By Adam Lashinsky
March 16, 2011

Charles Ferguson elaborates on his famous Oscar speech.

Inside Job, which recently won the Academy Aware for best documentary film of 2010, continues to be a conversation starter. Paul Krugman titled his latest column in The New York Times, “Another Inside Job.” Time Magazine’s Joe Klein evokes director Charles Ferguson’s now-famous acceptance speech at the Oscars in which the filmmaker lamented that so far no one has gone to jail for crimes to committed during the financial crisis of 2008.

Despite lots of overheated rhetoric, it never has been completely clear to me exactly which crimes people think were committed. If Klein, a political writer, has any ideas of specific crimes, he isn’t letting on. He writes about “the shyster army peddling tricky mortgages, usurious credit-card rates and unscrupulous payday-check-cashing shops.” Colorful language, yes. Examples of laws broken, no.

I put this question to Ferguson himself recently in a public interview in San Francisco. The best he could come up with was “accounting fraud” and “self-dealing” by unnamed, lower-down investment-bank employees. This isn’t to say crimes weren’t committed, and Klein’s strongest point is that the cops don’t have the resources to fight the criminals.

For anyone willing to dig more deeply on the subject, Ferguson contains a wealth of knowledge. He’s also willing to be pushed and to defend his assertions. The interview I did with him can be viewed here. I’ve also posted an unedited transcript of the interview below.

 

TRANSCRIPT:

Adam Lashinsky: Good evening, and welcome to today’s meeting of the Commonwealth Club of California, the place where you’re in the know. Find us on the Internet at commonwealthclub.org. Tonight’s program is also being held in association with the San Francisco Film Society. I am Adam Lashinsky, a writer with Fortune magazine, and your moderator for today’s program. It is now my pleasure to introduce our distinguished speaker, Charles Ferguson, Academy Award-winner and documentary filmmaker of Inside Job. To say that Charles Ferguson has had a varied career would be a gross understatement. A math major at the University of California at Berkeley, he later earned a PhD in political science at MIT. As an MIT post-doc he researched the intersection of high-tech globalization and government policy while serving as a consultant to several federal agencies including the White House staff. In 1994, he founded the software firm Vermeer Technologies, which created FrontPage, a pioneering website development tool. Just two years later, but well before the Internet bubble, he sold Vermeer to Microsoft and embarked on a career as an author and filmmaker. His first documentary, No End in Sight: The American Occupation of Iraq, was released in 2007 and provides a scathing appraisal of the Bush administration’s conduct of the war. For his second film he turned on his sights on a fiasco of a different sort, the 2008 financial crisis that nearly brought down the world’s economic system. That film, Inside Job, was awarded the Academy Award for best documentary film of 2010. In his brief acceptance speech in Hollywood three nights ago, Ferguson noted that not one high level person has yet gone to prison for their role in the crisis. Please join me in welcoming Charles Ferguson.

[audience applause]

L: Charles is going to say a few words to get things going. No gavel-knocking for you!

[audience laughter]

Charles Ferguson: No gavel-knocking, and let the record show that I’m wearing jeans.

[audience laughter]

F: Thank you, it’s a pleasure to be here. Well, I will just say a few things. First of all, it was a remarkable experience to make this film. I started thinking about it actually fairly early on because in a way, indirectly related to my earlier academic and policy career, I know several of the people who were among the earliest to warn about the coming of this crisis–Nouriel Roubini and Charles Morris who are two of the people, who appear in the film, are people that I’ve know for quite a while. And in 2007 they began talking to me about this telling me that something really quite serious and dangerous was going on, and that at some point it was going to end, and possibly end catastrophically. And I began paying rather close attention to them when major financial institutions began failing on a weekly basis, in 2008. And it was after the failure of the bankruptcy of Lehman Brothers in mid-September, 2008, that I decided that I really had to make this film, and I approached Sony Pictures Classics, who were immediately very supportive. And by early 2009, we were already in production and filming. And the making of the film entailed a great deal of research, and in some cases the two things coincided, in the sense that I frequently learned very surprising things in the course of conducting the interviews that make up the film. The aftermath, however, is a little more depressing. You know, I have to say that, like many people I think, I was initially very optimistic and hopeful that when Barack Obama was elected president that he would do something about this, and I think that he had a historically, politically, extraordinary, unique opportunity to do so as a result of the country’s condition, the mandate he had, the overwhelming majority of his party in Congress, the sentiment of the country and the population. And it was enormously disappointing when we saw him appointing as his economic and regulatory team the same people, a group of people many of whom had contributed to causing the crises, some of whom had done extraordinarily unethical things. And a couple of whom, you know, arguably should perhaps even be subject to legal sanction, and unfortunately his policy measures subsequently have been consistent with that economic and regulatory team. Today, the Securities and Exchange Commission did vote to adopt new and substantially improved regulations with regard to the control of executive and trader compensation in the financial services industry, but the measures they adopted were fairly weak. And in general, overall, I would have to say that I would give the Obama administration, you know, kind of a C-minus with regard to the handling of the situation. So, with that…

L: Good. Right before you won the Academy Award, you gave an interview to the New York Times, and my favorite part of this interview was when you were asked, it was suggested perhaps some of the people who interviewed and had heated exchanges with in the film, may not be so happy about their portrayal in the film. And your response was, “Too bad.” Could you elaborate on that please?

[audience laughter]

F: What part of too bad didn’t you understand?

[audience laughter]

L: I got it, certainly… But I’d like you to explain if you would the documentarian’s process or the journalist’s process of how it’s not your responsibility how they feel about having been portrayed badly. In other words, how did you get to be such a tough guy, is what I’m asking you?

