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Summer 2007.

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The high watermark of the boom.

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London and New York are the
dual centres of the world.

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Everyone is making money
and spending it like
there's no tomorrow.

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It was exciting. You were making
money hand over fist.

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It looked like there was no return
to the days of modesty,

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of thrift, of penury,
of just normal being.

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And on both sides of the Atlantic,
more people than ever were
buying their own homes.

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It was very easy to
qualify for a loan.

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If you could chew gum and walk
at the same time, you got a loan.

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Billions flew
into government coffers.

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The money these centres were
generating, the tax they were
generating, at 40%, was enormous.

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Then came the crash,
when global markets froze.

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There was an extraordinary loss of
confidence - panic, I would call it.

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The world has blamed the US
sub-prime mortgage crisis.

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But the true origins of the crash
lie in two decades of
seismic global changes.

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The crash arose from
global financial factors,
not domestic financial factors.

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With the help of those who were
there, we ask why free market
capitalism faltered so badly.

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If someone's making a lot of money,
it's sometimes a good idea to ask why
they are making that money,

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because things may not
be what they seem.

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And why those who
predicted it were ridiculed.

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The nickname I received
has been Dr Doom.

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Do you solemnly swear
that the testimony you...

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And who, if any one, is to blame.

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My question for you is simple.

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Were you wrong?

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I'm not saying I'm flawless
or that I've made no mistakes.
That's ridiculous.

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2006.

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Alan Greenspan, widely regarded
as the architect of the good times,
has just stepped down.

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During his 18 years as
chairman of the Federal Reserve,

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America's Central Bank,
he won almost universal praise.

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I don't have any
doubt about the fact

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that you will go down as the
greatest chairman in the history of
the Federal Reserve Bank.

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Greenspan presided over
years of growth,

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fuelled in part by the dawning
of the age of globalisation.

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It is very clear that globalisation
has created major benefits.

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Hundreds of millions of people have
been pulled out of abject poverty,

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not quite fully to the middle class,

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but clearly to a much
better standard of living.

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So how did it all go wrong?

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The seeds of the
boom years were sown almost
20 years earlier in 1987.

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A woman rang the BBC today and said

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she heard there was a hurricane on
the way. Don't worry, there isn't.

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'Southern Britain is clearing up
after the worst night of storms since
records began almost 300 years ago.'

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It was a turbulent year.

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Britain was hit by a hurricane.

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The stock markets crashed,
losing almost a quarter
of their value overnight.

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And internationally, two
superpowers - America and the Soviet
Union - struggled for supremacy.

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President Reagan
went on the offensive.

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Mr Gorbachev, tear down this wall.

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And it was in 1987 that Ronald
Reagan appointed a little-known
economist, Alan Greenspan.

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His decisions in office would
come under close scrutiny
two decades later.

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'On the Western side,
they're not waiting for the
East Germans to take it down.

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'With nothing now to fear,
they've been trying to
hack the wall apart themselves.'

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Two years after
Greenspan's appointment,
Soviet communism collapsed.

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The fall of the Berlin Wall,
which brought the Cold War to an end,

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is obviously one of the most critical
geopolitical events of
the latter part of the 20th century.

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But what very few people realise,
is how significant an
economic fact that was.

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There was a sense that the
world would never be the same,

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and it never was

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in terms of the fall of communism
and the triumph of capitalism.

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But there was also a sense in
some quarters that capitalism

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was almost inevitable in its
most extreme free market form.

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Within a year or two from the fall of
the Berlin Wall,

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you began to see massive shifts in
people, hundreds of millions of
people, actually,

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moving from a
central planned structure

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towards an increasing
form of competitive markets.

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Leaders who advocated those
competitive markets were in the
ascendant all over the globe.

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'The City came to work
this morning to get to grips
with a new way of life.

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'As trading started, there was
plenty of enthusiasm evident
for the Big Bang.'

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The Big Bang in Britain had
removed restrictions from the City,

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forcing it to become more
competitive and dynamic.

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There was a remarkable
physical transformation,

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the opening, as it were,
of a second City of London just
along the river at Canary Wharf.

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And it also brought in a
new class of people.

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It used to be public school types
with stiff upper lips and so on

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and very conscious of
being gentlemen,

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and it was opened up to thrusters

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and people from all
different backgrounds,

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but who worked extremely
hard and made a lot of money.

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Some veterans of the old City were
dismayed by the brave new world.

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There was a different...morality,
if I could put it that way.

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People felt they could move
around much more easily.

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They almost became sort of
gunslingers, in the way that

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if somebody offered them a bit more,
they'd leave and go somewhere else.

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# Gotta get up
gotta get up, gotta get up

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# Oh

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# Gotta get up, gotta get up
gotta get up. Oh...#

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Britain became increasingly
dependent on the City.

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Between 1987 and 2007,
the contribution of the
financial sector to GDP

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tripled from £31 billion
to £95 billion.

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We left the rival centres of
continental Europe miles behind

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and became, alongside New York,

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one of the great
financial centres of the world,

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and that was a good thing.

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Over in the United States,
Wall Street was also booming.

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So-called Masters of the Universe
ruled Manhattan.

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Back in the '80s, oyster farmer
Mike Osinski was a young man
eager to join their exalted ranks.

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His next move was to have greater
consequences than he could have
possibly imagined at the time.

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I wanted to become a trader.

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I asked my boss if I
could go to the trading floor,

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and he looked at me and said,

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"Do you really think
you could be a trader?

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"To be a trader means you have to
look for people dumber than you

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"and take advantage of them."

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Instead, Mike began
writing computer software

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used by traders to convert mortgages
into highly profitable bonds.

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20 years on,
this process would bring the
global economy to its knees.

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That's when I'd ask my colleague,
"What does that group do?"
and he said,

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"They create mortgage-backed
securities," and I said,
"How do those work?"

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and he said, "Basically, you take
chicken, run it through the grinder
and out comes sirloin."

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'I, William Jefferson Clinton,
do solemnly swear...'

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The emerging power
of the global markets

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was beginning to have a growing
influence over national leaders.

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..that I will
faithfully execute the office of
President of the United States.

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When Bill Clinton came to office
in 1993, he had ambitious plans.

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But the US was hugely in debt.

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Nevertheless, some in
Clinton's camp felt they
needed to increase spending.

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38 million people did not
have health insurance,

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our schools were coming apart, our
highways were literally coming apart,

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and it was very important for
the sake of the future
competitiveness of the country

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to undertake these
public investments.

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Critics believed, if the government
spent money it hadn't got,

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pushing the country further in debt,
then the global markets would lose
confidence in Clinton's Presidency.

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All of the research that the Federal
Reserve and I had been involved
with over the years

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indicated that deficits do matter.

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Alan Greenspan made
it absolutely clear

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that Bill Clinton dared
not increase the deficit and
increase public expenditure.

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I came here to talk about the
economy today with Mr Greenspan.

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If he wants to express
his opinion on that subject,
I'll be glad to hear it.

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Greenspan's view prevailed.

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Clinton did cut the deficit.

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And the global markets
loved him for it.

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The lessons were clear.

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The balance of power was shifting.

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The judgments of global markets
could not be ignored.

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In the years up to the crash, a
growing acceptance of market power

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would become increasingly
influential.

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Old Labour language - tax, spend, and
borrow, nationalisation, state
planning, isolationism -

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are equally inappropriate
to demands of the future.

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On the other side of the Atlantic,
Labour's Shadow Chancellor,

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Gordon Brown, was keenly
watching Clinton's progress.

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'Today's conference was gold-dusted

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'with a beamed-in
dose of Clintonomics

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'from the US Labour Secretary.'

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He and Tony Blair wanted to
harness the power of the
market to their ends.

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In 1994, they travelled
to Washington to seek
Greenspan's advice.

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I was fortunate enough
meet Alan Greenspan

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long before I
was Chancellor of the Exchequer,

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and Alan Greenspan was very good at

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meeting people from all sorts of
places in the world,

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even although they weren't in
government, and giving them advice.

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And I talked to him about making the
Bank of England independent, which we
eventually did,

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and of course one of the successful
independent central banks is the
Federal Reserve Bank of America.

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Remember that one of the fundamental
philosophies of New Labour

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was a recognition of the importance
of global trade, global freedom,

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and Shadow Chancellor Brown was
extraordinarily well versed in all
of the aspects of political economy.

