Margin Call

2012-04-01

in Economics, Films and movies, Geek stuff, Politics

I saw Margin Call yesterday – an interesting fictionalized depiction of the start of the mortgage-backed security meltdown of 2008. The film depicts one fundamental cause effectively enough, namely models that understimated the level of risk associated with mortgage-backed collateralized debt obligations, though what I have read about the crisis suggests that this may not have come as such a total surprise to the investment banking community as was depicted in the film.

Overall, I found the film accessible and interesting – an uncharacteristic portrayal of the internal dynamics of a large company. People who know a lot more about the subject than I do have called it realistic.

The film is also an interesting illustration of a complex strategic position, in which one company suddenly realizes that a major new asset class is toxic and needs to decide how to respond. Threatened with bankruptcy if they take modest losses on their highly leveraged portfolio, they decide to sell off as much as they can in one day, knowing the assets to be worse than useless, and knowing that they will spread chaos through the American financial system. One of the managers makes this point with another: “And you’re selling something that you *know* has no value” and gets the response: “We are selling to willing buyers at the current fair market price”. Among other things, this reveals the experimental nature of financial innovation, the scale of some of the risks associated with it, and the temptation to behave in intensely self-interested ways even when that is costly to others.

The main question raised by the film, as well as by the real-world crisis that inspired it, is probably whether we would be better off with a simpler and less innovative financial system. At one point, the most senior staff member depicted describes the history of American financial crises in this way:

Its just money; its made up. Pieces of paper with pictures on it so we don’t have to kill each other just to get something to eat. It’s not wrong. And it’s certainly no different today than its ever been. 1637, 1797, 1819, 37, 57, 84, 1901, 07, 29, 1937, 1974, 1987-Jesus, didn’t that fuck up me up good-92, 97, 2000 and whatever we want to call this. It’s all just the same thing over and over; we can’t help ourselves. And you and I can’t control it, or stop it, or even slow it. Or even ever-so-slightly alter it. We just react. And we make a lot money if we get it right. And we get left by the side of the side of the road if we get it wrong.

Another lower-level manager also discusses the ethics of the business:

Listen, if you really wanna do this with your life you have to believe you’re necessary and you are. People wanna live like this in their cars and big fuckin’ houses they can’t even pay for, then you’re necessary. The only reason that they all get to continue living like kings is cause we got our fingers on the scales in their favor. I take my hand off and then the whole world gets really fuckin’ fair really fuckin’ quickly and nobody actually wants that. They say they do but they don’t. They want what we have to give them but they also wanna, you know, play innocent and pretend they have know idea where it came from. Well, thats more hypocrisy than I’m willing to swallow, so fuck em. Fuck normal people. You know, the funny thing is, tomorrow if all of this goes tits up they’re gonna crucify us for being too reckless but if we’re wrong, and everything gets back on track? Well then, the same people are gonna laugh till they piss their pants cause we’re gonna all look like the biggest pussies God ever let through the door.

All told, the film offered what seemed like worthwhile insight into the culture of investment banks and the origins of the financial crisis, and did so in a way that was skillful and entertaining.

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{ 3 comments… read them below or add one }

oleh April 4, 2012 at 12:31 pm

I have been learning a bit about how the financial markets work – only a bit. It is strange what significant role momentum plays. It can belargely removed from fundamentals. This film illustrates that problem, or what can occur when fundamentals are not considered.

. April 4, 2012 at 1:51 pm
. May 14, 2012 at 8:07 pm

The benefits of the system
Why finance is good for us
A new call to arms

SINCE the September 2008 meltdown plunged much of the global economy into deep recession, no one has had a good word to say about finance or financial innovation. Adair Turner, Britain’s leading financial regulator, has given well-received speeches questioning whether much of finance is “socially useful” and arguing that it should be a smaller part of the economy. As for financial innovation, a comment by the former chairman of the Federal Reserve, Paul Volcker, that the only useful new concept in living memory is the ATM has garnered widespread sympathy, as has the admission that the day his grandson said he wanted to be a financial engineer was “one of the saddest” of his life.

In this context “Finance and the Good Society” is so contrarian as to be shocking—all the more so because its author, Robert Shiller, is no head-in-the-sand capitalist nor a highly paid Wall Street shill. The Yale economics professor was one of the earliest critics of the efficient-market hypothesis that underpinned much of the financial innovation in securities markets of the past 30 years or so. He has become something of a Cassandra, giving warning of bubbles in many financial markets, including American property before the recent crash. He even inspired the phrase “irrational exuberance” in a presentation about share prices to Alan Greenspan, then chairman of the Fed, in 2006.

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