Movie Review: Margin Call

Margin Call opened four months ago, so this review isn’t exactly timely, but for readers who haven’t seen it, it purports to be about the 2008 financial crisis. Since the Antiplanner has written extensively about this crisis, I found the movie intriguing enough to watch the DVD.

The entire picture takes place during about 27 hours in the life of an investment bank loosely modeled after Lehman Brothers, which went bankrupt in September, 2008. While the bank in the movie is never named, it has many parallels to Lehman. Lehman’s CEO, Richard Fuld, though out of touch with his employees, was at one time worth a billion dollars based on the value of his Lehman Brothers stock. The movie CEO, cleverly named John Tuld, is similarly remote but is also said to be worth a billion. Lehman’s chief financial officer in charge of risk management was a beautiful blonde who some whispered gained her position more because of a never-proven affair with the company’s executive VP than because of her skills. The movie’s chief risk manager, played by Demi Moore, is a beautiful brunette who apparently has a close but not fully disclosed relationship with the bank’s number two person. The blonde and her boss end up losing their jobs a few months before Lehman’s goes bankrupt; here the movie breaks from reality in that only Moore loses her job.

In the movie, the risk manager in the mortgage securities division discovers a problem with the company’s value at risk (VAR) model just before he is let go in a corporate downsizing (though the movie never explains why the bank is downsizing its mortgage division at a time when the mortgage market was hot and before anyone realized the market was about to collapse). He passes his research to one of his subordinates, who discovers that correcting the model indicates that a swing in the market similar to ones that they had been seeing for the previous several days could completely wipe out the bank’s net worth. At a late-night meeting held by the bank’s executive committee, the researcher nervously explains that the VAR model assumes the future volatility of an asset will be the same as its historic volatility, but for some reason mortgages have suddenly become far more volatile. This is a problem for the bank, the researcher explains, because even though it sells its mortgage bonds, at any given moment it has a large inventory of mortgages that it hasn’t yet packaged into bonds and sold.
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So far, this is a fairly accurate picture of the crisis. The value-at-risk model failed to account for what some call black swans–meaning unpredictable events–though the Antiplanner would argue that the increase in mortgage volatility was completely predictable given the increased government regulation of land and housing markets. Many banks owned large amounts of mortgage bonds, both because they looked like good investments and because they were repackaging them for sale and always had a large inventory of mortgages or bonds not yet ready to sell. These investments were highly leveraged, partly because SEC rules allowed banks to maintain minimal collateral or capital reserves for mortgage bonds because they were so highly rated.

Unfortunately, from there the movie descends into anti-Wall Street fantasy. The CEO decides the only way to save the company is to sell the bank’s inventory of mortgage bonds in one day, before anyone else figures out the bonds are worthless. Some employees argue that this will harm the company in the long run because the people buying the bonds will lose money and refuse to ever deal with the bank again. But they end up going along and quickly sell the bonds, after which most of them receive large bonuses and then are fired. The movie ends with the implication that the company survived.

In fact, it didn’t work at all like that. No bank secretly realized that mortgage-backed securities were worthless and unscrupulously sold them to unsuspecting buyers. Instead, mortgage-backed securities were downgraded by Moody’s and the other ratings firms, leading to very public crises at banks all over the country. Prior to the downgrading, the banks that suspected that mortgages were not as sound as the ratings companies had estimated either avoided the market (e.g., JP Morgan Chase and Wells Fargo) or actually encouraged investors to buy insurance against the bonds (e.g., Deutsche Bank). The real crisis was not that the securities lost value but that, at the lower ratings, the companies had to put up more collateral. Since they were so highly leveraged, they didn’t have that collateral, and that’s what put them out of business or led to bailouts.

So, despite positive reviews by other critics, the Antiplanner can’t recommend Margin Call. Another movie that might be more accurate is Too Big to Fail, which was made for HBO and is not yet available on DVD. I’ll post a review here if and when I see it.

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About The Antiplanner

The Antiplanner is a forester and economist with more than fifty years of experience critiquing government land-use and transportation plans.

3 Responses to Movie Review: Margin Call

  1. C. P. Zilliacus says:

    Somewhat relevant from the Washington Post: Freddie Mac’s big bet against homeowners

  2. Scott says:

    Few people know what really created the recession, but claim it was based on ____ ____. There were about a dozen factors which created it, for which O’Toole has highlighted the main ones.

    Summarizing, the 2 main factors: easy credit pushed by Congress to those who cannot afford the payments, combined with supply restrictions (driving up prices) in some urban markets.

    Randal or I could explain more fully, in person, in a Q&A. Thomas Sowell could too. Peter Schiff could somewhat (who foresaw the bubble), but he’s not familiar w/details on housing.

    BTW, BO is extending the recession, just like FDR made the depression a decade long, in which he expanded Hoover’s reactionary big-gov policies.

    Anyway, the secularization & bundling of mortgages was encouraged by Congress & the GSEs (despite his shortcomings, the Bush Admin did repeatedly warn about the impending housing crisis), as well as there being proponents of “pushing” home-ownership by Barney Frankfurter & Andrew Cuomo (as HUD Sec). How did they win their last elections?

    What this movie & others are doing are missing causes & effects. The “critical mass” of individual mortgage defaults was the start.

    As for the stock drop. I’ll admit that I’m not familiar with that part of finances, which unlike many who claim to know econ & thinking its common sense.

    However, I know much more in than the average person.

    Briefly [hinting], for the stock crash 08, look at naked short selling & a cabal of a few [out of many] who want to destroy the US. (yes a few Arabs; no George Soros, maybe, but previous, now & later)

  3. ws says:

    @Scott

    ..combined with supply restrictions (driving up prices) in some urban markets.”

    I don’t disagree with higher priced urban markets having a bigger problem once their respective markets crash (as they’ll be under water more), but there’s some points to be made as some high priced and growth restricted markets have done better than some low-cost, limited growth restricted markets.

    1) Some areas with scant growth restrictions have had the most difficult times with their real estate markets compared to higher priced ones (i.e., Phoenix versus DC or NYC).

    2) Bundling and securitization of mortgages versus traditional bank-owned mortgages was not regulated or forced upon lending institutions. Also to note, Fred/Fannie were late to that game.

    Seeing as you appear critical of these practices (Mortgage Backed Securities), how would a “free market” address these banking issues (or should they)?

    You can’t blame government for lose lending practices — institutions were doing this on their own volition because it made lots of money.

    In my opinion (albeit with a limited knowledge of finance and government), the housing crisis was both a government and private sector concoction, there’s blame to go all around and people only blame certain people because it fits their ideological narrative.

    I think in the coming years we’ll know more about the true causes of this crisis.

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