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And I must admit I was
quite surprised and frankly
very much impressed.

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A relatively younger Gordon Brown,

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looking to the time when he would
become, as he hoped, Chancellor

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and then Prime Minister, would have
thought that to tap the secrets

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of this great man's experience
would be the right prescription for
a successful term as Chancellor.

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And indeed his first ten years as
Chancellor would have borne that out.

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Because the left of centre believe
in higher public investment...

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Brown and Blair boasted in
the 1997 New Labour manifesto

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that they accepted
the global economy as a reality.

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They were determined to demonstrate

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that they were not going to be
outflanked by the Conservative Party

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on globalisation and market
economics, and they were right.

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I sensed a general awareness
or a recognition

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of what market economies
globally could do

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and I felt they were very
sophisticated on that issue.

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# Things can only get better...#

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May 1997.

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Labour swept to power.

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Margaret Thatcher's economic reforms
would be adapted, but not reversed.

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We have been elected as New Labour
and we will govern as New Labour.

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In its first week, the new
government gave the Bank of England

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the authority to set interest rates,
like the Fed in America.

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One month later, on June 12th,
Gordon Brown faced Britain's
leading City financiers.

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He needed to convince his audience
they were safe under Labour.

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He described the City as
demonstrating the British genius

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and having exactly the qualities
required to succeed in today's
global marketplace.

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Long-term investment holds the key
to our future prosperity in Britain,

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and that's why I am determined
to put in place the conditions
that will encourage

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the high levels of investment that we
need for the future.

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We wanted to show that
we were combining a policy

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for wealth-creation and at the
same time there would be proper
regulation of financial services.

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But we wanted also to show
that wealth-creation,
including financial services,

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was absolutely crucial for the
future of the United Kingdom,

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and we would support the
wealth-creating industries
of the country.

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It went down well.

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It was a tremendous sense of
endorsement frankly from the City.

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A tremendous sense of
relief from the Labour side,

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don't forget in every other
Labour government

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there would have been this tension,
and this lack of confidence,

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certainly from the
City towards Labour.

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We seemed to have overcome that
and so there's a coming together
in a positive sense

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and that was frankly, the whole
feeding of the evening.

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'The procession into the
dinner looked pretty traditional
but to the observant, shock horror,

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'a challenge to convention provided
by the new Chancellor and his
entourage wearing lounge suits.'

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Even his choice of dress
projected modernity.

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What really hit the headlines is
that while this is a black tie
evening dress affair,

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he insisted on appearing in an
ordinary business suit.

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And this seemed to me to be

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simply a rather boorish
display of bad manners.

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The fact that he wouldn't wear
a black tie did strike me as
rather a foolish gesture.

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There's a certain
kind of person on the left who
likes to make a social gesture.

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It wasn't very wise and I think
the people who got offended were
just stuffed shirts, in my opinion.

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Everybody was trying to
persuade him to be sensible
and put the damn thing on,

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he wouldn't have it,
he's very obstinate.

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One of his characteristics, to
this day is how obstinate he can be.

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# Someday you will find me
Caught beneath the landslide...#

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The financial sector
thrived under Labour.

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00:16:37,000 --> 00:16:39,440
Between 2001 and 2008,

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00:16:39,440 --> 00:16:43,360
bonus payments nearly tripled,

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from £6.5 billion to £16 billion.

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00:16:47,600 --> 00:16:53,800
In 2006 an estimated 4,000 people
received million-pound bonuses.

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00:16:53,800 --> 00:16:58,240
You can take the view that given the
amount of tax that was being paid

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not just by the large
financial institutions,

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but also by the individual employees

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that effectively
the bonus culture represented a

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00:17:07,880 --> 00:17:12,240
super tax on the profitability
of the financial institutions.

224
00:17:12,240 --> 00:17:17,000
And if you stripped out the
bonuses paid in the City of London
over those years

225
00:17:17,000 --> 00:17:19,360
and then looked at
Government economics

226
00:17:19,360 --> 00:17:23,680
you would find the amount of money
the Government had to spend was
considerably less.

227
00:17:24,680 --> 00:17:30,000
During its first decade in power,
Labour increased
real spending on the NHS

228
00:17:30,000 --> 00:17:35,720
by an average of over 6% a year,
and on education by over 4% a year.

229
00:17:35,720 --> 00:17:41,240
For a number of years
we benefited from the taxation
on these gigantic bonuses,

230
00:17:41,240 --> 00:17:45,640
these unimaginable bonuses that were
being earned in the City.

231
00:17:45,640 --> 00:17:50,400
We made a billion plus available to
fix the roofs of primary schools

232
00:17:50,400 --> 00:17:54,280
that were literally leaking with
buckets underneath them.

233
00:17:54,280 --> 00:17:56,800
I went to see them myself,
I couldn't believe it.

234
00:17:56,800 --> 00:18:00,240
I mean the money these
centres were generating,

235
00:18:00,240 --> 00:18:04,360
the tax they were generating at 40%
was enormous,

236
00:18:04,360 --> 00:18:11,320
it became almost a key element in
what the budget deficit or
surplus was going to be.

237
00:18:12,840 --> 00:18:18,920
The new Chancellor swept away the
old regulatory system and announced
that regulation would be divided

238
00:18:18,920 --> 00:18:26,200
between the Bank of England, the
treasury and a newly formed body,
the Financial Services Authority.

239
00:18:26,200 --> 00:18:30,760
The Government later told it to
welcome financial innovation.

240
00:18:30,760 --> 00:18:33,440
No government serious about
the global challenges...

241
00:18:33,440 --> 00:18:38,040
In 2006, Gordon Brown went further.

242
00:18:38,040 --> 00:18:43,520
And to be frank with you, many who
advised me, including not a few
newspapers,

243
00:18:43,520 --> 00:18:47,960
urged that in Britain there be a
regulatory crack down.

244
00:18:47,960 --> 00:18:52,160
I believe we were right not to go
down that road

245
00:18:52,160 --> 00:18:59,560
and we were right and continue to
right, to continue to improve our
light touch regulatory system...

246
00:18:59,560 --> 00:19:03,440
'What we were trying to do was have
a proper balance

247
00:19:03,440 --> 00:19:08,000
'between regulation
and innovation in the marketplace.'

248
00:19:08,000 --> 00:19:13,000
We made the Financial Services
Authority responsible for
financial services regulation.

249
00:19:13,000 --> 00:19:15,720
The issue over the next
10 years was people saying

250
00:19:15,720 --> 00:19:19,320
that we had over regulated in
that area, not under-regulated.

251
00:19:19,320 --> 00:19:23,440
In fact, what we were trying to do
all the time, as governments must
continue to try to do,

252
00:19:23,440 --> 00:19:26,880
is to get the balance
right between the wealth
creation that is necessary

253
00:19:26,880 --> 00:19:29,280
and the proper protection of the
public interest.

254
00:19:29,280 --> 00:19:34,720
But the balance between wealth
creation and public protection

255
00:19:34,720 --> 00:19:37,640
would become dangerously skewed.

256
00:19:37,640 --> 00:19:42,120
I think the prevailing
climate at the time and indeed,

257
00:19:42,120 --> 00:19:44,760
right up till the crisis commenced

258
00:19:44,760 --> 00:19:47,400
was that the market does know best.

259
00:19:47,400 --> 00:19:53,040
The way to develop a successful
international capital market
centre, such as London,

260
00:19:53,040 --> 00:19:55,840
is broadly to leave
it to the market place.

261
00:19:55,840 --> 00:20:01,440
And that was the prevailing
mood of society and of politicians
of all parties,

262
00:20:01,440 --> 00:20:05,080
and that was the context in
which the FSA was set up.

263
00:20:11,560 --> 00:20:14,920
# Come and play the tunes of glory

264
00:20:14,920 --> 00:20:19,280
# Raise your voice
in celebration... #

265
00:20:19,280 --> 00:20:25,320
By the end of the millennium,
many believed Britain was
moving into a golden decade.

266
00:20:25,320 --> 00:20:30,960
With 'light touch' regulation,
international capital
flooded into the City.

267
00:20:30,960 --> 00:20:38,200
From 1997 to 2007,
GDP increased by 33%.

268
00:20:41,160 --> 00:20:46,280
With house prices rising, the
British property market was booming.

