November 28, 2011
Film Review: Margin Call
by Robert Kropp
First-time director J.C. Chandor's film provides a fictionalized version of Lehman Brothers
awakening to the fact that inadequate risk management had launched the financial crisis.
Meaningful risk management is one of the essential components of the long-term investment
strategies of sustainable investors. Not only does it help protect the financial security of
investments; especially in the case of so-called too big to fail financial institutions, it also
helps protect the most vulnerable members of society from the economic devastation that became
reality with the financial crisis.
Interviewed in Inside Job, a documentary about the
financial crisis, an executive with the International Monetary Fund (IMF) stated, "At the end of
the day, the poorest, as always, pay the most."
One of the early signs that
something was about to go seriously wrong with the global economy occurred in late 2008, when the
investment bank Lehman Brothers collapsed under the weight of its investments in mortgage-backed
securities that had become worthless. Those investments, along with an unrealistically high degree
of leverage, plunged the firm into bankruptcy. Global capital markets responded with panic, and the
crisis was on.
Director J.C. Chandor's film Margin Call is not a documentary, and it does
not purport to cover ground that has been picked over countless times since Lehman's bankruptcy.
But that the film is based on Lehman Brothers is underscored by the fact that the name of the
fictional firm's CEO, played by Jeremy Irons, is John Tuld. The CEO of Lehman Brothers at the time
of its collapse was Richard Fuld.
The film opens in the middle of things, with
professional corporate downsizers arriving in the firm's offices. By the time they are done, 80% of
the firm's employees on the floor had been fired. One of them, Eric Dale, played by Stanley Tucci,
is incredulous. As he tells the downsizers, he's not in sales, but in risk management.
Dale is being escorted from the building, he hands a flash drive to Peter Sullivan, a young risk
analyst, and says: Be careful. As his surviving coworkers repair to a bar to celebrate their
status, Sullivan—who has a PhD in rocket propulsion but chose a career on Wall Street because of
the money—discovers that the firm is unsustainably over-leveraged and on the brink of collapse.
Thus begins an all-night series of meetings, in which more heads will roll and a plan is concocted
by Tuld to sell the firm's now worthless assets to unwitting investors.
The student of the
crisis and its ongoing aftermath will recognize the strategy as one actually implemented by Goldman
Sachs and other firms. In April, the US Senate's Permanent Subcommittee on Investigations issued a
the financial crisis which described how Goldman Sachs contributed to the financial crisis by
designing, marketing, and selling collateralized debt obligations (CDOs) "in ways that created
conflicts of interest with the firm's clients and at times led to the bank's profiting from the
same products that caused substantial losses for its clients."
g in Rolling Stone, Matt Taibbi observed that Goldman Sachs "used its canny perception of an
upcoming disaster (one which it helped create, incidentally) as an opportunity to enrich itself,
not only at the expense of clients but ultimately, through the bailouts and the collateral damage
of the wrecked economy, at the expense of society."
Faced with objections to the plan by
Kevin Spacey as a supervisor of the firm's traders, Tuld simply says, "We are selling to willing
buyers at the current fair market price so that we may survive."
Of course, when first
confronted with the evidence that the firm is on the brink of collapse, Tuld says, "We are going to
be left holding the biggest bag of odorous excrement ever assembled in the history of capitalism."
One wonders if the crisis could have been avoided, or at least made much less severe, if
calls for reform by sustainable investors had been heeded. Members of the Interfaith Center on Corporate Responsibility (ICCR) have been
calling for transparency in securitizations since the 1990s. In 2010, ICCR members introduced
shareowner proposals at several of the largest banks, requesting that the companies "ensure that
the collateral is maintained in segregated accounts and is not rehypothecated."
Rehypothecation refers to the practice by brokers of reusing the collateral of their clients as
collateral for their own transactions.
As to why Wall Street executives would risk the
health of their firm, as well as the stability of the financial system, the answer can again be
found in the concerns of sustainable investors. For many years, shareowner activists have been
filing resolutions addressing unrealistic levels of executive compensation, which in far too many
cases have been tied to quarterly earnings reports and unrelated to performance over the long term.
When the US Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Lisa Woll, CEO of US SIF: The Forum for Sustainable and
Responsible Investment, stated, "The most recent financial crisis highlighted for all Americans
the urgent need to instill greater discipline among corporate boards and in financial markets…say
on pay will help address these failures and strengthen America's financial markets."
per the mandate issued by Dodd-Frank, the Securities and Exchange Commission (SEC) adopted rules
requiring public companies that are subject to the federal proxy rules to provide shareowners with
an advisory vote on executive compensation at least every three years. The rule took effect for the
first time in the 2011 proxy season.
In a scene from the film, Sullivan and another young
analyst ask a senior trader played by Paul Bettany what he does with his annual salary of $2.5
million. "You learn to spend what is in your pocket," he replies, and adds that he was able to
charge back as entertainment expenses most of the $76,000 he spent in one year on prostitutes and
The annual salary of Tuld, the CEO, was of course many times that amount. And the
salary of the real Richard Fuld? According to Representative Henry A. Waxman, the California
Democrat who chaired the House Committee on Oversight and Government Reform, "Mr. Fuld will do
fine. He can walk away from Lehman a wealthy man who earned over $500 million. But taxpayers are
left with a $700 billion bill to rescue Wall Street and an economy in crisis."