Judging the most frightening part of the new Frontline documentary “Money, Power and Wall Street,” available anytime online proves to be an alarming contest.
Is it when Nicholas Dunbar, a physicist who now studies derivatives, observes that these instruments grew so complex that even the bankers peddling them to unsuspecting clients didn’t understand the danger. Parents instruct children not to play with matches. The flame may fascinate, but the kids may unwittingly burn down the house, a lesson apparently lost in the banking sector.
Or is it when Bill Winter, former co-chief executive of JP Morgan Chase confesses that profiting from laxly regulated derivatives markets allowed firms to abuse their customers. “The incentive to cheat is very high.”
Or is it the chilling conclusion of the four-hour program, namely that Wall Street lobbyists are today gutting key sections of the 2010 reform law on derivatives. Even as the first of the four parts of the Frontline documentary aired April 24, the House of Representatives approved a bill that allows firms that deal in as much as $200 billion worth of derivatives to evade prudential safeguards. Frank Partnoy, a former derivatives expert at Morgan Stanley and now a law professor at the University of San Diego, tells Frontline that the Wall Street lobby proves so formidable that it might require a few more financial crises to achieve sound reform.
Frontline’s sprawling documentary draws on numerous insiders and other experts.. Industry can’t claim they’re underrepresented; the most stern indictments come from former bankers. For example, we hear the confessions of JP Morgan bankers who developed the credit default swap at a boozy retreat. Failure to regulate those derivatives led to the largest single bailout, namely, the $180 billion check from taxpayers for AIG’s failure. Now a little older, these bankers lament that some derivatives grew too risky even for them.
Frontline dives usefully into the big money world of derivatives. Created by mathematicians (who might otherwise work in the computer industry), we learn that some derivatives are sold by agents known as “F9 Monkeys”. An F9 monkey was “somebody who was simply pricing these structures,” explains Desiree Fixler, a former JP Morgan executive. “You just had to put in a few inputs and press F9 and determine the price of the instruments.” With this infirm grip on their own product, bankers traversed the globe hunting for dupes, a.k.a.customers. We visit tiny Casino, Italy, where bankers convince the local government to purchase complex instruments with the promise that it might relieve money problems. The village lost millions in a derivatives bet with the bankers. Bankers sold a thousand other European municipalities similarly dubious deals. And Frontline takes us to Jefferson County, Alabama to dissect another corrupt derivative deal, which led to the nation’s largest municipal bankruptcy in history.
Frontline covers more subjects than Academy Award winning documentary “Inside Job,” and naturally includes fresher material. Where “Inside Job” focused on the politically corrupting influence of Wall Street lobbyists, Frontline explores the perversion of complexity. Regulators didn’t understand the risks. Financial Crisis Inquiry Commission leader Phil Angelides concludes, “The people that were charged with overseeing our financial system really didn’t have a sense of the risk that were embedded in the system. They didn’t see the fundamental rotting in the system that had manifested itself for years.” But neither did the bankers, as Dunbar notes. Mathematicians assert that certain derivatives are actually too complex to understand.
Certainly, the FDA wouldn’t approve a drug where the manufacturer acknowledged it didn’t understand all the side effects. Yet products with unknowable risks serve at the core at what generates the largest profit for Wall Street. So despite the ongoing wreckage from the financial crash, Wall Street continues to lobby. As Public Citizen fights efforts to dilute Wall Street reform, Frontline helps replace amnesia with nightmare. Not a happy experience, but unfortunately necessary. It should be must-online TV for all Congressional members and staff—and their constituents.