PAPER ASSIGNMENT

BUSINESS RISK MANAGEMENT

ANALYSIS OF INSIDE JOB MOVIE

Farah Amira Shofia

1406640726

INTERNATIONAL UNDERGRADUATE PROGRAM

FACULTY OF ECONOMICS, UNIVERSITAS INDONESIA
DEPOK, 2016

Statement of Authorship

I the undersigned certify that the paper/assignment attached is purely

our original work. No work of others that we use without citing its sources.
Except where reference is made in the text, this document contains no
material presented elsewhere or extracted in whole or in part from a
document presented by us for another qualification at this or any other
institution.
We understand that the paper which we collect may be reproduced or
communicated for the purpose of detecting plagiarism.
Name
Farah Amira Shofia
Course
Title of the paper

NPM
1406640726

Signature

: Business Risk Management

: Analysis of Inside Job Movie

Due Date

: 1 March 2016

Lecturers

: Lisa Fitriyanti Akbar M.M.

Contents

Chapter 1: Introduction
Summary
Chapter 2: The problem
Chapter 3: Analysis
Chapter 4: Suggestions
Suggestions
Resources
http://ethify.org/content/inside-job-documentary-2010
http://www.theguardian.com/film/2011/feb/17/inside-job-financialcrisis-bankers-verdicts

Introduction

1.1

Summary Inside Job (2010)

The Inside Job tells the story off the financial crisis in 2008 .Its a
documentary which won many prices at film festivals. The
documentary shows the corruption from banking systems mostly in
the US. It shows as well the effects what this corrupt system has on
society.
The documentary is set up in five different chapters. It all starts in
Iceland, where banks got privatized. The change in politic systems
was partly responsible for the collapse of the banks.
Chapter 1: How we got here
In this part, Inside Job shows that there was a change at hand in the
economic system. The growth of new technology made sure that
there was a new sector which wasnt categorized or organized as
good as the other sectors. Because (new) small companies and
investment banks kept investing in stuff that we didnt know if they
would actually have a good chance of survival, the risk was very
high. Some of these investment banks where really large companies
like Goldman Sachs, Merrill Lynch and the Lehman Brothers.
Insurance companies like AIG and rating agencies like Moodys
played a big part in this system.
The economic system changed, where mortgages fused with other
loans. Together they are called CDOs. Because of the small
connection between the rating companies, the investment banks
and the insurance companies, there were given out ratings to loans
which werent true. This means that some people could take a loan
(high risk) but were never able to pay the loan back.
Chapter 2: The Bubble
This chapter shows the risk of this system. If the investment banks
would sell more CDOs, they get more money. They told investors
that they were off a very good rating (AAA). When the CDOs can
not be paid back, they call it a bubble.
Chapter 3: The crisis
Described as in chapter 2. The bad side off this system happened,
and nobody did a thing about it. This meant that the economy came
in a great recession . Banks collapsed and where bought out by the
government. The weird part is that Banks like Lehman Brothers
collapsed, because 2 days before they collapsed, they had a triple A
rating. At this moment the corruption of the system is shown.
Chapter 4: Accountability
When the government helped the investment banks, nothing
changed. The banks got bigger so they get more a monopoly on the

economic system off the country. In the documentary, people are

asked about this strange behavior. It shows that the economics who
were against deregulation which was the problem in the first place,
where still against deregulation after the bubble.
This has a reason, the very top (1%) off the investment banks,
insurance companies and rating companies could leave the banks
with all their personal possessions This means that at the time that
the companies almost collapsed, the very top of the companies got
a lot of money. This is not only selfish, but corrupt as well.
They changed the whole political system to fit the economic system
they had in mind. Obama was the first one who actually noticed this
and said it out loud in his campaign that he would change it. But
because he choose the very same people as ministers of the
country, the system wouldnt be changed.
Chapter 5: Where we are now
The fifth chapter shows the part that at the moment, nothing has
really changed and that we have to wait for another bubble or
recession. The banks who are corrupted have gotten more power.
They tell us that we need them. There are still to few regulations on
rating agencys, investment banks and insurance companies so the
risk will still be high.
Europe tried to regulate the system, because they didnt want to
come in another recession. But America didnt want to do this.
The main reason why they dont do it is because the same people
who caused this mess are still in charge.
2.1 The Problem
1. Corruption and Fraud
At first, In United States, There was a tight regulation regarding the
financial industries. But, in 1982 there was a deregulation that
makes companies in the financial industries can make a high risk
investment easily. Deregulation pushed financial sector to freely
innovate and generated a product called Derivative.
Before deregulation, a bank only sold mortgages to customers who
were good risks and could pay them back over time.
With this derivative, obscure financial instruments were developed
and promoted whereby high-risk mortgages could be packaged
together and re-sold to large, speculative institutional investors.
With their own exposure thus diluted, banks started selling
mortgages with little regard for risk. It was like printing money: the
more mortgages they could generate, the greater the short-term
gains. Hence the housing bubble, built on mortgages sold to people
who likely could never pay them back.As this dense, elaborate
house of cards gradually built itself up, the rich got richer, and the

