio loan, in which I literally didn’t disclose my income.

01:49:53:01

01:49:55:07

CAPTION

Ed Andrews            

Economists Correspondent

New York Times

Ed Andrews

The house cost $460,000 which, even to me, was at that time an astounding amount of money. The problem that I had was huge child support payments to my ex-wife, as well as alimony, so I was paying out about $4,000 a month which is well over half of my take-home pay, well over half of my take-home pay.

01:50:17:18

Man wanting mortgage in movie

Mmm, that’s disappointing.

01:50:19:18

Mr Chandler in movie

Oh, not necessarily, let that be our problem.

01:50:23:13

Ed Andrews

Borrowing the money, even under my circumstances, was the easiest thing in the world. The only thing the lender knew, the only thing that they wanted to know, was that I had a credit rating of over 700m, that the house had been appraised and, you know, was worth what the purchase price was, and that I had a job. They did confirm I had a job, but they didn’t try to confirm what the income would be.

01:50:49:06

Mr Chandler in movie

Well, what are we waiting for?

01:50:52:13

Ed Andrews

For me it wasn’t a tall a financial investment. I had no expectation that I was gonna make a bundle of money on the rising value of the house. It’s a hormonal thing. It’s a cornerstone to keeping your family together. It’s a ticket to, you know, continued membership in the middle class. You know here I had been through this pseudo kind of traumatic, dramatic, you know, divorce and remarriage, this was normalcy again. I could still be a normal guy.

01:51:23:21

CAPTION

Queens, New York City

01:51:33:23

01:51:36:24

CAPTION

Antoinette Coffi-Ahibo

Optician

Antoinette Coffi-Ahibo

I used to have my own optical store. I needed financial help, so I went to the bank. And I found that each time I was talking with some financial people, they was asking me if I have a house. And they did explain to me that if I have a house, it would be like a collateral. So after I close my business, I told me my new adventure would be to get myself a house. And then from a house I can get myself another business.

01:52:03:13

Antoinette Coffi-Ahibo

So we came here and I liked the house. He told me the house was $679,000. $679,000!

01:52:18:04

Antoinette Coffi-Ahibo

I tried to get some older real estate, but in this neighbourhood the price is about the same. But he told me, you know what, it’s a two family house too. You can render all the part and you can do the basement.

01:52:33:15

Antoinette Coffi-Ahibo

They tell me you’re going to pay about like $4,000 a month. I said, “Listen, 4,000 is very expensive.” They told me don’t worry about it, after a year you can refinance. When you refinance you can get the mortgage go lower. So don’t worry, going for me just for one year.

01:52:59:02

CAPTION

NEDAP Offices, Manhattan

01:53:00:22

Sarah Ludwig

So we’re gonna just do some quick announcements and then turn it over to Herman.

01:53:07:11

Josh Zimmer

We’ve gotten quite a number of folks calling us for foreclosure assistance. I don’t know if you wanna highlight what’s been going on?

01:53:13:20

Woman in NEDAP office

We got four last week. I mean there just a bunch of homeowners who are in loans that were much too expensive for them.

01:53:19:23

01:53:24:24

CAPTION

Josh Zimmer

Co-director

NEDAP

Josh Zimmer

The majority of the loans that were generated and then sold to Wall Street to be securitised were refinanced loans. They weren’t adding to home ownership, they were taking away and they were deteriorating homeownership.

01:53:32:02

01:53:32:22

CAPTION

Sarah Ludwig

Co-director

NEDAP

Sarah Ludwig

Right, I was just gonna say, I mean, according to the Federal Reserve it’s something like 77% [phone ringing] of the sub-prime loans made were refinancing loans, so they were loans made to people who also, to add to what Josh was saying, had built up a lot of equity in their home, so they have a lot of wealth that they’d build up.

01:53:47:03

Josh Zimmer

And there were lenders and brokers and contractors who were all working together to try and get people into loans without any regard to whether they were affordable, because they knew that they could turn around and sell them the next day to Wall Street investment banks at a premium and make a profit. And they knew that they could charge high fees upfront.

01:54:07:06

Sarah Ludwig

Every time the loan is refinanced, the borrower, and this is what the incentive is for the broker and the lender to keep flipping the loans, is that they’re charging more upfront points and fees. And what that does is it strips out the equity each time more and more.

