LEARNING THROUGH MOVIES FINANCIAL CONCEPTS IN INSIDE JOB (2010 FINANCIAL DOCUMENTARY)
Inside Job (2010 financial documentary)
Inside Job is a 2010 documentary film about the late-2000s financial crisis directed by Charles H. Ferguson. The film is described by Ferguson as being about "the systemic corruption of the United States by the financial services industry and the consequences of that systemic corruption." In five parts, the film explores how changes in the policy environment and banking practices helped create the financial crisis. Inside Job was well received by film critics who praised its pacing, research, and exposition of complex material. The film was screened at the 2010 Cannes Film Festival in May and won the 2010 Academy Award for Best Documentary Feature. The subject of Inside Job is the global financial crisis of 2008. It features research and extensive interviews with financiers, politicians, journalists, and academics. The film follows a narrative that is split into five parts. The film received positive reviews, earning a 98% rating on the Rotten Tomatoes website. Roger Ebert described the film as "an angry, well-argued documentary about how the American financial industry set out deliberately to defraud the ordinary American investor." A.O. Scott of the New York Times wrote that "Mr. Ferguson has summoned the scourging moral force of a pulpit-shaking sermon. That he delivers it with rigor, restraint and good humor makes his case all the more devastating." Logan Hill of New York magazine's Vulture, characterized the film as a "rip-snorting, indignant documentary," noting the "effective presence" of narrator Matt Damon.Peter Bradshaw of The Guardiansaid the film was "as gripping as any thriller." He went on to say that it was obviously influenced by Michael Moore, describing it as "a Moore film with the gags and stunts removed." The conservative political magazine The American Spectator criticized the film as intellectually incoherent and inaccurate, accusing Ferguson of blaming "a lot of bad people [with] economic and political views to the right of [his]."
The film was selected for a special screening at the 2010 Cannes Film Festival. A reviewer writing from Cannes characterized the film as "a complex story told exceedingly well and with a great deal of unalloyed anger."
The documentary is split into five parts. It begins by examining how Iceland was highly deregulated in 2000 and the privatization of its banks. When Lehman Brothers went bankrupt and AIG collapsed, Iceland and the rest of the world went into a global recession.
Part I: How We Got Here The American financial industry was regulated from 1940 to 1980, followed by a long period of deregulation. At the end of the 1980s, a savings and loan crisis cost taxpayers about $124 billion. In the late 1990s, the financial sector had consolidated into a few giant firms. In March 2000, the Internet Stock Bubble burst because investment banks promoted Internet companies that they knew would fail, resulting in $5 trillion in investor losses. In the 1990s, derivatives became popular in the industry and added instability. Efforts to regulate derivatives were thwarted by the Commodity Futures Modernization Act of 2000, backed by several key officials. In the 2000s, the industry was dominated by five investment banks (Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, andBear Stearns), two financial conglomerates (Citigroup, JPMorgan Chase), three securitized insurance companies (AIG, MBIA,AMBAC) and the three rating agencies (Moody’s, Standard & Poors, Fitch). Investment banks bundled mortgages with other loans and debts into collateralized debt obligations (CDOs), which they sold to investors. Rating agencies gave many CDOs AAA ratings.Subprime loans led to predatory lending. Many home owners were given loans they could never repay.
Part II: The Bubble (2001–2007) During the housing boom, the ratio of money borrowed by an investment bank versus the bank's own assets reached unprecedented levels. The credit default swap (CDS), was akin to an insurance policy. Speculators could buy CDSs to bet against CDOs they did not own. Numerous CDOs were backed by subprime mortgages. Goldman-Sachs sold more than $3 billion worth of CDOs in the first half of 2006. Goldman also bet against the low-value CDOs, telling investors they were high-quality. The three biggest ratings agencies contributed to the problem. AAArated instruments rocketed from a mere handful in 2000 to over 4,000 in 2006.
Part III: The Crisis The market for CDOs collapsed and investment banks were left with hundreds of billions of dollars in loans, CDOs and real estate they could not unload. The Great Recessionbegan in November 2007, and in March 2008, Bear Stearns ran out of cash. In September, the federal government took over Fannie Mae and Freddie Mac, which had been on the brink of collapse. Two days later, Lehman Brothers collapsed. These entities all had AA or AAA ratings within days of being bailed out. Merrill Lynch, on the edge of collapse, was acquired by Bank of America. Henry Paulson and Timothy Geithner decided that Lehman must go into bankruptcy, which resulted in a collapse of the commercial papermarket. On September 17, the insolvent AIG was taken over by the government. The next day, Paulson and Fed chairman Ben Bernanke asked Congress for $700 billion to bail out the banks. The global financial system
became paralyzed. On October 3, 2008, President Bush signed the Troubled Asset Relief Program, but global stock markets continued to fall. Layoffs and foreclosures continued with unemployment rising to 10% in the U.S. and the European Union. By December 2008, GM and Chrysler also faced bankruptcy. Foreclosures in the U.S. reached unprecedented levels.
Part IV: Accountability Top executives of the insolvent companies walked away with their personal fortunes intact. The executives had hand-picked their boards of directors, which handed out billions in bonuses after the government bailout. The major banks grew in power and doubled anti-reform efforts. Academic economists had for decades advocated for deregulation and helped shape U.S. policy. They still opposed reform after the 2008 crisis. Some of the consulting firms involved were the Analysis Group, Charles River Associates, Compass Lexecon, and the Law and Economics Consulting Group (LECG). Many of these economists had conflicts of interest, collecting sums as consultants to companies and other groups involved in the financial crisis.
