LEARNING THROUGH MOVIES

FINANCIAL CONCEPTS IN INSIDE JOB

(2010 FINANCIAL DOCUMENTARY)









Inside Job (2010 financial documentary)



I nside J ob is a 2010 documentary film about the late-2000s financial crisis directed by Charles
H. Ferguson. The film is described by Ferguson as being about "the systemic corruption of the
United States by the financial services industry and the consequences of that systemic
corruption." In five parts, the film explores how changes in the policy environment and banking
practices helped create the financial crisis.

Inside Job was well received by film critics who praised its pacing, research, and exposition of
complex material. The film was screened at the 2010 Cannes Film Festival in May and won the
2010 Academy Award for Best Documentary Feature.

The subject of Inside Job is the global financial crisis of 2008. It features research and extensive
interviews with financiers, politicians, journalists, and academics. The film follows a narrative
that is split into five parts.

The film received positive reviews, earning a 98% rating on the Rotten Tomatoes website. Roger
Ebert described the film as "an angry, well-argued documentary about how the American
financial industry set out deliberately to defraud the ordinary American investor." A.O. Scott of
the New York Times wrote that "Mr. Ferguson has summoned the scourging moral force of a
pulpit-shaking sermon. That he delivers it with rigor, restraint and good humor makes his case all
the more devastating." Logan Hill of New York magazine's Vulture, characterized the film as a
"rip-snorting, indignant documentary," noting the "effective presence" of narrator Matt
Damon.Peter Bradshaw of The Guardiansaid the film was "as gripping as any thriller." He went
on to say that it was obviously influenced by Michael Moore, describing it as "a Moore film with
the gags and stunts removed."
The conservative political magazine The American Spectator criticized the film as intellectually
incoherent and inaccurate, accusing Ferguson of blaming "a lot of bad people [with] economic
and political views to the right of [his]."

The film was selected for a special screening at the 2010 Cannes Film Festival. A reviewer
writing from Cannes characterized the film as "a complex story told exceedingly well and with a
great deal of unalloyed anger."






The documentary is split into five parts. It begins by examining how Iceland was highly
deregulated in 2000 and the privatization of its banks. When Lehman Brothers went bankrupt
and AIG collapsed, Iceland and the rest of the world went into a global recession.

Part I: How We Got Here

The American financial industry was regulated from 1940 to 1980, followed by a long period of
deregulation. At the end of the 1980s, a savings and loan crisis cost taxpayers about $124 billion.
In the late 1990s, the financial sector had consolidated into a few giant firms. In March 2000,
the Internet Stock Bubble burst because investment banks promoted Internet companies that they
knew would fail, resulting in $5 trillion in investor losses. In the 1990s, derivatives became
popular in the industry and added instability. Efforts to regulate derivatives were thwarted by
the Commodity Futures Modernization Act of 2000, backed by several key officials. In the
2000s, the industry was dominated by five investment banks (Goldman Sachs, Morgan Stanley,
Lehman Brothers, Merrill Lynch, andBear Stearns), two financial conglomerates
(Citigroup, JPMorgan Chase), three securitized insurance companies (AIG, MBIA,AMBAC)
and the three rating agencies (Moodys, Standard & Poors, Fitch). Investment banks bundled
mortgages with other loans and debts into collateralized debt obligations (CDOs), which they
sold to investors. Rating agencies gave many CDOs AAA ratings.Subprime loans led to
predatory lending. Many home owners were given loans they could never repay.

Part II: The Bubble (20012007)

During the housing boom, the ratio of money borrowed by an investment bank versus the bank's
own assets reached unprecedented levels. The credit default swap (CDS), was akin to an
insurance policy. Speculators could buy CDSs to bet against CDOs they did not own. Numerous
CDOs were backed by subprime mortgages. Goldman-Sachs sold more than $3 billion worth of
CDOs in the first half of 2006. Goldman also bet against the low-value CDOs, telling investors
they were high-quality. The three biggest ratings agencies contributed to the problem. AAA-
rated instruments rocketed from a mere handful in 2000 to over 4,000 in 2006.

Part III: The Crisis

The market for CDOs collapsed and investment banks were left with hundreds of billions of
dollars in loans, CDOs and real estate they could not unload. The Great Recessionbegan in
November 2007, and in March 2008, Bear Stearns ran out of cash. In September, the federal
government took over Fannie Mae and Freddie Mac, which had been on the brink of collapse.
Two days later, Lehman Brothers collapsed. These entities all had AA or AAA ratings within
days of being bailed out. Merrill Lynch, on the edge of collapse, was acquired by Bank of
America. Henry Paulson and Timothy Geithner decided that Lehman must go into bankruptcy,
which resulted in a collapse of the commercial papermarket. On September 17, the insolvent
AIG was taken over by the government. The next day, Paulson and Fed chairman Ben
Bernanke asked Congress for $700 billion to bail out the banks. The global financial system
became paralyzed. On October 3, 2008, President Bush signed the Troubled Asset Relief
Program, but global stock markets continued to fall. Layoffs and foreclosures continued with
unemployment rising to 10% in the U.S. and the European Union. By December
2008, GM and Chrysler also faced bankruptcy. Foreclosures in the U.S. reached unprecedented
levels.

Part IV: Accountability

Top executives of the insolvent companies walked away with their personal fortunes intact. The
executives had hand-picked their boards of directors, which handed out billions in bonuses after
the government bailout. The major banks grew in power and doubled anti-reform efforts.
Academic economists had for decades advocated for deregulation and helped shape U.S. policy.
They still opposed reform after the 2008 crisis. Some of the consulting firms involved were
the Analysis Group, Charles River Associates, Compass Lexecon, and the Law and Economics
Consulting Group (LECG). Many of these economists had conflicts of interest, collecting sums
as consultants to companies and other groups involved in the financial crisis.