01:54:22:08

Josh Zimmer

If you look at the deed records for neighbourhoods, particularly neighbourhoods of colour in New York City where there’s a high rate of home ownership,

01:54:47:04

01:54:51:03

CAPTION

Joseph Stiglitz

Nobel Prize for Economics

Columbia University

Joseph Stiglitz

The banks were interested in maximising transaction cost. One  could understand, that’s capitalism, that maximise their profits, but… they were doing it at the expense of the poorest Americans. There were attempts to try to stop this. It was clear that it was predatorial lending, but they fought back.

01:55:11:04

Joseph Stiglitz

They stopped the legislation that was moving forward to stop the predatory lending. I’ve seen this. I’ve seen the kind of lending patterns. I’ve seen what they’ve done to some of these poor people. And let me tell you, it is outrageous.

01:55:34:24

Ed Andrews

If you are asking me who do I blame for my own mortgage wows, I will tell you absolutely certainly I blame myself and I don't put the blame on anybody else. I knew exactly what I was getting into, and I knew better actually than most other borrowers.

01:55:56:03

Ed Andrews

We began to struggle very quickly. We ran through what little extra cash cushion I had left in my savings, then we were borrowing

01:56:06:22

Patty Andrews

I hate this.

01:56:08:10

Ed Andrews

And we were borrowing more than we realised through our credit cards to keep ourselves afloat.

01:56:13:11

Patty Andrews

But, you know, sometimes these things work.

01:56:17:09

Ed Andrews

We were borrowing on average an extra $2,000 a month .

01:56:22:24

Patty Andrews

But where would this go then?

01:56:24:07

Ed Andrews

The staggering amount of money and the interest rates on that money were just through the roof. And I was trying to figure out what in god’s name to do and that’s when I called my friendly mortgage broker and started wailing about my problems.

01:56:42:07

Mr Chandler in movie

(phone ringing) Oh, excuse me. Chandler speaking.

01:56:45:24

Ed Andrews

He said, look, I’ll figure a way out of this, and indeed he did.

01:56:50:17

Mr Chandler in movie

Oh, oh, put him on.

01:56:52:21

Ed Andrews

The value of the house had gone up about 10% over those two years.

01:56:57:23

Mr Chandler in movie

Yes, sir.

01:56:58:22

Ed Andrews

And we ended up boosting the amount we had borrowed, another $50,000.

01:57:03:15

Mr Chandler in movie

I thought you would.

01:57:04:09

Ed Andrews

The theory of the whole manoeuvre was if I borrow more against the house, and pay off my credit cards, my credit scores automatically go up. Even though the total volume of debt is exactly as high, maybe a little higher, than it was before. And because I’ve got those higher credit scores, now I can get a slightly cheaper loan.  Go figure! It makes no sense at all. You have to be pulling the wool over your eyes aggressively to believe this kind of stuff.

01:57:38:16

Man on movie

Now we are beginning to see something of what a mortgage banker really does. A full and active life he leads, much of it behind the scenes, or the betterment of the community.

01:57:48:13

Louis Hyman

The reason why the money, this capital, gets allocated into consumer debt and gets allocated into mortgage debt, is because it has a better return than investing it in businesses, than investing it in factories or things that make things. And it’s the simple banal calculation that’s behind all of this, it’s not some greedy Wall Street banker. Wall Street bankers, and all capitalists, are always greedy, that’s the basis of our entire system. It’s that the opportunities for investment are different than they used to be. And that a dollar put into credit card debt, or into mortgage debt, makes you more than a dollar put into a factory.

01:58:32:10

CAPTION

Miami, Florida

01:58:51:22

01:58:54:24

CAPTION

Alex Chardiet

former Mortgage Broker

Alex Chardiet

Most of the buildings around here had sprung up within the last five years. I think this building over here, they’re still building, even though there’s close to 20,000 units that are either available or are gonna be available in a very short period of time.

01:59:07:21

Alex Chardiet

And this one just sprung up not too long ago as well. I think there is 400 units and there’s 50 people in it right now, so it makes for a lonely existence. In some buildings they’re empty. But what happens is that these banks, you know, they get the financing to build these buildings and, you know, they have to keep building.

01:59:37:21

Alex Chardiet

Started the mortgage business in 2001 and started in Miami, and started working for this company Ameriquest Mortgage. Last year as a branch manager I made little under $1 million, nine hundred and 30 something thousand. And most of the work that I did was refinance. Sixty percent of it was for debt consolidation and the other 30 / 40% was cash out.

