>> Tonight on FRONTLINE, the epic story of the
financial crisis spreads. >> These bankers were
fanning out across Europe >> A global crisis ... >> Investment banks,
such as Goldman Sachs were eager to lend to
risky places such as Greece. >> I find it hard to believe
that they couldn't figure out
that the Greeks were
cooking their books. I think they knew. In fact, i know they knew. >> And a culture of greed. >> It's actually known
as casino banking. >> One loophole after another. >> You're making so much money. >> They came down here
like sharks to raw meat in the water. >> Have I got a deal for you! >> Money, Power and Wall Street. >> Is anybody watching? Does anybody care about this? >> A special investigation,
tonight on FRONTLINE. >> NARRATOR: Every year
in December, bankers find out if the bets they've made
that year have paid off. It's Christmastime on Wall Street. By some measures, 2011 was
a dismal year to be a banker. Their stocks took a nosedive. But this season, New York banks
set aside $20 billion in bonuses. Since the crash of ‘08,
banks have paid out more than $80 billion in bonuses. While officials in Washington
focus on rule-making, nothing seems to have really
changed the culture of Wall Street, a culture some feel
has simply lost its bearings. >> I think it's probably not
an over-exaggeration to say Wall Street kind of lost its senses. >> NARRATOR: John Fullerton
is a former banker who says it all began when banks started
trading for their own gain and not for their customers. >> JOHN FULLERTON: It was the rise
of trading that shifted the culture. And with that came this much more
short-term profit-generating competitive mentality. There was just this kind of cult
of more, more, more, grow, grow, grow. And I think now the culture on
Wall Street is fundamentally unhealthy. I grew less happy about my work
and what I was doing every day. Candidly, I felt it was beginning
to change my own values, you know, how I looked at myself
and how I valued myself. >> NEWSCASTER: —industrials managed
to finish with a trip-digit gain today, but behind the scenes,
it was another nail-biter. The ground continues— >> I never really cared
about money per se. I never really wanted to
become a rich person. I knew that the people I was
working with wanted to be rich, so I wasn't offended by that idea. It seemed like a pretty typical
American goal, in fact. >> NARRATOR: Cathy O'Neil,
a mathematician, came to Wall Street in 2007 after beginning
her career in academia. >> CATHY O'NEIL: I went to
U.C. Berkeley as an undergrad. I went to Harvard for grad school. And then I was a post-doc
for five years at MIT. And I applied to work at
a hedge fund, D.E. Shaw, and I got the job. And I thought this was great. I was a quant. A quant uses statistical methods
to try to predict patterns in the market. >> NARRATOR: Her work was used
to predict when big pension funds would buy or sell, so the firm could
jump in ahead of their trades. >> CATHY O'NEIL: I just felt like
I was doing something immoral. I was taking advantage of people
I don't even know whose retirements were in these funds. We all put money into our 401(k)s. And Wall Street takes this money
and just skims off, like, a certain percentage every quarter. At the very end of somebody's career,
they retire and they get some of that back. This is this person's money,
and it's just basically going to— to Wall Street. This doesn't seem right. >> Everybody kind of knows
in their heart that something's not right. But once you are making money
for a while, you don't ever want to stop making money. >> NARRATOR: Caitlin Kline
came to Wall Street in 2004. She says it was all very seductive. >> CAITLIN KLINE: Your whole
first summer is taken up with things like golf lessons and negotiation classes,
wine tastings, things to make sure you know how to handle yourself
in a business environment. >> NARRATOR: Kline was a math major
at New York University and considered becoming a teacher. But she remained on
Wall Street for six years. >> CAITLIN KLINE: You have the sneaking suspicion
that you're not contributing to society. But it was always really easy
to say, "I know the risks." "They know the risks." "None of this is our money." "So you know, we can kind of do
these things, and it's all fair game." >> I don't think I at any point thought
I was doing anything harmful. I just didn't think I was doing
something necessarily positive. >> NARRATOR: Alexis Goldstein
graduated from Columbia with a degree in computer science. She then designed trading software
for Deutsche Bank and Merrill Lynch. >> ALEXIS GOLDSTEIN: There's an
incentive to make as much money as you can for the firm. And in some senses, I think,
for the traders, they think, "Hey, I earned a billion
dollars this year." "I deserve some small
percentage of that." What I think is incorrect about that
is the behavior that that incentivizes is, "I'm going to go for broke." "I'm going to try and make
as much money as I can." "And if it blows up three years
from now, that's not going to affect the bonus I make today." >> NARRATOR: The incentives are powerful. A young trader at a big Wall Street bank
can make around $150,000 a year. But based on performance,
