- 1.1 Part I: How We Got Here
- 1.2 Part II: The Bubble (2001-2007)
- 1.3 Part III: The Crisis
- 1.4 Part IV: Accountability
- 1.5 Part V: Where We Are Now
Compared to what I've already heard and read about the financial crisis, this film captures a lot of what happened in a fairly straightforward way. What was particularly telling for me were the confrontations with various players and the commentary of people who were close observers.
I was reminded in the Congressional grillings of bankers how contrived much of Congressional hearings are. The Congress members ask questions that have the answers embedded in them - "Did you feel anything when you sold securities that you and your colleagues described as shit?"
As an emeritus professor myself, I was also struck by the damning evidence of academics who write reports funded (lavishly in these cases) by the institutions they were studying and the implications of how academic disciplines (specifically economics in the film) are corrupted by their close ties to business interests.
Columbia Business School Professor Mishkin was asked about his study that found Iceland's banks to be in great financial shape before their collapse brought down the Icelandic economy. Filmmaker Ferguson reads from Mishkin's report
"Iceland is an advanced country with excellent institutions, low corruption, rule of law, the economy has already adjusted to financial liberalization, which was already completed a long time ago, while prudential regulation and supervision is quite strong."To his credit, Mishkin acknowledges, "That was a mistake. It turns out the prudential regulation and supervision was not strong in Iceland." Since Iceland went into economic collapse because the banks failed, I'm not sure what else he could say. But Ferguson follows up.
Ferguson: So what led you to think that it was?The screen goes black and then shows that Mishkin got paid $124,000 for his work on the report.
Mishkin: I think. . . you go with the information you have . . Generally the view was that Iceland had very good institutions, it was a very advanced company . . .
Ferguson: Who told you that? What kind of research did you do?
Mishkin: You talk to people, you have faith in the Central Bank, which actually did fall down on the job, ah
Ferguson: Why do you have faith in the Central Bank?
Mishkin: Well [not?] faith, you, uh, because, you, uh, go with the information you have -
Ferguson: How much were you paid to write it? [This is a good question but I think he should have let him finish the previous answer first just to see where it would go.]
Mishkin: I was paid, uh, I think the number's public, it was public information .
I did research on Chinese Civil Service Reform in the early 90s. I met other American academics in Beijing who attended similar Chinese presentations I heard and I read their articles that pretty much followed the wording of the handouts the agencies distributed. That's not my idea of research. I went back home and studied Mandarin for a year, returned to Beijing, got a tutor for two weeks more intensive Chinese (barely enough to go through the initial introductions in Chinese and to be able to understand some of the words I was hearing) and did intensive interviews with the nine agencies that were doing experiments with Chinese civil service reform and discovered that the rosy picture being presented by the officials the year before was not exactly what was happening. I paid my own way back to Beijing and for my student-interpreter and all my other expenses. I got no fee, though my Hong Kong students and I did get feasted well on that first study trip. It was in later research that I learned that hosting such meals was considered by some as a form of corruption. And while the final article missed many things, it didn't rely on 'faith' in the official party line nor did I "go with the information you have." That's why they call it research, you go beyond what everyone believes and you seek a basis for what people tell you.
So I'm not terribly tolerant of lazy academics who pick up hefty fees (his $124,000 fee - on top of his full time salary at Columbia at the time I presume - was well above my full time salary when I retired from UAA) - to lend academic approval to their clients' projects.
Then Ferguson asks about the title of the report.
Ferguson: In your CV the title of the report has been changed from "Financial Stability in Iceland" to "Financial Instability in Iceland."Hmmmm. Let's change the title, after the fact, and in contradiction to the contents, to reflect what actually happened and not what I wrote. Sorry, that's simply fraud in my opinion. Typo? If it were a typo he should have been surprised by the question and asked to see it. Rarely are my typos that convenient.
Mishkin: Well I don't know. If, which, whatever it is, is, the uh, if it's a typo, there's a typo. [I transcribed this as best I could, you can hear it on the video below.]
There's a cut to the Dean of the College, R. Glenn Hubbard.
Hubbard: I think what should be publicly available is whenever anybody does research on topic they disclose if they have any financial conflict with that research.The film cuts back to Ferguson saying to Mishkin:
Ferguson: But if I recall, there is no policy to that effect.
Hubbard: [Looking very sincere] I can't imagine anybody not doing that in terms of putting in a paper. It would be significant professional sanctions for failure to do that.
Ferguson: I didn't see anyplace in the study where you said you'd been paid by the Icelandic Chamber of Commerce to produce it . . .
Mishkin: [shaking his head] No, I don't.
My sense is that Professor Mishkin agreed to the interview in good faith. He believes that what he is doing is normal and ethical and, apparently, important. And that he's important. Overall, even though he has some trouble answering some of the questions, he doesn't seem to be personally offended in any way. He doesn't seem to think that anyone would have any problem with the things he'd done.
