Margin Call

“There are three ways to make a living in this business: Be first. Be smarter. Or cheat.”

--John Tuld, “Margin Call”

Director J.C. Chandor’s “Margin Call” (2011) opens with a long, notable sequence that truthfully highlights the main cause of the 2008 financial crisis. Here we see Eric Dale (Stanley Tucci), who heads the Risk Management division, getting fired by his firm. Surely, those were extraordinary times, calling for cutbacks and reducing operating costs. But of all the employees, firing the Risk Manager of a financial firm is not the right place to start the layoffs. Not only does a move like this spell fear within the organization, but it also shows how “smart” people on Wall Street were acting without any concrete business strategy. After all, it is the responsibility of a Risk Manager to assess the risks posed by complex financial instruments. Risk management is an integral component of any financial firm, and in ideal market conditions, mortgage-backed securities were sold and bought after understanding the risks associated with these products, at least, in some rudimentary way. The 2008 crisis was triggered because the traders didn’t quite understand the risks of mortgage-backed securities and credit swaps; all the ideal risk management principles were thrown out the door. We gather Eric’s termination is definitely not good, and we sense an impending storm in the form of a fiery stock market that is about to hit his firm. Indeed, Eric’s departure is a metaphor on how Wall Street operated in a greedy fashion, wherein managing and containing the risks was completely forgotten.

Eric has been working on something important, and before leaving the building, he hands a portable USB drive to Peter (Zachary Quinto). He tells Peter, “Be careful.” Peter opens up Eric’s file and starts applying quantitative models, to expand on Eric’s work. We assume this firm deals with mortgage-backed securities and CDO. Peter concludes that the assets on the books are not priced properly, and in fact the fair value of the assets is almost two-weeks old since the financial turmoil. This means if assets are priced today at market value, then the assets will decline by a further 25%, and the company’s losses will be more than its market capitalization. One way or the other, these securities are worthless now. This “25% decline” condition was something many financial firms faced in the 2008 financial crisis. As Michael Lewis writes in his book “The Big Short:” “To wipe out any triple-B bond, all that was needed was a 7 percent loss in the underlying pool of home loans. That same 7 percent loss would thus wipe out entirely any CDO made up of triple-B bonds, no matter what rating was assigned to it.” Bets like this and the one shown in the film clearly demonstrate the high leverage ratio--that is the amount of borrowing on a dollar--the firms on Wall Street were operating on.

Peter raises an alert on his findings with his boss, Will Emerson (Paul Bettany). Will might seem callous in firing Eric, but he is a smart guy, paying close attention to details raised by his team. Instead of dismissing Peter’s theory, Will right away calls his boss, Sam Rogers (Kevin Spacey), and explains to him the gravity of the current situation. From that point onward, all the executives from various divisions are involved, with the CEO of the firm, John Tuld (Jeremy Irons), calling a meeting in the wee hours of the morning to discuss what can be done to lessen the damage, before the word gets out in the market.

Peter’s analysis is complex, and his bosses ask him to explain in simple, layman’s language. At one point John says, “Explain to me as if you are talking to a child.” The senior executives at this firm might lack the technical loquaciousness of the financial world, but like other leaders, their job is to make sure things are in the right order. They rely on their foresight and experience to weed out any roadblocks, paving the way for smoother rides. This situation, however, is going to get really unpleasant as the time passes. Will and Sam are challenged, and probably for the first time in their careers, they are thinking hard about their jobs from an ethical perspective. Sam is a depressed soul because of his failed relationships but also because his dog is slowly dying of cancer. A dying dog serves as a symbol for Sam’s firm, where he has worked for thirty-four years; the firm will be bankrupt soon, and the current turmoil is just the start of its eventual death. Director Chandor uses “heights” to represent the money and fame generated by Wall Street firms, the vibrant lifestyle of Wall Street traders, and the market slide from the “heights.”  Will goes out for a smoke on the roof, and looking below he says, “It’s a long way down,” signifying that the heights reached by his firm and his splendid career may quickly evaporate.

In the wake of a crisis, Will and Sam’s soul-searching exercise leads them to question the nature of their business. Maybe they have played this game too long, and they now realize it’s time to align their moral compass based on what’s ethical for once. Demi Moore, who plays Sarah Robertson, the head of Risk, tells John that it will take a few weeks before they can price the toxic assets held on the books. So, then what is the right thing in this situation? As the film’s title suggests, the margin call occurs when the current holdings fall below a margin level and the account holder has the option to sell the securities or buy more to keep the asset value above the margin level. John makes this call and orders his traders to unload every asset, even if it means taking heaving losses. At least the firm will stay alive, although temporarily. Will, Sam, and Sarah know that by selling the assets, which are basically worthless, they are committing a fraud, and it could start a chain reaction in the money market.  After seeing this segment, I vividly remembered a piece from Michael Lewis’s best-seller, “The Big Short.” In this book a trader utters: “But the more we looked at what a CDO really was, the more we were like, Holy shit, that’s just fucking crazy. That’s fraud. Maybe you can’t prove it in a court of law. But it’s a fraud.” Truly, Peter’s initial discovery was a rare “what-the-fuck” moment for him. Indeed, everyone on Wall Street was committing fraud, and since there were no regulations on how mortgage-backed securities were traded, no one was held accountable for selling assets that were basically toxic.

“Margin Call” is an amazing motion picture with honest performances. Of the entire lot, I was most impressed by Spacey’s performance. Spacey has played a boss in a number of movies now, but most recently, he played the character of a hard-assed boss in “Horrible Bosses.” In “Margin Call” he is not a horrible boss in any way, and his personality is relatively quiet, unlike the strong, bossy character he played in “Horrible Bosses.” Here, Spacey’s character is genial and always thinking, a man torn by the ethical values of his business dealings. He appears grieving, and his personal state reflects the “gloom-and-doom” scenario about to hit the markets. It’s like a light bulb that is suddenly turned off in his life. Spacey delivers a compassionate performance, which is rather different from his past performances. Bettany and Irons are equally impressive, with Bettany perfectly embodying the character of a Wall Street senior manager.

In the end, “Margin Call” succeeds because the performances and script accurately relate the tale of a financial crisis at a Wall Street firm. It is brutally authentic in its representation of the greed and coldhearted nature of Wall Street executives. What’s more, the story is realistic, as it perfectly applies to the reasons why Bear Sterns and Lehman Brothers went bust. The film features a few memorable quotes that are punchy, too, capturing the work culture of financial traders. If Oliver Stone’s “Wall Street” served as a crash course on Wall Street ethics, then Chandor’s “Margin Call” takes us to a comprehensive journey in the dark trenches of Wall Street, leading to the 2008 financial crisis. “Margin Call” is a fine movie about Wall Street and should not be missed.