that number can rise quickly. Star traders make huge sums. >> How much are you making
if you're a star trader? >> For a star trader, you could,
after 10 years, reach pay above $4 million or $10 million for the—
for the star performers. That wasn't the average. >> Ten million dollars a year. How much did you make as a trader? >> I was— I think I was a star performer,
so I probably followed the— the pay curve of the star performers, yeah. >> So between $5 million
to $10 million a year. >> I mean, I guess so. >> Is that— is it a secret? >> Well, it— it was a secret, in fact. I mean, compensations were not public,
for all the obvious reasons. >> I'd really rather not say,
if that's OK, because I just don't know if that's publicly available information. But it's certainly, like, more than you
would get at most first-time jobs. >> I shouldn't talk about that. That's in— that's in the contract. I can't talk about any salaries
or bonuses or anything like that. But it was a lot of money, I mean,
especially for young people, you know? >> NARRATOR: It wasn't always this way. For most of the last century,
bankers made the same salaries as lawyers, doctors and engineers. The last time Wall Street saw
extravagant compensation was in the run-up to the crash of 1929. >> The 1920s, of course, were a period of
financial frenzy and a big stock market boom. And there was a lot of innovating,
risk-taking banking at that time. >> NARRATOR: At the time, it wasn't
uncommon for bankers to take home paychecks that, when adjusted for inflation,
rival those earned by bankers today. But it didn't last. >> SIMON JOHNSON: From the
1930s, we got a period of reform and constraints placed on banks. They became much more regulated. And many of the banks were forced to do
what you might call plain vanilla business— taking deposits, lend it out. You could make good money. Don't get me wrong. But it was boring. It was very straightforward. It was about being
in the community. It was about understanding
who was a good credit risk. That's the history of American banking. >> When I started life in banking,
it was basically a simple profession, very much like being an
executive at an electrical company or some sort of utility. You provided some essential services. >> In the old days, Wall Street
and the finance industry financed things that got done, be they the railroads
or the interstate system. All of that has to be financed. That's what finance is
supposed to be about. What has entirely changed is that they're
in the business of making money for themselves. If it happens that they can also
finance something along the way, OK, but that's really no longer
part of the core business. >> Now it gives me great pleasure
to introduce the President of the United States, William Jefferson Clinton. >> NARRATOR: The changes
were formalized in the late ‘90s, as the last of the Depression-era
reforms were lifted— >> The Glass-Steagall law
is no longer appropriate— >> NARRATOR: —and traditional
commercial banks could merge with trading-oriented investment banks. Trading activity and
bank profits rose quickly. >> The trading side became,
you know, overwhelming— three, four, five times bigger
than the banking side. The banking side grew, as well,
but not as much as the trading side. >> This is very much the
beginning of the brain drain, when Wall Street looked at people
who had technical, scientific training, and it said, "We'll pay you double,
triple, five times what you could make in any other field." And if you're looking at
those kinds of incentives, you're trained as an engineer,
why wouldn't you want to make three times more money? >> NARRATOR: So they came. And many ended up doing
what is called "proprietary trading," trading for the bank's own account. Some bankers were uncomfortable. >> I think that sometimes, we weren't
really serving the interests of the clients but we were serving our interests. And I didn't like that. >> NARRATOR: Claudio Costamagna was
the co-head of European investment banking for Goldman Sachs. >> CLAUDIO COSTAMAGNA:
Everybody was making money. Everybody jumped in. It's a sort of, you know,
human nature. You know, you see your neighbor
making tons of money in that activity, even if you don't understand it,
you just walk in. >> By "that activity," you mean what exactly? >> You know, selling derivatives,
making proprietary bets, and so forth and so on. >> NARRATOR: Derivatives. It's where the really big
money is made. >> TRADER: I'm going to propose
here a micron swap— >> NARRATOR: Derivatives can be
many things, but are basically contracts or bets that derive their value from
the performance of something else— an interest rate, a bond or stock, a loan,
a currency, a commodity, virtually anything. For traders, derivatives
are a perfect product. >> A derivative is something—
can be made up— crafted right on the trading floor and sold the next day? >> Absolutely. Most derivatives, you don't need
to have them in warehouses. You don't need to find them to sell them. You just can create them. >> NARRATOR: They're also very profitable. >> I would say probably two third
of the trading revenues was directly or indirectly associated with derivatives. >> CORRESPONDENT: So it's