269
00:20:46,280 --> 00:20:52,000
To everyone here and
throughout Britain,
have a happy and wonderful New Year.

270
00:20:52,000 --> 00:20:55,520
From us all here in Britain
to people throughout the world,

271
00:20:55,520 --> 00:20:58,920
we wish you peace, we wish you
prosperity in the new millennium.

272
00:21:04,160 --> 00:21:07,840
In 2002,
Gordon Brown declared the UK,

273
00:21:07,840 --> 00:21:12,840
"Small in size but large
in vision and global reach".

274
00:21:12,840 --> 00:21:16,000
He'd had the American model to follow

275
00:21:16,000 --> 00:21:21,200
and I think he found that the longer
he pursued that course as Chancellor,

276
00:21:21,200 --> 00:21:23,280
the more his reputation grew

277
00:21:23,280 --> 00:21:29,080
and he could afford to
sit there being the dour and
tough Scottish Chancellor.

278
00:21:29,080 --> 00:21:36,040
And following that light touch on the
tiller that he so admired in the case
of Alan Greenspan or Bill Clinton.

279
00:21:38,440 --> 00:21:44,320
On both sides of the Atlantic,
politicians had accepted
'light touch' regulation.

280
00:21:44,320 --> 00:21:47,160
And with this new freedom,
the banks created scores of new,

281
00:21:47,160 --> 00:21:52,680
complex and highly lucrative
financial products - derivatives.

282
00:21:52,680 --> 00:21:58,560
One was called a credit default
swap, a type of insurance contract,

283
00:21:58,560 --> 00:22:01,440
which paid out
if an investment went wrong.

284
00:22:01,440 --> 00:22:07,080
But some US regulators
spotted potential problems.

285
00:22:07,080 --> 00:22:12,840
I'm very pleased to represent the
Commodity Futures Trading Commission
here today,

286
00:22:12,840 --> 00:22:17,640
to testify concerning
the over-the-counter
derivatives market.

287
00:22:17,640 --> 00:22:21,200
Brooksley Born, who at that
time was head of the

288
00:22:21,200 --> 00:22:27,400
Commodity Futures Trading Commission
wanted to regulate
credit default swaps.

289
00:22:27,400 --> 00:22:29,560
She was concerned
that these insurance,

290
00:22:29,560 --> 00:22:33,120
basically insurance instruments were
getting a little bit out of control

291
00:22:33,120 --> 00:22:34,480
and there was no oversights,

292
00:22:34,480 --> 00:22:37,560
there was no guarantee that they had
any capital behind them,

293
00:22:37,560 --> 00:22:40,320
no minimum capital requirements,
there was nothing.

294
00:22:40,320 --> 00:22:42,720
It was potentially

295
00:22:42,720 --> 00:22:48,800
a very significant problem, because
I don't see how anybody knew

296
00:22:48,800 --> 00:22:54,560
what the actual nature of
the contracts were that
were being exchanged.

297
00:22:54,560 --> 00:22:58,720
However, in 1998,
when Born proposed at a meeting

298
00:22:58,720 --> 00:23:06,000
that derivatives including Credit
Default Swaps should be regulated,
Greenspan's view was different.

299
00:23:06,000 --> 00:23:09,280
A heated exchange ensued.

300
00:23:09,280 --> 00:23:14,120
I think people expressed their views
quite forcefully.

301
00:23:14,120 --> 00:23:20,600
Alan Greenspan said 'Absolutely no,
we don't want any more regulation,

302
00:23:20,600 --> 00:23:24,040
we aren't even moving in the
opposite direction, de-regulation.

303
00:23:24,040 --> 00:23:26,120
Markets can take care of themselves.

304
00:23:26,120 --> 00:23:29,320
I would say that both
Brooksley as chair person

305
00:23:29,320 --> 00:23:36,560
as well as her senior
staff, and I personally

306
00:23:36,560 --> 00:23:44,400
was extremely surprised at the
strength of the opposition.

307
00:23:45,160 --> 00:23:47,240
The proposal was defeated.

308
00:23:47,240 --> 00:23:49,920
Greenspan's view had prevailed.

309
00:23:51,120 --> 00:23:53,800
I think it was
conventionally understood

310
00:23:53,800 --> 00:23:57,880
that the dominant voice in
crafting financial policy

311
00:23:57,880 --> 00:24:00,960
of the United States government
was Chairman Greenspan.

312
00:24:02,160 --> 00:24:06,320
Credit default swaps
created confidence, but ultimately

313
00:24:06,320 --> 00:24:10,200
complacency, because banks thought
they could pass on their risks.

314
00:24:10,200 --> 00:24:14,040
In 1998, the market for
them was small,

315
00:24:14,040 --> 00:24:20,640
but by 2007 it had mushroomed
to an astonishing 62 trillion.

316
00:24:34,400 --> 00:24:40,000
On September 11, 2001, attacks
in Manhattan's financial district

317
00:24:40,000 --> 00:24:45,560
destroyed the World Trade Centre,
killing nearly 3,000 people.

318
00:24:45,560 --> 00:24:51,880
The New York Stock Exchange
was closed for the first time
since the Great Depression.

319
00:24:51,880 --> 00:24:54,360
The global markets seized up.

320
00:24:56,240 --> 00:25:01,840
But out of the shock,
came a determination
the economy would not fail.

321
00:25:01,840 --> 00:25:05,480
The way the government reacted
proved vital.

322
00:25:05,480 --> 00:25:08,800
There was a very strong feeling that

323
00:25:08,800 --> 00:25:12,800
although this was a
terrible tragic event,

324
00:25:12,800 --> 00:25:16,160
we could not let the terrorist win.

325
00:25:17,840 --> 00:25:24,160
The next morning, the Sheraton
Hotel became temporary home to
investment bank, Lehman Brothers.

326
00:25:24,160 --> 00:25:27,360
Its offices had been
beside the fallen towers.

327
00:25:27,360 --> 00:25:30,520
The atmosphere was
hustle and bustle.

328
00:25:30,520 --> 00:25:34,000
It was controlled madness,
to be honest with you.

329
00:25:34,000 --> 00:25:37,600
We not only had the trading floor
going here on the 5th floor, 

330
00:25:37,600 --> 00:25:39,480
but we had 665 guest rooms

331
00:25:39,480 --> 00:25:43,040
that needed to be converted
into office space.

332
00:25:43,040 --> 00:25:48,640
If you can envision a sea of
mattresses coming down the elevator,
out onto 7th Avenue,

333
00:25:48,640 --> 00:25:50,360
being loaded into trucks,

334
00:25:50,360 --> 00:25:53,400
you have the flipside of it going on

335
00:25:53,400 --> 00:25:58,560
were you're moving in chairs,
desks and additional phones,

336
00:25:58,560 --> 00:26:01,120
just all this office
equipment that had to happen.

337
00:26:01,120 --> 00:26:06,880
Well, I think the sense of what came
out of the employees during this
terrible time

338
00:26:06,880 --> 00:26:08,600
was that we were invincible,

339
00:26:08,600 --> 00:26:11,440
that the firm
was really strong,

340
00:26:11,440 --> 00:26:15,280
that you know perhaps
we could never be touched.

341
00:26:18,000 --> 00:26:22,240
The New York Stock Exchange
re-opened six days later.

342
00:26:24,760 --> 00:26:30,320
After 9/11, I had some friends that
were working writing the software
to bring the whole thing back up.

343
00:26:30,320 --> 00:26:33,560
They worked non stop,
all through that week.

344
00:26:33,560 --> 00:26:36,680
And sure enough, everything came up
on that Monday morning,

345
00:26:36,680 --> 00:26:39,160
a week after 9/11,
everybody went back trading,

346
00:26:39,160 --> 00:26:41,440
the markets dropped,
but all the software,

347
00:26:41,440 --> 00:26:43,440
all the infrastructure
was running.

348
00:26:45,000 --> 00:26:49,120
The year before,
Clinton's boom had turned sour.

349
00:26:49,120 --> 00:26:55,240
And now, with the shock of 9/11,
the economy needed help.

350
00:26:55,240 --> 00:26:57,640
What we were finding
very immediately

351
00:26:57,640 --> 00:27:01,240
is that the markets were
tightening up very dramatically,

352
00:27:01,240 --> 00:27:05,000
so the one thing a
central bank can do

353
00:27:05,000 --> 00:27:09,640
is to flood the market
with liquidity.