F: Well, I’ve been one for a while, actually. Partially, perhaps, the way I was raised, I don’t know. When I was an academic, you know, certainly it was quite routine to get into tough fights–intellectual fights, not personal ones. But people were very direct about their views of each other’s ideas. And also I had the benefit of a PhD thesis advisor, who is a remarkable man, who had done real things in the real world. He had been deputy national security advisor for the Kennedy administration. And I remember one time when I complained to him that I was under a lot of pressure. And he kind of smiled and he said, “Well Charles, let me tell you about the Cuban missile crisis.”

[audience laughter]

F: “That’s pressure. Your problems are not pressure.” So, you know, he set a high standard. And also, for my first film, I spent a month filming in occupied Iraq in 2006, which was not a garden spot, to put it mildly. And so the idea of Glen Hubbard getting angry at me didn’t exactly terrify me.

L: Very early in Inside Job, I can’t remember if it’s you or if it’s Matt Damon, as narrator says, “This was not an accident.” I think that’s sort of the critical statement of your film. Would you explain what that means, that the financial crisis of 2008 was not an accident?

F: What I meant by that, and I think there’s rather wide agreement on this in the relevant analytic community, was that if you set up a financial system that has incredibly dangerous incentives and you don’t have any regulatory oversight of that system, then you’re going to get dangerous behavior, and so it shouldn’t come as a surprise if people do things that end up causing a major financial crisis. And I would point most particularly to two practices in which the financial sector engaged, both of which it still engages in. One is the extremity of the leveraging of these financial institutions: they fund themselves using very short-term funding; they make very long-term, very illiquid investment decisions; and they borrow enormous amounts of money. At the height of the bubble, Lehman Brothers had a leverage ratio of somewhere around 35 to one, meaning that a three percent decline in the value of their investment portfolio would lead them to be insolvent, and that’s dangerous. So first of all, that kind of institutional behavior. But I would say even more importantly was the structure of personal incentives. People were given enormous short-term, primarily cash–but whether cash or stock it almost doesn’t matter–enormous short-term incentives and rewards for doing things that had enormous long-term consequences. And if those things went bad, they paid no price whatsoever. You know, if you’re going to have a system run like that, and furthermore a system run without regulatory oversight, then you’re going to have crises.

L: So in the first case leverage ratios are down considerably at all financial institutions in the United States. So that problem, whether by fiat or not, has been dealt with, for now.

F: For now.

L: OK. On the second issue, what would you do, whose salaries would you regulate in the financial systems? Everyone’s, the top X number of people? How exactly would you write the regulation or legislation to solve this problem?

F: Well certainly you would regulate the compensation of top management and boards of directors, where, boards of directors are also important. Director compensation in this industry is far from ideal.

L: So you’d cap it, at how much?

F: No, you wouldn’t cap it, you would regulate it. And you’d also regulate the compensation of anybody who had the capacity to take major risks or cause major damage, high level traders who have high limits, things like that. Look, you know, when I started my software company, it was funded by venture capitalists, and when they decided that they wanted to invest in the company they sat me down and we had a little talk. And a little went like this: “Charles, your salary is going to be $100,000 a year, it’s never going to go up. You will never receive a bonus, you will not have any outside income. Your stock will vest over five years. You cannot sell a single share of it, ever, until the company is liquid. So, Charles, go out and make your stock worth something.” Well if we had compensation structures like that in the financial services industry, I think we’d have very different behavior.

L: So, since you spent so much time on this, I want you to linger on this and drill a little more deeply. You don’t want to cap it, but you want to regulate it? So you want some regulator to write regs that would give guidance to a Goldman Sachs (GS) on how to structure a trader’s compensation?

F: Yes. More than guidance! You know, I think that this is so important that this should be more than guidance. So what should it be like? Well, a very high fraction of their compensation should be deferred for a significant period of time–the SEC regulations voted on today defer 50 percent of compensation for three years–that is not enough. This bubble lasted six years, at least, some people would say seven or eight. And 50% isn’t an oppressive number, either. So, compensation should be deferred, a high fraction of compensation should be in some form that brings direct feedback with regard to the consequences of that person’s decisions. Some banks in Europe, for example, have begun compensating people with the same financial products that they create and sell. And…

[audience applause]

F: Yes!

L: This is the “Eating your own dog food” form of compensation?

F: Yes.

[audience laughter]

F: And also where the compensation is in the form of stock–it should be stock that you have to hold for a significant period of time, and if you do something wrong it should be taken away from you.

L: So in the case of your venture capitalists, the reason they had so much power over your compensation is that they owned the company, metaphorically. They invested, they were the owners, they called the shots, they told you what to do. Your suggestion here is taking power away from the owners who are the shareholders and putting it in the hands of regulators. So, I’m going to ask you a question that is–I’m meaning to be half-serious and half-devil’s advocate with you. Isn’t this un-American, isn’t this anti-capitalist, what you’re suggesting?

F: No. Well, there is perhaps a sense in which it unfortunately is, but that is in its response to the extremely uncapitalist behavior who have been running the financial services industry. If the people who ran the financial services industry behaved the same way, as Silicon Valley venture capitalists, we wouldn’t have these problems. But they don’t. And there are a number of reasons for that. I wouldn’t pretend actually to understand this completely. How, over the last 20 years, the financial services industry, has come to be captured by its employees, its senior employees, as opposed to shareholder representatives, who would want to behave much differently.

L: Yeah.

F: But there’s also something else that’s very important. We actually do very tightly regulate compensation and many other aspects of behavior, even far more intrusive than compensation, in industries that are dangerous. We don’t let ordinary individuals own unlimited quantities of high explosives…

L: Yeah.

