Free Inside Job by Charles Ferguson

Standard & Poor’s, and Fitch);
Moody’s alone held about 40 percent of the total market. By 2000 five accounting firms dominated the market for corporate auditing. (After the collapse of Enron led to the prosecution and
dissolution of Arthur Andersen, five became four.) Five banks, led by JPMorgan Chase and Goldman Sachs, controlled 90 percent of all global derivatives trading. The consumer credit card market was
overwhelmingly dominated by Visa, MasterCard, and American Express. NationsBank/Bank of America, Citigroup, and JPMorgan Chase dominated interstate banking. Asset management was increasingly
dominated by large firms as well—Fidelity, Vanguard, Alliance Capital, BlackRock, Pimco, Putnam, and a handful of others. (These are enormous firms; in 2011, BlackRock managed $3.6 trillion;
Fidelity managed $1.5 trillion.)
    Not only was the financial sector highly concentrated, but it was increasingly collusive. The major firms did compete with one another, but they also cooperated extensively—in business,
for example, through securities syndication, but also in lobbying and politicalaction through industry associations, and through shared use of lobbying firms, law firms, and
academic experts.
    Incentives
    THE LAST MAJOR development in financial services during the 1990s was its progressive internal corruption. By the time the Bush administration took office,
incentives had turned pervasively toxic.
    Although the details varied by industry segment and individual profession, the direction was remarkably consistent. Prior to 1971 only private partnerships were allowed to join the New York
Stock Exchange, ensuring that investment banks and bankers had the long time horizons and caution associated with partnership money that could only be withdrawn upon retirement. But in 1971 the New
York Stock Exchange changed the rule, investment banks started going public, and bankers’ incentives started to shift towards annual bonuses and stock options. In principle, it would have
been possible to replicate the earlier incentives; for example, by having very long vesting and holding periods for stock. But this was never done, and by 2000 the majority of investment banking
compensation was in annual bonuses, mostly cash. Even the stock options rarely required more than five years’ vesting. Equally important, the former requirement that senior bankers place the
majority of their own money at risk was abandoned.
    Several major developments corrupted the structural incentives of firms relative to their customers. One major factor was the securitization food chain. Mortgage lenders no longer needed to care
about whether mortgages would be repaid, because they sold them almost instantly to investment banks, which in turn sold them to various structured investment vehicles or to suckers (i.e.,
customers). In order to generate loans with higher sales prices, the lenders started paying mortgage brokers “yield spread premiums”, which were effectively bribes for pushing borrowers
into the most expensive loans possible.
    The investment banks didn’t care about selling trash to theircustomers for several reasons. First, the former model of relationship banking was largely gone. Second,
fee structures carried no penalties for selling junk; the banks and bankers didn’t share in any subsequent customer losses. Third, bankers’ compensation was overwhelmingly dominated by
annual bonuses, which were driven by that year’s transaction revenues, so traders and salesmen didn’t care what happened later.
    The ratings process was corrupted by the shift from buyer to issuer payment, by personnel turnover, and by the rise of ratings “consulting”. As late as the 1970s, rating agencies
were paid by the buyers of the securities they rated, not by the investment banks that created and sold the securities. But that started to change, and by 2000 all three of the major rating
agencies were paid to rate new securities almost