354
00:27:09,640 --> 00:27:12,640
And what we found was,

355
00:27:12,640 --> 00:27:18,600
the global economy actually went
into a very deep swoon

356
00:27:18,600 --> 00:27:23,080
for just a few weeks and
much to my surprise

357
00:27:23,080 --> 00:27:27,560
it stabilised very quickly
and came back.

358
00:27:27,560 --> 00:27:33,960
Alan Greenspan cut interest rates
sharply, eventually hitting 1%,

359
00:27:33,960 --> 00:27:37,160
and kept them there until mid 2004.

360
00:27:37,160 --> 00:27:40,800
It's a decision that has
since been heavily criticised,

361
00:27:40,800 --> 00:27:45,320
as providing the fuel
for the banks to lend recklessly.

362
00:27:45,320 --> 00:27:49,320
The Fed made a clear mistake by
pushing rates too low

363
00:27:49,320 --> 00:27:53,040
for too long and increasing them
too little too slowly.

364
00:27:53,040 --> 00:27:56,320
But you know, as people have said in
the past, the job of the Central Bank

365
00:27:56,320 --> 00:28:00,680
is to take the punch bowl away when
the party gets going,

366
00:28:00,680 --> 00:28:04,520
to try to avoid these
housing and credit bubble.

367
00:28:04,520 --> 00:28:10,760
And during those years the Fed not
only was not taking away the punch
bowl, it was adding vodka and whisky

368
00:28:10,760 --> 00:28:16,960
and even more toxic stuff to the
punch bowl and making everybody
drunk with irrational exuberance.

369
00:28:19,240 --> 00:28:22,760
But there was another major factor
that kept borrowing cheap and easy

370
00:28:22,760 --> 00:28:28,600
for banks in the early years
of the 21st century. China.

371
00:28:39,560 --> 00:28:45,280
Over the past 15 years, the most
important development in the world
economy has been the rise of China,

372
00:28:45,280 --> 00:28:48,720
its advent in to the trading and
capital markets

373
00:28:48,720 --> 00:28:52,160
of the world and
the amount of money which China

374
00:28:52,160 --> 00:28:57,680
has saved has been so large that
it's pushed down interest rates
right across the world.

375
00:28:57,680 --> 00:29:00,800
We are operating in an
integrated world capital market.

376
00:29:01,960 --> 00:29:06,040
China, with its virtually
limitless supply of cheap labour,

377
00:29:06,040 --> 00:29:09,840
was now one of the world's
fastest growing economies.

378
00:29:09,840 --> 00:29:15,120
As a result of the shift
of the developing world

379
00:29:15,120 --> 00:29:19,360
towards an ever increasing emphasis

380
00:29:19,360 --> 00:29:24,960
on competitive markets,
there was explosive growth.

381
00:29:24,960 --> 00:29:31,680
And the growth was so
rapid and the income
increases were so rapid

382
00:29:31,680 --> 00:29:38,400
that you could not get
enough spending to
absorb the income.

383
00:29:41,120 --> 00:29:43,360
A vicious circle developed.

384
00:29:43,360 --> 00:29:46,960
As cheap Chinese goods were
bought by Western shoppers,

385
00:29:46,960 --> 00:29:53,160
China saved its new wealth,
investing it in Western banks.

386
00:29:53,160 --> 00:29:55,520
With so much money
flooding into the system,

387
00:29:55,520 --> 00:30:00,040
Alan Greenspan lost control of one
of the key levers of the economy.

388
00:30:00,040 --> 00:30:04,320
What that did is,
it took a whole segment

389
00:30:04,320 --> 00:30:10,440
of the economy out of the hands,
not fully, but to a large extent,

390
00:30:10,440 --> 00:30:15,880
out of the hands of central bankers
and monetary authorities in general.

391
00:30:15,880 --> 00:30:21,120
These low interest rates
substantially reduced
investors' returns.

392
00:30:21,120 --> 00:30:25,720
And how banks reacted
was to prove disastrous.

393
00:30:25,720 --> 00:30:33,200
Unfortunately, investors in financial
markets, or at least some investors,
really found it difficult to accept

394
00:30:33,200 --> 00:30:37,880
those low levels of interest rates
and were persuaded themselves that

395
00:30:37,880 --> 00:30:43,040
it was sensible to take bigger risks
in order to generate higher returns.

396
00:30:43,040 --> 00:30:49,280
With interest rates low,
it was cheap - virtually free -
for banks to borrow money.

397
00:30:49,280 --> 00:30:53,600
They searched
for lucrative new investments.

398
00:30:53,600 --> 00:30:59,040
Now, consider you are a financial
institution and somebody says to
you, "Do you want free money?"

399
00:30:59,040 --> 00:31:02,560
Well, what do you say? You say,
"Of course I'd like free money,"

400
00:31:02,560 --> 00:31:06,280
and then you get all
this free money, and what are
you going to do with it?

401
00:31:06,280 --> 00:31:10,480
Well, to make money off
the free money, you have to lend it,
and so you lend it.

402
00:31:10,480 --> 00:31:15,880
And if the money is free that you're
getting to lend, then you're
going to lend to anybody.

403
00:31:17,600 --> 00:31:20,280
A flood of cheap money.

404
00:31:20,280 --> 00:31:24,480
The explosion of new,
complex financial products.

405
00:31:24,480 --> 00:31:26,480
A light-touch regulatory system.

406
00:31:26,480 --> 00:31:30,520
It only needed one thing
to go seriously wrong.

407
00:31:32,280 --> 00:31:39,720
And it was something which, on the
face of it, looked like a blessing
for the American people - property.

408
00:31:39,720 --> 00:31:45,360
A new generation
of lending companies sprang up,
targeting would-be homeowners

409
00:31:45,360 --> 00:31:49,040
with bad credit ratings who could
be charged higher interest rates.

410
00:31:50,120 --> 00:31:54,080
To the banks, the borrowers
were known as sub-prime.

411
00:31:54,080 --> 00:31:57,920
They were borrowing money
through Wall Street
at two or three per cent,

412
00:31:57,920 --> 00:32:00,720
lending it out sub-prime rates
at eight per cent.

413
00:32:00,720 --> 00:32:04,360
The difference between that three
per cent and that eight per cent

414
00:32:04,360 --> 00:32:07,160
is five per cent,
and that's a huge profit margin.

415
00:32:07,160 --> 00:32:10,240
That's why the business boomed
so much in those early years,

416
00:32:10,240 --> 00:32:14,000
is that the profit margins on
these products were so enormous.

417
00:32:15,520 --> 00:32:23,080
The drive to help the poor share
in the American home-owning dream
was endorsed from the very top.

418
00:32:23,080 --> 00:32:27,160
Part of being a secure America
is to encourage home ownership.

419
00:32:27,160 --> 00:32:33,240
Now, we've got a problem here
in America that we have to address.

420
00:32:33,240 --> 00:32:40,560
Too many American families, too
many minorities, do not own a home.

421
00:32:40,560 --> 00:32:45,480
And it starts with setting a goal,
and so by the year 2010

422
00:32:45,480 --> 00:32:49,000
we must increase minority homeowners

423
00:32:49,000 --> 00:32:52,040
by at least five and a half million.

424
00:32:53,120 --> 00:32:56,960
Had President Bush, before
the credit crunch, said, you know,

425
00:32:56,960 --> 00:33:02,120
"We have too liberal
lending practices
and we've got to stop this,"

426
00:33:02,120 --> 00:33:04,960
he would have been greeted with

427
00:33:04,960 --> 00:33:08,360
enormous criticism,
because everyone would have said,

428
00:33:08,360 --> 00:33:11,520
"Here, President Bush
does not want lower-income people

429
00:33:11,520 --> 00:33:13,120
"to own their own home.

430
00:33:13,120 --> 00:33:16,240
"President Bush wants to stop
the growth of the economy."

431
00:33:16,240 --> 00:33:17,720
So there's no question

432
00:33:17,720 --> 00:33:22,800
it would have been difficult.
But at the same time, I can assure
you, President Bush would

433
00:33:22,800 --> 00:33:26,160
have done that if he'd felt that
was the appropriate thing to do.

434
00:33:26,160 --> 00:33:30,040
But we did not see the big crisis
coming that actually came.