F: …We don’t let just anybody fly a 747. And if you fly a 747 when you’re drunk, you get fired. And you don’t just get fired because the airline fires you, you get fired because the FAA doesn’t permit it. And we have to understand the financial system is like that. If the financial system goes down, then the consequences are really very serious.

L: A few quick topics before we go to audience questions. First of all, TARP. Was TARP a good idea, and in your opinion did it work?

F: Well…

L: I’m sorry, maybe if you would just speak for 20 seconds on what TARP was, for the benefit of anyone who doesn’t remember that acronym?

F: TARP stood for Troubled Asset Relief Program. It was the $700 billion effort to stabilize the financial system during the crisis of 2008, in part by directly injecting capital into financial institutions, in part by purchasing some of the securities that they owned but could not sell. Certainly it was necessary to use a great deal of money to stabilize the system. Unquestionably, that was an extremely urgent necessity.

L: So you’re willing to give the Bush administration and the Congress credit for that step that they took?

F: Yes, at least for part of it. There are two things, however, about TARP, and more generally the Bush administration’s response to the crisis, that were and remain very troubling. The first was that all of the assistance went to basically the top 1/10 of one percent of the population, so there was very little assistance to people who were suddenly losing their jobs, losing their houses, losing their assets and their wealth because of the effect on the stock market. And those effects were extremely severe, very severe. During the latter months, the last months of the Bush administration, unemployment in the United States was increasing by more than 1/2 of one percent per month. So over a half-million people a month were losing their jobs, and that’s, you know, not good, obviously. And very little was done to help the bottom 75 percent of the American population. That’s the first problem. The second problem was that this assistance was given without any serious requirements in return. So nothing was done to curb investment banking bonuses, for example, which in early 2009, at the height of the crisis, actually set records, which is pretty amazing when all of these companies are on life support, and unquestionably would have failed without federal support, they pay out billions of dollars in cash bonuses.

L: Well in fact they also were required to pay out billions of dollars in dividends to the investor, namely the government. I mean it’s not that nothing was required of the banks–these were structured in the form investments, in the form of loans, which had coupons?

F: Yes, that’s true. So the government got either an interest rate, or in a few cases a dividend. But that was quite minor relative to the other effects. And regardless of their comparative size, if the signal that you’re trying to send is that you want to reform the financial system and prevent this kind of thing from happening again, that signal was not sent. In fact, the signal that was sent was exactly the opposite, which was, you’re free to continue doing this, and you’ll pay no penalty for it.

L: So, on the subject of reform: in the film you are dismissive of Dodd–Frank. It’s essentially, I’ll paraphrase it, “a useless piece of legislation that doesn’t achieve reform.” Is that your perspective?

F: That’s a bit too strong, but what grade would I give Dodd–Frank? Maybe a C-minus. Which, up from an F, that’s an improvement. But is it an A-plus? No. No.

L: So you’re not impressed with the Volcker Rule, not impressed with some of the things that have been in the news in the past few days about things that will have the effect of raising the percentage of down payments on average for insured mortgages? There will be thousands of regulations written as a result, including in the next few years, but it’s not enough.

F: Yes. Most of the regulations have not yet been written, is the first comment to make. For most of the areas covered by the bill, there’s a study period and a period for the formation of regulations, drafting of regulations, comment on them, promulgation of them, which lasts from one to four years. So, only in a few areas have regulations already been put into place. Many areas are potentially covered by these regulations, but they are reversible, in the first place. In the second place, the ones that have been put in place, you know, I would not say that they give me a great deal of comfort. They might prevent exactly the same crisis from happening, but another bubble in a different market with a few tricks, I’m not at all convinced that we have prevented this from happening again in another 10 or 15 years.

L: Last thread before we change gears. My favorite part of your film were the interviews you did with Glen Hubbard and Fred Mishkin; both academics who have served stints in government, and made a lot of money–made money consulting to various entities…

F: A lot of money.

L: Yeah. Describe that a little bit if you would?

F: Well this actually for me personally is one of the most disturbing aspects of what has occurred, it’s something that I saw beginning to happen when I was a graduate student at MIT in the late 1980s. The Law and Economics Consulting Group, for example, a consulting firm founded in Berkeley by a group of UC Berkeley professors, was founded in 1988. It is now a $350 million a year publicly traded firm. So, this is big business. And what’s happened is that industries with very heavy regulatory and government policy problems and involvement, and whose profitability is heavily dependent on the degree to which they’re regulated, have invaded the academic economics discipline, both in economic departments and in business schools, and also public policy schools by the way, and have basically blanketed these institutions and people with money to a really stunning extent. And in the case of people like Hubbard and Mishkin and many others, Larry Summers, their private income from giving regulatory advice, testifying in Congress–their paid to testify in Congress on behalf of these industries. Many people don’t understand that, that when an academic is testifying in Congress, most of the time their being paid to do so by somebody. That kind of income typically is 5 to 25 times the size of their academic income. These people make millions of dollars a year doing this. And it’s become a very, very disturbing problem.

L: I think you have to go further. The size of it alone is sort of irrelevant, isn’t it? Just because it’s a lot of money, OK, so what?

F: Well, OK. So obviously the question is, has this in fact corrupted the academic enterprise and the way these people behave when they’re in government, and so on? The answer is yes. And the part of the film that deals with that is very up front about that…

L: Could you briefly tell the story about the Icelandic chamber of commerce, please?

