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Excerpts from
A Crisis of Autonomy: The 2008 U.S. Financial Meltdown
and the Collapse of Organizational Independence
An analysis of Inside Job (2010) based on the Causal Theory of
Organizational Deviance








Kristine Lu
Professor Diane Vaughan
SOC W3490: Mistake, Misconduct, Disaster
20 December 2011
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The 2010 documentary film Inside Job offers a scathing and methodical analysis of the
highly volatile, interdependent 2008 global economic crisis as caused by unexposed
interdependencies between the United States financial industry and the governmental entities
regulating it. Writer and director Charles H. Ferguson meticulously recapitulates the routine
nonconformity organizational deviance that becomes routine embedded within the corporate
culture of financial America. In each instance, Ferguson directs scrutiny towards governmental
agents who not only allowed but in many cases also promoted corporate deviance through
positions of regulatory power, signaling to the tight coupling of the government with the financial
sector and caricaturing the extent to which conflict of interests propelled both the financial
catastrophe and, more drastically, the nations inability to recover from it. In my examination of
the 2008 financial crisis based on Fergusons film, I will use the Causal Theory of Organizational
Deviance
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to investigate the United States financial industry, whose highly normalized deviant
culture, especially amongst top-rank executives, exacerbated by an appalling collapse of regulation
resulting from unmediated interdependence, escalated into a nation-wide and subsequently
worldwide economic recession, the effects of which are still intensely felt to this day.

Competitive Environment: The Monopolys Showroom
I. Competition: A Ten-Year Collapse
By the year 2001, seven years before the 2008 Wall Street crash of major industry players
such as investment banks Lehman Brothers and Bear Stearns, domestic and national competition
for the U.S. financial sector had essentially fizzled to little or nothing. This left the competitive
environment of financial America mostly a monopoly held by a very concentrated group of high-
finance organizations: 5 Investment Banks (Goldman Sachs, Morgan Stanley, Lehman Brothers,
Merill Lynch, and Bear Stearns), 2 Financial Conglomerates (Citigroup and JP Morgan), 3
Insurance Companies (AIG, MBIA, AMBAC), and 3 Ratings Agencies (Moodys, Standard &
Poors, and Fitch). As with many environmental factors, the competitive environment was a result
of change over time. The history of the United States financial sector and its gradual
transformation into the concentrated competitive monopoly of the 21
st
century reveal the first and
perhaps most important cause of regulatory failure. Fergusons films astutely discusses the
comprehensive history of the United States Banking System, highlighting the 40 years after the
Great Depression during which most banks, and, especially investment banks, were privately
owned. At this point, these banks were still small entities involving careful players who were not
willing to assume much risk in their investments. In the 1980s, however, investment banks for the
first time became public, leading to an increase in public income and a steady 30-year period of
financial deregulation. By 1982, deregulation had reached its zenith: Risky investments could be
made with loaners money, costing thousands of investor dollars and arrests of bankers and bank
officials. Nonetheless, de-regulation of the financial sector continued under the Clinton and Bush
administrations by the counsel of key government economists such as Alan Greenspan, Robert
Rubin, and Larry Summers. As later will be discussed, all of these government economists owed
sizable portions of their personal wealth to their stints serving on the directorial boards of some of
the aforementioned key financial companies, such as Goldman Sachs and Citigroup. They were
thus likely serving their personal interests by encouraging de-regulation of the American market.
Throughout the 1990s, the financial game became one governed by large-scale mergers.
This was at first illegal; the 1998 merger of what became known as Citigroup had violated the