435
00:33:30,040 --> 00:33:34,840
Robert Gnaizda has spent the last
three decades running a charity

436
00:33:34,840 --> 00:33:41,400
helping low-income people
to improve their lives,
including buying their own homes.

437
00:33:41,400 --> 00:33:44,040
I favoured sub-prime products

438
00:33:44,040 --> 00:33:46,560
if they were properly priced

439
00:33:46,560 --> 00:33:49,680
and they were plain vanilla in terms

440
00:33:49,680 --> 00:33:54,040
of the ability of people
with a tenth-grade education

441
00:33:54,040 --> 00:33:57,840
to understand the terms
and the consequences.

442
00:33:57,840 --> 00:34:00,520
'What do you see
when you look at people?

443
00:34:00,520 --> 00:34:05,440
'At Ameriquest Mortgage,
we see more than an easy label
and a credit score.

444
00:34:05,440 --> 00:34:11,480
'We see homeowners with hope,
families with commitment
and endurance...'

445
00:34:11,480 --> 00:34:18,840
One of the leading sub-prime lenders
was Ameriquest, founded in 1994
by Roland Arnall.

446
00:34:18,840 --> 00:34:22,720
Over the years, in building a very
substantial series of businesses,

447
00:34:22,720 --> 00:34:25,520
I've had to learn
how to become a diplomat.

448
00:34:25,520 --> 00:34:32,240
He was charming,
he was witty, he was nuanced,

449
00:34:32,240 --> 00:34:35,080
very thoughtful, he was engaged

450
00:34:35,080 --> 00:34:41,000
and he captivated almost everyone
who met him, including myself.

451
00:34:41,000 --> 00:34:45,200
What's most fascinating about Arnall
is that so many people that worked

452
00:34:45,200 --> 00:34:48,920
for him over the years went on to
start their own sub-prime companies.

453
00:34:48,920 --> 00:34:52,480
So he's sort of the father
of sub-prime, in my eyes.

454
00:34:52,480 --> 00:34:55,160
'Is your adjustable-rate
mortgage going up?

455
00:34:55,160 --> 00:34:56,760
'Refinance with Ameriquest

456
00:34:56,760 --> 00:34:59,400
'and get your rate back to
where you want it...'

457
00:34:59,400 --> 00:35:04,160
Ameriquest's commission-driven staff
hungrily sought out
potential borrowers.

458
00:35:04,160 --> 00:35:07,720
'..even if your credit is less
than perfect, Ameriquest can help.

459
00:35:07,720 --> 00:35:10,680
'Call 1-866-AMERIQUEST today.'

460
00:35:10,680 --> 00:35:14,360
If you didn't make your numbers
by even one loan, you were out.

461
00:35:14,360 --> 00:35:17,560
One month.
They didn't give you a second chance.

462
00:35:17,560 --> 00:35:21,160
They were all about turning,
you know, getting the machine going,

463
00:35:21,160 --> 00:35:24,560
and everybody had
to have at least ten loans a month.

464
00:35:24,560 --> 00:35:26,280
And if you're having 20 people,

465
00:35:26,280 --> 00:35:29,320
that's a lot of loans and a lot
of money that Ameriquest made.

466
00:35:29,320 --> 00:35:34,200
Now, on average, most of the people
that worked at Ameriquest

467
00:35:34,200 --> 00:35:37,600
made sometimes 20,000,
30,000 a month,

468
00:35:37,600 --> 00:35:41,160
easily, and that was without
really having to work hard.

469
00:35:41,160 --> 00:35:44,440
Yeah, it was a lot of money.

470
00:35:47,160 --> 00:35:49,240
I made close to 1 million one year.

471
00:35:49,240 --> 00:35:52,160
Like, 900 and something thousand
dollars.

472
00:35:52,160 --> 00:35:53,760
Managing.

473
00:35:53,760 --> 00:35:57,040
So, yeah,
it was definitely a lot of fun.

474
00:35:59,880 --> 00:36:05,120
But many of the borrowers were
sold bewilderingly complex loans.

475
00:36:05,120 --> 00:36:08,720
Often, the loan would have a low
rate to begin with and dramatically

476
00:36:08,720 --> 00:36:13,120
increase after two years -
the teaser rate mortgage.

477
00:36:13,120 --> 00:36:17,880
Most people didn't understand
what they were really getting into.

478
00:36:17,880 --> 00:36:24,280
They'd sell them on all the perks
and not really educate them on
all the things that could go wrong.

479
00:36:24,280 --> 00:36:29,160
'Wouldn't it feel great
to cut your monthly payments
by as much as 500 or more?'

480
00:36:29,160 --> 00:36:33,320
Risky lending practices became
commonplace across the industry.

481
00:36:34,840 --> 00:36:39,200
Borrowers didn't even have
to prove what they earned,
and no-one checked.

482
00:36:39,200 --> 00:36:42,720
This practice
was known as stated income.

483
00:36:42,720 --> 00:36:45,920
'No income verification
and cash out!'

484
00:36:45,920 --> 00:36:52,320
Stated income was not a bad idea, it
was the WORST idea I had ever heard.

485
00:36:52,320 --> 00:36:58,720
When you tell someone you don't care
what their real income is,
but to get the loan they have to

486
00:36:58,720 --> 00:37:02,880
have 10,000 a month,
that is very dangerous.

487
00:37:02,880 --> 00:37:05,760
It's contrary to every
financial principle.

488
00:37:05,760 --> 00:37:08,560
There were people that got loans
that shouldn't have.

489
00:37:08,560 --> 00:37:12,880
It was very easy to qualify.
If you could chew gum and walk,
you got a loan.

490
00:37:12,880 --> 00:37:18,400
Roland Arnall became a billionaire
and President Bush supporter.

491
00:37:18,400 --> 00:37:24,280
In 2004, he contributed generously
to the president's
re-election campaign.

492
00:37:24,280 --> 00:37:28,440
In 2006, he was appointed
US ambassador to the Netherlands.

493
00:37:28,440 --> 00:37:33,240
We have stood shoulder to shoulder
in wars such as
in Iraq and Afghanistan.

494
00:37:33,240 --> 00:37:39,320
Our efforts in those countries
and elsewhere are helping
to spread freedom and democracy.

495
00:37:43,000 --> 00:37:49,040
As long as home prices kept rising,
the entire house of cards
remained upright.

496
00:37:49,040 --> 00:37:54,000
Roland Arnall's business continued
to gain support.

497
00:37:54,000 --> 00:38:01,240
It's easy to blame Roland Arnall
alone, and I think
he has a lot of blame.

498
00:38:01,240 --> 00:38:07,400
However, Wall Street fully understood
what Roland Arnall was doing,

499
00:38:07,400 --> 00:38:09,320
and they backed him.

500
00:38:09,320 --> 00:38:16,040
Mortgage lenders like Ameriquest
were financed by banks around
the world, including British banks.

501
00:38:16,040 --> 00:38:20,120
Banks bought the mortgages
off the lenders' books.

502
00:38:20,120 --> 00:38:24,720
Now they could collect years
of high mortgage payments from
the original borrower,

503
00:38:24,720 --> 00:38:30,280
IF they kept up the payments.
The mortgages were bundled up
and sold on.

504
00:38:30,280 --> 00:38:33,560
The process was known
as securitisation.

505
00:38:33,560 --> 00:38:37,080
The growth of computerisation and the
growth of networking and the growth

506
00:38:37,080 --> 00:38:40,920
of the internet allowed this whole
process to spread all over the world.

507
00:38:43,200 --> 00:38:47,840
The banks repackaged and resold
the products amongst themselves,

508
00:38:47,840 --> 00:38:54,520
creating long chains of investors,
many ignorant of the content
of the original sub-prime loans.

509
00:38:54,520 --> 00:39:01,000
So it was everybody in the world
could now be a participant
in the American mortgage market.

510
00:39:02,920 --> 00:39:07,360
Many of these bundles of mortgages
were then insured

511
00:39:07,360 --> 00:39:14,160
using the credit default swaps
that Alan Greenspan had not wanted
regulated back in 1998.

512
00:39:14,160 --> 00:39:20,040
Credit default swaps were the
security blanket for the entire

513
00:39:20,040 --> 00:39:23,680
sub-prime meltdown, which is the fuse
that led the worldwide crisis.

514
00:39:23,680 --> 00:39:27,720
And London was at the heart
of it all.

