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Financial markets everywhere in the world hold the key to the economic performance of a given country. When the financial markets are doing well, the economy of that country tends to perform equally well, leading to good economic growth that leads to a high quality of life for the residents. In the same way, when the markets start performing badly, there is an equal, negative ripple effect that permeates virtually into every aspect of life. This leads to poor economic performance leading to financial difficulties and bankruptcies among companies and individuals within a country with the resultant job losses, loan and mortgage payment defaults, and business closures.
Of interest is the interrelationship and interconnection of global financial markets where, a negative effect in one market quickly spreads to the rest of financial markets, regardless of their location and vice-versa. This makes financial markets some of the most sensitive economic sectors of any economy and which can help either to sustain the state of an economy or lead to its collapse with a single blow. The following three movie reviews will be used to give historical perspectives of some past financial misdeeds and how these affected the economies of the world.
This award-winning documentary film was produced in 2010 and was directed by Charles Ferguson, the founder and president of Representational Pictures, Inc. He has also directed the 2007 movie, No End in Sight: The American Occupation of Iraq (2007). Inside Job is a documentary that seeks to analyze the interplaying factors that led to the infamous global economic recession, which has characterized the last half of the past decade. The film is divided into five parts that try to explore how changes effected in the financial policy environment, and the banking sector led to the financial crisis. The film begins with an insight on the deregulation of the economy of Iceland in the year 2000 followed by privatization of its banks soon after. This created instability in the country’s economy whose magnitude the world had not realized, until September 2008. It is around this time that American International Group (AIG), an American multinational Insurance Company collapsed while Lehman Brothers, a global financial services firm went bankrupt. This triggered panic shocks in the financial markets across the globe. The effect was the global recession witnessed soon after.
In part one, the Director goes into the historical aspect of the problem by highlighting the policy changes effected over time in the American financial sector. The financial industry was regulated from 1940 to 1980. The deregulation that followed led to the ‘savings and loan crisis’ in America in the late 1980s that cost the taxpayers up to USD 124 billion. Another USD 5 trillion was lost by investors across the globe, through the Internet Stock Bubble Burst of 2001, after investment banks got into promoting internet companies, which they knew would fail. By the turn of the new millennium, regulations had ensured dominance of the American financial sector, by only five investment banks, two financial conglomerates, three insurance companies and three rating agencies. This was due to the deregulation mentioned above that led to smaller companies either folding up, or being forced to get into mergers or getting bought out by the bigger companies.
The second part of the film is based on the 2001 – 2007 bubble caused by high mortgage uptakes, uncontrolled investment on Collateralized Debt Obligations (CDOs) and seemingly unfair and uncontrolled AAA instrument ratings from just a few in 2000 to more than 4000 in 2006. This was driven more by greed than logic. Part 3 of the film deals with the actual crisis that began after CDOs collapsed, subjecting the investment banks to hundreds of dollars in loans. This led to the beginning of the actual recession in 2007 as the financial markets got bogged down by repayment defaults and an eventual financial gridlock. Towards March 2008, Bear Stearns, a global brokerage, trading and investment bank filed for bankruptcy, while the government acquired both Fannie Mae and Freddie Mac. Soon after, Lehman Brothers collapsed while the Bank of America took over Merrill Lynch, which was also tottering at the edge of collapse. Also taken, by the government, was AIG in September of the same year. These incidences sent shock waves in the global financial sector leading to a free fall of stock and share prices. Jobs were lost across the globe, leading to a high of 10% unemployment rate in America and the European Union. To stem further business collapse, the American government tried to intervene by establishing the ‘Troubled Asset Relief Program’ aimed at bailing out companies in distress. As General Motors and Chrysler were facing an imminent collapse, the country was experiencing a company foreclosures rate that had never been seen before.
Part four of the film highlights how the company executives of the collapsed companies still managed to get away with huge bonuses, after the bail-outs, despite being the main causes of the problems. This led to more calls for regulation in the financial sector from among others, the government and financial consultants. Many saw regulation as a means towards enhancing responsibility and accountability by the executives, although this faced stiff resistance from industry players who claimed that it was tantamount to interference with free trade. However, a weak link was in the fact that some in the government, and consultancy, had benefitted from the same crisis, indicating the complexity in the whole matter. The final part of the film gives an insight on the position of the current American financial sector, and the fact that weak interventions and policies, by past and present governments, have not successfully shielded the sector from another possible crisis.
Enron: The Smartest Guys in the Room
This is a 2005 documentary film based on a 2003 book by the same title written by two journalists, Bethany McLean and Peter Elkind. The film explores the 2001 collapse of the energy giant, Enron Corporation that led to the criminal trials of some of its top executives. The film also highlights the involvement of Enron traders, in the 2000 Summer California electricity crisis, suspected to have been caused by manipulation, and unethical pipeline shutdowns, by Texas energy consortiums. The story of the film is based on interviews with the two book authors, former Enron executives, employees, reporters, stock dealers and analysts and Gray Davis, a former Californian Governor.