You can see these exchanges in this 2 minute video clip I got from YouTube:
In contrast, his Dean at Columbia's School of Business, and former Chair of President George W. Bush's Council of Economic Advisers, R. Glenn Hubbard, does get upset. He too seems, at first, used to being given respect and apparently accepted this interview because he's an expert who is being consulted about the financial crisis. But (in the 2nd clip below, which begins with the assertion that the field of economics itself has been corrupted by its close ties with the financial industry) when the questions get closer to home Hubbard gets testy.
Deans have to be more accessible than business executives and high level government officials to the young and sometimes cheeky and it's almost as though he were indulging one of his grad students by accepting this interview.
Ferguson: I'm looking at your resume now. It looks to me as if the majority of your outside activities are uh consulting and directorship arrangements with the financial services industry. Is that, would you not agree with that characterization?*Actually, Hubbard's online CV does include consulting clients and directorships. [Were they always on there or are they on there because of the new Columbia policy (see below)?]
Hubbard: To my knowledge, I don't think my consulting clients are even on my CV.*
Ferguson: Ah. Who are your consulting clients?
Hubbard: I don't believe I have to discuss that with you. . .
Ferguson: OK [I bet he's kicking himself for not following up with "I'm sorry, can you explain why you would have a problem discussing your consulting clients?"]
Hubbard: You've got a few more minutes and the interview's over.
Ferguson: Do they include other financial services firms?
Hubbard: [Shrugging his shoulders] Possible.
Ferguson: You don't remember?
Hubbard: This isn't a deposition, sir. [Clearly irritated now] I was polite enough to give you time, foolishly, I now see. You have three more minutes. Give it your best shot.
DIRECTORSHIPSThe video cuts to a 2004 report co-authored by Hubbard (and Goldman, Sachs' chief economist) titled, "How Capital Markets Enhance Economic Performance and Facilitate Job Creation" and highlights sections that seemingly prematurely praise factors of the financial market such as:
CONSULTING OR ADVISORY RELATIONSHIPS
2007-present Met Life 2006-2008 Capmark Financial Corporation; Information Services Group 2004-present ADP, Inc.; KKR Financial Corporation; BlackRock Closed-End Funds 2004-2008 Duke Realty Corporation 2004-2006 Dex Media/R.H. Donnelley 2003-2005 ITU Ventures 2000-2001 Angel Society, LLC; Information Technology University, LLC
2005-2009 Arcapita 2005-present Nomura Holdings America 2003-present Analysis Group (also 1995-2003) 2008 Laurus Funds 2005-2008 Chart Venture Partners 2003-2009 Ripplewood Holdings
- ". . . and the derivatives market - has improved the allocation of capital and of risks throughout."
- ". . . the enhanced stability of the US banking system"
- "The capital markets have acted to reduce volatility in the economy. Recessions are less frequent and milder when they occur.
- "Credit derivative obligations have become an important element that has helped protect bank lending portfolios against loss."
The movie then cuts to John Campbell, Dean of the Department of Economics, Harvard who is asked whether he would be bothered if medical researchers didn't disclose that their income came mainly from pharmaceutical companies.
Campbell: It's certainly important to disclose the um, the um [looks down, long pause] well, I think that's also a little different from cases we're talking about around here because um [pause - screen goes black] um . . .Then on the black screen it says,
"The Presidents of Harvard University and Columbia University refused to comment on academic conflicts of interest."[Note, the clip here cuts to a black screen, but with references to the film itself. You can see a different clip with just John Campbell here with the references to the Harvard and Columbia presidents]
I don't know what got edited out and whether the exchanges were fairly - even if dramatically - close to what we actually see. From the Columbia Spectator:
Hubbard added that he told Ferguson in their on-camera interview about his public disclosures, although this portion of the interview did not appear in the film.
“I did say it to him, but he has editorial authority and I don’t,” Hubbard said.
Below is the clip with Hubbard and Campbell.
I couldn't help but wonder how this interview affected the faculty and students at Columbia's School of Business. It was just so damning about the Dean and Mishkin. I've found two Columbia Spectator articles about the reaction on campus. A long April 13, 2011 article says the movie was shown on campus and filmmaker Ferguson was there for discussion. One professor said every student should see the film and there were calls for an examination of the conflict of interest policy. It also explains Hubbard's reluctance to talk about his directorships.
"Hubbard did not want to talk about the fact that he is paid $250,000 per year to serve on the board of Metropolitan Life, one of the largest global insurance providers, and that he sat on the board of Capmark, a major commercial mortgage lender, until shortly before its bankruptcy in 2009."[It's not clear to me whether this came out in the film or not. I don't remember it from Friday night and it's not in the clips I looked at on YouTube.]
The May 14 Columbia Spectator article (updated May 19) says a faculty committee have rewritten the ethics codes and requirements.
Under the new policy, Business School professors will be required to publicly disclose all outside activities—including consulting—that create or appear to create conflicts of interest.
“If there is even a potential for a conflict of interest, it should be disclosed,” Business School professor Michael Johannes said in an email. “To me, that is what the policy prescribes. That part is easy.”