Part V: Where We Are Now

Tens of thousands of U.S. factory workers were laid off. The new Obama administrations
financial reforms have been weak, and there was no significant proposed regulation of the
practices of ratings agencies, lobbyists, and executive compensation. Geithner became Treasury
Secretary. Feldstein, Tyson and Summers were all top economic advisers to Obama. Bernanke
was reappointed Fed Chair. European nations have imposed strict regulations on bank
compensation, but the U.S. has resisted them. Trust remains questionable.

The film focuses on changes in the financial industry in the decade leading up to the crisis, the
political movement toward deregulation, and how the development of complex trading such as
the derivatives market allowed for large increases in risk taking that circumvented older
regulations that were intended to control systemic risk. In describing the crisis as it unfolded, the
film also looks at conflicts of interest in the financial sector, many of which it suggests are not
properly disclosed. The film suggests that these conflicts of interest affected credit rating
agencies as well as academics who receive funding as consultants but do not disclose this
information in their academic writing, and that these conflicts played a role in obscuring and
exacerbating the crisis.

A major theme is the pressure from the financial industry on the political process to avoid
regulation, and the ways that it is exerted. One conflict discussed is the prevalence of the
revolving door, whereby financial regulators can be hired within the financial sector upon
leaving government and make millions.





Leverage is the main reason behind the economic crisis of 2008.

What is Leverage?

Leverage is a business term that refers to borrowing. If a business is "leveraged," it means that
the business has borrowed money to finance the purchase of assets. The other way to purchase
assets is through use of owner funds, or equity.
Leverage is useful to fund company growth and development through the purchase of assets. But
if the company has too much borrowing, it may not be able to pay back all of its debts.
Using debt, or leverage, increases the company's risk of bankruptcy. It also increases the
company's returns; specifically its return on equity.



How Leverage works ?

Leverage is the strategy of using borrowed money to increase return on an investment. If the
return on the total value invested in the security (your own cash plus borrowed funds) is higher
than the interest you pay on the borrowed funds, you can make significant profit. While leverage
does not change the percentage rate of return (starting with $100 and ending with $115 dollars
and starting with $1000 and ending with $1150 is still a 15% return in both cases), leverage can
increase the total dollar value of return (a return of $15 is significantly less than a return of
$150).

Heres an example of how leverage can result in outsized returns. Lets say you have $100 of
your own money, and you can borrow $1500 from the bank at an interest rate of 6%. Lets say
you invest the entire $1600 amount in an investment, which you are confident will grow 15% in
a year, and return the borrowed money plus interest at the end of a year. The value of the
investment will be $1840 at the end of the year and you will pay the bank back $1500 + $90 =
$1590, leaving you with a total of $250 and a net gain of $150 once you subtract the initial $100
you invested. Thats a 150% return!

Leverage Ratios

The ratios used to determine about the companies financing methods, or the ability to meet the
obligations. There are many ratios to calculate leverage but the important factors include debt,
interest expenses, equity and assets.

Debt ratio is a ratio that indicates the proportion of a company's debt to its total assets. It shows
how much the company relies on debt to finance assets. The debt ratio gives users a quick
measure of the amount of debt that the company has on its balance sheets compared to its assets.
The higher the ratio, the greater the risk associated with the firm's operation. A low debt ratio
indicates conservative financing with an opportunity to borrow in the future at no significant
risk.

The debt ratio is calculated by dividing total liabilities (i.e. long-term and short-term liabilities)
by total assets:
Debt ratio = Liabilities / Assets

The debt-to-equity ratio (debt/equity ratio, D/E) is a financial ratio indicating the relative
proportion of entity's equity and debt used to finance an entity's assets. This ratio is also known
as financial leverage.
Debt-to-equity ratio is the key financial ratio and is used as a standard for judging a company's
financial standing. It is also a measure of a company's ability to repay its obligations. When
examining the health of a company, it is critical to pay attention to the debt/equity ratio. If the
ratio is increasing, the company is being financed by creditors rather than from its own financial
sources which may be a dangerous trend. Lenders and investors usually prefer low debt-to-equity
ratios because their interests are better protected in the event of a business decline. Thus,
companies with high debt-to-equity ratios may not be able to attract additional lending capital

A debt-to-equity ratio is calculated by taking the total liabilities and dividing it by the
shareholders' equity:
Debt-to-equity ratio = Liabilities / Equity

The interest coverage ratio (ICR) is a measure of a company's ability to meet its interest
payments. Interest coverage ratio is equal to earnings before interest and taxes (EBIT) for a time
period, often one year, divided by interest expenses for the same time period. The interest
coverage ratio is a measure of the number of times a company could make the interest payments
on its debt with its EBIT. It determines how easily a company can pay interest expenses on
outstanding debt.
Interest coverage ratio is also known as interest coverage, debt service ratio or debt service
coverage ratio.

The interest coverage ratio is calculated by dividing a company's earnings before interest and
taxes (EBIT) by the company's interest expenses for the same period.
Interest coverage ratio = EBIT / Interest expenses



Conclusions

'Inside Job' provides a comprehensive analysis of the global financial crisis of 2008, which at a
cost over $20 trillion, caused millions of people to lose their jobs and homes in the worst
recession since the Great Depression, and nearly resulted in a global financial collapse. Through
exhaustive research and extensive interviews with key financial insiders, politicians, journalists,
and academics, the film traces the rise of a rogue industry which has corrupted politics,
regulation, and academia.