Will Charles Ferguson be Our Ferdinand Pecora? (Review of Inside Job)
posted by Frank Pasquale
In his post on Michael Perino’s book Hellhound of Wall Street, Lawrence Cunningham observes that “Our predecessors were fortunate to have someone like Ferdinand Pecora to uncover top-secret financial shenanigans. No such person appears in our midst.”
It’s a tragic situation, especially because there are some real truth tellers out there—Yves Smith, Mike Konczal, Michael Greenberger, and many affiliates of the Roosevelt Institute come to mind. The difference between Pecora’s time and ours is a fragmented and manipulated media that a) can barely follow a complex financial story for more than a few hours, and b) fastidiously counterbalances every account of a Wall Street misdeed with some “expert” assuring us that it’s just business as usual in an industry that’s way too complicated for ordinary people to understand.
Charles Ferguson’s compelling film Inside Job steps in for a phantom mass media. Every citizen should be conversant with the basic narrative Ferguson puts together. Andrew Sheng, Chief Advisor to the China Banking Regulatory Commission, puts it in a nutshell: there was massive private gain in the US financial sector leading to massive public loss. Looking back, we might have all been better off if the finance tycoons profiled in the film had simply demanded hundreds of millions of dollars directly from the government back in 2000, and retired to Capri.
Instead, these deci- and centimillionaires helped build up the Rube Goldberg contraption of derivative deregulation, CDO’s, and CDS’s Ferguson describes. Fortunately, the film concisely explains that farrago in a way that will both educate the uninitiated and intrigue those who’ve read some books on the crisis. The film’s real contribution lies in four arguments it makes.
First, Ferguson shows just how loopy Wall Street pay has become. If you ever doubted that the compensation cart is in front of the capital allocation horse, you won’t any more. In the film, Raghuran Rajan describes Larry Summers’s infamous dismissal of Rajan’s prescient description of perverse compensation incentives in the financial sector. We then hear how AIGFP’s 400 employees earned $3.5 billion between 2000 and 2007, stonewalling accountants like Joseph St. Denis who could have blown the whistle on their casino. As one consumer advocate notes, for top bankers, any given compensation level was “never enough.” Given that the Wall Street Journal recently reported that financiers now call $100 million a “unit,” $1 million a “stick,” and $1 billion a “yard,” that mentality persists.
Second, Inside Job dissects the Obama Administration’s string of failures in dealing with Wall Street. When other world leaders organized to demand compensation reform fundamental to real change (including Christine Lagard and five other European finance ministers), our Treasury Department and Fed did nothing. In Ferguson’s telling, Summers, Geithner, and Bernanke either overtly cheerled (or politely tolerated) the excesses that led up to the crisis. Ferguson traces an unbroken line of Wall Street solicitude from Reagan to Clinton to Bush to the current administration. I’m hoping that the Dodd-Frank Act will be energetically enforced, but optimism is not an easy option after Ferguson’s film, which describes in detail Wall Street’s lobbying clout.
Third, the film explains why a President as visionary and smart as Obama could not think beyond the incrementalism of an economic team rife with Goldman Sachs alums and fail-upward regulators. It portrays an academic environment festering with direct and indirect conflicts of interests. Economists and B-school professors appear content to churn out papers and reports without revealing the full web of financial ties affecting their thinking. Cognitive capture has rarely been conveyed so concisely.
When Ferguson grills Harvard Econ Dep’t chair John Campbell on the cozy relationship between academe and the finance sector, Campbell shrugs it off. Ferguson then asks Campbell what the difference is between an economist who, say, champions a deregulatory policy while failing to disclose payments from a party interested in the policy, and a doctor who promotes a drug while failing to disclose he is paid for doing so. The response (or lack thereof) is priceless. Harvard luminary Martin Feldstein also proudly claims to have “no regrets” for his long time service on the AIG board. And Columbia Business School Dean Glenn Hubbard imperiously declaims “this is not a deposition” when asked to reveal the companies he consults for which are not listed on his resume. Ferguson goes on to describe a multi-billion dollar industry of “academics for hire.” In his review of the film, Dean Baker concludes that “the economics profession . . .richly deserves the abuse” Ferguson delivers.
