INSIDE JOB , an Incredible JOB

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Inside Job, one of the most educational documentaries I have had a change to see, captures the plight of recession in a way that can be processed by a common man. The bubble that led to recession, also led to this movie and definitely, this movie does justice in enlightening the economic crisis in a way that many around the world do not even know. It does not take enough financial background to understand what the movie tries to infer, for the commendable job of Director Charles Ferguson explains each ingredient in the bubble’s recipe, that swept the global economy and  led to the greatest recession witnessed since the Great Depression.

I have tried to highlight some important facts that I took from the movie, in my words for people who still are unaware of the discourse. I would recommend each and everyone to watch the film, since recession affected every single life on the planet and everyone deserves to know the truth. Remember, that incomplete information does not lead to a clear understanding and often postulates incorrect results. Its important to know the true story. So, lets find ourselves an in-depth analysis for clear perception.

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What change has Recession brought?

  • Global recession caused the world over $20 trillion, rendered 30 million people unemployed,
  • Doubled national debt of US

What caused the Recession

  • Massive private gains at public loss attributed to the monopoly of investment banks in the financial sector. The strategies were for higher profits and revenue generation in short interval, not accounting bankruptcy as the final verdict.
  • The bonus system, which payed highly, to the employees working for the investment banks and security insurance agencies as soon as the contracts were signed based on short term profits.
  • The derivatives market which entitled anyone to bet on future contracts, options derived from other form of assets.
  • The competition among Investment banks which further led to riskier loan schemes, especially on houses for everyone, not bothered about the financial standing of the borrower.
  • Faulty rating attributed to the CDO (Collateralized debt obligation) which were to be payed to the investors at last. Even the CDO which investment bank bet would fail were sold to costumers based on high ratings by rating agencies.

Earlier Trends

  • Bankers were prohibited to speculate depositor savings
  • They were tightly regulated, as businesses were partnerships and  these partners who put up the money watched it closely
  • The lenders were mostly local

Earlier instances in history

  • 1982, deregulation of saving and loan companies allowed them to pursue risky investments with the depositors money, caused tax payers their money and many people their life savings.
  • The next crisis came at the end of the nineties, investment banks fulled the massive bubble in internet stocks which was followed by a crash in 2001 that cost 5 trillion dollar in investment losses. Internet companies were promoted which were likely to fail and stock analysts were paid based on how much business they bring in.

Understanding Concepts and Happenings

Securitization food chain

  • Participants in the chain – home buyers, lenders, investment banks and investors. Later, rating agencies and security insurance companies become very crucial.
  • Collateralize debt obligations (CDOs) are derived from fixed income assets. The customer loans were placed in sub-prime loans which were riskier and further, formed major component of the CDO. These CDO were mere payments to the investors. The investment bank earn commission at the time of its issue and since, they added these mortgage payments into the complex CDO, the problem of riskier sub-prime loans seemed diluted.
  • Home buyers borrowed money from local lenders, but as is the trend that mortgage payments are to be payed to local lenders, saw a shift. The payments were forwarded to the investment banks, and then on to the investors as CDO. Thus, the chain is more like a bridge where the two ends are borrowers and investors, but there is no interaction between the two. Thus, the connecting dots are lenders and investment banks, who are practically non existent in the system. They are simply forwarding the money and making profits based on interest rates and maximizing the same for greater forwarded CDO. Thus, To increase the number of CDO, the number of loan borrowers need to be maximized, thus lenders proposed easier loan schemes.
  • Credit Rating Agencies assign ratings to the debt obligations such as CDO which are used by broker-dealers, investors, investment banks and governments. These agencies have been speculated to receive compensation for giving higher ratings to CDO by the Investment banks to lure in customers and investors.
  • Further, Investment banks payed rating agencies which gave most of the CDO good rating, resulting in increase of the number of investors and clients, and hence greater earning on commission on part of Investment banks.
  • Derivative Market – a financial innovation, an unstable 50$ trillion unregulated market. When a person invests in derivative, the underlying asset is usually a commodity, bond, stock, or currency. He bet that the value derived from the underlying asset which can be future contracts or options, will increase or decrease by a certain amount within a certain fixed period of time.
  • The role of security insurance companies was to take quarterly premium from investors to secure their stand if their CDO ever failed. These insurance companies went a step ahead and accepted premiums from third parties such as Investment Banks as well. This became possible because of unregulated derivative market, so if the payments went bad, the company had to pay the third party as well. The investment banks used the derivative market to bet on CDO especially designed to fail, and earn money on it. They did not disclose the information of faulty CDO to their customers or investors.