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Please see final attached outline of the Causal Model used and developed by Diane Vaughan for
analyzing organizational deviance.
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Glass-Steagal Act, but Congress, likely driven by Greenspan, Rubin, and Summers, overturned this
statute with the Gramm-Leach-Biley Act, thereby clearing the way for large-scale mergers to be
completed. It was the catalyst towards construction of the monopoly that became the United States
Banking System. The smaller, privately compartmentalized version of the financial market was de-
regulated into a few select banking conglomerates, leaving competition null and interdependence
yet more necessary: In order to maintain their monopoly, these financial colossuses had to help
each other.
Outside of the United States, the competitive environment for financial services was not
vastly different. The United States prominence in the global economic environment the reason
for which a drop in the American economy has precipitated into a financial crisis so widespread
is due to the structure of financial systems as a whole and the accelerating rate of globalization. In
his work on complex organizations, Charles Perrow (1999) predominantly focused on individual
entities and their internal structure and processes. However, his theory of tight coupling, in which
inter-reliance of multiple independent actors becomes increasingly problematic, also pertinently
applies to an organizations effect on an external environment. The global financial system is
highly complex; any major player is immediately linked to every other player in the system,
mostly due to the nature of the transactions but also, in the case of the 2008 financial meltdown, a
result of the sheer magnitude of the American companies involved. With banks such as Lehman
Brothers and Citigroup having such sizable presences in foreign economies (i.e., in the United
Kingdom or China), the collapse of a single major American bank had a multi-national impact.
The global financial industry adheres to many of Perrows characteristics defining complex
systems, including personnel specialization, unfamiliar or unintended feedback loops, control
parameters, indirect or inferential information sources, and interconnected subsystems (pg. 96).
The fundamental complexity of the United States financial sector as evidenced by Charles
Perrows seminal definition and underscored by the tight interconnectedness of the United States
with other markets in the global financial system further foreshadows the perils of the U.S.
banking failure. As Pfeffer and Salancik (2003) explain, the effectiveness of an organization is its
ability to create acceptable outcomes and actions, and the license for doing so is founded upon the
implication of an organizations ability to manipulate, influence, and create acceptability for itself
and its activities (11). If self-image is the key to controlling the game, then the United States
certainly triumphs, dominating financial competition not only domestically but also through the
creation of mammoth multinational presences. For example, when American financial giant
Lehman Brothers folded in September 2008, its collapse led also to a drastic dip in the United
Kingdoms economy, due particularly to the major hiring presence Lehman Brothers had in the
UK. Furthermore, the long-term effects of the Wall Street crash on the Chinese economy in
discouraging the consumer spending globally that had once bolstered the Chinese manufacturing
job sector, indicates the incredible influence of the American financial industry on other nations
economies and provides outstanding evidence of Perrows tight coupling theory at an international
scale. Thus, while the immediate market crash only affected a few entities within the banking
system, the complex associations formed within the domestic and international financial
community thus explains the massive snowball effect that resulted, further illuminating the steady
annulment of competition to impede repercussions.
I. Scarce Resources: Deficiency in Nonexistence
The scantest resource in any economic crisis is, unsurprisingly, money itself. In the United
States financial sector, the scarcity of money as an investment tool translated not into the expected
fiercer competition but instead into an increase in normalized deviance, mainly in the form of
steepened risk. Deficiency of physical capital in the financial system made money the primary
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gambling device for the organizations involved in the 2008 meltdown. Instead of creating security
on loans that held lenders accountable, the Securitization Food Chain, as it was termed in
Fergusons film, led to a restructuring of the investment game based not on physical capital but
instead on derivative contracts, an industry tool which effectively promised money where it could
not be gotten.
II. Norms: A Marsh of Deviation
Pfeffer and Salancik (2003) further purport that the social context of an organization is,
itself, the outcome of social actors[.] One function of management, then, is to guide and control
this process of manipulating the environment (pg. 18). The normative environment for the
American financial industry mainly consisted of a socially encouraged deviant culture established
and typified by high banking executives who effectively defined workplace culture. At its core, the
2008 financial meltdown could easily be attributed to the deviant culture reinforced by industry
executives, who normalized both active engagement of risk and the industry standard for
exorbitant incomes. In Fergusons film, the executives are described as having Type-A
personalities [] risk-takers [and] impulsive, frequenting strip bars, abusing cocaine, and
charging prostitutes to corporate accounts. Wall Street culture also involved an extortionate
impulse to own as much as physically possible: penthouses, vacation homes, jets, yachts, etc.
These were the defining factors of being a successful investment banker and outlined the aspired
ideal for all members within the deviant culture.
Much as was discussed by Diane Vaughan (1996) in The Challenger Launch Decision and
explicated by Caitlin Zaloom (2003) in Out of the Pits, a defined culture of risk involves the
habituation of risk engagement into routine. Zaloom explains that risk is a constitutive element of
contemporary power and economic practice[;] the complex practices of economic risk-taking are
exemplary acts of contemporary capitalism that configure markets and shape speculators (pg. 93).
A culture of risky speculation and even riskier behavior (for example, investments on loans that
cannot be paid) is not only standard but in fact encouraged within the financial industry, where
risk reaps reward in money, status, the elaboration of the social space of markets, and the
construction of a masculine self (pg. 93). The champions of risky behavior reap benefits as they
mount the organizational hierarchy, further cementing the social rules and encouraging the
socialization of all industry members into risk-taking culture. This behavior by top-rank
management promotes similar ambitions in subordinate members through bureaucratic
socialization, a process which shapes peoples consciousness[,] regulariz[ing their] experiences
[and] routiniz[ing] their lives by [bringing] them into daily proximity with and subordination to
authority [and] creating [] upward-looking stances [that seek] specific goals (Jackall, 1998, pg.
6).
The lavish culture of risk-taking financial executives is carefully depicted in Fergusons
film, which also reveals the astounding deviance embedded in this culture. As Zaloom further
explains on pg. 124, the culture of the financial industry largely involves sex and a hyper-
masculine dependency on pornography and prostitution, staples both of the culture and in the
appropriation of corporate funds. As an industry built largely on interpersonal relationships, the
financial industry not only encouraged deviance (excess of income built from fraudulent bonuses
and severance checks) but furthermore encouraged the practice of deviance as a social or even
business norm, requiring its employees to buy into this corrupt, hyper-masculine culture in order to
please clients and profligate the lavish lifestyle of the financial industry.

