Inside Job

by Charles Ferguson

  My filmed interview with Hubbard in 2009 contained the following exchange:

  CF: How does your personal income compare, your private income as opposed to your university salary?

  GLENN HUBBARD: Vastly times more, because I write textbooks, so that’s much more remunerative than being a professor.

  Textbooks? Surprising.

  In 2011, Hubbard became a senior economic adviser to Republican Mitt Romney’s presidential campaign.

  Larry Summers. Summers, who is undeniably brilliant, is the son of two economists and a relative of Paul Samuelson and Kenneth Arrow, two of the greatest economists of the last century. Summers became a full professor at Harvard at a very young age and by now has held almost every important government position in economics. After being chief economist of the World Bank, he became, successively, undersecretary of the Treasury for international affairs, deputy Treasury secretary, and finally Treasury secretary in the Clinton administration. He then became president of Harvard, his candidacy championed by Robert Rubin, until Summers was forced out in 2006. In 2009 he became director of the National Economic Council in the Obama administration; he returned to Harvard in 2011 as a professor at the John F. Kennedy School of Government.

  I don’t think that Summers is corrupt, but his thinking may have been tainted by some of that widely perceived arrogance and, perhaps, a desire to be regarded as important by the wealthy and powerful. Although sensible about many issues, Summers has made a succession of well-documented mistakes and compromises. And his views on the financial sector would be hard to distinguish from those of, say, Lloyd Blankfein or Jamie Dimon.

  Periodically, Summers has found himself in trouble. At the World Bank, he authorized a memo suggesting that wealthy nations should export pollution to the poor; when president of Harvard, he suggested that women might be innately inferior to men in scientific reasoning. Then there were his policy choices: remaining entirely silent about the abuses within investment banking that furthered the Internet bubble; working with Robert Rubin and Alan Greenspan to repeal the Glass-Steagall separation between commercial and investment banking; joining with Alan Greenspan to ban regulation of privately traded derivatives. He testified in Congress that “the parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty [in]solvencies.”11

  That statement was made even as Long-Term Capital Management was being rescued from catastrophic defaults triggered by the very class of derivatives Summers was opposed to regulating. His opposition to Brooksley Born, the head of the Commodity Futures Trading Commission at the time, may also have been tinged with the sexism that later contributed to his resignation from the presidency of Harvard. In 2005, when Raghuram Rajan presented his prescient paper at Jackson Hole, Summers shouted that Rajan was a “Luddite” and that his paper was misguided.

  When Summers became president of Harvard, he also started consulting to, and making speeches for financial services firms. Because Harvard, along with most other major universities, does not require its faculty (or its presidents) to disclose outside income, we do not know how much Summers made. Even now, his Harvard Web page lists none of his consulting clients or speaking engagements. But even while he was president of Harvard, his income from the financial sector was probably already substantial.

  Shortly after he was forced to resign as president and returned to being a professor, Summers agreed to work one day a week at D. E. Shaw, a large hedge fund, which paid him over $5 million in the year before Summers entered the Obama administration in 2009.

  His government service was, indeed, helpful in one regard. Most of our information about his outside activities at Harvard comes from his mandatory government disclosure form, not from any disclosures made to or by Harvard. (Harvard’s president and provost declined to be interviewed for my film and also declined to respond to written questions.) Summers’s 2009 disclosure form stated his net worth to be $17 million to $39 million. His total earnings in the year prior to joining the government were $7,813,000. He made $1,729,000 from thirty-one speaking engagements, nearly all for financial services companies; Goldman Sachs paid him $135,000 for one speech. He was also paid $45,000 by Merrill Lynch for a speech on 12 November 2008 after Merrill had completely collapsed financially, and one week after Obama’s election. After questions were raised, Summers donated the Merrill Lynch fee to charity.