not an exaggeration to say that trading of derivatives was really
the lifeblood of the banks. >> Yes, I think it's fair to say. >> TRADER: And I'd say, "Listen,
I'd buy 10 million of these things at 6 and three eighths points,
and I'll show you 10 million''— >> NARRATOR: The problem
with derivatives is that they can be very dangerous for
unsophisticated customers. >> TRADER: We put them out at
10.33 versus 9.99, is where he sells it— >> NARRATOR: They often
involve highly leveraged bets. A small change in market conditions
can mean huge losses. And traders are incentivized
to get the deals done, even if it's at the customer's expense. >> There was a phrase,
"ripping someone's face off," that was used on the trading floor
to describe when you sold something to a client who didn't understand it, and you were able to extract a massive fee
because they didn't understand it. And the idea was that this
was a good thing because what you were doing was
making more money for the bank. And that sort of spirit of being
antagonistic to your client actually took on a significant
life on Wall Street. >> NARRATOR: And to maximize
profits, banks want to do business where there is less regulation. >> NEWCASTER: On this week's program,
hear from some of the people who are being called the new kings of capitalism. >> NARRATOR: Beginning in the ‘90s,
many American banks found London preferable to New York. >> The two big markets that rival
each other are New York, with Wall Street, and London, the City of London. And in some instances, the key
risk-taking activities were in London. They were outside the purview
of American regulators. >> NARRATOR: Hundreds of young
bankers moved here from Wall Street to pursue careers in derivative trading. As the economy boomed, British and American
bankers became the toast of the town. >> These are the rock stars of London
at the time, people being paid, you know, $10 million, $15 million a year. And you saw them in the— in their
expensive shirts and in these VIP places, where there's, like,
a 500 pound bottle of vodka. And there were all these girls in miniskirts
were flocking to these VIP rooms, enjoying this, you know
once-in-a-lifetime opportunity, people in their 20s making
this kind of money. >> You lived and breathed for the firm. I mean, the hours were insane. You never questioned it. And on a relative basis, you were
making so much money and you felt grateful. You felt indebted to the bank. >> NARRATOR: Desiree Fixler, a graduate
of the London School of Economics, sold derivatives for
Deutsche Bank and JP Morgan. >> DESIREE FIXLER: I didn't think
for myself, you know, so desperate to perform for the bank— I mean,
you know, for so many of us, if you slit our wrists,
corporate logos would jump out. >> NARRATOR: Fixler was part of
a small army of bankers pushing derivatives to European markets. On the trading floor, they were
known as "F9 monkeys." >> CORRESPONDENT:
You were an F9 monkey? >> Half of me is an F9 monkey! [laughs] And the other half would be
out on the road marketing to accounts. >> So what was an F9 monkey? >> Well, just somebody who's just
simply pricing all of these structures. >> These are on the computer? >> Exactly right. So you just had
to put in a few inputs and press F9, and it would determine the price
of the instrument, and in fact, your hedge, as well. >> And who did you—
who did you sell to? >> Hedge funds, to pension funds,
to insurance companies, to all sorts of different types of banks. And there were many uses
to the product, so it just— it naturally grew. >> NARRATOR: After pricing the derivatives,
teams of investment bankers hit the road. >> They're called investment bankers,
but they're effectively salesmen. Their job is to go out and sell
the stuff that the bank is creating, just in the same way a
pharmaceuticals company would have a very large sales force, would go around selling their
latest version of whatever the particular drug of the moment is. >> These bankers were
fanning out across Europe, finding all of these clients that were—
who were lapping up these deals. It's what you might call a form
of governance arbitrage, where the bankers will find the type of client
that doesn't understand the product in order to sell the product
that the client shouldn't be buying. >> How many of these
deals were being done? >> We don't know. These deals are confidential. We only know about them
when the— when they go wrong. >> NARRATOR: Take, for instance,
this small town, Cassino, an hour south of Rome. In 2003, a team of investment
bankers from Bear Stearns arrived at Cassino's city hall
and met with officials. >> They went to Cassino and they said,
"We can lower your borrowing." They'd be saying, "You're paying,
you know, 5 percent a year on your debt." "We can reduce it
to 1 percent or 2 percent." "But you have to enter into a derivative
with us, an interest rate swap or an option, some kind of derivative, where as long
as something doesn't happen in the market, your rates will stay low." So they signed this contract
with Bear Stearns, now JP Morgan, and they got a benefit from it
in terms of lower borrowing costs. >> NARRATOR: But it didn't
work out that way. Soon after the deal was signed,
