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.