Margin Call, brilliant film.
I’ve completed a Bachelor of Commerce majoring Finance and Economics so I was completely in awe of this movie. It mixed my love of finance and film. It was absolutely drummed into us at university the causes and effects of the global financial crisis 2008. So to explain the movie margin call, I’ll give a very brief and simple overview of the Global Financial Crisis 2008.
Margin Call is actually a great way to explain the GFC in terms of what lead to the scenario. It is also a great way of explaining what the consequences were of the actions taken in the movie upon the rest of society. So here we go.
#A. The Housing Market
- The years leading up to 2007, the U.S. government wants every citizen to realize the
American dream and own a house. Fair Call.
- To do this though, they encouraged mortgage lenders to lend to people who couldn’t really afford it (sub-prime).
- Lending institutions including government back organisations approved loans that were sub-prime, housing market booms which inflated prices above actual housing prices.
- Eventually people who couldn’t afford these loans began defaulting, the market was flooded with new houses already therefore housing prices decline.
- It’s not long before the housing bubble bursts
However, while this is all going on………
#B. Financial Institutions
Lending Institutions don’t lend traditionally anymore. As in they don’t hold that loan for its full 30 year term or even its expectancy of 7 years.
- So the bank manager approves a loan then puts that loan with the rest.
- Some smart cookie who works for that bank gathers those loans, puts them into piles according to demographic, geographic, loan term, amount or whatever.
- The bank then sells these piles of packaged loans to hedge funds, other banks or to whoever, makes a quick buck but the point is, their risk of those loans defaulting is gone.
- Here lies the problem, the bank selling the loan doesn’t care who the loan is made to, so they lend to everyone, regardless of socio-economic status then on top of this, as already mentioned, the government is encouraging lending as well.
- This process of packaging loans is securitization and they’re selling mortgage-back securities. The mortgage-back securities are just loans packaged together and sold off.
#C. Explain the Movie Margin Call – When We Mix #A and #B
Margin Call focuses on a financial institution (based on an unknown company but I have my suspicions) that supposedly is the first to discover the impending doom. This comes in the form of a fired manager Eric (Stanley Tucci) handing down his work to a clever sub-ordinate Peter (Zachary Quinto) who carries on his boss’ work that very night to discover a flaw in their risk management.
In finance, more specifically financial risk management, there is a calculation a firm can make to determine a possible maximum loss to a specific investment or portfolio on or over a specific time period. It’s called VaR and stands for Value at Risk. I believe Peter and Eric were using something similiar and the volatility in the previous days or weeks trading were meeting the levels calculated using VaR. Volatility mind you is just risk, the variance or standard deviation in returns. How dissimilar are your returns from the previous day. In finance you want your returns as stable and secure as possible with maximum returns possible for that given level of risk.
And when I say previous days or weeks trading, they were trading MBS or Mortgage-backed securities. The VaR levels being met, I’d have to assume, were the sub-prime mortgage borrowers who are having trouble meeting the repayments of their loans defaulting. The risk is going up and returns down. From this point in the movie onwards is about corporrate governance, moral dilemmas and personal vendettas against work colleague. That doesn’t really need much explaining.
So, come the board meeting the with Jeremy Irons as CEO. They are the first to discover this problem, which I believe too by the way since firms are always trying to get the upper hand on their competitors. That’s business. They decide to offload the merchandise, the MBSs, much to the chagrin of upper manager Sam (Kevin Spacey). The gravity of their situation is basically make or break, the losses were shadowing the market capitalization of the entire firm. Meaning if the losses were actually realized one day, it would be bankruptcy tomorrow.
And they weren’t alone, every financial institution across the globe were investing in these Mortgage-backed Securities. They had to options, alert the world the calamity it faces and possibly go under themselves but contain and control this drama. Or, unload the merchandise, survive themselves, but cause a global meltdown.
Well, you watched the movie, you know they went with the latter. Jeremy Iron’s character was company survival and big bonuses, Kevin Spacey’s character was for a more ethical approach, save the world so to speak and face his own demise (unemployment).
P.S. When I say firm, think of Investment Banks or Commercial Banks, think of Lehmann Brothers, Bear Sterns and the like, however, those banks went under so they didn’t obviously find out first.
An absolutely astonishing revelation of the Global Financial Crisis is a really great documentary called the Inside Job. It goes into great detail of the turbulent events of 2007/2008. It reveals that the GFC could have easily been avoided!
Read the awesome reviews on Amazon.
#D The implications of the actions taken in Margin Call (Global Financial Crisis 2008)
You can argue the crisis started in 2007 but actual crisis, definitely 2008. Things could have gotten a lot worse, think Zombie apocalypse worse. So in the movie though. The next day, trading begins, they unleash this poisen (MBSs) into the market place while it still has some sort of perceived value. In doing so, not only have they devalued this asset/security but they’ve just alerted the entire market place something is wrong plus they’ve spread it worldwide more than it already was. This is what happens next.
- Mortgage-backed securities have a fraction of the value they were. In short, no value. (FYI, the years leading to the GFC, firms were making squillions on this MBSs)
- Big banks and Investment Banks go under overnight. You have to realize too, banks are one of the most highly leveraged businesses out there.
- Enter Credit Crunch, banks have no money to lend, the little they do have, is equity propping themselves up.
- This has two main consequences. Bank runs and economic slow down (more so, screeching halt). Economic slowdown means GDP falls. Bankruns mean people like you and I, take our money out of the bank and bury it in the back yard. Sheer panic. Banks don’t like this and you probably don’t know it. But that money sitting in your account right now, has been used by the bank to buy someone a house, lending, they make money off your money while pretending to keep it safe. So GFC happens, I go try and get my money out, it’s not there. Also with the economic slowdown part, our economy relies on lending. Mum and Dad want to start a corner store, they borrow, they employ, they pay tax. They own the business sooner than if they saved plus along the way they helped the country out. It’s called the multiplier effect and its why we’ve been living in economic prosperity and abundance for the past 100 years.
- It gets real scary now
- No lending, no economic output/input (GDP), stock market and every other financial market dries up, unemployment increases, wealth in general decreases, essentially no one has money
- Now governments step in. Our economy is based on us having a job then consuming products in any shape or form. When that stops, as Jeremy Iron says so well “Silence”.
- Central Banks such as the Federal Reserve want you spending money again so interest rates go down, lending will then increase plus they print money and just pump it straight into the economy to stimulate spending again. Known as quantitative easing.
- The part that pisses me off. They then throw in a stimulus package to the banks that caused this awesome problem. I can see why they did it, to save the financial system and avert the next stone age, however, those CEOs and others responsible should be in jail. They jailed the guys that caused the Great Depression, why not now?
To explain this film is a bit of a herculean effort but I hope I did it well but, more so, I hope I sparked your interest in the causes and effects of the Global Financial Crisis 2008.
One last thing, a margin call in finance terminology means you’d get a call from your broker or investment supervisor. They’d be saying a limit or loss has been reached in your account and you either need to transfer more funds into the account or face it being closed down.
Great name for a great movie which I think was the point.
I hope you’ve enjoyed this post. If you can explain the movie Margin Call just as good, if not better, feel free to say so! I want to hear your opinion. Leave a comment below.
Cheers MCM’s Rohan.