What Government did wrong

  • The public law that prevented banks with consumer deposits to involve in riskier investments was later changed by “Gramm Leach Bliley Act ” which cleared the way for future mergers such as the formation of Citigroup and other conglomerates.
  • On April 28, 2004, the SEC met to consider leverage limits on the investment banks.
  • Never considered regulating highly risky derivative market.
  • Investment Banks were allowed to manipulate market economics by not levying bar on them as they involved in corruption, unprecedented betting etc.

Who was responsible

  • The entire system of securitization of food chain, that saw the giants of financial services exploiting borrowers money, practically gambling with it to increase their short time earnings and revenue, comprising the long term standing of the company. Also, luring the public into loan schemes, unprotected by Government, not in public interest, and finally dumping them with the burden of unemployment.
  • To buy a home is an American Dream, and does it not bother one when the dream becomes so much real, that everyone can own it. The current financial turmoil that eventually led to the severe global recession, undoubtedly urges people to remain more vigilant, to think harder before putting money into the hands of such companies.

Some Quotes in the movie I found essentially Great

  • When you start thinking that you can create something out of nothing it is very difficult to resist.
  • Recently neuroscientists have done experiments where they have taken individuals and put them into an MRI machine and they have to play a game where the price is money and they noticed that when the subjects earn money, the part of the brain that gets stimulated is the same part that cocaine stimulates.
  • Why should a financial engineer be paid 4 – 100 times more than a real engineer? A real engineer builds bridges, a financial engineer build dreams and you know when those dreams turn out to be nightmares, other people pay for it.

Hey CHEVRON, what’s up with CRUDE

Do you believe in Karma? Do you believe that if you commit a mistake then the forces of nature work against you, to even out your arrest.

What do you think of the Amazon rain-forest, do you believe they are beautiful and are the only remaining explicable entities to comprehend our natural outlook. If your answer is YES, then the next big thing will come as a shock to the many who are not aware of it. I believe no environmentalist has missed it and it underlines a fine line between “Industrial Exploitation permitted by law” and “Contamination of Nature”. The story I am referring to is “the $ 27 billion lawsuit against Chevron filed by tens of thousands of Ecuadorans”.

A documentary “Crude” deals with the issue and explores the real-time problems that the Ecuadorians face, a possible result of the oil exploration by Texaco, now Chevron. The lawsuit will be the largest environmentally ever encountered if proved. The Joe Berlinger’s film Crude provides diverse angles to the depleting quality of life of the Ecuadorians, the environmental peril and captures explanations from each side onto asserting their claims. Let us understand the situation and study the possible.

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The Scenario

Chevron the third largest  company in USA, is being sued by the Ecuadorian people in a court room of  Ecuador. The high fine is accredited to the clean up and implementation of water systems, and to compensate for cancer debt.

Back in 1972, the Gulf Oil, Texaco and Ecuadorian Government were controlling the oil production in Amazon. But soon in 1997, the Government oil company (CEPE, later restructured and named PetroEcuador) bought shares of Gulf Oil to let it off, since the Government wanted to nationalize the Oil Consortium. Thus, the 40-60 partnership between Texaco and PetroEcuador ran the oil production with Texaco acting as the operator i.e., responsible for safe execution of the construction and commissioning activities in accordance with plan, company standards and management processes.

How they got there?

The lawsuit of $1.5 billion was filed in 1993 by a group of Ecuadorians against Texaco. Chevron acquired Texaco in 2001 and hence inherited the case. They emphasized that the case belongs to Ecuador and not in Manhattan where it was initially filed. They won the case to pursue the fight in Ecuadorian Court, but the compensation raised to a staggering $27 billion.

The case by People

The thousands of Ecuadorians were supported by Plaintiff lawyers lead attorney Steven Donziger to raise the claims of contamination in the Amazon. In 1990, Texaco had spend $40 million in clean up and hence the Ecuadorian Government exempted them from any further liabilities, but there was a loop hole in the pact – it was the absence of third-party claims which was judicially exploited by the people of Ecuador as purported by the Plaintiff lawyers.