The Regulatory Environment: Embedded and Impotent
I. Autonomy: Unheeded Warning Signs
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The running theme across almost all causal analyses is that retrospective examinations of
disasters invariably reveal obvious early warning signals that were missed or unforeseen.
Perhaps the greatest tragedy of the 2008 crash of the United States financial sector, however, was
that, at least according to Fergusons film, the warning signs were all blatantly present in many
cases so much so that they were essentially spoon fed to regulatory government officials and near-
impossible to miss. Yet even despite urgency from various sources, they were resisted.
By early 2004, the FBI had already published statements warning of mortgage fraud,
reporting inflated appraisals, fraudulent loan documentation, and other corrupt activities. The next
year, Raghuram Rajan, then chief economist of the International Monetary Fund, published and
presented a paper to major international economists, including those in the American government,
warning of dangerous incentives that could lead to an escalated crisis. Admonitions over the next
years came from various other sources, including NYU Stern Business School professor Nouriel
Roubini, and Alan Sloan from his articles in Fortune and The Washington Post. Hedge fund
manager Bill Ackman, who circulated a presentation detailing the unraveling of the financial
bubble, even directly counseled executives in the financial sector itself. Repeated warnings
continued to be issued from the International Monetary Fund. These advisories continued even up
to the year of the collapse, becoming seemingly more and more explicit: Charles Morris, in March
2008, published his book on the impending crisis called The Two Trillion Dollar Meltdown.
Against all odds, there were still, in fact, autonomous agents who actively hounded
government officials, trying repeatedly to underscore warnings but to no avail. Robert Gnaizda,
head of the consumer advocacy group the Greenlining Institute, met three times with members of
the Federal Reserve, each time offering advice and loan documentation, and yet nothing was done.
Early on, even an auditor of AIG, Joseph St. Dennis, attempted vocally to raise concern, but
became so frustrated likely influenced also by the extremely volatile cultures of the organizations
with which he interacted that he eventually resigned.
All autonomous forms of regulation thus only became silenced signals, regardless of how
pressing or pronounced they were. The United States financial industry had become too powerful
and threatening a colossal superpower that autonomous attempts to monitor it repeatedly failed.
II. Interdependence: The Primary and Unrelenting Cause
The 2008 collapse of the United States financial industry was fundamentally attributed to
the breakdown of government regulation. Fergusons film meticulously notes all of the instances in
which members of government regulatory boards serving on organizations such as the Federal
Reserve, the Security Exchange Commission, and the Treasury Department were multi-billionaires
as a direct result of their previous (or concurrent) work with Wall Street corporations the very
corporations at the heart of the 2008 financial crisis. High-profile government officials and chief
economists, including, most prominently, former U.S. Secretaries of the Treasury Henry Paulson,
Larry Summers, Robert Rubin, and Timothy Geitner, as well as former Chairman of the Federal
Reserve Ben Bernanke, had served on the directorial boards of these companies. Unsurprisingly,
they supported de-regulation of Wall Street transactions and punished any individuals who
attempted to impede this (for example, Brooksley Born, once head of the Commodity Futures
Trading Commission, who warned against the dangers of the derivatives market). Furthermore, in
the aftermath of the meltdown, they proposed rehabilitation methods requiring yet greater degrees
of interdependence: Instead of encouraging more government regulation, these mediating
government officials encouraged government bailouts of failed corporations.
Within one month of the start of the Wall Street crash, Secretary of the Treasury Henry
Paulson, previously Chairman and Chief Executive Officer at Goldman Sachs, convinced the
government to institute a $700 billion bailout bill. Aside from the disastrous consequences of a bill
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that did little to nothing to mitigate the global recession, rising foreclosures, and astonishing
unemployment rate, Paulsons efficacy in convincing the government that a sponsored bailout was
the right thing to do, even without promises of accountability, epitomized Fergusons thesis: Even
today, the American government is a Wall Street Government. Regulation is ultimately useless
when the government directly depends upon the corrupted organizations that comprise the worlds
largest and most powerful consolidated economic entity. Wall Streets influence in the United
States government only further submerged the country into the dark depths of a growing economic
leviathan, leaving no room for the slap-on-the-wrist retributions that corporations very desperately
needed.