the interest rate the deal was pegged to began to rise. Cassino found itself paying hundreds
of thousands of dollars more in interest than it bargained for. >> NARRATOR: Carmelo Palombo
is a former city councilman. >> CORRESPONDENT: How well do
these people understand the deals that they're buying? >> They had very little
understanding of them at all. They should never have been allowed to
be even talking to these investment banks. It was— it was a crazy idea for them
even to get into these kind of conversations. >> CORRESPONDENT: And when
you talk to bankers, what justification do they offer for selling to rubes out there,
these complex financial instruments that they know they don't understand? >> They'd be saying, "Well,
they might win," you know? "I can tell you— I can tell you a client
who's— who's done that bet and did very well out of it." >> I think very few people
knew what they were buying. >> But if they don't know what
they're buying, then somebody's failing to do their job, aren't they? >> But in a way, I think that
it's more on the investor side, that the due diligence
has to be done. I mean, you know, it's—
it's an open market. So I put more blame on the investors
than on the banks that were selling them. >> But who could understand
these products, besides the bankers? >> Very often, even the bankers
do not understand them. [laughs] >> NARRATOR: Cassino ended up paying
Bear Stearns over a million dollars in interest. The town sued the bank,
now owned by JP Morgan, and received a half-million
dollar settlement. But it was still left in the red. >> CORRESPONDENT:
You bought Bear Stearns in 2008. And they had done some deals
in the town of Cassino outside of Rome, which— are you familiar with those? >> Yeah. >> Was that a clean deal? >> I don't know. At the time that the— the deals
were entered into, hard to tell. Would— would JP Morgan
have done those deals? No. No. Too complicated,
too small a counterparty. >> So in this case, I mean,
you're holding banks responsible for leading less sophisticated
municipal officials, you know, down the— down the wrong path. >> Yeah, I would hold banks
responsible for that. >> That was the abuse
of derivatives, right? >> There were abuses. In every market, there are abuses. There were abuses in the
derivative markets. Because of the opaqueness
of derivatives, it was probably easier to abuse in some cases. >> And what does that say
about the profession? >> It obviously doesn't cover
the profession in glory. When you go through a period,
like we all did, where really large amounts of money were available
to individuals— we're talking bonuses— the incentive to cheat is very high. It's very high. >> NARRATOR: By last count,
over 1,000 municipalities and institutions across Europe entered into similar deals
with other banks, like Merrill Lynch, UBS and Deutsche Bank. Potential losses are
estimated to be in the billions. Scores of lawsuits have been filed. It wasn't just in Europe. The banks did deals in America, too, in places like Birmingham, Alabama,
seat of Jefferson County. >> They came down here like
sharks to raw meat in the water and took advantage, full advantage
of the opportunity that was here to make a lot of money. >> NARRATOR: Jefferson County had a problem. In 1996, it had squandered
$2 billion dollars to build a state-of-the-art sewage system. People were left with sewers
to nowhere and huge monthly bills. >> If my bill is $30,
I now have to pay $90. Most of the people in this— in this
neighborhood are on a fixed income. So even if you're paying $70 a month
for water and sewage, and after that $700 a year, that's— that's pretty much
sum of their checks for the month. >> NARRATOR: In 2002, the county
was looking to refinance their sewer debt by issuing another
$3 billion worth of bonds. >> The Jefferson County sewer financing,
in $3 billion worth of borrowing over a two or three-year period,
would be a huge financing at that time in the marketplace. It would be a huge financing
today in the marketplace. Those numbers gets
Wall Street's attention. >> NARRATOR: One banker
who called was Charles LeCroy. >> He was the leading producer
at JPMorgan and supposedly— street talk is he was the largest
profit center that JP Morgan had for several years running. So he was hustling this product
not just in Jefferson County, but all over the country. >> NARRATOR: One of the products
LeCroy was pitching to Jefferson County was an interest rate swap similar
to the one Cassino had entered into. >> He says, "Have I got a deal for you!" "We've got this new product." "It's called a swap." "And we know how to work this
swap program to help write off, where you don't have to
raise rates on your citizens." >> NARRATOR: In late 2002, a former
local TV reporter turned politician named Larry Langford took charge
of the county's finances. >> I think the bankers in New York
had to stifle the laugh because you had a guy here who
had no idea about swaps, had no idea about
auction rate securities, had no idea about the financial market. >> NARRATOR: Langford
decided to consult a friend, Birmingham financial advisor Bill Blount. >> Blount looks at it, says,
"It's a pretty good deal, Larry." "We just swap this debt.