The policy passed with “overwhelming” faculty support at a Tuesday faculty meeting, according to Business School Vice Dean Christopher Mayer, who chaired the committee that crafted the policy.
The new policy mandates that faculty members publish up-to-date curricula vitae, including a section on outside activities, on their Columbia webpages. In this section, they will be required to list outside organizations to which they have provided paid or unpaid services during the past five years, and which they think creates the appearance of a conflict of interest.Although the article says,
This section must include, but is not limited to, consulting work, research, membership on a company’s board, and expert witness testimony.
“We’re talking about five years of work,” Mayer said. “And it’s not like activities of $10,000 or more…I give a talk for $1,500 to some group four years ago, and I’m listing that on my vitae.”
The film ignited a debate about conflict of interest policies at Columbia, prompting the administration to reexamine the issue and influencing a scheduled University Senate policy review.Dean Hubbard maintained a different view.
Hubbard, though, said that the terms of the new policy do not reflect the allegations made in the film, noting that the Business School was involved in discussing a new conflict of interest policy that the University Senate passed in 2009.
“I don’t think they’re related at all,” Hubbard said, referring to the movie and the new policy. “In our case, our faculty started in 2009, and in my own case, the question about my board service was clearly on my CV, and the amount was on the FEC website.”Ego is such a strange thing. In the movie Hubbard said he didn't think his consulting was on his CV. And what exactly does "involved in discussing a new . . . policy" mean? Clearly Hubbard does not want to acknowledge the film caused the change. And even if they were working on a new policy already, to say the film had no affect at all, looks ridiculous in the context of the article. But it's possible he is correct, because the Columbia Business School's new Conflict of Interest policy (dated July 1, 2011) has a section dated July 1, 2009.
This leaves the question about whether there ever were any sanctions for Professor Mishkin. (The report was done well before the 2009 policy, though in the film the Dean said anyone doing what he did would be severely sanctioned.) I'd note that the new policy also says faculty may not do outside consulting that takes more than one day per week. We don't know how long Mishkin spent on his Icelandic report, but how do you do a $100,000 job one day a week?
Conflict of InterestUniversity Policy on Financial Conflicts of Interest and Research (published July 1, 2009) “… requires individuals to disclose outside financial interests that relate to any of their research, including unfunded research, to peers and members of the public. These disclosures must be made in publications, reports, talks, or other presentations of research.” Columbia University faculty members are expected to follow this disclosure not only in academic publications but in consulting reports, presentations, and other work product that will be publicly available.
A comment at Poets and Quants on this, suggests the new regs don't go nearly far enough:
I would say that in my academic career I ran across a variety of faculty. Most were sincere and decent, though I suspect that Professor Mishkin appeared in class as a decent person too. Many faculty I knew were aware of the ethical standards and scrupulous about keeping their research free of any appearance of conflicts of interest. A small number saw the research as a means to an end (promotion, travel to conferences, prestige, pay), not an end in itself.
For interested Alaskans, here's what University of Alaska employees (everyone, not just faculty) must report annually (from a University of Alaska HR webpage):
"Employees also must disclose any work they perform outside of their University employment. Examples of outside activities that must be disclosed are self-employment, independent contracting, or consulting. In addition, any volunteer or uncompensated work performed outside of the University must be disclosed if there is any possibility that the work might involve the same issues or people as your University duties. All employee and employee family member interests in contracts with the University must be disclosed and pre-approved using the Interest In Contracts form, not the Outside Employment form. In case of doubt, be on the safe side and disclose. If you have no outside activities, you are not required to submit a form. . .
Outside employment must be disclosed prior to beginning the employment, when changes occur, and every July 1, even if a form was previously submitted (or within 30 days of beginning or resuming University employment). The attached form titled, “Disclosure of Employment or Services Outside of the University of Alaska” must be completed in full, signed by the employee, and reviewed by the employee’s supervisor. The supervisor makes an initial determination about possible adverse affect on employment, and forwards the form to the designated MAU ethics representative for review.
Other ethics disclosure forms (interest in grants/contracts/leases/loans, notification of receipt of gift in excess of $150, notification of receipt of gift from another government, notification of potential violation, disclosure of employment of immediate family members) may be obtained from the Office of the General Counsel. Additional information regarding the Ethics Act is also available at http://www.alaska.edu/hr/forms/hr_ethicsforms/ or http://www.law.state.ak.us/doclibrary/ethics.html Please note that the disclosure form on the reverse side of this memo was revised June 2010; any blank forms with an earlier date should be destroyed.
Money is America's most certain motivator. Whoever is paying is going to have influence on what is done. And knowing you might get another contract or speaking engagement causes many, even if they aren't conscious of it, to censor what they write so as not to offend the source of the money.You may be required to submit other disclosures if you engage in sponsored research. Please contact your MAU research compliance officer for further information. Thank you for your cooperation. Feel free to contact me if you have questions."