poor got set up. And when it all finally imploded in 2008, the
reverberations were felt globally.
2. Bribery
Bank managers: risk managers were paid by the banks to tell lies
about the way their companies operated. They said that all of these
regarding the derivatives are totally safe. But in fact, derivative
makes the market unstable. A risk manager said that to raise an
issue that undermined the bank's multi-billion-dollar profits would
have been to "sign his own death warrant". This inability to
challenge trading desks generating billions in phantom profits was
endemic.
Rating agency: This rating agency was paid by the banks for giving
rating AAA on derivative, which makes many people to think that
derivative is a financial instrument with a small risk and not
dangerous, while the fact it is not.
3. Injustice
It will doubtless make many people especially those who lost their
jobs and savings angry at not only what the banks did, but that
many of the people responsible are still in their jobs, and that no
one's gone to prison.It beggars belief that ordinary taxpayers are
facing higher taxes and spending cuts, while bankers walked away
scot-free. The film shows that people who had bought a house they
couldn't afford are now living in a tent, whereas bankers have still
got their jobs. Consumers enjoyed buying houses that ultimately
they couldn't afford, but mortgages were shoved down their throats
without any care on the part of the bankers. In the old days, the
bank would say: "We don't think you can afford that mortgage, so
we won't lend you money." The film showed how this kind of advice
was thrown out of the window. The biggest victims in financial
downturns are in fact our poorest citizens, not the people who
caused the whole mess to happen.
4. Conflict of interest
I thought the film also brought out well the "capture" of regulators,
politicians and academics who all became cheerleaders for the
continued deregulation of finance that began under Ronald Reagan
and that culminated in the great crisis. Massive re-regulation is
required to ensure that finance is safely locked up in a straitjacket
again.Of particular interest is the dubious role played by academic
economists, especially those in the US. Many were paid vast,
undeclared sums to produce biased reports saying CDOs and other
dodgy derivatives were safe and that Iceland was fine to be
gambling with 10 times its annual GDP. The corruption of top US
economists and their complete lack of awareness of what they had
6

done was truly shameful. His villainous lineup includes bankers,

politicians (many of whom were previously bankers), regulators, the
credit ratings agencies and academics. When Glenn Hubbard,
George Bush's chief economic adviser and dean of Columbia
Business School, is shown as a partisan advocate of deregulation,
we have one of the movie's punch-the-air moments. During the
interview, Hubbard, who denies he was corrupted by his paid-for
relationships with government, angrily barks: "You've got five
minutes, mister. Give it your best shot."
5. Accountability
Another angle missed by the film was the role of accounting firms.
There is a huge amount of blame to be attributed to them. It was
their responsibility to monitor the accounts of banks, and when they
signed off a bank's results, they were stating their confidence in the
bank's ability to trade solvently. The film ignored the failure of
accountants to say anything. It talked about regulators and ratings
agencies. But the accountancy firms are just as big as some of the
larger banks and not to analyse their role in the crisis was a huge
omission.
3.1 Analysis
There are certain risk events that can only result in negative
outcomes. These risks are hazard risks or pure risks, and these may
be thought of as operational or insurable risks. In general,
organizations will have a tolerance of hazard risks and these need to
be managed within the levels of tolerance of the organization. A
good example of a hazard risk faced by many organizations is that
of theft. So, basically fraud, corruption, and bribery are considered
as hazard risk.This is especially true for organizations handling cash
or managing a signifi cant number of fi nancial transactions.
Techniques relevant to the avoidance of theft and fraud include
adequate security procedures, segregation of fi nancial duties, and
authorization and delegation procedures, as well as the vetting of
staff prior to employment.
In general terms, long-term risks will impact several years, perhaps
up to five years, after the event occurs or the decision is taken.
Long-term risks therefore relate to strategic decisions. When a
decision is taken to launch a new product, the impact of that
decision (and the success of the product itself) may not be fully
apparent for some time. The decision of launching derivatives
products are
considered as long term risks.
4.1 Suggestions
An effective ways to reduce the fraud, corruption, and bribery
happens in the business is by focusing on three objectives:

Prevention: Control designed to reduce the risk of fraud, corruption,

and bribery from occurring in the first place
Detection: controls designed to discover fraud, corruption, and
bribery when it occurs.
Response: Control designed to take corrective action and remedy
the harm caused by fraud, corruption, and bribery.