DC Current: A damning view of financial services from Inside Job's director, Charles Ferguson

RIABiz is launching a weekly Washington column by Elizabeth MacBride. It will appear on Fridays.

Advisors’ businesses have recovered somewhat from the financial crisis of two years ago. Not so the psyches of the American people, whose anger came to the fore this week in a poll-day condemnation of President Barack Obama and his party.

Whether the 30-or-so Tea Party populists who will come to Washington, D.C., in January have the wherewithal to take on financial reform is a big, open question. Will they roll up their sleeves and get involved in the complexities of changing Dodd-Frank, either legislatively or through the rules-making system.

Some of them were elected on fat-cat Wall Street rhetoric – but rhetoric is a far cry from actually doing anything, says Neil Simon, government relations vice president for the Investment Adviser Association, who says he believes Tea Partiers will remain focused on budget-cutting.

What’s more likely to have a marginal effect on financial reform than the populist hot air is the new, prevailing Republican wind in the capital. Democrats that have been the staunchest advocates for a fiduciary standard to be extended to brokers now fall out of power. Spencer Bachus, R-Ala., who has advocated for FINRA to be RIAs’ regulator, will become chairman of the House Financial Services Committee.

But the effect, as I said, is likely to be marginal: Even a determined ally of big brokerages and insurance companies would have a hard time getting anything through what’s likely to be a gridlocked Congress.

David Tittsworth, Simon’s boss and the executive director of the IAA, was one Washingtonian taking a break from thinking about this strange chess game of politics in a movie theater lately. He saw Inside Job, a documentary film that seems to exude the same anger toward the Washington-Wall Street cabal that voters expressed. The film, by the rich, independent director Charles Ferguson, was the quiet buzz of Schwab IMPACT last week. Mellody Hobson, president of Ariel Investments, worried out loud about the effect the movie will have on the already damaged image of financial services in the eyes of Americans.

Inside Job tells the story of the financial crisis beginning from decades ago, tracing its roots to the deregulation of Wall Street, including the repeal of Glass-Steagall, the failure to regulate derivatives, and the higher leverage limits on investment banks that were put in place. It levies personal attacks on several high-level officials, including Larry Summers and Hank Paulson, drawing connections between the policies they advocated and the size of their paychecks. It’s decidedly not a partisan film, and levies harsh criticism at the past three administrations.

Tittsworth called the film “captivating,” (as a moviegoer, he says, and not speaking officially for the IAA.) “I loved it,” he said. “It wasn’t just for geeks.”
He thought it particularly strong when it pointed out how the system went awry when people – both mortgagees and Wall Streeters – no longer had “skin in the game.”

I interviewed director Charles Ferguson yesterday. His previous film, No End In Sight, about the American occupation of Iraq, was nominated for an academy award.

The movie opens nationwide today.

Your film seems to channel some of the diffuse anger of the American people about the financial crisis and the lack of accountability. We saw some of that same anger erupt in the midterm elections this week.

I think there’s a tight connection. I would not portray myself as somebody who is the most astutue analyst of American popular opinion, but … a lot of what was going on with this election was not a fundamental move to the right or the Republican party. It was disaffection with Obama and disillusion with him.

I tried to make the point that this was not a partisan issue. Both parties had been involved.

Do you consider the film part of this populist movement?

I hope the film has some effect. I hope that it makes people energized. But, no, I’m not a populist. I don’t regard myself as a political person. I am never going to run for office. I did support the Obama campaign, and I feel some of the same disillusionment.

Did you mean to paint all of financial services with a broad brush? Do you think the whole system is corrupt?

I agree that’s a limitation of the film. That’s an issue of length or complexity. I could not find a way to say “this is just part of the larger industry.” It just seemed that there was a risk of either boring people or confusing them or both.

We did find a way to say that all business are not bad … by drawing a contrast between financial services and high-tech.

*What’s the most damning moment in the film?”

