The Inside Job and the Ethics of the 2008 Economic Crisis

Posted On: Monday, October 18, 2010

The stuff of crises — arrogance, greed, unacknowledged conflicts of interest, unethical behavior, lack of transparency, failed leadership, and insufficient  accountability – fueled “an industry out of control” according to Charles Ferguson’s documentary Inside Job which chronicles the 2008 economic meltdown.

While of course we know the outcome of the unfolding events Ferguson describes, his interviews with many of the players in the crisis provide additional insight into the larger question of how could so many very bright people be involved in a failure so huge? The film shows the consequences when thought capital is wrapped around the dogged pursuit of an ideology, in this case deregulation, so that conflicting data or opposing viewpoints are not allowed to interfere.

The band of men from Ivy League economics departments wielded a lot of power in the 30-year push for deregulation. They served as consultants to the industry and were selected for significant regulatory or White House advisor positions. Ferguson raises questions about their objectivity as scholars, as well as whether their integrity was compromised by conflicts of interest and accepting fees from Wall Street, or to testify before Congress, or as expert witnesses.

His interview with Frederic Mishkin, Alfred Lerner Professor of Banking and Financial Institutions at Columbia Business School, is one of the most revealing in the documentary. The video clip above addresses his co-authorship of a report called “Financial Stability in Iceland,” how he could have written such a positive report right before the collapse, whether he had disclosed payment of $124,000 by Iceland’s Chamber of Commerce to write it, and changes made in his resume altering the title of the report to read “Financial Instability in Iceland.” Ferguson asked Mishkin how as a governor of the Board of Governors of the Federal Reserve System from 2006 to 2008, he and the other governors hadn’t seen the meltdown coming and done something about it. There was no real answer to that. Ferguson pursues why Mishkin resigned in August 2008 with six years remaining on his term to return to Columbia. Mishkin replied that he needed to revise his textbook, an excuse that seemed to insult the intelligence of the movie audience snickering around me. So much for building trust.

Scott Talbott, chief lobbyist for the Financial Services Roundtable, which lobbies on behalf of the top 100 banks, and credit card, insurance and financial services companies, — including many of the bailed-out banks – parried Ferguson’s pointed questions, indicating he was pleased with the considerable influence his group wielded in Congress, because that is the way it works.

The ethics policy of the Roundtable, which members are asked to sign, indicates members are expected to set the highest ethical standards for the industry. “Fairness and Respect,”  is one of the principles: “we will treat people with respect and prohibit practices that do not provide a benefit to our customers or have the effect of taking unfair advantage of our customers….” I wonder if Countrywide had any problems signing their agreement with the policy when they were a member of the Roundtable? Former CEO Angelo Mozilo just settled a fraud suit with the SEC.

The predatory lending practices of Countrywide and other mortgage companies in the sub-prime business highlight an almost sociopathic disregard for customers that seem a hallmark of the meltdown. From Lehman to Goldman Sachs customers were objectified, not real flesh and blood, the way a hit and run driver leaves the scene telling himself he didn’t really hit anything.

So where do we go from here?

Ferguson sees business as usual, nothing really having changed to restore the trust that was broken. Crimes were committed and no one has yet gone to jail.

Arrogance, greed, conflicts of interest, unethical behavior, lack of transparency, failed leadership, and no accountability are the antithesis of a model for sustainable business success.

Companies on Wall Street have a higher burden of proof in the business of restoring trust. No question it is complicated. It gets to the heart of what a company really stands for, whether, for example, when addressing business strategy ethical liability will be put on the table for discussion along with legal liability.

It is a slow process to change a culture. It will depend on whether companies consider sustainable business success worth the effort.

Gael O’Brien is a catalyst for leaders leading with purpose and impact. She is an executive coach with a corporate and public affairs background. Gael is President of Strategic Opportunities Group.

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