  • The people use water as a crucial resource and the centimeters deep oil spills had polluted the water. The result was dying aquatic life, dying animals and loss of human health. For instance, chicken were found dead because of the pollution, further majority of younger generation had stopped developing over time. Consumption of water with traces of oil lead to deaths. Later “Amazon watch” a social activists group supported the case raised by people.

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  • When oil is extracted from ground, pits are constructed  around it to store the liquid oil waste produced. These pits are temporarily filled and then emptied, they are kept away from water sources to prevent contamination. The pits dug by Texaco as operator, till date are filled with the waste, also an anomaly in the construction is the design of pits which have been provided with pipes to let the waste seep out of it when filled completely, into streams directly connecting to water sources used by people.

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  • The hydrocarbons are dangerous to human health, the presence of carcinogens in the water degraded the health of people, further elevated the cancer rates in the region.
  • When evidence were searched in site inspections, the lawyers exclaimed that “Chevron claims that no waste can be found on the ground, and it is true, since it resides beneath it and can be found in the whole region”. According to Chevron, Texaco cleaned 162 pits but inspection of the site discovered 968 pits which was huge.
  • The Plaintiff Lawyers believed that the request of Texaco to pursue the case in Ecuador instead of USA was a deviation, since they intended to delay the case and eventually expected them to run out of money.

The case by Chevron

At first Chevron claimed that the water sources were not contaminated because of them. Texaco had done thorough examination of water, out of which 99% was safe as per WHO standards.

  • Chevron’s Chief Environmental Scientist stated that they disposed their resources in finding the truth and found no increase in cancer deceases. They also blamed poor sanitation for contamination.
  • In the videos shown at the Chevron shareholder meetings, the company blamed PetroEcuador for massive oil spills in the region. They said since they were 40% partners, hence they are liable for 40% of the mess. Thus, the company’s strategy was to pinpoint blame on the Government run company “PetroEcuador”.
  • The company deliberately emphasized on “decisions managed by Consortium” which it was when with PetroEcuador, even though it was the operator and was blamed for faulty pit construction, disrupted waste management system.
  • The company further blamed the judicial system of Ecuador. They were the one’s who in 2002 won the case to shift the case to Ecuador and later blasted on the politically influenced judiciary. They believed that the judge will be partial to the people after being sued for $27 billion in Ecuadorian court. Also the billion dollar lawsuit was erroneous and invented according to them.

The result till date

The Ecuadorian Court on 2011 fined Chevron with $8 billion as found guilty. This makes it the largest environmental lawsuit payable ever. Also, they were asked to provide a public apology, otherwise an additional fine of same amount would be imposed.

To this Chevron replied back with another appeal against the ruling, and the plaintiff lawyers. They have already sued Plaintiff lawyers such as lead attorney Steven Donziger and others involved for manipulation, unethical and improper if not illegal and faulty practices in estimating global assessment report.

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According to them, even if the practices pursued are legal in Ecuadorian Court, the US court would discard the lawsuit on the basis of foul play.

Opinion by a Neutral

  • The pits were responsibility of Texaco, now Chevron and they were being sued, but why is PetroEcuador not being sued, it has also operated and was solely responsible for the damage after 1992. The Plaintiff lawyers said they would do so once they win against Chevron. Is it true what The Wall Street Journal said “an Amazonian Swindle” and the fact that “Chevron is where the money is”. The Chevron spokesman described the lawyers as con man for looting the rich companies.
  • When a master list of the pits dug were inquired from Chevron, they had none. This does not hold to their claim of cleaning up 162 pits, and further cannot challenge the claim of Ecuadorians of having 900+ pits.
  • The company is blaming the Ecuadorian court for corruption, then why did it choose to change the court room in the first place. Why did they not confine themselves to the US court instead of fighting a case for Ecuador for 9 years?

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Chevron is to be blamed for their irresponsible behavior in waste disposal and construction as an operator in the Consortium. However, Chevron is right to blame PetroEcuador for part of fines, however it cannot completely hold PetroEcuador liable for the claims. Not much can be said about the Plaintiff lawyers, but the people of Ecuador are definitely on the losing side and hence, need to be protected.