Some of the most remarkable interviews didn’t make it in.
In one interview with Iceland’s former prime minister (Elizabeth’s note: Iceland as a precursor to the global crisis opens the film), Geir H. Haarde, he got deeply, deeply uncomfortable when I asked about (the Iceland banks’ leverage). About four weeks ago, he was indicted.

There were other moments. I was stunned when Christine Lagarde (The French minister of finance, economic affairs, industry and employment) told me that the way she learned about Lehman’s bankruptcy … was on the radio.

We were about halfway through the production of the film … when this issue of Goldman Sachs creating investments in order to bet against them came up. ... If somebody in late 2008 had told me the investment banks had created investment products to bet against them, I would have said, no, people in America don’t do that. I would have assumed that it was illegal to do that. I think as a practical matter there must have been criminal activity.

What does this say about the United States, that Iceland has had indictments and we have had none of major Wall Street players?

It’s a huge indictment about the United States. The Bush Administration was actually more aggressive about prosecutions … maybe to the point of going to far, such as prosecturing Arthur Andersen as a firm. That, and Enron and the WorldCom prosecution, without question, they sent a message.

This could be the single worst failure of the Obama White House.

Are you aware of the fiduciary issue?

I regret that it’s not in the film. There should be more attention paid to what investment bankers, money managers and investment advisers do and should do.

Hank Paulson is making the rounds at conferences this year, telling his side of the story. Have you read his book or heard him speak?

His book is an interesting mixture of complete bullshit and if you look carefully, damning admissions … He admits in the book that he did not understand any of the major consequences of forcing Lehman into bankruptcy. He did not understand the effect on the commercial paper market, or the effect foreign bankruptcy laws would have, and that assets in those offices would need to be frozen … those are pretty damning admissions.

He talks about his reluctance to serve and how difficult the job was. Do you have any sympathy for him?

He had a major role in causing this problem. Over many years, he was involved in lifting or blocking pertinent, relevant regulations. His firm was already doing really nasty, toxic stuff while he was CEO.

And I haven’t noticed him giving any of the money back.

Isn’t it possible that many people in good conscience just made mistakes, that they couldn’t forsee the effects of these deregulations?

The most fuming smoking gun … is that many of them had begun creating investment products to bet against. They knew what they were doing.

Inside Job draws a connection between academics, the advice they give and papers they write, and their compensation. Many academic economists are highly paid consultants. If so much of academia is part of this cabal – then whom do we trust?

That’s a major issue, a major disturbing issue. That’s why I think disclosure is very important.
I don’t see how anybody can legitimately oppose a disclosure requirement.

The next step beyond full and open disclosure would be limiting outside income … some medical schools have already done this (when it comes to consulting and speaking fees from pharmaceutical companies).

I personally think that would be a good idea: Limiting outside income releated to conflicts of interest.

What was the moment you decided to do this film?

After the Lehman weekend … which was actually the Lehman, Merrill, AIG weekend.

You’ve said you hope this film will do for financial reform what Inconvenient Truth did for the environmental movement. But, people could walk out of that movie and change their lightbulbs. What are the actions that you want people to take?

That is a very hard problem. It’s connected to the first question you asked. This isn’t a situation where it’s clear and easy … that there’s this other person you could vote for … or another party you could join. It’s going to take a lot more energy than that.

President Obama had a very special, very unusual opportunity to do something about this … he could have gotten a lot done.

He blew it.

Now that that moment has passed, it’s going to be much more difficult and much slower, and it’s going to be like the feminist movement or the civil rights moment or the progressive movement of a century ago. It took them decades to achieve those things.
I fear that’s what might be involved here.

When I say that to political people they tell me there will be another moment of opportunity … because there will be another crisis. Let’s hope that it doesn’t have to come that way, but unfortunately I think that’s a real possibility. Some of the dangerous incentives that led to this crisis are still very much present.

The point of view of your film is that putting a wall back up between banking and investment banking would do a lot to stabilize the system.

There are two or three simple things that would have a huge effect

Restoring Glass-Steagall is one.

The other kind of obvious gigantic one: some regulation of compensation. It shouldn’t be possible to make gigantic cash bonuses, gut your company, and then leave and keep all the money.