F: By all means, yes. So Iceland had an extraordinary bubble, highly criminal. One of the people that we interviewed for the film, the former prime minister of Iceland, was recently indicted, which caused a gigantic bubble. There was an enormous financial bubble, and it began to falter around 2006. And the Icelandic banks took many steps to keep propping it up, and one thing that they did was they had the Icelandic chamber of commerce commission reports from prominent American and European academics saying everything’s wonderful. And one of the first ones they commissioned was from Frederic Mishkin, who had just left the Federal Reserve. He had been one of the seven governors of the Federal Reserve. Excuse me, it was just before he went into the Fed, I’m sorry. He was a governor of the Fed from 2006 to 2008. And a few months before he entered the Fed, he was paid $125,000 by the Icelandic chamber of commerce to write this, just, hysterical, hallucinatory report about how Iceland’s new financial system was wonderful, and how Iceland was well-regulated and so forth. And he had good company: a number of other very prominent, very prominent economics professors did similar things, as late as late 2007.

L: And the title of his report was, can you just…

F: Ah, yes.

L: It’s just too good to not share with the few people in the room who may not have seen your film.

F: The title of his report was “Financial Stability in Iceland.” And he falsified his resume after the crash, and the title of the report on his resume was changed to “Financial Instability in Iceland.”

[audience laughter]

F: And we ask him about this, I ask him about this in the film, and he’s a little embarrassed. He says it was a typo.

[audience laughter]

L: That’s some typo. I want to remind our radio audience that you’re listening to the Commonwealth Club of California Radio Program, and our guest today is documentary filmmaker and Academy Award-winner Charles Ferguson, who is talking about his latest film Inside Job. I’m going to begin reading some of the questions that have been submitted. The first one is a question that is asked twice, first from the Internet, which is, what is your list of the top five bankers who should be in jail?

[audience laughter]

L: And a slightly different take on this question is, how is it that we’ve had two years of a Democratic president and a Democratic Congress, and not one major figure on Wall Street has been indicted? Does Wall Street own our government?

F: Wall Street has come dangerously close to owning our government. And unfortunately, this is now a thoroughly bi-partisan problem. This is not something where Democrats and Republicans have a vast divide. So the reason, unfortunately, I have to say the Obama administration has not done anything about this, is first of all the president has clearly made personally, individually, a decision that he doesn’t want to go after this, for reasons that might be personal, emotion, or might have to do with his political calculations. But more broadly, Congress and the people who go into the government, they are very heavily influenced by the size of financial industry campaign contributions, by the size of their lobbying effort, by the fact that they want to get highly paid jobs when they leave government, etc. As to my top five names: there I’m going to decline, for a serious reason, which is that we haven’t yet adjudicated any of this, and accusing an individual of a criminal offense is not something that one does casually. But I will say, and I mean this quite seriously, that from what I’ve seen I think that a significant fraction of the senior management of American investment banking should be tried for criminal offenses.

[audience applause]

L: So, I respect your lack of interest in putting a name out, for a variety of reasons I assume. So let’s just say one of these people you’re referring to: what is an example of a crime that they committed?

F: Oh, that is all too easy, and I’m happy to answer it at far greater length than you would like me to! A short sampling, OK. So we know that Lehman Brothers engaged in accounting tricks to hide the size of its liabilities, we also know that it over-valued its commercial real estate investments by many billions of dollars, for a considerable period of time, and that internally people were warning about this inside Lehman Brothers in an extremely aggressive way. Nobody has been tried for accounting fraud. We know that Merrill Lynch and other investment banks engaged in self-dealing in order to artificially prop up the value of securities that they could no longer sell on the open market. In fact, we know that Merrill Lynch traders actually paid each other bribes to have other divisions of Merrill Lynch “purchase” these securities, in quotes, internally, to set a price and keep these securities supposedly of high value, so that Merrill would not have to write them down–also so that individual traders would be able to get bonuses.

L: But do we know that the CEO of Merrill Lynch or the CEO of Lehman Brothers was aware of this accounting fraud, in the one case, or the self-dealing in the other case?

F: In the case…we don’t yet know as much as we should, is the way that I would put it. It seems, in both cases, almost inescapable that the top management of the firm knew at least something about this. But what we should have of course, is we should have lots of prosecutors going through everybody’s email, and we should have lower level people getting prosecuted and flipped and made to talk, and we don’t have any of that.

L: The Justice Department did make a run at Angelo Mozilo, the former CEO of Countrywide. Do you have any insight into why that prosecution went nowhere, and they’ve subsequently dropped it, right?

F: They have dropped it…

L: Officially dropped it.

F: Yes, they have, and I don’t know why. They’ve also decided not to pursue any prosecution against Joseph Cassano of AIG (AIG), another major episode of this kind. He and his group made a total of over $4 billion in cash bonuses writing several hundred billion dollars of credit default swaps, very shortly before their value collapsed, causing the collapse of AIG. Cassano publicly stated that he didn’t think that there would be even a single dollar of loss on any of the securities involved. And he also is known to have blocked efforts to audit his unit, that’s a publicly known verified fact.

L: This is another question from the audience. Do you know if president Obama has seen “Inside Job”? And has he or any members of his administration talked to you about it?

F: The answer is no to both. I don’t know whether he or other senior members of the administration have seen the film. I do know that they are very aware of the film. I know that, that’s not a guess. But none of them have spoken with me directly. In fact one of the greatest personal disappointments I had in the course of the film’s distribution, and also actually it started when I was making the film, was that nobody in the Obama administration would speak with me, even off the record, and these are people in some cases I’ve known for 20 years, who’ve been my dinner guests, who I regard as friends. The Bush administration was a model of openness and transparency compared to the Obama administration, at least with regard to these issues, which is, you know, that’s a statement.