515
00:39:29,360 --> 00:39:31,560
What went wrong here,
and it's important

516
00:39:31,560 --> 00:39:33,960
people understand
the causes of the problem

517
00:39:33,960 --> 00:39:37,600
before they then decide on the
solution, the cause of the problem

518
00:39:37,600 --> 00:39:42,160
was that people were, they thought,
dispersing the risk throughout
the world.

519
00:39:42,160 --> 00:39:47,320
But it turned out, at the same
time, they were buying back that risk
through another door in the bank.

520
00:39:47,320 --> 00:39:52,960
The assumption was risk had
disappeared, or at least

521
00:39:52,960 --> 00:39:56,240
unreasonable, irrational risk
had disappeared.

522
00:39:56,240 --> 00:40:00,720
It was not at all like
the situation leading up
to the great crash of 1929,

523
00:40:00,720 --> 00:40:05,920
because markets
automatically diversified.

524
00:40:05,920 --> 00:40:10,920
They bought products that
counterbalanced any particular risk.

525
00:40:13,320 --> 00:40:18,240
But with a system dividing
regulation between the FSA,

526
00:40:18,240 --> 00:40:25,400
the Bank of England and
the Treasury, it was unclear who
was on watch as the storm gathered.

527
00:40:25,400 --> 00:40:27,720
I've made the point
on many occasions.

528
00:40:27,720 --> 00:40:31,240
Our regulators, everybody else's
regulators, governments,

529
00:40:31,240 --> 00:40:34,600
have a lot to learn in terms
of how intrusive they should be.

530
00:40:34,600 --> 00:40:38,200
More serious and more searching
questions should have been asked.

531
00:40:38,200 --> 00:40:44,200
If someone's making a lot of money,
it's sometimes a good idea to ask why
they are making that money, because,

532
00:40:44,200 --> 00:40:46,440
you know,
things may not be what they seem.

533
00:40:46,440 --> 00:40:51,960
If it was not the Treasury,
then was it the FSA?

534
00:40:51,960 --> 00:40:55,000
The FSA didn't really look for
and didn't make judgments

535
00:40:55,000 --> 00:40:57,120
about what might happen
in the future.

536
00:40:57,120 --> 00:40:59,440
As we've said a number
of times before,

537
00:40:59,440 --> 00:41:01,360
the historic way of regulation

538
00:41:01,360 --> 00:41:06,520
was really only to look at the facts
and say, "If you have made a mistake,

539
00:41:06,520 --> 00:41:10,320
"if you have made a misjudgement
which transgresses our rules,

540
00:41:10,320 --> 00:41:12,360
"we will take action against you.

541
00:41:12,360 --> 00:41:15,600
"But we won't think about what
might happen in the future.

542
00:41:15,600 --> 00:41:19,800
"And if there's a risk
of your business model
running into difficultly,

543
00:41:19,800 --> 00:41:22,800
"we won't come and say to you,
'You shouldn't be doing that.'"

544
00:41:22,800 --> 00:41:27,720
So the FSA just wasn't
a forward-looking organisation
in respect of business model risk.

545
00:41:30,600 --> 00:41:33,800
And what about the Bank of England?

546
00:41:33,800 --> 00:41:37,080
The Bank of England was not
regulating banks in any sense,

547
00:41:37,080 --> 00:41:40,000
but we would have contacts
and conversations with them.

548
00:41:40,000 --> 00:41:42,480
And they saw the reports
that we wrote and the

549
00:41:42,480 --> 00:41:45,640
speeches that we made, and we
raised many of these risks.

550
00:41:45,640 --> 00:41:52,360
And, of course, I think many of them
felt that at the level of a
dispassionate observer, they too

551
00:41:52,360 --> 00:41:56,720
were concerned about the fact that
the price of risk was extremely low,

552
00:41:56,720 --> 00:41:59,240
about the fact that asset prices
were rising

553
00:41:59,240 --> 00:42:04,840
and people were making decisions
apparently on the basis that they
thought that would carry on forever.

554
00:42:04,840 --> 00:42:08,280
For most of the 12 years since 1997,

555
00:42:08,280 --> 00:42:12,360
the criticism that
has been made by the City and

556
00:42:12,360 --> 00:42:16,200
others of the Financial Services
Authority was that it overregulated.

557
00:42:16,200 --> 00:42:18,680
I had to stand up,
as Alistair Darling did,

558
00:42:18,680 --> 00:42:22,560
and say that regulation is
a necessary part of a modern
financial system,

559
00:42:22,560 --> 00:42:27,200
and, indeed,
that global financial regulation -
and we made proposals for that -

560
00:42:27,200 --> 00:42:30,960
is an essential element if
you've got global financial markets.

561
00:42:33,160 --> 00:42:40,880
The risks attached to
the financial products were
hugely underestimated by the banks.

562
00:42:40,880 --> 00:42:42,680
What happened to the bankers...

563
00:42:42,680 --> 00:42:44,680
Yes, they knew

564
00:42:44,680 --> 00:42:49,240
that they were involved
in an under-pricing of risk

565
00:42:49,240 --> 00:42:53,600
and at some point
that correction would be made.

566
00:42:53,600 --> 00:42:58,000
I fear that too many of them thought
they would be able to spot

567
00:42:58,000 --> 00:43:02,160
the actual trigger point of
the crisis in time to get out.

568
00:43:03,680 --> 00:43:11,240
But even if bankers saw problems,
they were making so much money
it was difficult for them to stop.

569
00:43:11,240 --> 00:43:15,960
I think it was obvious from the
outside that if it were to unwind,

570
00:43:15,960 --> 00:43:18,760
then the consequences
could be pretty disastrous.

571
00:43:18,760 --> 00:43:22,640
Now, when I first saw this,
I questioned

572
00:43:22,640 --> 00:43:27,400
the sustainability of this
business with a colleague of mine.

573
00:43:27,400 --> 00:43:32,680
And after five minutes
of talking about it, he just paused

574
00:43:32,680 --> 00:43:36,880
and said,
"Look, we cannot simply stop

575
00:43:36,880 --> 00:43:40,400
"doing these deals, because that
is not what we are paid to do."

576
00:43:44,160 --> 00:43:49,640
And it was not just regulators
and City high flyers
who looked the other way.

577
00:43:49,640 --> 00:43:55,400
We were all mesmerised
by the global property boom
that easy money unleashed.

578
00:43:55,400 --> 00:44:01,240
In the UK, average house prices were
increasing by ten per cent a year.

579
00:44:01,240 --> 00:44:03,920
Well, in 2005, in the early summer,

580
00:44:03,920 --> 00:44:08,960
we decided to talk out about what
was happening to house prices.

581
00:44:08,960 --> 00:44:13,880
I drafted a speech which had a very
indirect and gentle reference
to the fact

582
00:44:13,880 --> 00:44:19,200
that people ought to consider
that house prices might not
only ever go up.

583
00:44:19,200 --> 00:44:24,520
And, of course, you're then met
by an avalanche of headlines
talking about house-price crashes.

584
00:44:24,520 --> 00:44:28,760
So it is extremely difficult,
I think, to engage in a public debate

585
00:44:28,760 --> 00:44:33,760
about what is happening to asset
prices without either appearing to

586
00:44:33,760 --> 00:44:37,960
scare the horses on the one hand
or appear complacent on the other.

587
00:44:39,760 --> 00:44:44,560
The few questioning voices
were struggling to be heard.

588
00:44:44,560 --> 00:44:48,160
One of the incidents that really
sticks in my mind was in January
2007,

589
00:44:48,160 --> 00:44:50,600
when I went to
the World Economic Forum meeting

590
00:44:50,600 --> 00:44:52,160
in Davos for the first time,

591
00:44:52,160 --> 00:44:56,400
and one of the luminaries
of the American financial scene,

592
00:44:56,400 --> 00:44:58,800
somebody who had previously been

593
00:44:58,800 --> 00:45:01,720
very, very senior
in the American government,

594
00:45:01,720 --> 00:45:08,360
whipped out an article that I'd
written just the week before about
Northern Rock and about innovation

595
00:45:08,360 --> 00:45:15,280
and sort of waved this around as an
example of the type of scaremongering
or negative thinking that was around.

596
00:45:15,280 --> 00:45:20,520
And at the time I thought, "Well,
shall I put my hand up and try and
say something and fight back?"