Part V: Where We Are Now Tens of thousands of U.S. factory workers were laid off. The new Obama administration’s financial reforms have been weak, and there was no significant proposed regulation of the practices of ratings agencies, lobbyists, and executive compensation. Geithner became Treasury Secretary. Feldstein, Tyson and Summers were all top economic advisers to Obama. Bernanke was reappointed Fed Chair. European nations have imposed strict regulations on bank compensation, but the U.S. has resisted them. Trust remains questionable. The film focuses on changes in the financial industry in the decade leading up to the crisis, the political movement toward deregulation, and how the development of complex trading such as the derivatives market allowed for large increases in risk taking that circumvented older regulations that were intended to control systemic risk. In describing the crisis as it unfolded, the film also looks at conflicts of interest in the financial sector, many of which it suggests are not properly disclosed. The film suggests that these conflicts of interest affected credit rating agencies as well as academics who receive funding as consultants but do not disclose this information in their academic writing, and that these conflicts played a role in obscuring and exacerbating the crisis. A major theme is the pressure from the financial industry on the political process to avoid regulation, and the ways that it is exerted. One conflict discussed is the prevalence of the revolving door, whereby financial regulators can be hired within the financial sector upon leaving government and make millions.
Leverage is the main reason behind the economic crisis of 2008. What is Leverage? Leverage is a business term that refers to borrowing. If a business is "leveraged," it means that the business has borrowed money to finance the purchase of assets. The other way to purchase assets is through use of owner funds, or equity. Leverage is useful to fund company growth and development through the purchase of assets. But if the company has too much borrowing, it may not be able to pay back all of its debts. Using debt, or leverage, increases the company's risk of bankruptcy. It also increases the company's returns; specifically its return on equity.
How Leverage works ? Leverage is the strategy of using borrowed money to increase return on an investment. If the return on the total value invested in the security (your own cash plus borrowed funds) is higher than the interest you pay on the borrowed funds, you can make significant profit. While leverage does not change the percentage rate of return (starting with $100 and ending with $115 dollars and starting with $1000 and ending with $1150 is still a 15% return in both cases), leverage can increase the total dollar value of return (a return of $15 is significantly less than a return of $150). Here’s an example of how leverage can result in outsized returns. Let’s say you have $100 of your own money, and you can borrow $1500 from the bank at an interest rate of 6%. Let’s say you invest the entire $1600 amount in an investment, which you are confident will grow 15% in a year, and return the borrowed money plus interest at the end of a year. The value of the investment will be $1840 at the end of the year and you will pay the bank back $1500 + $90 = $1590, leaving you with a total of $250 and a net gain of $150 once you subtract the initial $100 you invested. That’s a 150% return!
Leverage Ratios The ratios used to determine about the companies’ financing methods, or the ability to meet the obligations. There are many ratios to calculate leverage but the important factors include debt, interest expenses, equity and assets. Debt ratio is a ratio that indicates the proportion of a company's debt to its total assets. It shows how much the company relies on debt to finance assets. The debt ratio gives users a quick measure of the amount of debt that the company has on its balance sheets compared to its assets. The higher the ratio, the greater the risk associated with the firm's operation. A low debt ratio indicates conservative financing with an opportunity to borrow in the future at no significant risk.
The debt ratio is calculated by dividing total liabilities (i.e. long-term and short-term liabilities) by total assets: Debt ratio = Liabilities / Assets The debt-to-equity ratio (debt/equity ratio, D/E) is a financial ratio indicating the relative proportion of entity's equity and debt used to finance an entity's assets. This ratio is also known as financial leverage. Debt-to-equity ratio is the key financial ratio and is used as a standard for judging a company's financial standing. It is also a measure of a company's ability to repay its obligations. When examining the health of a company, it is critical to pay attention to the debt/equity ratio. If the ratio is increasing, the company is being financed by creditors rather than from its own financial sources which may be a dangerous trend. Lenders and investors usually prefer low debt-to-equity ratios because their interests are better protected in the event of a business decline. Thus, companies with high debt-to-equity ratios may not be able to attract additional lending capital A debt-to-equity ratio is calculated by taking the total liabilities and dividing it by the shareholders' equity: Debt-to-equity ratio = Liabilities / Equity The interest coverage ratio (ICR) is a measure of a company's ability to meet its interest payments. Interest coverage ratio is equal to earnings before interest and taxes (EBIT) for a time period, often one year, divided by interest expenses for the same time period. The interest coverage ratio is a measure of the number of times a company could make the interest payments on its debt with its EBIT. It determines how easily a company can pay interest expenses on outstanding debt. Interest coverage ratio is also known as interest coverage, debt service ratio or debt service coverage ratio. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by the company's interest expenses for the same period. Interest coverage ratio = EBIT / Interest expenses
Conclusions 'Inside Job' provides a comprehensive analysis of the global financial crisis of 2008, which at a cost over $20 trillion, caused millions of people to lose their jobs and homes in the worst recession since the Great Depression, and nearly resulted in a global financial collapse. Through exhaustive research and extensive interviews with key financial insiders, politicians, journalists, and academics, the film traces the rise of a rogue industry which has corrupted politics, regulation, and academia.