L: You singled out in the film Timothy Geithner, who was a guest of the Club several months ago. Is it ipso facto true that because he was the Fed governor of New York during the crisis, that he can’t be an effective Treasury Secretary now?

F: Well, I wouldn’t say ipso facto, but we know at least something. Again, we don’t know nearly as much as we should, and there’s been an enormous amount of secrecy with regard to what the New York Fed did during this period, and what Mr. Geithner did during this period. But we do know that he participated directly in the negotiations about how to rescue AIG, and somehow nobody paid too much attention to the possibility of forcing the investment banks to take substantial haircuts on their credit default swaps. But in that 48, 72-hour crisis period, somehow the Federal Bank of New York was able to think carefully enough to require that AIG surrender its right to sue for fraud in return for getting bailed out. Well, you know, I don’t think that somebody who was involved in doing that really should be our treasury secretary right now.

[audience applause]

L: All right. This is the call-to-action question from the audience, I’ll just read it verbatim. “He says nothing has really been done, but the movie has no call to action for the informed American. What can someone do to bring better regulation and compensation limits?”

F: Well, I would give two answers to this, which you’re probably going to find very unsatisfactory. One of them is a kind of evasion, and the other is not, but is still unhappy and unsatisfactory. The evasive one is, I don’t really view that as my function. Why do I say that? I view myself as an investigative journalist and documentary filmmaker and filmmaker, and perhaps a policy analyst. But I am actually not really a political person. I’ve never held government office, I’ve never run for office, I never will. I did donate to the Obama campaign, but it’s unusual for me even to do that. I view myself as somebody who by what I do hopefully informs the public so that people can take action in the ways that our democracy permits. The second, however, the second answer is, unfortunately, this is a really tough, tough problem because it is a thoroughly bi-partisan problem, and we have a two-party system. And as a friend of mine remarked to me recently: if there’s anything the two parties can agree on it’s the undesirability of a third major party. And we really have a kind of political cartel now as a result of the role of financial industry, and sometimes other industries, the role of their money and lobbying in our political system. And I think that changing that is going to be a long, hard, difficult, gradual thing.

L: I’m going to take your cue on the subject of filmmaking and segue to a couple questions from the audience about the craft, there’s three here. First, why did you choose to tell the story of “Inside Job” as a documentary film rather than say a magazine essay or a book? Secondly, please talk about the editing process in the making of this film. And the third question is, what is your next documentary? And I’ll supplement that by asking what is your next project?

F: Why…

L: If you need me to remind you of any of that, tell me, Charles.

[audience laughter]

F: I’ll try, I’ll try. Why a film, not a book? Actually…

L: Or a magazine essay.

F: …Or a magazine essay. Actually, I’m now writing a book based on the material we gathered in the film, which will expand on it, and which will be published by Random House next year. I’m writing it with Charles Morris who is one of the people who appears in the film. But I now regard myself as a filmmaker. And I have to say, from a purely personal point of view, I’ve several careers doing several different things and nothing comes remotely close to making movies. Making movies is the most amazing thing in the whole world. It engages your visual sense, your sense of music and sound, of pacing; it’s linear, it’s non-linear, it’s intellectual, it’s visceral. It’s an extraordinary experience to make a movie. And so as long as the world lets me, I’m going to continue making movies because I love it. How was the film edited? For documentaries at least, editing is the most amazing and most interesting part of filmmaking, although I enjoyed everything about making this film. But there were two editors, Chad Beck and Adam Bolt, they’re brilliant people. When it came time to edit the film, I wrote a document, a very kind of former policy [indecipherable 38:27], very highly structured document: you know, this is what I think the film should look like. They produced a five and a half hour long assembly of what they thought was the best footage. They’d watched all the footage, and this is hundreds of hours. And they produced this assembly of what they thought was the most interesting footage. And then, we started constructing individual sequences about individual issues, and then we started experimenting with how they related to each other and how they wove into each other, and what their order should be. And then we wrote narration around that. It was a great, great thing. And also the credit sequence of the film is basically a four and a half minute long rock video: we were able to license Peter Gabriel’s “Big Time.” Although I will say doing business with Peter Gabriel was not the most enjoyable part of making this movie.

[audience laughter]

L: Why?

F: I would have to get very in-delegate. [laughs]

L: We’re all friends here.

F: No. But it was arduous, and unpleasant. And that’s a widely shared experience, it turns out. It turns out that licensing music is known to be a nightmare in movie making, and boy, was it! But we got it. And I have to say, making that four and a half minute long music video was a lot of fun, I mean it was a blast.

L: It was worth putting up with him, then?

F: It was, it was. And the music is great, he’s a musical genius I think, and I think the music’s fabulous. So editing the film, boy, a peak experience, really extraordinary peak experience. As to what I’m going to do next, I don’t know yet. I may make some shameless entertainment. After making two political disaster movies, I think that I might be entitled to a break. And I love film noir, I love movies like “Chinatown” and “L.A. Confidential” and “Blade Runner.” And if I could make one of those, I’d be in heaven.

L: When we were talking earlier, you used the expression “classy trash.”

F: Yes.

L: I love that. Tomorrow, Phil Angelides will be speaking here: what question would you like to ask him? Did you learn anything new from his report?

F: I haven’t yet read the full text of the report, I’ve read only a relatively short summary of it. I’m just starting to read the whole thing now. I’ve spoken to several people who have read the whole thing. And I’d ask him to address two things. One is, why they didn’t use their subpoena power much more than they did. It took them several months before they even issued their first subpoena. Part of that was because they weren’t given a very large budget, and they were very constrained by the legislation that set up the commission. But one thing is, why didn’t they aggressively use their subpoena power? And the second this is why doesn’t he think people should be indicted, prosecuted and put in jail?