597
00:45:20,520 --> 00:45:23,560
But before I could even do that,
Nouriel Roubini,

598
00:45:23,560 --> 00:45:26,920
who at the time was
a not terribly well known economist,

599
00:45:26,920 --> 00:45:32,000
I mean, people used to think
he was a bit of a crackpot,
a big of a scaremongerer like me.

600
00:45:32,000 --> 00:45:36,160
But Nouriel Roubini was also there
and he jumped in and started saying,

601
00:45:36,160 --> 00:45:39,560
"No, no, no, I think that there
is an issue about derivatives,

602
00:45:39,560 --> 00:45:43,720
"there is an issue about innovation,
we need to talk
about the potential risks."

603
00:45:43,720 --> 00:45:47,600
The nickname I received has
been the one of Doctor Doom,

604
00:45:47,600 --> 00:45:51,320
but actually, I prefer to
be referred as Doctor Realist.

605
00:45:51,320 --> 00:45:55,480
For one thing, things turned out
to be even worse
than my worst expectation,

606
00:45:55,480 --> 00:46:00,480
and unfortunately,
in good times, people don't listen.

607
00:46:00,480 --> 00:46:03,280
This is a formula for an explosion,

608
00:46:03,280 --> 00:46:08,960
a formula for a gigantic bubble
that would almost inevitably burst.

609
00:46:08,960 --> 00:46:15,240
You didn't have to be a rocket
scientist, you did not have to have
a fancy financial degree to know

610
00:46:15,240 --> 00:46:17,400
that the day of reckoning
was coming.

611
00:46:25,680 --> 00:46:31,160
Summer 2007. London and New York
are the dual centres of the world.

612
00:46:31,160 --> 00:46:34,320
It is the height of the boom.

613
00:46:34,320 --> 00:46:39,080
But the world economy
is balanced on a precipice.

614
00:46:39,080 --> 00:46:42,160
What people weren't anticipating,
which is what happened,

615
00:46:42,160 --> 00:46:45,080
was the crisis of confidence
that subsequently led to

616
00:46:45,080 --> 00:46:47,680
massive freezing
of markets and in particular,

617
00:46:47,680 --> 00:46:52,760
the disappearance of short term
liquidity, which then created
a whole series of other problems.

618
00:46:52,760 --> 00:46:54,800
So I think in that summer of '07,

619
00:46:54,800 --> 00:46:58,520
to a degree, people may well
have been a little bit complacent.

620
00:47:01,960 --> 00:47:05,560
Thousands of miles from London,
the day of reckoning was dawning.

621
00:47:10,000 --> 00:47:13,920
A growing number of people
who had been seduced
by teaser rate mortgages

622
00:47:13,920 --> 00:47:17,200
couldn't keep up with the payments
when rates increased.

623
00:47:17,200 --> 00:47:22,560
Repossessions rocketed
and house prices slumped.

624
00:47:22,560 --> 00:47:26,960
The White House
was not initially alarmed.

625
00:47:26,960 --> 00:47:29,920
The council of economic advisors,
which is really the

626
00:47:29,920 --> 00:47:33,960
in-house think tank of economists
in the White House, studied it,

627
00:47:33,960 --> 00:47:37,120
and their conclusion was that
it was contained,

628
00:47:37,120 --> 00:47:42,480
because the sub-prime market
represented only a relatively small
part of the mortgage market.

629
00:47:43,600 --> 00:47:48,440
But the original sub-prime mortgages
were not the entire problem.

630
00:47:48,440 --> 00:47:54,480
It was how they, and millions
of other loans, had been bundled
together and sold around the world.

631
00:47:54,480 --> 00:48:02,040
Now, the banks didn't know which
of these assets they held were still
valuable and which were worthless.

632
00:48:02,040 --> 00:48:05,000
The entire market was tainted.

633
00:48:05,000 --> 00:48:09,520
At the end of summer 2007,
confidence evaporated.

634
00:48:09,520 --> 00:48:12,480
The banks stopped lending
to each other.

635
00:48:12,480 --> 00:48:17,160
'One of Britain's biggest mortgage
lenders needs emergency support
from the bank of England.

636
00:48:17,160 --> 00:48:23,080
'Northern Rock has problems
raising money because of the crisis
in the financial markets.'

637
00:48:23,080 --> 00:48:27,040
A crisis that would come to a head
exactly one year later.

638
00:48:27,040 --> 00:48:30,480
'This is a CNBC special report.

639
00:48:30,480 --> 00:48:32,240
'Is your money safe?

640
00:48:32,240 --> 00:48:34,240
'The fall of Lehman Brothers.'

641
00:48:34,240 --> 00:48:37,680
'You are looking at a live picture
of the once-mighty Lehman Brothers.

642
00:48:37,680 --> 00:48:41,520
'A 158-year-old firm, born before
the industrial revolution,

643
00:48:41,520 --> 00:48:44,800
'surviving the Great Depression,
two world wars.

644
00:48:44,800 --> 00:48:48,200
'Lehman Brothers will likely
file for bankruptcy tonight.'

645
00:48:48,200 --> 00:48:54,400
It was the biggest bankruptcy
in history and the tipping point
into global recession.

646
00:48:54,400 --> 00:48:59,280
The adventure into sub-prime
sunk banks around the world.

647
00:48:59,280 --> 00:49:06,600
Banks wrote off billions,
businesses went to the wall
and houses were repossessed.

648
00:49:10,280 --> 00:49:17,840
The crisis spared no-one. Even
former Ameriquest staff were trapped
as property prices were in freefall.

649
00:49:17,840 --> 00:49:20,760
Income's tight, very, very tight.

650
00:49:20,760 --> 00:49:24,760
Four months late. We're trying to do
a loan modification and it's just...

651
00:49:24,760 --> 00:49:27,440
it's hard.
It's very hard with two kids.

652
00:49:27,440 --> 00:49:28,680
I'm sorry.

653
00:49:31,200 --> 00:49:33,440
I'm just so scared.

654
00:49:37,720 --> 00:49:39,240
Sorry.

655
00:49:44,240 --> 00:49:47,680
I'm scared
we're going to lose our house

656
00:49:47,680 --> 00:49:49,240
and have nowhere to go.

657
00:49:51,680 --> 00:49:53,800
They were betting.
People bet all the time.

658
00:49:53,800 --> 00:49:55,360
I bet all the time in business.

659
00:49:55,360 --> 00:49:58,920
They were betting that that house
would appreciate in value and

660
00:49:58,920 --> 00:50:02,520
they would be able to re-finance out
of it, or sell it and make money.

661
00:50:02,520 --> 00:50:09,720
And obviously a lot of people
did that and eventually, you know,

662
00:50:09,720 --> 00:50:11,600
the merry-go-round

663
00:50:11,600 --> 00:50:16,400
quit turning and the people
still on it got caught.

664
00:50:19,320 --> 00:50:24,240
The sub-prime lending business
folded as quickly
as it had grown up.

665
00:50:28,040 --> 00:50:32,400
In 2006, accused of predatory
lending, Ameriquest settled a

666
00:50:32,400 --> 00:50:39,400
325 million dollar law suit brought
against it by 49 out of 50 states.

667
00:50:39,400 --> 00:50:42,160
It stopped lending mortgages.

668
00:50:42,160 --> 00:50:46,400
Its boss,
the so-called "father of sub-prime",

669
00:50:46,400 --> 00:50:50,120
Roland Arnall, died in 2008.

670
00:50:54,560 --> 00:50:59,920
Mike Osinski, who wrote the software
which helped the sub-prime
industry to get underway,

671
00:50:59,920 --> 00:51:06,560
now supplies oysters to top
Manhattan restaurants, frequented by
those that have survived the crash.

672
00:51:06,560 --> 00:51:11,560
His own role in the sub-prime crisis
is often in his thoughts.

673
00:51:11,560 --> 00:51:14,160
I mean, I wasn't the person
selling these bonds and

674
00:51:14,160 --> 00:51:17,960
issuing mortgages to people,
but I was involved in the process.

675
00:51:17,960 --> 00:51:21,400
It's very dismaying
to see all your hard work

676
00:51:21,400 --> 00:51:24,040
turn into this huge catastrophe.

677
00:51:24,040 --> 00:51:29,240
You know,
there's some level of involvement.

678
00:51:29,240 --> 00:51:31,760
I don't know if guilt
is the right word, you know.

