Interview: Charles Ferguson of ‘Inside Job’

The scariest — and most infuriating — movie of the year is “Inside Job,” the documentary about the financial meltdown from Charles Ferguson, the director of “No End in Sight.” With just two films, Ferguson, a PhD in political science who made a fortune in software, has become an extraordinarily accomplished director and journalist and an important participant in the conversation about definitional issues of policy. His films are exceptionally well-crafted. He has a true story-teller’s understanding of the material and, as his interviews of the friendly and not-so-friendly subjects of this film demonstrate, a fearless intellect and a gift for getting to the point — all of which made interviewing him a rare treat.

I have done a great deal of research myself on the subprime portion of the financial meltdown and I believe a core problem was that everyone at every stage of the Wall Street conveyor belt, had incentive compensation that was all upside and no downside — they all got paid for success with no risk of loss for failure. Is that what you discovered as well?

These people were rewarded enormously for doing the dangerous things they did and even on a net basis, despite the losses they suffered when their firms collapsed, they made more money then they would have if they behaved ethically. Harvard Law School professor Lucien Bebchuk’s study on executive compensation at Bear Stearns showed that it created incentives for excess risk.

I think it’s unquestionably correct at several different stages and several different levels in the system, beginning with the yield-spread premiums that lenders paid to mortgage brokers which incented mortgage brokers to put people in more expensive and more dangerous loans than they should have going all the way up to the structure of trader and sales and CEO compensation in investment banking, which are all exceptionally dangerous and give people huge incentives to take risks and/or commit fraud, both of which occurred on a gigantic scale. Even the nature of director compensation and corporate governance — the directors are essentially paid to be passive and to not challenge entrenched management.

How would you describe what went wrong?

Large-scale fraud became a core part of the financial system — a combination of deregulation and lack of enforcement of the law.

One of the big differences between the financial crises of the Enron/WorldCom era and the more recent one is that no one seems to be going to jail. Why is that?

The reason that they’re not going to jail is not that they didn’t commit crimes. It’s because there’s been no effort to enforce the law, an even more disturbing phenomenon.

What’s the solution?

The American people have to get angry enough and organized enough to force our political leaders to change. At the moment it doesn’t seem at all likely that it’s going to come from the current administration. It’s been a great disappointment that it’s turned out to be more of the same. And so far the American people have been remarkably quiescent in the face of this, given what’s occurred. I hope that that’s changing. There are good guys but they’re not organized. There’s no Chamber of Commerce for the good guys. That’s what we need, whether it’s a political party or some non-profit/lobbying organization that coordinates — there are a number of organizations but they are very scattered and divided.

How can Washington stand up to Wall Street, given the amount of money they spend on lobbying and campaign contributions?

Wall Street has certainly become very powerful. It’s depressingly the case that politicians are inexpensive to purchase. Three things are critical — changing the role that money plays in elections, paying regulators very well, which some countries do, like Singapore, which gives them no financial incentive to move to or give favors to the private sector, and third is law enforcement. One of the least well covered in media terms developments related to this is the politicization of law enforcement for white collar crimes.

As they say, if you rob a bank with a gun, you go to jail; if you rob a bank with a pen, you get to keep your job and your bonus.

And that’s a change. After the S&L crisis, many people went to jail. Now no one goes to jail.

Who should have gone to jail?

All of the major investment banks artificially concealed their liabilities, most of them inflated the value of their assets for quite a long period of time. We also know all the major investment banks were heavily involved in selling securities they knew to be defective and in many cases designing them to fail so they could bet against them or allow their clients to bet against them. In principle it’s possible to do those things without violating the law but as a practical matter it’s hard to sell hundreds of billions of dollars of those securities without committing fraud. If you’re honest and you don’t lie and you don’t commit fraud, it’s a tough sell. We know that Goldman Sachs executives were referring to these as “s***y deals” at the same time that they were selling them as very safe securities. I suspect that a very high fraction of the senior sales forces, the senior people on the mortgage tests, the senior mortgage traders, the senior management of the investment banking industry should be prosecuted.

What is the hardest part of explaining all of this to frustrated and angry Americans, where so many people feel that the system is unfair but whose eyes glaze over when they hear “credit default swaps?” How do you reach the people you want to get angry?

Keeping the jargon out and getting to the essence of things, not letting the jargon overwhelm you. We wanted to make the film interesting and accessible for the average person. We used good cinematography, cool images, great music, pacing, to make it appeal to the audience. I hope that many, many people will see this film.

You were a serious film fan before you became a film-maker. What are some of your favorites?

There are serious ones and silly ones. I love film noir, “The Maltese Falcon,” “The Big Sleep,” the newer incarnations like “LA Confidential.” I love heist movies. “Inside Man” I thought was great. And serious things, too: “Kagimusha,” “Ran.” My friend Jason Kohn’s movie “Manda Bala” about corruption in Brazil is beautiful, amazing. It’s about crime and corruption in Brazil and it’s gorgeous, really extraordinary. It’s so unusual in the way that it is visually gorgeous. It was made in anamorphic Super 16, 2.7 to 1 so a standard DVD will not do it justice. It’s really breathtaking.

Are documentaries the agent for social change the way Dickens was in the late 19th century and journalists like Upton Sinclair and Rachel Carson were in the 20th century?

It’s not the only place investigative journalism gets done these days but journalism is shrinking, and under a lot of pressure. Documentary film is taking up some of that slack and I hope it will become increasingly prominent.