You won't have to raise rates." "Everything looks great. Here we go." They didn't just do it once. They did it several times. They were swapping variable to fixed,
and they were swapping fixed back to variable. "Where's the market going?" "If it goes up, we do this." "If it goes down, we do this." I mean, it was just basically
commodity trading because they were just literally
betting against the market. >> NEWSCASTER: Wall Street had
one of its worst days on record— >> NARRATOR: But what the county
didn't account for was a big change in the markets. In 2008, it all went horribly wrong. >> NEWSCASTER: This was the day
we were afraid to wake up to— >> NEWSCASTER: Financial
institutions are in trouble. Lehman Brothers filed for bankruptcy— >> NEWSCASTER: —first financial crisis
in modern times and perhaps the end of an era in American— >> In 2008, when the music stopped
in the fall, they pull out the chairs, they're several chairs short. >> The county suddenly owed
hundreds of millions of dollars in fees and penalties to its
debt holders, including JP Morgan. >> When the derivatives and
the variable rates shot up, we knew we could not sustain
the debt that we had amassed. And so we just put off the fact
that we were in bankruptcy, just like an alcoholic who never
admits that they're alcoholic. >> NARRATOR: And there was more. It turns out LeCroy had paid money
to Langford's friend, Bill Blount. According to federal prosecutors,
the money was for bribes, $3 million from JP Morgan to Blount,
who in turn passed money and gifts to Langford. >> I can't say that JP Morgan paid bribes,
certainly didn't pay any bribes to Larry. Now, what JP Morgan did is they
paid some benefits to Bill Blount. Is it bribery? Is it undue influence? Is it good or is it not good? It depends on the situation. But certainly, it's at least
got the potential for corruption. >> NARRATOR: In 2010, Langford went
to jail on charges of bribery and fraud. He is currently serving a 15-year sentence. Langford's friend, Bill Blount,
cooperated with authorities and is serving four-and-a-half years. JP Morgan settled with the SEC
for $25 million and was ordered to forgive the county fees
totaling $697 million. Charles LeCroy was sentenced
to three months in jail after a similar deal in Philadelphia. >> NEWSCASTER: Jefferson County,
Alabama, was going to teach America how to use swaps and derivatives. Now it's running out of money,
and officials don't know— >> NARRATOR: In November 2011,
after years of corruption and mismanagement, Jefferson County filed the largest
municipal bankruptcy in U.S. history. Across the country, over a hundred
of school districts and hospitals, as well as scores of state
and local governments, bought interest rate swaps. With the crash, the deals backfired. In the last five years, bad swaps have cost
American taxpayers $20 billion dollars. On Wall Street, the derivatives business is
sometimes called the solutions business. Traders are constantly looking
for big problems to solve. >> For a derivative person—
trader, marketer for the business— naturally, you tend to focus
your attention to big problems. Usually, big problems become
a big source of opportunities, and— and business. >> And some of the biggest problems
and opportunities were in Europe, when, starting in the ‘90s, countries
were bidding to join the Euro club. >> It became very clear that
the question of who was going to be let into the club or not was going
to rely very heavily on statistics. It's a bit like your
SAT scores for university. The question of how those
are calculated is absolutely key. And what happened,
as so often in finance, was that bankers spotted
a seemingly dull, geeky area that was incredibly important, that almost no one understood, and the politicians certainly
weren't looking at, and thought, "Aha, here is a chance for arbitrage." >> Regulatory arbitrage. This is a kind of esoteric term,
but basically, what it means is figuring out way
to get around the law. And Wall Street has become
very good at regulatory arbitrage. They're very good at figuring out
a complicated financial structure that achieves some objective
that you couldn't achieve otherwise in a legal way. >> Your job was to find a solution,
a legal solution, to selling these derivative products. And the more of this, if you want to say,
regulatory accounting arbitrage, that happened, the more you got promoted
and the more you were paid. >> So violating the spirit of the— >> Absolutely, yes. >> —of regulations. >> Yes, that— >> That was very much the game. >> Absolutely. >> NARRATOR: So bankers
descended on European capitals offering derivative solutions. >> Derivatives became
the name of the game, became some kind of magic formula
through which you could readjust macroeconomic imbalances
across the border by speculating. It almost became something that
you had to do, or you had to try. >> NARRATOR: Countries also used other tricks. >> The French were cooking their books
by reclassifying their pension obligations. The Germans were cooking
their books with gold transactions. Now, this was the time when—
when Europeans were generally cooking their books. >> NARRATOR: The first known case of a
country using a derivative to window-dress its accounts was in Italy. Officials in Rome
had been struggling. >> In Italy, the fear was that if we
are not going to get hooked to Europe, we are going to get hooked to North Africa. And so there was
not much of a chance— there was not much of a choice
about what to do about this. We had to be in Europe, period. >> NARRATOR: They turned
to JP Morgan for help. The bank sent the head of derivatives
for Italy, Bertrand Des Pallieres. >> CORRESPONDENT:
You went to Rome. You helped them enter
a derivative contract. Did it effectively lower their deficit? >> This transaction? >> Yes.