679
00:51:35,760 --> 00:51:40,160
Although sub-prime was
the final card that brought
the shaky edifice down,

680
00:51:40,160 --> 00:51:45,520
the origins of the crisis lay
in the age of risk.

681
00:51:46,640 --> 00:51:52,400
The roots of this crisis
are global and geo-political.

682
00:51:52,400 --> 00:51:59,720
The actual trigger is securitised
American sub-prime mortgages

683
00:51:59,720 --> 00:52:05,840
which became toxic and essentially
proliferated around the world.

684
00:52:05,840 --> 00:52:12,680
However, if it were not
that trigger, in other words,
if it were not the sub-prime,

685
00:52:12,680 --> 00:52:15,080
something else
would have triggered it.

686
00:52:17,360 --> 00:52:21,080
The world saw
two decades of globalisation,

687
00:52:21,080 --> 00:52:27,600
two decades of deregulation and
two decades of misplaced confidence.

688
00:52:27,600 --> 00:52:35,360
House prices would always go up,
risk had been eliminated
and banks could regulate themselves.

689
00:52:35,360 --> 00:52:40,840
In retrospect, I think what we've
all realised is that the regime
of the Financial Services Authority

690
00:52:40,840 --> 00:52:44,600
and all other authorities
in the rest of the world,
have got to be tougher.

691
00:52:44,600 --> 00:52:49,400
They cannot rely simply
on the information provided
by individual firms.

692
00:52:49,400 --> 00:52:53,200
They've got to have better methods
of assessing information themselves,

693
00:52:53,200 --> 00:52:56,080
they've got to deal with issues
of solvency and liquidity.

694
00:52:56,080 --> 00:53:00,280
It is not easy for anybody, whether
it's commentators in the media,

695
00:53:00,280 --> 00:53:05,880
television, regulators, politicians,
to criticise success.

696
00:53:05,880 --> 00:53:08,960
And I think one of the challenges
for the future

697
00:53:08,960 --> 00:53:16,120
is to put in place a framework for
the regulation of banks which ensures
that it is possible to challenge

698
00:53:16,120 --> 00:53:20,360
what they are doing, even though it
appears to be successful at the time.

699
00:53:20,360 --> 00:53:27,680
So who bears most responsibility
for helping create the age of risk?

700
00:53:27,680 --> 00:53:32,080
I would start with blaming
Alan Greenspan for the crisis,

701
00:53:32,080 --> 00:53:37,520
because he was the most powerful
person in the United States

702
00:53:37,520 --> 00:53:39,960
and the most influential in the world

703
00:53:39,960 --> 00:53:43,040
in regard to any financial
or economic matter.

704
00:53:43,040 --> 00:53:48,080
He was the one who capped rates and
kept them too low for too long,
he was the one who had the power

705
00:53:48,080 --> 00:53:53,400
to regulate mortgages and he was
the biggest cheerleader of these
toxic financial innovations.

706
00:53:53,400 --> 00:53:59,320
Do you solemnly swear that
the testimony you will give before
the committee will be the truth,

707
00:53:59,320 --> 00:54:01,800
the whole truth
and nothing but the truth?

708
00:54:01,800 --> 00:54:08,440
On October 23rd, 2008,
Alan Greenspan was summoned out
of retirement to Capitol Hill

709
00:54:08,440 --> 00:54:11,360
and questioned
about his role in the disaster.

710
00:54:11,360 --> 00:54:17,520
We're here today in this hearing
to hear from you and
to be able to question you.

711
00:54:17,520 --> 00:54:20,160
His every decision was examined.

712
00:54:20,160 --> 00:54:24,400
My question for you is simple.
Were you wrong?

713
00:54:24,400 --> 00:54:30,960
Partially. But let's separate this
problem into its component parts.

714
00:54:30,960 --> 00:54:35,720
He looked miserably tired,

715
00:54:35,720 --> 00:54:39,720
contrite - to the extent that
he will ever be contrite -

716
00:54:39,720 --> 00:54:47,120
and he looked like his world,
certainly his world view,
had collapsed.

717
00:54:47,120 --> 00:54:52,200
And the principle guiding him
as he led the global economy
was challenged.

718
00:54:52,200 --> 00:54:55,960
That sounds to me like you're saying
that those who trusted the market

719
00:54:55,960 --> 00:55:01,400
to regulate itself, yourself
included, made a serious mistake.

720
00:55:01,400 --> 00:55:07,000
I made a mistake in presuming that
the self-interest of organisations,

721
00:55:07,000 --> 00:55:09,600
specifically banks and others,

722
00:55:09,600 --> 00:55:15,680
was such that they were best capable
of protecting their own shareholders.

723
00:55:15,680 --> 00:55:20,200
I have been dealing
with the American economy

724
00:55:20,200 --> 00:55:22,760
for 60 years.

725
00:55:22,760 --> 00:55:28,960
That premise always worked
and I was shocked into disbelief

726
00:55:28,960 --> 00:55:35,160
that what unfolded was a complete
breakdown of that premise.

727
00:55:35,160 --> 00:55:37,400
I find that preposterous,

728
00:55:37,400 --> 00:55:43,880
that anyone would indulge
the thought that the greediest
of Americans

729
00:55:43,880 --> 00:55:48,320
who populate Wall Street - I don't
say that with moral judgement,

730
00:55:48,320 --> 00:55:55,160
they're just people out there
just to make money - are going
to self-regulate themselves.

731
00:55:55,160 --> 00:55:58,320
I still do not fully understand
why it happened,

732
00:55:58,320 --> 00:56:05,840
and obviously to the extent that I
figure out where it happened
and why, I will change my views.

733
00:56:05,840 --> 00:56:10,320
Alan Greenspan is someone
who is very honest

734
00:56:10,320 --> 00:56:12,560
about the way he approaches issues.

735
00:56:12,560 --> 00:56:17,040
And I think his honesty is reflected
in the fact that after
the financial crash,

736
00:56:17,040 --> 00:56:21,240
he was able to say,
"Look, here is my conclusion,
that the owners

737
00:56:21,240 --> 00:56:26,640
"or the executives of companies,
were not sufficiently taking
the public interest into account."

738
00:56:28,720 --> 00:56:35,920
An idea that guided Alan Greenspan
for his entire career proved flawed.

739
00:56:35,920 --> 00:56:39,840
Fundamental to the functioning
of a market system

740
00:56:39,840 --> 00:56:45,680
is the fact that
each individual economic entity

741
00:56:45,680 --> 00:56:51,600
works extraordinarily assiduously
to preserve its solvency.

742
00:56:51,600 --> 00:56:57,960
It is such a critical part of
the way the competitive
free market system works.

743
00:56:57,960 --> 00:57:02,240
You have to have
that as an essential ingredient

744
00:57:02,240 --> 00:57:05,080
in the marketplace,
or it will not work.

745
00:57:06,280 --> 00:57:11,360
But, despite everything
that's happened, he believes there
is no better alternative.

746
00:57:11,360 --> 00:57:18,640
The question isn't whether or not
competitive markets function
perfectly. They do not.

747
00:57:18,640 --> 00:57:21,120
Regrettably, there is nothing better.

748
00:57:21,120 --> 00:57:27,240
And the man whose ideas dominated
the world's economy for two decades

749
00:57:27,240 --> 00:57:30,080
has a warning about the future.

750
00:57:30,080 --> 00:57:32,600
Crisis will happen again,

751
00:57:32,600 --> 00:57:34,840
but it will be different.

752
00:57:34,840 --> 00:57:41,440
It's human nature. Unless somebody
can find a way to change human
nature, we will have more crises.

753
00:57:41,440 --> 00:57:48,960
None of them will look like this,
because no two crises have anything
in common except human nature.

754
00:57:51,280 --> 00:57:53,240
Next week, the inside story

755
00:57:53,240 --> 00:57:57,200
of how near we came
to complete financial meltdown.

756
00:57:57,200 --> 00:57:59,840
And how the world's leaders reacted.

757
00:57:59,840 --> 00:58:02,560
Are we really back from the brink?

758
00:58:02,560 --> 00:58:08,040
To find out more, go to...

759
00:58:12,320 --> 00:58:15,600
Subtitles by Red Bee Media Ltd

760
00:58:15,600 --> 00:58:18,680
E-mail subtitling@bbc.co.uk