02:00:09:05

Alex Chardiet

We felt like we were helping people, you know. We’d walk into our office and there was baskets of flowers and fruit from people that we refinanced that weren’t able to refinance and, you know, we got ‘em a loan and now they were saving $400 or $500 a month, or you know we pulled their house out of foreclosure. There was a lot of that we did, so how could that not make you feel good? At the time it seemed like win, win for everybody.

02:00:38:13

02:00:42:02

GRAPHICS ON SCREEN

Graph line showing drop

02:00:46:21

GRAPHICS ON SCREEN

Graph of house prices against years

TEXT ON GRAPH

HOUSE PRICES (vertical axis)

UNITED STATES HOME PRICE INDEX 1890 TO 2009 (horizontal axis)

Louis Hyman

It’s wonderful, it turns out, that while incomes are falling… house prices were rising.

02:00:50:22

Louis Hyman

As the housing assets grew, and their wages remained stagnant, people would borrow money from their houses to make up the gap in their wages.

02:01:03:02

02:01:06:06

CAPTION

Robert Wade

Professor of Political Economy

London School of Economics

02:01:11:08

IN-SCREEN TEXT            

PAY WINDOW (sign on archive footage)

Robert Wade

This fall in the share of the bottom 90% represents a transfer upwards of roughly one and a half trillion dollars each year to the top 1%.

02:01:21:16

02:01:23:12

GRAPHICS ON SCREEN

Part of graph showing top 1% of taxpayers

Robert Wade

This enormous upward redistribution of American income took place in a stable democracy with governments that were promoting this upwards redistribution being re-elected time and time again.

02:01:40:09

Robert Wade

It’s a very interesting question of how was the American elite able to get away with it.

02:01:51:16

Alex Chardiet

When we were doing refinancing, it was very common to see people with $20,000 and $30,000 worth of credit card debt.

02:01:57:12

Narrator on movie

Holy smokes!

02:01:58:08

GRAPHICS ON SCREEN

Images of graphs

02:02:01:19

George Cooper

We’ve masked a lack of income growth by the fact that people have been supporting their living standards with more debt.

02:02:11:13

Alex Chardiet

So what they were doing is they now had all this equity in the properties, so a lot of people refinanced to get rid of that debt, to consolidate the debt.

02:02:21:12

Joseph Stiglitz

We had, in one year alone, over $900 billion in what are called mortgage equity withdrawal, much of that money going into consumption.

02:02:33:01

Robert Wade

So you have roughly one and a half trillion a year going up and roughly one trillion a year coming down in the form of house equity refinancing. If the American population had been receiving something like the same income share as in the 1950s and 60s, then they would have been able to increase their consumption in a sustainable way out of rising income, but that’s not what happened.

02:03:07:15

02:03:09:23

CAPTION

Nell Minow

corporate watchdog

The Corporate Library

Nell Minow

The fatal flaw was the assumption that real estate values would always go up, and I think even a fourth grader would be able to tell you that’s impossible. It can’t happen. That’s contrary to the laws of physics. It’s contrary to history, and yet somehow everyone literally bought into that.

02:03:21:04

GRAPHICS ON SCREEN

Graph line going up and down, then graph of houses pries against years.

TEXT ON GRAPH

HOUSE PRICES (vertical axis)

UNITED STATES HOME PRICE INDEX 1890 TO 2009 (horizontal axis)

02:03:34:05

02:03:45:11

CAPTION

Antoinette Coffi-Ahibo

Optician

Antoinette Coffi-Ahibo

The problem started after a year. So when I call them, they say, “No, you cannot refinance because the value of the house went down. “ Then I hear some bell, panic. And she told me, “You know what? You can do a loan modification, OK?” I say, “OK, fine. If I can do a loan modification, what is a loan modification?” OK. “That where we going to go over your loan and lower your end choice, and give you something that you can afford.” I said, “OK perfect.” When they answered me back they told me that my loan modification was denied. I say, “Why?” They say, “because you’ve been paying your mortgage on time. You have never been late, so it means that you have no hardship. Don’t pay your mortgage. Don’t pay for two or three month and then you apply for other colleague to do loan modification and then we will be able to give you the loan modification. “ I said, “OK, fine.” So I take three month I didn't pay, and I filled out the paperwork again. And guess what? They deny.