  A report in an Asia Times blog suggests that in the summer of 2007, right after AAA-rated mortgage CDOs blew up a Bear Stearns hedge fund, Summers was marketing Shaw-owned CDOs to Asian sovereign wealth funds. If true, that raises an interesting question: was Summers helping Shaw execute a Goldman-like strategy of dumping toxic assets on naive institutions? Or did he not understand, even in 2007, that these things were so dangerous?12 But it doesn’t really matter. Summers is a compromised man who owes most of his fortune and much of his political success to the financial services industry, and who was involved in some of the most disastrous economic policy decisions of the last half century.

  In the Obama administration, Summers opposed strong measures to sanction bankers or curtail their income. He has never apologized for any of the decisions or statements he made between 1995 and 2006. He declined to be interviewed for my film, as did all members of the Obama administration.

  In 2011 two Harvard professors decided to show my film in their class. When Summers learned of this, he contacted the professors and demanded the right to come to the class and comment on the film. They agreed, on the condition that they invite me to comment as well. When I agreed to come, Professor Summers decided that he didn’t need to appear after all. To a remarkable extent, Summers has been able to avoid direct questioning about both his policy record and his financial involvements.

  In early 2012, however, Summers was finally forced to address both my film and his earlier policy decisions, albeit briefly, in a televised interview in Britain that was then posted by Reuters financial blogger Felix Salmon.13 In the interview, Summers defends his role in banning all regulation of OTC derivatives by saying that the credit default swap market “essentially didn’t exist” when he advocated the legislation. There are two important points to make about this. The first is that the explicit goal of the legislation, and of Summers’s public arguments in favour of it at the time, was to prohibit any regulation of any OTC derivatives, whether past, present, or not yet invented. The legislation accomplished this, and thereby crippled the ability of the US government to deal with toxic instruments, and indeed gave the financial sector a green light to develop them. But second, as Salmon points out in his blog post, Summers is flat wrong about CDSs. Not only did CDSs already exist when the legislation was enacted, they had been invented years before and by 2000, the year in which the legislation was passed, they were in fact already a $900 billion market. They were even used at the time to insure against, and to bet on, Enron’s imminent failure.14

  Later in the interview, Summers is then asked about my film. He replies, “Inside Job had essentially all its facts wrong,” and then goes on to explain that he did not have any financial conflicts of interest. I will now quote him verbatim from the interview, without any editing:

  Whatever I did or did not do right or wrong in the Clinton Administration, I had earned no significant sum of money prior to working in the Clinton Administration, or in association with the financial sector for more than five years after I left the Clinton Administration, and so any suggestion that what I did in the Clinton Administration had to do with loyalty to the financial sector, I think is a bit absurd. You can argue about whether it was right or whether it was wrong, but it didn’t come out of any proximity to the financial sector, because I didn’t have any before, and I didn’t have any afterwards.

  However, in at least one further regard, Summers has his facts wrong. Contrary to his statement in the interview, he did not let five years elapse after leaving the Clinton gov
ernment before he started making money from the financial sector. It is true Summers did not begin his most lucrative consulting arrangement (with D.E. Shaw) until he resigned from the presidency of Harvard in 2006. But we know that he had already begun consulting to a major hedge fund, Taconic Capital Advisors, by 2004 (while serving as president of Harvard), a fact only revealed in April 2009 by an article in the New York Times.15 In fact, the same Times article also reports, Summers later recommended one of his hedge fund clients for a major job in the Obama administration.

  Summers may have had other financial sector involvements as well. However we do not know anything further about Summers’s outside activities between 2001 and 2008, because Harvard did not (and still does not) require Summers to disclose them publicly, and Summers himself has never done so. Both Harvard and Summers declined my requests for the information.

  Summers continues to speak and consult for financial groups. His Harvard web page still does not list any of his paid outside activities, and little is known about them.16 But in June 2011, Summers announced that he was becoming an adviser to the venture capital firm Andreessen Horowitz. And as of early 2012, Summers’s web page on his speaking agent’s website included testimonials from seven clients. All but one (Regent University) were financial; they included the Texas Pacific Group, the Chinese Finance Association, Charles River Ventures, and Institutional Investor magazine.17 Summers has not disclosed the identities of his other speaking or consulting clients.

