Frontline's new documentary about the financial crisis probably doesn't say much you didn't already know, at least if you've followed the story. But it's a story worth telling again anyway, because memories on Wall Street and in Washington are dangerously short.
On Tuesday night PBS will air the first two parts of a four-part documentary on the crisis, called "Money, Power and Wall Street," with the second two parts to air next Tuesday, May 1.
The first hour tells the history of the credit derivatives at the heart of the crisis, while the second hour tells the blow-by-blow of the crisis itself, culminating with the bank bailouts in the fall of 2008.
Viewers familiar with all of this material -- and there's not much new in the first two hours, which could probably have been condensed to one hour without losing much -- might be confused about the point of rehashing what is by now old history. The trailer for the whole series suggests Frontline is slowly building a case, maybe to be hammered home in the final two hours next week, that the financial system is still just as primed for disaster as it was four years ago.
The second part of the documentary, airing in the second hour tonight, is more entertaining than the first, but mainly in the way oft-told horror stories are fun to hear around the campfire. Stop me if you've heard any of this before: Bear Stearns goes down because of toxic mortgage debt early in 2008. Policy makers take the summer off. Treasury Secretary Hank Paulson decides to let Lehman Brothers die, to teach Wall Street a lesson. Oops! AIG and the rest of Wall Street get hundreds of billions of dollars to keep the financial system from going down the drain.
The first hour is far drier and again won't come as much of a shock to people who have been paying attention. But it's probably the more important part. It puts credit derivatives in their rightful position as the ultimate cause of the financial crisis -- not the selling of houses to poor people, not super-low Federal Reserve interest rates, not a surplus of savings from China or Japan.
It also puts the blame on this situation squarely where it belongs: on the banks that cooked up these derivatives (though the JPMorganites who started it all get off surprisingly easy), and the regulators who aggressively paid no attention to what was happening until it was far too late.
Derivatives -- bundles of securities that sliced and diced mortgages and sold them to investors, and credit default swaps that helped investors pretend they'd bought insurance against those bundles going bad -- fueled what Frontline calls "an unfettered brave new world of banking," spreading credit liberally throughout the land, feeding the housing boom and exposing the banking system to nightmarish risk.
And this all happened far, far away from the oversight of regulators, who bought the arguments of Alan Greenspan, the Thomas Friedman of finance, that any fetters on the free market would block the free flow of credit.
"The regulation of derivatives transactions that are privately negotiated by professionals is unnecessary," rasped the Ayn Rand acolyte, who seems to grow more monstrous with hindsight. "It hinders the efficiency of markets."
Banks, meanwhile, whined that they would lose their ability to compete in the global financial system if the government didn't immediately break down the Depression-era rules that prevented them from getting too big to fail. Okey-doke, said both Congress and the Clinton administration. You got it.
Meanwhile, the mortgage industry strained against regulations on predatory lending, Frontline reminds us, which helped generate so much of the subprime garbage that ended up getting crammed into mortgage backed securities.
Again, stop me if you've heard this one before, but the banking industry, while getting bigger and more systemically important, managed to sell increasingly toxic, complicated derivatives in ballooning numbers to investors all over the world. And regulators willfully ignored warnings, from Harvard economist Martin Feldstein, then-Wells Fargo CEO Richard Kovacevich, Commodity Futures Trading Commission chief Brooksley Born and others who pop into the documentary for cameos, that the system was at risk of collapse.
And that's one of the big services the Frontline documentary does: It reminds us that, contrary to the slackjawed expressions of disbelief by regulators and Wall Street chieftains that they could not possibly have known this could all go horribly wrong, there were plenty of warnings along the way. Even in typically clueless Congress, then-Senator Byron Dorgan (D-N.D.) warned in a 1999 speech that credit derivatives, "one day, with a thud, will wake everyone up."
Hopefully the last two hours of the Frontline series will focus on how little has really changed since Dorgan's warning. The banks, having been bailed out with no requirements that they change their ways, are bigger now than they ever have been. Derivatives are still under-regulated, and the banks are lobbying as hard as they can to keep them that way, while trying to roll back whatever other regulations they can spend money to defeat. And they seem to be winning.
As Columbia professor Joseph Stiglitz points out in the second part of the documentary, banks hate transparency in markets because the darkness is where they can make the easiest killing, as they did just ahead of the financial crisis. Wall Street, pushing against regulation as hard as it can, gives every sign that it is just waiting for the next opportunity to make another killing, putting the global economy at risk in the process.
Which is why this oft-told scary story probably can't be told often enough.
Correction: An earlier version of this post incorrectly identified Harvard economist Martin Feldstein as Milton Friedman.