02:04:54:10

02:05:41:14

CAPTION

Steve Pennington

Head of Financial Engineering

Dynamic Credit Partners

Steve Pennington

Tampa, St Peterbsurg, New Orleans, Kenner, Mansfield, Ohio, Phoenix, Messer Scottsdale, San José, Sunnyvale… Fresno, Columbus, Ohio, [UNSURE OF WORD], New York, Michigan city, Port, Indiana, New York, New Jersey, San Francisco, Tampa, St Petersburg, Portland, Vancouver, Dallas, Fort Worth, Arlington, Tampa, Los Angeles, Long Beach, Riverside, New York, Cleveland, Boise City, San Diego Carlsbad. Each one of these is a mortgage that is part of a particular pool for which we have an exposure to, or in this particular case, we’ve done an analysis for. We’re looking history of a borrower. And so what you see is this delinquency history for 12 periods. And so there’s C for current. There’s three for 30 days. There’s six for 60 days and then nine is for 90 days or more delinquent. Then you’ve got FC which means the process of foreclosure has been started. And then you have REO which means the process of foreclosure was completed. So C’s good, you wanna see long lists of C. You wanna see everybody that looks like that.

02:06:20:10

Steve Pennington

Where it gets bad is when you look at situations like this where you went foreclosure, REO and then the bank finally discharged to the home, but they took a $193,000 loss on this home. And so interesting things are you looked at present status nine, but they started out current and then they went through five periods of current, and then they got 30 days delinquent, then they basically fought back to current. It appears that they’ve survived some event and then they just went down the slippery slope and this time they’ve turned the corner. Once you’re 90 days delinquent it’s really tough to get back. It’s kind of a dark world because you see it happen and it’s somebody’s life.

02:07:16:18

Steve Pennington

As Americans you’ve been taught this is one of your major stores of value and a situation where, you know, wages are not rising in America, this has been one of the major methods for people to ultimately increase their income in the middle class, is through this house appreciation factor. But now that that’s gone, it’s a devastating reality, and so you’re seeing this ripple through the economy.

02:07:46:23

CAPTION

MELTDOWN

02:08:07:24

02:08:11:07

CAPTION

George Cooper

Fund Manager

Blue Crest Capital

George Cooper

It’s a myth that people didn’t see this crisis coming. There was a lot of chatter in the industry.

02:08:13:22

Reporter on Kudlow & Company (archive)

Despite the Dow hitting a three month high, more and more analysts are cautioning that a recession could be just around the corner.

02:08:21:04

02:08:22:02

CAPTION

Jim Finkel

Chief Executive Officer

Dynamic Credit Partners

Jim Finkel

Well things started to go wrong in the fall of 2006.

02:08:28:03

Arthur Laffer (archive)

In all these years that we’ve been running these trade deficits, the wealth of the average American household has been going up not down.

02:08:34:00

Guest 2 on Kudlow & Company (archive)

No, it hasn’t.

02:08:34:20

02:08:36:10

CAPTION

Ed Andrews

Economics Correspondent

New York Times

Ed Andrews

The so-called ‘smart money’ people… You know, the definition of being a ‘smart money’ kind of person or player is that you know when to get out, and so they all thought they knew when to get out.

02:08:43:19

Jim Finkel

Sophisticated investors would negotiate for better protection. They’d said, well I need more protection against potential defaults in the portfolios, so they get an extra 1% protection. But 1% extra protection was like saying to somebody, you know, I’m gonna give you an extra life vest to wear on the Titanic.

02:09:06:14

IN-SCREEN TEXT

RECESSION RISK (on archive footage)

Guest on Kudlow & Company (archive)

When you see the stock market come down and the real estate bubble burst, all that phony wealth is gonna evaporate, and all that’s gonna be left is all the debt.

02:09:14:09

02:09:15:06

CAPTION

Steve Nahas

Real Estate Investor

Steve Nahas

My safety valve in my mind when I did this, again no one put a gun to my head, but I always thought if the market starts to turn, I’ll sell.

02:09:20:10

Arthur Laffer (archive)

This is an economy that’s driven by good economic policies, by good monetary policy, by good trade policy, and it’s working beautifully.

02:09:28:19

Jim Finkel

You started having borrowers not paying in the first month, the second month or the third month, and there’s wave of mortgages coming back to the originators.

02:09:35:11

IN-SCREEN TEXT

‘R’ IS FOR RECESSION

(on archive footage)

Arthur Laffer (archive)

It’s a zero sum game - every interest dollar paid is interest dollar earned. Please.

02:09:39:02

Guest on Kudlow & Company (archive)

Art, the people that earn the dollars are in China.

