Margin Call

An unnamed investment bank holding enough of its own subprime-mortgage-based securities on its
books to more than erase the firms entire market value should those derivatives lose only 25% of their
value. What to do? In Margin Call (2011), the CEO, played by Jeremy Irons, makes the callthe firms
traders are to unload the entire asset class the next morning. Kevin Spaceys character has two major
objectionsone normative and the other operational. The marginal place of ethics on Wall Street is well
illustrated by how these objections pan out in the film.
Spacey plays Sam Rogers, the supervisor of a trading floor who had been with the firm for over thirty
years. Operationally speaking, he warns John Tuld, the firms CEO, at 3 or 4 am that the fire sale would
have to be done by early afternoon or the unloading strategy would not work. After a few hours of
heavy unloading without any buying of the asset class from the counterparties (i.e., swaps), word on the
street would pummel the remaining securities market value; claims of readjusting a firms overall risk
only go so far in the face of such mass selling, and it would be only a matter of time before the market
learns that the derivative securities are largely worthless.
Hence, Sam warns both his boss and the CEO that knowingly selling crap to the long-established
counterparties of the firms soon-to-be unemployed traders would effectively trash the credibility of the
firm and its traders on the Street, and be highly unethical to both the traders and their counterparties.
Apart from the film, Goldman Sachs knowingly sold its derivative securities to its counterparties even
though the firms traders were referring to the instruments as crap. Whereas the fictional firm in the
film lied to counterparties to unload the firms entire holdings of the asset, Goldman Sachs traders lied
about the actual worthlessness of the banks mortgage securities in the regular course of businessthe
profit margins being too good to pass up. Unlike the fictional firm, Goldman bought insurance that
essentially transferred the risk of the derivatives on the books to AIG and shorted derivatives sold by
other banks. In selling derivatives it would buy later, Goldman was betting that the value of derivatives
would decrease even as the banks traders knowingly sold the banks own securitized mortgages to even
the banks best counterparties. Goldmans executives were both smarter and more unethical than the
characters in the films fictional bank.
In the film, the CEO has more of a basis in pointing to the firms survival because continuing to hold onto
its derivatives that were in its pipeline risked being left standing when the music stops. Looking out
onto a dark Manhattan at 3am from the banks high conference room, John says he does not hear any
music in the near future, and it would not be long until other people in the bewindowed towers see the
writing on the wall too. So the firm must sell all the crap it has as soon as possible, or in all likelihood the
firm would face bankruptcy and everyone in the room would be unemployed. Survival is a given that
does not permit alternatives; moreover, the CEO depicts it as a sort of a moral principle countering all
the resulting harm to others, rather than admitting that it is actually naked self-interest that is fueling
the deceitful fire sale that he was about to unleash on the firms counterparties.
As if the firm were an end in itself, its survival is vital. The same holds at the individual level; expensive
mortgages and other commitments such as alimony (e.g., to Sams ex-wife, who lives in a mansion)
make it seem that continuing those mammoth executive compensation inflows counts as nothing less
than survival. Ethics is easily cast by the wayside as though scruples were an interesting though
irrelevant observation on the way to what must be done. It is as though there were absolutely no choice
in the matter, just as there had been little perceived choice for Demi Moores risk-management
character, Sarah Robertson, a year or two earlier when she passed on the red-flag warnings of Stanley
Tuccis character, Eric Dale, without due urgency. The lack of urgency, Sarah finally admits to him just
after both had been fired, had seemed at the time to be necessary.
The lure of the large profit margins on the firms manufactured mortgage-based bonds had undoubtedly
been behind the necessity not to blow the whistle. For when an oilman has a gusher spewing out black
gold, only a fool risks what can be extracted for certain today for what one expects will still be available
tomorrow. A bird in the hand is worth two in the bush. Even with Erics dire warning in hand, Sarah
could only have saved the firm from its own incompetence only if the executive committee had gone
along.
How could we have fucked it up so badly? Sam asks the CEO at the end. Dont be a sour-puss, replies
the enabling top executive in denial; he had already procured Sarahs head on a plate for the board,
which is different than going after the incompetence that led to the self-inflicted disaster. Incredibly, the
risk management executives still assumed a sort of entitlement to hold onto their jobs, as if having
nearly brought the firm down was a sufficient reason to be fired, or resign. There is apparently no honor
on Wall Streetno Japanese willing to fall on their swords (or even feel the natural sentiment of
humiliation)and no serious consideration given to the ethical dimension in its own right.
The CEO does not even try to hide his dismissiveness of Sams ethical point that selling stuff that only
the seller knows will soon be worthless in the hands of the counterparties. So Sam tries to appeal to the
firms own financial interest. We wont be able to sell anything again to our counterparties, he warns.
Tuld is unswayed, and probably with good merit. Apart from the film, Wall Street did not punish
Goldman Sachs too much for having knowingly sold crap in what Lloyd Blankfein would tell a U.S.
Senate committee was merely market making. In general, the lure of profits proves to be a good
thickener of once-aggrieved slights from the past.
In the film, the CEO is utterly unconcerned about the tarnished reputations of the banks traders (many
of whom will soon be without a job). However, it can be argued that approving the $1 million bonuses in
the event of a successful unloading of the sordid excrement is not only oriented to providing sufficient
incentive (i.e., in the firms financial interest), but also makes up for the traderss loss of established
trading relationships.
Even so, the CEOs maxim treats self-interest itself as a esteemed, even ethical, principle. It is about
ones own survival and that of the firm; the strongest surviving both at the firm and individual level.
Being the first out of a burning building is no vice, the CEO contends. In fact, being the first to spot the
fire and get out is laudatory rather than blame-worthy. However, what of the utter incompetence that
had gotten the firm into such an over-leveraged, risky position in which the established VAR numbers
no longer heldthe risk being now too great? Does the firm, not to mention its occupants, deserve to
survive in the exclusive club known as Wall Street? Being the first out of a burning building could be
nothing more than the basic animal instinct of flight, rather than intelligence.
Moreover, the bloated claim of survival necessity could simply be selfishness and greed with a complete
disregard for the harm one is inflicting on others (e.g., colleagues in the firm as well as the
counterparties). Yet in the face of the inexorable path of money, such normative concerns are mere
diversions like store windows during the Christmas season. To a selfish kid bent on what he or she is
going to get on Christmas morning, barely a glimpse goes to the ascetics, not to mention the ethical.
Perhaps the overarching impression that the film presents is that of selfish children in such lofty
positions not only on the Street, but societally as well.