L: Does he think the people should not be? I mean, is that the conclusion?

F: He has thus far not been willing to address that subject in a very explicit and direct manner, and the report apparently does not. The summary that I read certainly doesn’t, and the report doesn’t, in the reports that I’ve received from people who have read it.

L: Of course whatever the merits of the report, I think it’s a safe statement to make that it’s a political failure, given how the report was produced, right? I mean we can safely say this report will go nowhere, right?

F: I think we can safely say that. And I think we can safely say that it was designed to go nowhere from the very beginning…

L: …In that they couldn’t come to a consensus. But I’m not sure, why couldn’t they have come to a consensus? Because of the political nature of the commission?

F: Well, I think, yeah. I would point to a number of things about the legislation and the context that established it. One was that there would be this political divide between very partisan Democrats, very partisan Republicans. That was a problem. The budget was a problem, the budget and the time table. A $6 million budget, that’s ridiculous. That’s absurd. Forgive me for being vulgar, but to investigate Mr. Clinton’s oral sex, 10 times as much. This is crazy.

L: Another question from the audience involving a personality. “I have read almost all of the books on the sub-prime crisis. All highly praised Jaime Dimon, the CEO of JPMorgan Chase (JPM). In your final scene you showed a video of him and others and had Matt Damon describe them as bad guys who escaped punishment. Why label the best guy as a bad guy?”

F: Mr. Dimon has gotten a remarkable free ride from the media. Although there have been excellent, well done reports in the media of the things that JPMorgan has done, if you want one good one, Google Jefferson County, Alabama. JPMorgan first paid Goldman Sachs not to compete for the business, then bribed a large number of Jefferson County officials, sold them a large number of financial derivative products that they did not need, and that subsequently blew up in their face, causing the county to go bankrupt–this is the largest county in Alabama, it includes Birmingham, Alabama, for example, and the county is now bankrupt–and collected $125 million in fees. This, I would not describe as exemplary behavior. And then of course there’s JPMorgan’s role with regard to Bernard Madoff. There have now been very serious allegations that people inside JPMorgan at high levels must have known that he was running a Ponzi scheme, for a very long period of time. And there was an article in “Forbes” a couple of days ago: several hundred checks for identical amounts, all of them just under a million dollars, went through two accounts in a short period of time, I think in the course of one year. A total of $76 billion in cash was transferred between two accounts that were maintained, one by Madoff, one by somebody who was a confederate of his. It’s very difficult to imagine that $76 billion got transferred without somebody kind of wondering what was going on here.

L: A question from the audience. Fannie and Freddie’s leverage exceeded the Wall Street investment banks by a substantial margin. That’s an accurate statement?

F: Yes, that is an accurate statement, yes.

L: Had there been no Fannie/Freddie, no mandated community lending, no FHA–I’ll just add to this question–would there have been a housing bubble and a financial crisis?

F: Oh yeah, I think so. I think that it’s arithmetically demonstrable that Fannie and Freddie were not at the heart of this. They were certainly part of it, they contributed to it. The way that they contributed to it by the way is primarily by acting, in a general sense, in a way extremely similar to the rest of Wall Street. They didn’t act like government owned firms, which they actually weren’t, they were private firms. They acted like very powerful private firms with very large lobbying budgets, that lobbied extremely aggressively. The majority of their losses actually were from their investment accounts, not from the loans that they guaranteed or insured, although those produced major losses as well. There’s a very good description of their behavior in one of the books about the crisis, “All the Devils are Here”–there’s a very good chapter on Fannie and Freddie that talks about their just extraordinarily aggressive lobbying. Really remarkable.

L: I think the implication of the question is, and this is obviously very complicated stuff, but that without Fannie and Freddie and without the massive decades long securitization of the mortgage industry, these securities that became derivatives that became–what’s Warren Buffet’s expression, something of mass destruction?

F: Weapons of mass destruction.

L: Weapons of mass destruction, I don’t know how I could forget that. …That, it’s a complicated chain, but that it begins with Fannie and Freddie, at least as a metaphor, of the way we constructed our housing market. So if that wouldn’t have happened, there couldn’t have been a financial crisis?

F: Well, securitization was at the heart of this, that’s absolutely true. But securitization was occurring quite independently of Fannie and Freddie, and occurred also by the way with instruments and financial products and forms of credit that Fannie and Freddie have nothing to do with. Some of these CDOs had in addition to residential mortgages, they also have credit card debt, student loans, they had commercial real estate, all kind of things that Fannie and Freddie had nothing to do with. Fannie and Freddie were involved in, I don’t know, maybe 15, 20 percent of the total of the crap that was part of this financial bubble.

L: That’s a term of art in the financial industry, right?

F: Yes it is, yeah. Well Goldman Sachs used a different term, which I won’t use in public here, if you’ll remember.

L: I do! [laughs] I want to remind our listening audience that this is the Commonwealth Club of California radio program, and our guest today is documentary filmmaker and Academy Award-winner Charles Ferguson, who is talking about his latest film, “Inside Job.” Because someone in the audience wants to ask this, I’m going to open a hornet’s nest here. We hear that Goldman Sachs and others sold securities and then, quote, “bet against them,” unquote. Please explain how such a situation works? And you have two minutes to explain.