  Frederic Mishkin. Mishkin received his PhD in economics from MIT in 1976 and is now a professor of banking and finance at Columbia Business School. Mishkin also spent two years as director of research at the New York Federal Reserve, and from September 2006 through August 2008, he was on the board of governors of the Federal Reserve system.

  When I interviewed Mishkin for my film, he was both evasive and embarrassed about his 2006 paper “Financial Stability in Iceland”. And well he should be, because it’s awfully embarrassing. The Icelandic Chamber of Commerce paid him over $120,000 to write it, a payment he disclosed when he was required to, on the government financial disclosure form required by the Federal Reserve Board.

  Mishkin’s paper gave legitimacy, and renewed energy, to one of the world’s worst financial frauds, one that devastated an entire nation. Iceland, whose population is only 320,000, was until recently a prosperous democracy with very low unemployment and little debt. But then a new conservative government privatized and deregulated Iceland’s three major banks in 2001.

  The new owners of these banks promptly embarked on a borrowing and spending spree that was as insane as it was criminal. In seven years they borrowed over $125 billion, about $1 million for every adult in the country. Most of it was lent to “investment funds” and various shell companies, often owned by the bankers’ families and friends. Suddenly there were yachts, pin-striped private jets, New York penthouses, boutique hotels, private concerts, huge parties. By 2006 bank “assets”—loans the banks had made with the money they had borrowed—were already equal to 350 percent of Iceland’s GDP. The nation’s financial regulator did nothing; it had a total of fewer than forty employees, including clerical staff, and a third of them left to work for the banks. The stock market, dominated by bank stocks, zoomed upwards—because the banks were using borrowed money to purchase their own stock. Much of it was a Ponzi scheme, with new borrowed money used to prop up the banks’ untenable positions. In March 2006 analysts at a Danish bank wrote that “Iceland looks worse on all measures than Thailand did before its crisis of 1997.”18

  This was the environment in mid-2006, when Professor Mishkin wrote, “Iceland is not an emerging economy . . . [and] comparisons of Iceland with emerging market countries, like Thailand and Turkey, are not only facile, but completely misguided.” He went on:

  Iceland, however, has excellent institutions: indeed, as we have seen, the quality of its bureaucracy and low levels of corruption, rank it among the best-run countries in the world as we saw in the overview chapter. In contrast to the inadequate prudential supervision in countries that have experienced financial instability, Iceland’s prudential supervisors are seen as honest and competent. Their statements that the banking system in Iceland is safe and sound should be taken at face value.19

  Mishkin and his report were paraded through the media and the financial industries of both Iceland and the US, and his report played a role in helping the Icelandic banks to continue to borrow. Icelandic bank bonds were even incorporated into a number of CDOs issued during the bubble by US banks. The bankers were able to continue their Ponzi scheme until 2008; when the global financial crisis started, it revealed that Iceland was insolvent, with bank losses of $100 billion. Unemployment tripled in six months, and Iceland now faces decades of economic hardship, as well as chronic disputes with other nations and foreign banks that lost money from the fraud. Post-crisis investigations revealed that the “excellent” prudential supervisors of Mishkin’s imagination had failed to spot gross embezzlement and other crimes by bankers and their co-conspirators in the investment funds.

  After the crash, Mishkin revised the title of his report on his CV, changing it from “Financial Stability in Iceland” to “Financial Instability in Iceland”. In a Financial Times article written in response to my film, he claimed that this was a temporary typographical error that had been corrected long before. This is not true; I had downloaded his CV from his Columbia website the morning of our interview.

