Charles Ferguson: The securitization food chain

In Blog by Ian Fraser3 Comments

10 January 2011

 

Charles Ferguson, director of the seminal movie about the global financial crisis, Inside Job, has warned that we should continue to feel a profound sense of unease about banks and financial institutions — and by extension about all our economic and political futures.

In a lecture at Massachusetts Institute of Technology on November 9th, 2010 (see above), Ferguson unpicked the “securitization food chain”, the system by which banks boosted their lending power by spreading debt around the financial system. The method, originally seen as a means of reducing financial risk and volatility, was embraced with gusto by banks and other financial institutions worldwide from the mid to late 1990s onwards.

Egged on by friendly government policies, banks including JP Morgan, Lehman Brothers, Bear Sterns and latterly RBS Greenwich transformed the financial landscape. They purchased or underwrote billions of dollars of mortgages and other forms of debt, then provided a repackaging and spray-job service before palming them off on investors worldwide.

Allied financial institutions became adept at selling cheap mortgages to ordinary people, fuelling the US housing market bubble. Insurance and ratings agencies bought into the scam. The speed of growth and scale of the securitization food chain was unprecedented, recounts Ferguson — as was its impact on the economy, both at the market’s peak, and after its collapse.

In the lecture Ferguson explains how in a near regulatory vacuum, individuals inside big institutions made out like bandits, because they could. Senior executives at firms like Bear Stearns took out over $1 billion in cash each in the years prior to the 2008 market collapse. The head of Countrywide Mortgage saw the crash coming, and cashed out over $100m in stock. Ferguson asks: “Why was such extreme behavior permitted? I have to conclude there was a complete abdication on the part of the regulatory system.”

Ferguson finds it galling that the government is so apathetic when it comes to regulating and prosecuting high-end white collar crime, but perceives the reason: the financial services  sector “as it rapidly consolidated and concentrated, became the dominant source not only of corporate profits but campaign contributions and political funding in the U.S.” (i.e. the banks effectively ‘bribed’ politicians on both sides of the House of Congress to ensure they could get away with it).

Evidence for unrestrained financial power is apparent from the muted government response to the crisis, which Ferguson says he been engineered by Wall Street insiders whose sole agenda is to shore up firms that are too big to fail. Ferguson also cites the “corruption of the economics discipline,” the rising role of money in politics, and the increasing concentration of wealth in the hands of a few.

The dominance of a single industry such as banking constitutes a profound change and a danger, believes Ferguson. He said the US “has evolved a political duopoly where two political parties agree on things related to finance and money.”

Without a political structure that is immune to such influence, Ferguson says there is little or no chance of challenging the interests of the financial giants.

This article is an edited version of the lecture summary on the MIT website