Conclusion: A Consuming Catastrophe
Fergusons film not only shows the normalization of risk and a culture of corruption as the
standard in the United States financial industry, but also exposes how easily this continued pattern
of deregulation may very well turn unmonitored deviance into a national standard. When a
regulatory body cannot be separated from its regulated organization, the organizational structure
collapses or rather, does the unit of analysis. In Inside Job, the United States financial industry is
depicted to resemble a growing organizational animal, one that continues to consume both its
regulatory and competitive environments. At this rate, Ferguson seems to suggest that the Causal
Theory may soon be insufficient to examine the persisting problems of the United States financial
industry: Without regulation, the financial sector may realistically one day become so
ungovernable that it can devour all other external influences and institute a highly volatile and
highly pervasive dictate of deviant culture.
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References
Jackall, Robert, 1988. Introduction. Moral Mazes: The World of Corporate Managers. Oxford
University Press.
Lindblom, "The Science of Muddling Through," 79-88. Public Administration Review, 19, 1
(Spring 1959).
Lundman, Richard J. and M. David Ermann (eds.) 2004. Corporate and Governmental Deviance,
3-53. Oxford University Press.
Marrs, A. (Producer), & Ferguson, C. H. (Screenwriter/Director/Producer). (2010). Inside Job
[Motion Picture]. United States: Sony Pictures Classics.
Perrow, Charles. 1999 (1984). Normal Accidents: Living with High-Risk Technologies. Princeton
University Press. Ch. 3, "Complexity, Coupling, and Catastrophe, 62-100.
Pfeffer, Jeffrey and Gerald Salancik, 2003. Ch.1. "An External Perspective on Organizations". On
the External Control of Organizations: A Resource Dependence Perspective, 1-21.
Vaughan, Diane, 1996, The Challenger Launch Decision: Risky Technology, Culture, and
Deviance at NASA. University of Chicago Press.
Zaloom, Caitlin, 2006. Out of the Pits: Traders and Technology from Chicago to London, 93-125.
University of Chicago Press.
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Theory of Organizational Deviance (or, how things go wrong in organizations) : An overview
and guide, in skeletal form
These are the major elements/concepts of the causal theory. Within each are sub- concepts that
explain how that particular component works. The theory explains (rather than describes) how
unanticipated consequences are systematically produced in and by organizations.
Also see: Pfeffer, Jeffrey, and Gerald R. Salancik. The External Control of Organizations: A
Resource Dependence Perspective. New York: Harper & Row, 1978.

The Competitive Environment
Competition
Scarce Resources
Norms

Organization Characteristics
Structure
Processes
Transactions/Technology

The Regulatory Environment
Autonomy
Interdependence

The theory is an explanation because the three major component parts are interrelated. In
combination they produce organizational deviance as follows:
The competitive environment (competition, scarce resources, and norms) provide a
structural motivation (or structural push, or structural pressures) on organizations for deviance.
B) Organizations (their structure, processes, and transactions) provide opportunities to act on those
pressures to achieve organization goals. Finally, C) the structure of the regulatory environment,
defined as the relationship between regulatory organizations and the organizations they regulate
(autonomy and interdependence) systematically undermines regulatory efforts, thereby affecting
decisions and actions by organization members.