02:09:42:09

Ed Andrews

What triggered it was an abrupt lowering of ratings on hundreds of sub-prime mortgage back securities.

02:09:51:07

Jim Finkel

And that struck a huge panic into the whole structural products market.

02:09:55:03

Ed Andrews

Investors suddenly knew that the game was up. It wasn’t that they were surprised that the downgrades had happened, but they now knew that all of the other securities couldn’t hold up either, and knowing that they bailed out very, very quickly.

02:10:10:07

02:10:11:10

CAPTION

Andrew Luan

former mortgage bond trader

Andrew Luan

Oh yeah we were surprised at how fast the devastation took place.

02:10:16:02

Steve Nahas

There was no time to sell. Once there’s blood in the water, everybody’s running and there was just no way out.

02:10:23:00

02:10:25:14

CAPTION

Robert Shiller

Professor of Economics

Yale University

Robert Shiller

The crisis came on us rather fast and it took fast action. I think that the government had to prevent a collapse in confidence.

02:10:40:06

Sarah Ludwig

The whole system was predicated on there being a complete gap between the people on the ground making the loans and the people packaging them to sell them off, you know, through the securitisation process on Wall Street. So that you can have people sitting in their high rise building on Wall Street, or wherever they were, in their fancy offices, having no connection whatsoever, and no regard, and not even in their imagination, thinking about what this commodity was that they were bundling and selling off. They were completely severed, and that was why this was able to go for so long. Cause one would hope there would be some people within that machinery that had some conscience, and that if they understood what they were packaging was actually translating very concretely into loans that were, let’s just be blunt, ruining people’s lives. I mean wiping out people’s life savings, stealing their equity, making people homeless, wrecking families. I mean the devastation can’t really be overstated what it means to sort of be kind of induced into a loan that then spins out of control and leaves you without your home.

02:11:45:22

Andrew Luan

Do I feel any responsibility?

02:12:02:05

Jim Finkel

I think responsibility is a difficult feeling for people in the sense that most people’s participation, other than a select few which had very, very important jobs probably head of the rating agencies, some chief regulators, couple of chief bankers, etc, most of the other participants in the system I think kind of felt like hogs in the wheel of a much larger piece of machinery.

02:12:37:24

02:12:41:22

CAPTION

Financial Market Regulators

House Oversight Committee

02:12:51:05

CAPTION

Alan Greenspan

Former Chairman

Federal Reserve Board 1987-2006

02:13:02:21

CAPTION

Financial Market Regulators

House Oversight Committee

02:13:15:07

CAPTION

Alan Greenspan

Former Chairman

Federal Reserve Board 1987-2006

Alan Greenspan (archive)

Mr Chairman, I agree with you in the fact that there are a lot of people who raised issues about problems emerging, but there are always a lot people raising issues and half the time they’re wrong. And the question is what do you do. I mean you point out, quite correctly, that the Federal Reserve had as good and economic an organisation as exists in, I would say, in the world. If all those extraordinarily capable people were unable to foresee the development of this critical problem, I think we have to ask ourselves why is that. And the answer is that we’re not smart enough.

02:13:39:15

Steve Nahas

My aunt had a riding stables in the Midwest and every summer I’d go out there and work for her.

02:13:45:20

Steve Nahas

Go on, girl.

02:13:48:12

02:13:54:16

CAPTION

Steve Nahas

Real Estate Investor

Steve Nahas

She died 12 / 14 years ago, and there were 50 horses to dispose of, so I thought, “Well, I have the land now, maybe I should get horses.” So that’s what happened

02:14:00:15

Woman on horse

Good girl.

02:14:02:10

Steve Nahas

I owe a lot more on this place than it’s worth, so hopefully it’ll all work out and I can hang on to it, but that’s still to be determined.

02:14:16:16

02:14:21:15

CAPTION

Antoinette Coffi-Ahibo

Optician

Antoinette Coffi-Ahibo

My situation right now is I’m waiting for a loan modification. I need a loan modification. My only way out is a loan modification. I don’t want to be live free, I know I have to pay my mortgage, I’m going to pay my mortgage.

02:14:34:16

Antoinette Coffi-Ahibo

It would be ashamed if I cannot hang on to my house. It would be a shame. I don’t want to think about that, because I don’t think it’s right because I can pay for it, all I’m asking is the loan modification. OK. The value of the house was too high. The kind of mortgage I got was a bad mortgage, so why they cannot redo my mortgage for me? Why they are going to want me to lose my house, or what they going to do with it?

02:15:07:06