>> Did it lower their deficit? It's— this transaction probably had—
yeah, this transaction lowered the deficit. Absolutely. But it's probably inappropriate
for me to discuss, you know, too specific details because I think
I have duty towards clients. I have duty towards my employer. >> NARRATOR: Not all the details
are known, but Italy and JP Morgan entered into a currency swap,
a commonly used derivative. Except in this case, the swap
was more complex. It had a built-in loan.
>> This was done with JP Morgan and Italy as a derivative, rather than as a traditional loan. It was not put on
the financial statements. It potentially deceives the other countries
in the eurozone into thinking that they're cleaning up their books
more than they really are. >> NARRATOR: In 1999, Italy
was allowed into the eurozone. >> The euro is the beginning
of a stronger European Union. We shall be the best in the world! The best in the world. >> NARRATOR: Italy said derivative deals
had little effect on their acceptance but nobody really knows
how many deals they entered into. JP Morgan declines
to discuss the deal, but Des Pallieres says the bank
id nothing to fool regulators or other European countries
about Italy's financial health. >> Did the deal with Italy change
the perception of the nation? >> Absolutely not. Absolutely not. And furthermore, every transaction
that we were involved in Europe, every transaction we
were involved in Europe, were not hidden to
the other European partners. >> NARRATOR: Des Pallieres insists
that his deals for JP Morgan were all aboveboard. He won't vouch for other banks. But in 2003, Nick Dunbar published
a story in Risk magazine uncovering a secret deal between
Goldman Sachs and Greece. The article revealed that Goldman
had sold Greece several giant swaps to help Greece meet its targets. >> What was the reaction
when your story came out? >> What happened was complete silence. You know, I think I did
one radio appearance, and the story was just buried. Nothing happened at all. >> NARRATOR: The silence was surprising. This was the largest sovereign
derivative deal ever reported. The deal cut Greece's debt
by around 2 percent. What other deals there were
is not known. >> It was a secret off-balance-sheet loan,
legal within the rules at the time, as Goldman would say,
but it was an off-balance-sheet loan. It's a very expensive form
of borrowing for Greece. By going through Goldman,
Greece ended up paying something like 16 percent a year. It's a bit like a subprime mortgage,
or something like that. It's a crazy borrowing rate for someone
that's desperate to borrow money. >> And how much did
Goldman make in the deal? >> I think you can safely say that Goldman
earned hundreds of millions on that deal. >> NARRATOR: Desiree Fixler was working
at JP Morgan when the news hit. >> When Nick Dunbar's story
came out in 2003, what was the reaction inside the bank? >> The reaction wasn't scandal— "My goodness, I can't believe
Goldman Sachs has pushed it this far and clearly has broken the spirit of the law." The reaction was, "You better go
down to Athens and find out if there's any more to do." "How did you miss this?" So most banks were trying
to see if they could replicate it. >> I can tell you it's absolutely false. I was in charge, and I— you know,
extremely knowledgeable in that domain. The position didn't make much sense. For Greece, the transaction
was disguised from Greece's partners, and a number of other— and I think
the margins didn't really make sense. >> Because it was too much
dressing of the books. >> Absolutely. >> So you were leaving
a lot of bonus on the table. >> Oh, yes. When you drop—
and when I— when I speak about, you know, several hundred million transaction,
it's— several people are on the table, leaving several million of personal money. That's absolutely right. >> NARRATOR: With its books
dressed, Greece had kicked its problems down the road. For the next several years,
Greece would also go on a massive spending spree. >> Credit was easy, and big
global investment banks such as Goldman Sachs were eager
to lend to relatively risky places such as Greece. And they were eager to tell
their customers that these risks were not very big. >> Banks considered Greece
almost as safe as Germany. So Greece could borrow
on German interest rates, and they were very low indeed. >> There was a bubble,
a consumption bubble, I would say. Banks were intermediating that. So we had an increase in expenditures
way above our means. >> ANNOUNCER: Citizens of the world,
welcome to Athens! >> It has a special twist in Greece
because of the Olympic Games. There was a euphoria
that led to irresponsibility. >> No one was thinking, you know,
"The money's available, but we're borrowing it and this is very expensive." "And at some stage, we're going
to have to pay it back." "Well, how is that
going to work out?" Greece being such a small country,
being a small economy and one that wasn't
