I consider anyone working in the financial field a thief. It may sound judgmental and even naïve to some, but it’s just how I see it. Working with money, particularly other people’s money, is a risky business. Especially when it’s based on figures and ratings from people in the same field.

What do they care if they miscalculate or recommend a bad investment? While it might be their reputations on the line, at the end of the day it’s not their cash, it’s yours. 

Saying I’m utterly right is a bit of an overstatement, but you can’t say I’m completely wrong after watching the documentary Inside Job (2010).

Inside Job, directed by Charles Ferguson, explains how the global financial crisis of 2008 took place, featuring research and extensive interviews with financial experts, politicians, journalists and academics.

The beauty of this documentary is that anyone can understand it. It showcases in layman’s terms the changes in the financial industry leading up to the crisis, the political movements influencing deregulation, which played a major role in the crisis, and how the development of complex speculative trading, such as derivatives, exposed investors’ money to irresponsible risk.

The financial industry in the US was tightly regulated after the Great Depression of the 1930s and banks were banned from speculating with depositors’ savings. However, in the 1980s, policies governing how savings and loans could be invested were loosened, allowing bankers to make riskier, but also potentially higher yielding investments. Under George W. Bush’s administration, the financial sector was profitable, concentrated and more powerful than ever, with lots of political and financial clout to avoid attempts to rein it in.

Previously, people applied for a home loan and they were assessed in terms of risk. More recently, the process of securitization allowed people to borrow money without providing deposits or meeting stringent criteria because investment banks combined thousands of mortgages and other credit such as student and car loans and credit card debts.

This created complex derivatives called collateralized debt obligations (CDOs) that were then sold by investment banks to investors. And when borrowers  made payments on their mortgages, the money went to investors all over the world and investment banks paid rating agencies to evaluate those CDOs with AAA ratings.

Between 2000 and 2003, the number of mortgages signed each year nearly tripled. Inside Job claims banks were less concerned with the quality of the loans, looking instead to maximize their volume by getting the highest ratings.

Sometimes banks actually preferred subprime loans because they carry higher interest, which theoretically yield bigger returns. In the meantime, big financial institutions urged economists and politicians to continue to loosen regulations governing these kinds of mortgages, an easy feat since markets were booming, investors were making money and more people could now ‘afford’ homes.

In order to boost profitability even more, investment banks borrowed heavily to purchase further loans to be repackaged as CDOs. At the same time, AIG, the world’s largest insurance company, was selling huge quantities of derivatives called credit default swaps (CDS) — an insurance tool that protected people should a CDO investment turn sour.

To make things worse, speculators could also buy CDSs from AIG to bet against CDOs that they didn’t even own. Suddenly, hundreds of billions of dollars per year were flowing through the securitization chain. So when borrowers began to default on their loan payments en masse, the biggest financial bubble in history finally burst.

By 2008, home foreclosures were skyrocketing and the securitization chain fell apart. Lenders could no longer sell their loans to the investment banks, and as the loans went south, investment banks were left holding hundreds of billions of dollars of debt. Lehman Brothers, one of the biggest investment banks, was forced to declare itself bankrupt and Merrill Lynch put itself up for sale.

Then came the final blow – the collapse of AIG, which cost tens of millions of people their savings, and sometimes even their jobs and homes.

So, was I right or what?
Despite some recent attempts to regulate the sector, the underlying unregulated system is still very much alive. As Frank Partony, professor of law and finance at the University of California, said in the documentary: “You’re going to make an extra $2 million (LE 11.92 million) a year, or $10 million (LE 59.62 million) a year for putting your financial institution at risk. Someone else pays the bill, you don’t. Would you make that bet? Most people on Wall Street said: ‘Sure, I’d make that bet.’”

Oh, and one more thing — we didn’t learn from our mistakes. On September 15, UBS, the biggest bank in Switzerland, lost $2 billion (LE 11.92 billion) due to an unauthorized trading deal, showing the world our money isn’t any safer now than it was before the bubble burst. bt