[audience laughter]

F: [laughs] Well the details are complicated, but yes this happened. And it happened on a very large scale, it happened in several different ways. If you really want to investigate this, you can Google things like synthetic CDOs, which were one of the wonderful things that were designed and developed during this period. There were a number of different mechanisms that the investment banks used to do this, but all of the major investment banks did it to some degree. And Goldman Sachs was the most successful one, and in fact made tens of billions of dollars by betting against both the specific securities that they were selling, and also the entire market. Some of the bets that they made were that the whole market would go down. In fact that was the majority of their bets, was that all of these securities as a group would suffer catastrophic reverses, and they did. And they also by the way, one of the ways that they were able to sell as much of this stuff as they were, was when they were selling it they would say, “If you’re worried about this stuff you can insure it by buying credit default swaps from AIG.” And they took such large positions, that at a certain point…and they also used AIG themselves, they bought credit default swaps from AIG directly. And at a certain point they realized that they had done so much of this stuff that AIG was very likely to fail as a company, and so they started buying credit insurance the failure of AIG. Which, that really I think…you have to give them credit for intelligence and imagination, but I wouldn’t say…

L: Creativity… Now, so we’re clear, if they were merely a market maker in these activities, making a market for someone else to make a derivative bet on, anything–whether or not you’re going to speak now when I stop speaking, for example. Would you be OK with that, as long as they weren’t also the investor?

F: If they were purely making markets, that would certainly help. But even when you’re purely making markets, if you tell lies to both sides in order to make the market, that isn’t such a good thing, in the first place. In the second place, they weren’t just making markets. In addition to making markets, they were also making massive proprietary bets. And in fact, this is a very common parlance on Wall Street, many people on Wall Street describe Goldman in fairly literal terms as a gigantic hedge fund, that basically everything they do in one way or another is for their proprietary benefit.

L: We have just a little time left, so I’m going to turn to some other topics before we finish. One is, is there an end in sight in Iraq now, by which I mean, could you talk a little bit about the time that has passed since your first film?

F: Yes. The film’s description of what happened during the occupation has stood up very well, but towards the end of the film I kind of imply, the film kind of implies, that Iraq had fallen into irretrievable chaos, and that we weren’t going to be able to pull it back from the brink–and that turned out not to be true. I got that wrong, many people got that wrong, and I have to say that General Petraeus and the Bush administration deserve credit for doing something very daring with the surge. Now, having…

L: To double down, in other words, as opposed to pulling out?

F: Yes. Yes. However, that said, if an accurate description of your behavior is, you go up to a random person on the street, you shoot them, you knife them, you run them over with a car, in inject poison into them, and then you take them to the hospital and save their life, are you on a net basis a good guy?

[audience laughter]

F: Tough call.

[audience applause]

F: But having said that, they and also the Obama administration, do deserve credit for pulling that situation back from what could have been utterly horrific. Iraq is still a very unpleasant, violent, corrupt, horrible place, but it is nothing compared to what it could have become if they hadn’t done that.

L: Have you been back?

F: I have not. I do however have many friends who have been back, one of them who I met in Iraq, Louise Roug, was the “L.A. Times” correspondent. She went back fairly recently, reported that it was much better in a lot of ways, but the place where she and I had both lived in 2006 had been since hit by a car bomb and destroyed. She lived in the Al Hamra hotel, which doesn’t exist any more. But the place is much more stable than it was.

L: From the audience: How do you invest your own money? And in parenthesis it says, who do you trust?

[audience laughter]

F: Well, there is actually a little bit of a story there, I don’t think is appropriate for public consumption. But I invest very conservatively; my holdings are primarily in common stocks of technology corporations.

L: You have a…

F: I don’t hold major financial positions in the American investment banking industry.

L: [laughs] They might give you back your money if you tried to buy their shares.

F: Indeed.

L: In general, in the film and this evening, you have a rosy view of Silicon Valley and the technology world: they’re the white hats, the good guys, compared with the investment banks, who wear the black hats and are the bad guys. Why is that?

F: Well, it’s actually a very interesting question. You know, if Intel (INTC) made microprocessors that behaved the way Goldman Sachs’ financial products did, they’d go out of business pretty fast. Why doesn’t the same thing happen with the financial services industry? It’s actually a very interesting question. And part of it is their political and financial power, part of it is that there’s a long lag time between the creation and sale of something destruction and when the bomb goes off. But part of it I can’t say I can totally explain. But it is true that I do have a considerable amount of affection and respect for the technology sector and the people in it, and in general I think the technology sector has been a force for good. Not always, there are problems in that industry as there are in any. But in general I think it’s been good for the United States and good for the world.

L: You’re a rarity in the technology world, by the way, which is a one-time successful entrepreneur who hasn’t tried again. You don’t have the itch to go do another software start-up that’s going to make you gobs more money than you made the first time?

F: Actually I did try again, and it was the biggest mistake that I’ve made in my life. I didn’t mean that as a financial statement, although it did cost me some money, I did lose some money. But what I really meant was that my heart wasn’t in it. I’m very glad that I did the company that I did, it was a fascinating, remarkable experience. But I really wanted to do other things, and I’m incredibly happy with what I’m doing now.

L: I don’t know if this is a stretch, if it is then we’ll move on to the next question. But your PhD work and some of the post-doc work you did had to do with the intersection of technology and politics and globalization. We’re in an interesting moment of technology and politics and globalization: would you like to comment on that?

F: I assume you’re referring to what’s going on in the Mideast?

L: I am.

F: It’s extraordinary. And over New Year’s I was in parts of the Mideast, not parts that are most affected by what’s going on now. I was in Lebanon, Israel, and the West Bank. But I know a lot of people from that part of the world, and…

L: It’s rare for that to be the calm part of the Mid East, right?