really going anywhere, it was a disastrous mix. >> NARRATOR: Between 2001 and 2008,
Greece's debt had doubled. No one, it seemed, wanted
to ask any hard questions, including the European regulator Eurostat. >> I find it hard to believe that
a continent that can figure out, you know, pretty precisely how many
centrifuges Iran is running at this moment enriching plutonium and uranium, couldn't figure out that the Greeks
were cooking their books, doing currency transactions
with Goldman Sachs. I think they knew. In fact, I know they knew. And they just didn't care. >> How do you know they knew? >> Because I talked to them. They knew. You know, the Greeks had
a constant dialogue with Eurostat. Now, it doesn't mean that they
didn't play a few tricks along the way that Eurostat didn't know about,
but the Eurostat knew the big ones. >> I would put it cynically as follows. For several years, Greek governments
pretended that— to keep their public finances in order and their
European partners pretended to believe them. >> NARRATOR: The reckoning came in 2009. The newly elected government
of Georges Papandreou would arrive in office claiming to have no idea
what the true size of the debt was or what tricks had been used to hide it. Giorgos Papakonstantinou
was the minister of finance. >> Not until we sat down
in the general accounting office and sort of slowly stripped the layers
of expenditures that were due, but not really being recorded or declared— not until that time did we realize that what
we had was a very, very serious problem. >> NARRATOR: Papakonstantinou
had to deliver the bad news to his fellow European finance ministers. >> Our deficit for this year's going to be
double the one previously projected, in double digits, around 12.5 percent. I showed up and I had to tell them
that the deficit was twice as big as the previous government had told them— >> NEWSCASTER: —extensive
foreign exchange volatility— >> And six times as big
as was originally planned. >> NEWSCASTER: The ministers
are ignoring Greece at their own risk. >> It was clear to me from the reaction
that we were unleashing a certain chain of events. >> NARRATOR: Bond traders from
New York to London started dumping Greek sovereign bonds. The very same institutions that had
happily fueled the euro spending spree pulled back. >> And in 2009, this whole thing fell apart. And what you're seeing at the moment
is this sort of crumbling edifice that was built over the last few decades. >> NARRATOR: With the markets
no longer willing to provide Greece cheap credit,
the country had to cut spending. People took to the streets in protest. Other European countries
had no plan in place to deal with the situation. >> I think everybody knew
that the construction of the euro was not a finished construction. Because, you know, when you don't have
a real, common economic policy and fiscal policy, clearly, you know,
a common currency theoretically doesn't work. >> NARRATOR: In 2010, the value
of the euro dropped precipitously. Ireland, Portugal and Italy started
their own downward spirals. Today it's Spain, an economy
four-and-a-half times larger than that of Greece. >> It became apparent that
Greece was not alone, that this was not
just a Greek issue, that there were other countries
that had similar problems. So what was originally perceived
as an isolated problem quickly became a systemic problem
for the rest of the eurozone. >> Could this affect the United States? Absolutely. Of course. Our banks would be the
obvious conduit for any shock. They lend a lot to Europe. They transact a lot
with European banks. And we in the United States
have not sufficiently prepared for those difficulties. >> NEWSCASTER: The debt crisis
and economic chaos could have a dangerous ripple effect
around the world. >> NARRATOR: If difficulties in Europe
lead to the failure of a big American bank, it could be catastrophic. >> NEWSCASTER: How palpable is the fear? How much of an impact
could this have in the U.S.? >> NARRATOR: Since 2007, the five biggest
banks in America have become larger. Today, they control assets equal to
56 percent of the American economy. >> NEWSCASTER: But is there potential
for a domino effect in Europe— >> PROTESTERS: We are the 99 percent! We are the 99 percent! >> NARRATOR: Last fall, as the European
debt crisis worsened, Occupy Wall Street launched its protests in New York. >> I remember sending
an e-mail to my boss asking, "Is anybody watching?
Does anybody care about this?" "What? The protests? No." That was the response, you know? I mean, just wasn't an issue. >> When I first saw Occupy Wall Street,
I was highly skeptical and I just thought it would be shut down on day one,
like I think most people did. And then they had this momentum. And then there was
the pepper spray incident. Those three girls were kettled in the
orange netting and sprayed in the face. And that was the moment where I said,
"I have to get down there." "And I have to— I have
to be involved in this."