The film starts with a historical view of Enron Company that was founded in 1985 by Kenneth Lay. Soon after inception, Enron finds itself in unethical practices, which are first brought about through a scandal involving betting on oil markets by two Enron traders leading to suspiciously consistent profits. Auditors also discovered that Louis Borget Enron’s CEO had been diverting company money to offshore accounts. Lay’s advice to the auditors who uncover this is to encourage them to keep a blind eye on the schemes. Later, Enron apparently starts engaging in unethical corporate practices that included open theft of shareholders money and announcing nonexistent profits to boost the share prices in the stock market. Part of the stolen shareholders’ money is apparently used to pay for strip joint visits by Lou Pai, the CEO of Enron Energy Services and also for entertaining strippers into his office and the Enron trading floor.
When Pai resigns abruptly from Enron, he leaves with USD 250 million that he uses to buy a ranch in Colorado after selling his stock in the company. This is despite the division that he formerly headed at Enron recording a USD 1 billion loss. Enron engages in many business ventures that end up failing. These include setting up Dabhol Power Plant in India, a venture that eventually closes down as India could not afford the power produced leading to a further USD 1 billion loss, the setting up of a broadband technology aimed at delivering movies on demand and a venture aimed at trading weather as a commodity, both which failed badly. This is despite the books of account recording nonexistent profits for all these ventures. The company ‘apparently’ survives the 2000 internet bubble and is given positive reviews by among others, the Fortune magazine. However, Jim Chanos, an Enron investor and Maclean, one of the Fortune magazine reporters who authored the above book later start raising questions on irregular dealings in the company. These are countered by the new Enron’s CEO, Jeffrey Skilling, who claims that they are misrepresentations of the facts. Things come to a head when unbeknown to the rest, one of the executives; Andrew Fastow creates companies to do business with Enron and in the process end up defrauding the company tens of millions of dollars.
Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders
This 2006 documentary film is about the predatory nature and abusive practices among lending institutions. The film was written and directed by James Scurlock, and involves interviews with creditors, debtors and academics among others to develop the story. The story is on the way banks and other lending institutions wave attractive mortgage and loan offers to unsuspecting clients, most of who are already in financial distress and in the process end up pushing them further into financial problems. The film highlights the conspiracy that exists between lending institutions, lawmakers, debt collectors and the government in condoning and promoting this practice whose aim is to exploit the gullible citizens. This film explains that this unethical lending practice is part of the reason why as the rich continue getting richer, the poor continue getting poorer due to debt slavery.
The above films have stories that are strong indicators of how lack of regulations, in the finance sector, can wreck the entire market, leading to ripple effects that shake the very foundations of many economies. To start with, Enron, The Smartest Guys in the Room, is a story of sheer lack of ethics and manipulation driven by greed and thirst for quick money that eventually leads to huge loss for the investors. Making up fake profits, in the company’s books of accounts, was aimed at shoring up the stock and share prices, and to hoodwink investors into believing that the company was doing well. Stealing and misuse of shareholders’ money is an indication that investors’ money is not always safe, and could be squandered at will, unless strong measures and policies are put in place to prevent this. The actions of the executives of the above company led to financial instability for the company, a phenomenon that eventually led to the company’s collapse and huge losses for investors. With proper regulation, this would have been avoided.
Inside Job is the story of the genesis of a series of financial insufficiencies in the various governments of the world which led to the global economic recession in 2008. Again, greed among the financial companies and resistance to regulation led to huge losses, bankruptcy and collapse of many companies igniting a melt down that affected the entire globe. Maxed Out tries to advise individuals on why it is prudent to avoid unnecessary loans and debts, as these are only meant to keep someone in a vicious cycle of indebtedness, which only benefits the lenders. The film gives the advice that loans and mortgages are aimed at making one dependent and should be avoided if necessary.
The above films strongly relate with the unit course on “Financial Markets and Institutions,” as they highlight the importance of these markets as drivers of economies, and cases of how markets can be manipulated and, in the process, cause irreversible damages to national economies. The films also help in showing the sensitive nature of these markets and how vulnerable they are to abuse by crooks and dishonest traders if and when left without proper regulation. Crooks and greedy operators are known to have got into the financial market business as it was the case with Enron and some of the companies mentioned in Inside Job, undertaking actions that have pulled the entire globe into a recession in the past. Stringent policy measures should be adopted to create checks and balances in the sector, and severe punishments meted to the executives who create financial mess. Maxed Out points at financial conspiracies that are aimed at enriching a few at the expense of the majority. This calls for urgent policy changes and regulation of the sector if the world is to avoid the crisis that was witnessed in 2008 that pushed many people into bankruptcy, destroyed many businesses, led to auctioning of homes and left many people destitute.