F: That is pretty amazing, isn’t it? [laughs] Ramallah being the calm part. Yes. I do find it absolutely fascinating. I’ve been speaking with a considerable number of people who were involved in it, and/or observing it in various ways, and I am of course tempted to make a film about it. I’m going to do so this instant, but it’s fascinating and I think tremendously important, and very hopeful–although we don’t know yet how these things are going to come out. Yeah, a very exciting time in the world.

L: Because we up here in northern California are fascinated by what goes on in southern California, I think we’ll wrap up with a few questions about Hollywood. First of all, someone from the audience wants to know: Why do you think Sony backed you so quickly?

F: Also an interesting question. I think there are several parts to that answer. The film was backed by Sony Pictures Classics, which is the, in quotes, “independent arm” of Sony’s filmmaking activities. And Sony Pictures Classics, they have quite a lot of independents, and it’s run by two guys who’ve run it for 20 years, or, you know, 15 years, and they just turn out to be really remarkable people. And they gave me final cut, they gave me contractual final cut, and they gave me real final cut.

L: Tell us what final cut means?

F: Final cut means that I have final say over the contents of the film. In the filmmaking industry it is extremely rare for a director to have final cut, only a few directors have it. And to give me final cut and to honor that, completely, which they did–never once did they say, you know, “This guy is on our board, could you maybe tone it down. He’s a neighbor…” Never, not once. Not once. And for those of you who have seen the film, very few wealthy, powerful financiers are left uninsulted in this film.

[audience laughter]

F: So I have to say, Michael and Tom, thank you. They’re just remarkable guys. Now also, more kind of structurally, Sony is not a financial company. It makes real things, it was hurt by the crisis. It’s a Japanese company. It’s run by a British man who is a former documentary filmmaker. So, for all those kinds of reasons…

L: And journalist.

F: And journalist. Yeah. So it’s a kind of hospitable place for doing this kind of work. And I have to say that for a gigantic multinational company, about which you could have many concerns, they’ve been absolutely fantastic.

L: Will “Inside Job” make money?

F: It will. It will.

[audience applause]

F: I haven’t seen any yet! [laughs] It will certainly make money for its distributor, and they tell me that in the end, two, three, four years from now it will even make money for me.

L: So with a successful feature film, an Academy Award-winning feature film with a major distributor, that wouldn’t be the case, right? Maybe you’d see the money a little more quickly?

F: I don’t know. I think it’s a general characteristic of the film industry that revenues, particularly to directors, tend to come later than they come to distributors. But also, I’m not a famous, famous guy who has made fifteen $100 million films. I was a relative newcomer, this is only my second film.

L: How much did it cost to make “Inside Job”?

F: It cost about $2 million, of which Sony provided just over half.

L: So then, by definition, Matt Damon did not get the fee that he would have gotten had he been acting in a feature film?

F: Mr. Damon took a rather substantial pay cut from his usual rate.

L: Tell us how you came together with him?

F: We asked him, and he said yes. You know, it really was that simple. It turned out that he had seen my first film while he was preparing for his role in a feature film he made called “Green Zone,” which is a political thriller which takes place in occupied Iraq. And he had seen my first documentary, and liked it. And so when we came calling he knew who we were and was favorably disposed. He was an incredibly great guy to work with. He’s very smart, he was totally not arrogant. He was wonderful. He had very good suggestions for the narration, some of which we incorporated into the narration. We needed him a second time to bring the film a little bit up to date. A few months later, he went into a sound studio in Miami and let us record him again.

L: How much time did it take the first time, his first session? How long did that take?

F: Only a few hours. We…

L: A few hours?

F: Yes. Because he’s so astonishingly good at his job. We had budgeted two full days, two 10-hour days is what we had budgeted and what we had, with some difficulty dealing with his rather fierce lawyer, gotten him/them to agree to. But it turned out that he got everything right the first time.

L: Wow.

F: And this is not easy because the issue is timing. He can’t just say things. Well, he has to say them in exactly the quantity of time allotted before the next sequence starts or whatever, or before the music starts. And he got things right the first time, almost every time. So, he’s good at his job.

L: We’ve reached the point in the program where we have time for one last question, and it will be mine. And that is, did you have a good time at the Academy Awards, and can you tell us a little bit about that?

[audience laughter]

F: I had a great time at the Academy Awards! The good times started with the result. Let me tell you, when you’re waiting for the result–that was tense.

L: Maybe more tense I assume because everyone said you were going to win, right? You were the favorite?

F: Yes, by some standards. But, you know…God, you don’t want to hear about all this. All sorts of people said all sorts of things, and there was good reason to believe that other films might win, including the Banksy film which I thought was delightful–you know, I love that film. I know some of the other filmmakers, in fact I know most of them who were nominated, and they were all good films and they’re all good filmmakers. And one of the saddest things about the Academy Awards is that only 20 percent of the people there can win. That is a little unfortunate. But the parties were good…

[audience laughter]

L: [laughs] Well, so does a documentarian get to go to the A-list parties, or do you have to go to some documentary track, party?

[audience laughter]

F: I can’t give you a general answer, but we got to go to the right party!

L: [laughs] Well, please join me in thanking Charles Ferguson.

[audience applause]

F: Thank you very much.

L: That is, to be clear, Charles Ferguson, Academy Award-winner of the documentary film “Inside Job.” We would also like to thank our audiences here in San Francisco and on radio, television and the Internet. The program has also been held in association with the San Francisco Film Society. I am Adam Lashinsky. And now this meeting of the Commonwealth Club of California, the place where you’re in the know, is adjourned.

[audience applause]

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