>> NEWSCASTER: People took
to the streets to express their anger. But what exactly is their message? >> NEWSCASTER: What do these people want? >> You know, Occupy Wall Street
from the very beginning was being criticized for not really knowing
how the system works. And what I realized was,
"You know what?" "Nobody knows how the system works." "Even the people in finance
don't understand the system." They understand their
little corner of the system. But very few people would come forward
and say, "I'm an expert on the financial system." "I know how everything works." >> PROTESTERS: We are Occupy Wall Street! >> The Occupiers, they know that the result
of this system is not working for them. That's enough. The system is a huge black box,
and they are seeing the output of that black box. You know, a lot of them
are college-educated. They have enormous student loans,
and they don't have a job. And that is the output. Them and all the people around them
don't have jobs and are in huge debt. They don't have the power, in fact,
to address the system and to question it. And I feel like the Occupiers
should be appreciated, that in spite of the fact that
they don't understand it, they're willing to come out
and say, "This isn't working." "The system isn't working." >> PROTESTERS: Occupy everything! Occupy everything! >> NARRATOR: In Washington,
other battles are being fought. On one side are the 12 federal agencies
responsible for protecting the public interest. On the other, the bank lobby. Ever since the passage of the Dodd-Frank
financial reform act in 2010, the two groups have been in
a virtual deadlock over what kind of rules are acceptable.
The industry has spent over
$320 million lobbying lawmakers. To date, the rule-writing
process has ben slow. Few rules have been finalized. At the Federal Deposit Insurance Corporation,
regulators are meeting to discuss banks that are "too big to fail." They've pulled together a group
of financial heavyweights, among them former
CitiGroup CEO John Reed, Wall Street super-lawyer Rodgin Cohen, former SEC chairman William Donaldson, and former Fed chief Paul Volcker. Across the table are officials
from the FDIC's Office of Complex Financial Institutions. It is their job to plan
for a big bank failure. There are many questions—
how to unwind derivative contracts, how to protect customers' money,
how to deal with foreign subsidiaries, how to prevent catastrophe. >> I don't know how this ends. We like to think that
we live in unique times, but during the 1920s, we had a
tremendous amount of financial innovation. And when we had the great crash
and we came out of it, we had a series of investigations
that led to the securities laws. My hope is that we'll learn the lessons
that we learned from 1929. Maybe it'll take longer for us
to learn the lessons of 2007 and 2008. Maybe we'll need another
several crises to get us there. >> NARRATOR: Some believe
the answer is to roll back time. Former Fed chief Volcker
has proposed a rule that would, in effect, reinstate a cornerstone
of the Depression-era Glass-Steagall act, separating proprietary trading from
traditional customer-oriented banking. >> There seems to be no willingness
to address the conflict of interest inherent in modern banking, because that
would mean essentially pulling apart the two parts of the bank, the proprietary trading
and the client-focused businesses. And there is no real energy or traction
for dealing with that issue. >> NARRATOR: In New York,
Occupy Wall Street has formed its own group to review
the Volcker Rule. After extensive industry lobbying,
the rule has ballooned from 10 pages to almost 300 of exemptions and loopholes. >> The risk section of the Volcker Rule
is really vague, really vague. And you know, I worked in risk. I mean, if I'm a bank, I can game this. We need people who are experts,
who have gamed the system. >> We decided we would read through
and figure out what the rule was trying to do, and then sit and try and figure out
how we would get around it. If we were still working
on Wall Street, what are the ways that we would try and evade it? >> NARRATOR: They submitted
their proposal to the SEC, the FDIC and the Fed in the hope that
the Volcker rule would be tightened up. >> Normally, the only people
that comment on these regulations are the industries that
are about to be regulated. And you can probably guess
what they say, right? They say, "This is too harsh." "You have to take this out." "This is going to ruin our business." They'll say, "This'll ruin the economy." >> The cynic in me will say that
even under the best circumstances, if this law went through and all speculative
proprietary trading was cut from the banks and they just couldn't do it anymore,
they will find something else. They always do. >> We can absolutely reform banks. We just have to care enough about it,
and we have to— we have to trust that the world won't collapse
in the meantime. Banks were reformed
after the Great Depression. They absolutely were. It was a political will issue,
and it continues to be. And the question isn't, "Are we
going to create something perfect?" The question is, "Are we going
to create something better than this?" It's actually a pretty low bar. So I think it's— it's definitely achievable. >> NARRATOR: Recently, the government
tried to create tougher rules for banks that trade more than $100 million
of swaps annually. The bank lobby swung into action. The outcome, only banks trading
more than $8 billion will be subject to oversight, leaving 85 percent
of all derivative players outside the reach of regulators. >> We now somehow believe
that finance sort of drives everything. The crisis was an opportunity
to change that, to ask questions like, "What is the role of
finance in our economy?" "What is the role of banks?" But I suspect it's very hard because
it's very difficult to change gods. And in the modern age,
our god was finance, except its turned out to be
a very cruel and destructive god. For more on this and other FRONTLINE
programs, visit our website at pbs.org/frontline FRONTLINE's "Money, Power and Wall Street"
is available on DVD. To order, visit: shoppbs.org or call 1-800 PLAY PBS FRONTLINE is also available
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