Finally, Ferguson connects the reckless growth of the finance sector to its actual consequences for the real economy. He quotes a Chinese official wondering how on earth, in the US, “financial engineers” are regularly paid 4 to a hundred times as much as real engineers. The latter build bridges, the official notes, while the former build mere dreams—or nightmares, as the case may be. It was no surprise to me to hear recently that one of our leading manufacturers of rare earth magnets has shipped production off to China, as our miraculous market delivered a factory up to its highest and best use:
Just how far U.S. manufacturing has waned is apparent at a factory in Valparaiso, Indiana, where dogs skitter across a bare concrete shop floor, their nails clicking. This brick plant on Elm Street once made 80 percent of the rare-earth magnets in laser-guided U.S. smart bombs, according to U.S. Senator Evan Bayh, a Democrat from Indiana. In 2003, the plant’s owner shifted work to China, costing 230 jobs.
Now the plant houses Coco’s Canine Cabana, a doggy day care the current tenants started to supplement sagging income from their machine shop.
Ferguson states that US wealth inequality is higher than in any other industrialized country, and he describes how the struggling middle class has had to work and borrow ever more to get by as productivity gains are monopolized by an ever-narrower elite. For the first time in history, he states, average Americans are less wealthy, and have less education, than their parents. He leaves little doubt that we can expect further decline for a country whose economic future is largely determined by a finance sector with no vision beyond enriching itself.
Ferguson does not give any easy “answers,” and his closing shot of the Statue of Liberty feels more elegiac than hopeful. Nevertheless, at the end of this documentary, we have a much better sense of where the answers to our economic problems will not be found. I won’t be eager to hear any more editorializing from hedge fund managers who worry about a looming, Medicare-driven sovereign debt crisis while failing to even entertain the thought of a Tobin tax or higher taxes for the top 0.1% of earners. I’ll be looking beyond the core of the economics profession for a compelling account of a fair and just society. When it comes to finance, progressives should also realize they have few friends in the current administration. They should treat whatever rulemakings it proposes with the same level of scrutiny as they would have given Bush, Clinton, or Reagan-era regulation.
Ferguson may not make up for the deficiencies of our FCIC, CNN, and Fox. But I have little doubt that Ferdinand Pecora would approve of the film he has crafted.
October 11, 2010 at 12:30 am
Posted in: Corporate Finance, Corporate Law, Corruption
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Responses (4)
Ken Rhodes - October 11, 2010 at 10:01 am
The website for Inside Job (your link in paragraph 3) is interesting. Under “Cast” there are sections for different categories, including a category titled “Those who warned us.” That category could be bigger than it is; there were lots of warnings.
Three who specifically come to mind are:
(a) Brooksley Born–Chairperson of the Commodoties futures Trading Commission. In 1998 she attempted to get some transparency into derivatives trading, and was trounced by Alan Greenspan, Robert Rubin, Lawrence Summers, and Arthur Levitt. They lobbied against any regulation of derivatives trading, stating Born’s concerns were unfounded, and that the threat of CFTC regulation could bring the entire financial world to a crisis.
(b) Ferdinand Pecora–He went to all that trouble, back in the day, and then we forgot, which brings us to …
(c) George Santayana–He warned us over a hundred years ago.
Frank - October 11, 2010 at 10:44 am
Thanks, Ken…I just wish Brooksley Born would speak! I think the only interview she’s given is to a Stanford Alum magazine; anyone find any other comments from her?
Business Law Prof - October 11, 2010 at 12:11 pm
Brooksley Born was interviewed as part of a Frontline piece on the crisis. Her interview is available here:
http://www.pbs.org/wgbh/pages/frontline/warning/interviews/born.html
A.J. Sutter - October 12, 2010 at 11:25 am
Apropos of engineering, perhaps a scary point for the future: most of the students I lectured to at Renmin University in Beijing in the past few years were majoring in financial engineering. And many of them wound up going straight into China’s Ministry of Finance.
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