  Mishkin’s other writings display a similar kindness towards the financial sector. In 2003 he wrote a paper entitled “Policy Remedies for Conflicts of Interest in the Financial System”. In this paper, Mishkin basically says there’s nothing to worry about. For example, while rating agencies may appear to have conflicts of interest—granting high ratings to securities sold by powerful customers will increase their business—Mishkin concludes that “there is little evidence that ratings agencies engage in such conflicts of interest,” because exploiting their position “would result in decreased credibility of the ratings . . . and a costly decline in [their] reputation.”20

  The year before Mishkin joined the Federal Reserve board, his salary at Columbia (for a half year) was $232,000, and he had textbook royalties and advances of $522,000. His total consulting revenue, including Iceland, was $274,000, and he earned $30,000 in speaking fees, for a total income of $1,058,000. He also listed securities valued between $6,740,103 and $21,356,000. When I asked him whether he consulted for any financial institutions after leaving the Federal Reserve, he replied that he did, but that he did not want to discuss them.21

  Like Summers and others we shall encounter shortly, Mishkin is on the speaking circuit, too. And here, I am grateful to one effect of my film. As mentioned earlier, after the documentary was released, Columbia Business School (and several other academic organizations) finally adopted disclosure policies. Columbia still doesn’t require disclosure of dollar amounts of outside income, but professors are now required to disclose the identities of their clients. Here is Mishkin’s disclosure of all of his speaking engagements between 2005 and February 2012:

  ACLI

  Bank America

  Barclays Capital

  Bidvest

  BNP Paribas

  Brevan Howard

  BTG Asset Management

  CME Group

  Deloitte

  Deutsche Bank

  Fidelity Investments

  Freeman and Co.

  Futures Industry Association

  Goldman Sachs

  Goodwin Proctor

  Handelsbanken

  International Monetary Fund

  Kairos Investments

  Lexington Partners

  Miura Global

  National Business Travel Association

  NRUCF

  Penn State University

  Pension Real Estate Association

  Premiere, Inc.

  Shroeder’s Investment Management

  Treasury Manag
ement Association

  Tudor Investment

  UBS

  Urban Land Institute

  Villanova University

  Richard Portes. Although he is an American, Richard Portes is one of the most prominent economists in Europe. He is a professor of economics at London Business School, and founder and director of the Centre for Economic Policy Research, as well as holding several other positions.

  And in 2007, Professor Portes, like Frederic Mishkin, became a consultant for the Icelandic Chamber of Commerce, which in November 2007 published his opus “The Internationalization of Iceland’s Financial Sector”, coauthored with a professor of economics at Reykjavik University. Just a year later, Iceland totally collapsed. But Portes was, if anything, more confident than Mishkin, and apparently unaware of the fact that Icelandic bank “assets” had risen to 800 percent of GNP. His paper and accompanying PowerPoint presentation are full of phrases like “Internationalization of Icelandic Financial Sector Is a Major Success” and “Financial Volatility Not a Threat”. Even well into 2008, Portes continued to make media appearances on behalf of the Icelandic banks. In July 2008, three months before the implosion, Portes wrote an opinion piece in the Financial Times. It did not disclose that he had ever received payments from the Icelandic Chamber of Commerce. In the article, Portes harshly criticizes another economist, Robert Wade, who had recently written an article entitled “Iceland Pays the Price for Financial Excess”. An excerpt from Portes’s reply:

  “Iceland could not get away with ‘as light a regulatory touch as possible.’ It has had to apply exactly the same legislation and regulatory framework as European Union member states, and its Financial Services Authority is highly professional. Prof Wade repeats the common claim that Icelandic banks ‘operated like hedge funds.’ ”

  And Portes’s article concludes:

  “The Icelandic banks had virtually no exposure to the toxic securities that almost all other banks did buy.

  “The rest of Prof Wade’s comments are political, including rumourmongering. This and his carelessness with the data are regrettable in the fragile conditions of today’s international financial markets. He would prefer that the Icelanders adopt ‘a more Scandinavian model.’ The advice is doubtless well-intentioned, but we should not be surprised if they ignore it.”