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Unfocused Friday: Best Business Movie Clip #5

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This week begins an additional post for  I am calling this Unfocused Friday, because, well, who needs focus heading into a weekend.  As you may have suspected this will feature random posts covering a variety of topics.  The first bunch of these posts will be a series of “best lists”.  Who doesn’t like a best list?  If nothing else it is a good way to start an argument.  The first series will be the top 5 best business movie clips, with some commentary about what the clips, and the movies themselves can teach us.  Enjoy!

To qualify as a business movie the plot must focus primarily on a business enterprise, and the story must pivot around what goes on in that business.  There may be murder and mayhem, but it centers around the operations of the business being featured.

#5 Margin Call Senior Management Emergency Meeting

This week is #5 on the list of best business movie clips.  This comes from the 2011 film Margin Call.  This is a film centering on a company in the midst of the 2008 meltdown of the housing market that triggered the so-called “Great Recession”.  This recession led to a severe drop in the equity markets as well as the bankruptcy of some large names on Wall Street.  It also led the Federal Reserve to inject massive amounts of made-up money into the system to keep the market from fully correcting itself from the distortions created by the previous Federal Reserve massive injections of made-up money.  The movie had a stellar cast including Jeremy Irons, Kevin Spacey, Demi Moore, and Zachary Quinto.

In the movie the firm has been taking Mortgage Backed Securities (MBS) and packing them into securities that they then resell, making massive profits in the process.  All of this was made possible by the housing boom ignited by the low interest rate policy enacted by the Federal Reserve.  The problem was that the Fed was slowing the growth of the money supply and raising rates to avoid a bout of price inflation.  This exposed firms like this to a serious downdraft in the value of the business they were doing. 

In this scene a group of senior executives are meeting to discuss what an analyst (Zachary Quinto) discovered.   What he uncovered is that the firm had leveraged (borrowed) so much in packaging these mortgages for resell that even a drop of 25% would create a loss greater than the whole market value of the firm.

The discussion then shifts to what to do about it.  This is where the movie poses some interesting moral questions.  The only way out is for the company to fire sale all of these toxic products in one morning.  In so doing they will save the company but at great cost.  No one on the Street will ever trust them or the brokers that sold this again.  This means a necessary change of career for those who execute the fire sale, and the gathering of what would soon be worthless assets for the companies that bought these products.

The counter moral argument put forth by the CEO (Jeremy Irons) is that these are willing buyers and in any event the analyst might be wrong which means the company would trash itself instead of saving itself.  This seems to me the better argument.  If a company had realized this in time back in 2008 they would have been selling to willing buyers.  Buyers who were not the elderly with passbook savings accounts but large well capitalized, sophisticated financial firms.  And yes, they could have been wrong.  There was no certainty at the time that a sale like this would be the correct move.  Nonetheless the firm would have been correct in doing so because their financial obligation was to their shareholders, and the survival of their firm.  None of this could have occurred without the willing buyers at the other end of the transaction.  If I were them in that board room I would have done the same thing.

The broader takeaway is that this is a fleshing out of the ramifications of why the governmental policy of having the Federal Reserve artificially lower interest rates was so damaging.  In a true and honest market this firm would not be doing this kind of business or taking these kinds of risks.  In fact, firms like this would likely not exist at all, certainly not to the size and breadth that they did in reality.

In the real world there were a few insightful people who did see the trainwreck coming and positioned themselves to avoid and/or profit from the unwinding of this mess, although not is such a dramatic fashion (for this take see the movie The Big Short).  As we have seen with the polices since then policymakers In the government have learned nothing from this era.

The clips explains a lot about the two sides in the moral debate as well as the dynamics of this whole process.  The whole movie is worth watching, especially in light of the meltdown now in process (for much the same reasons).  It is a well-crafted story with an outstanding cast that brings it to life. Enjoy!

Margin Call: Senior Management Emergency Meeting

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