Archive for October 2011
The excellent movie Margin Call depicts a serious problem in our culture, and it’s one that goes a lot deeper than the frenetic culture of Wall Street, which is what the story is about on the surface.
A margin call in the financial markets is a brutal wake-up call for overextended traders. It means that the trader who gets the margin call has made too many bad bets on borrowed money and has to pony up some more cash in a hurry or else the broker will start dumping his assets for whatever price he can get.
That’s what the movie depicts. A fictional investment firm, close enough to the real-life bankrupt Lehman Brothers, is too heavily leveraged (meaning it bet too much on borrowed money) in mortgage-backed securities, bonds that represented batches of mortgages and second-mortgages that ordinary people had taken out on their homes, often houses that cost too much and loans that came from unconscionable lenders — from the big name-brand banks to fast-buck, no-credit-history operators. No one cared about the facts that the people couldn’t pay and that the high cost of buying a home couldn’t be sustained.
Lots of people say they knew those things all along; lots of smart people who have made a lot of money on Wall Street have been claiming for the past two years since the markets blew up that they got out just in time. I didn’t believe them, and I’m glad to be reading Michael Lewis’s new book, The Big Short, on the Wall Street meltdown, that he doesn’t believe most of them either. The book talks to a few that did.
I’m skeptical because I heard the logic that supported the mortgage-backed securities so often, for so many many years, that I have come to believe that a whole lot of people wanted to believe very badly that these things were safe.
I think back to a time many years ago, well before the savings and loan scandal of 1987 — one of a couple precursors to the meltdown of 2008 — when a bright, pleasant colleague of mine in the news business declared that housing prices could never go down. He and his wife spared no expense when they built a brand new house, just before housing prices collapsed. Being underwater on your own home is not a new experience, but just one kind of pain that we collectively want to forget.
Some years later I was suddenly shocked by the fact that I was getting older, so shocked that I started putting money away in my employer’s 401k retirement plan. Before then, I thought retirement plans were for wimps. Once, and only once, I took advantage of being able to call the financial adviser at the staid mutual fund company that handled the 401k, and heard my investment choices criticized for being too conservative. The voice on the phone vigorously urged me to move my meager funds into mortgage-backed securities. They were safe, he assured me, and they had a high rate of return. I believed him, but I decided against the move.
Now my question is: were these two guys in on a giant conspiracy to scam the rest of us on mortgage-backed securities? Of course not, you say. Were they victims? Not entirely. The blind optimism that people enjoy without understanding the complexities of a system they have faith in is too deep, too widespread for us to divide up the world into heros and villains — especially if we’re limiting the villains to only 1% of the population. That lets the rest of us off the hook too easily.
As for the movie, Margin Call, it doesn’t make the executives into the villains many people see today. On the surface, the movie deals with the swirl of office politics of the firm. A risk management executive, played by Stanley Tucci, begins to foresee the firm’s impending margin call (metaphorically, I mean, in case any Wall Street types are reading) but as luck would have it, he’s fired one afternoon in a downsizing just before he’s done. Over the course of the long night and the next day, his protégé finishes his calculations, alerts his superiors, and they have to digest the nightmare and do something fast.
The executives, led by their boss John Tuld, played by Jeremy Irons, wrestle with moral and tactical questions. They are very human throughout. Their characterizations by the writer-director, J.C. Chandor, a young man who never did a feature film before, are strong, absorbing and sympathetic. He was smart to simplify the technicalities of trading.
He conveys a lot of insight into life at the top of Wall Street — and in a larger sense of all corporate America.
Throughout the story, he returns over and over again to the point that the further up the food chain, the less and less do the executives understand the businesses they’re in. Someone, somewhere far below them knows something, but no one can find them in an emergency. It’s bad on Wall Street because the stuff they sell is manufactured by mathematicians with doctorates — the “quants”, who were widely castigated at the onset of the meltdown, even as job openings for more of them appeared regularly at my former university. But it’s not just Wall Street. The big corporations are too diverse, too complex, and the products they make and sell are too technical for any one person to understand — much less a person whose talents are salesmanship, back-slapping, glad-handing and ass-covering.
I did an experiment. If Lehman was the inspiration for Margin Call, then its former chief executive Dick Fuld should offer a clue about the managerial class. I wrote into Google two phrases together “dick fuld” and “surrounded by yes men”, both in quotes, and came up with 59 citations. At smaller companies, the entourage gets smaller, but never goes away. That’s the situation at every organization I ever worked for.
There’s another great insight in the movie: There is a limit to the practical value of amassing money to an individual. For years, a million dollars was a dividing line, but with the bubble in housing prices, a million is not enough. A few million — not sure of how many — means that the owner of that hoard no longer has to think about money on a day-to-day basis. Something like $50 million or $100 million — which is possible for a person to make on Wall Street, and elsewhere with stock options — is totally bizarre.
It’s true. You can’t buy love. For example, one of the more sympathetic characters in Margin Call, played by Paul Bettany, talked about the meaning of his $2.5 million salary plus bonus in the previous year. He told two younger guys what he did with it: $50,000 on clothes, $150,000 on a car and $76,000 on hookers and booze. Another intriguing character, played by Kevin Spacey, had a lavish suburban home, but like his ex-wife told him, “You don’t live here anymore.”
Then, you may well ask, what moves a person to struggle desperately for the next billion dollars?
It’s my hunch that once human beings get past the danger of starvation, they turn everything into a game in which the currency is status. Money is only a measure of status. Alliances come and go, victories and defeats are transitory. We can’t know this for sure. Our motives are too murky and mixed.
Still, any discussion of Wall Street cries out for casino metaphors. Classic Wall Street, the Wall Street of Marx and Engels, the Wall Street of Jay Gatsby, and even the Wall Street of Gordon Gekko, is a casino, where the odds are fixed, and the house skims off its cut from top, while the players struggle with chance and each other.
In that Wall Street, there have always been traders, trying to smooth out the market and the money flows, and among them, some who tried to get ahead of the pack by quickness and cleverness, and some who just cheated, buying and selling just in front of their own clients’ orders.
There may be a new Wall Street, assisted by computers, trying to make the most out of digital speed on worldwide markets. And more recently to compute investment risk, and remove the human from the loop altogether. In all these cases, Wall Street remains an ordinary business as long as it stays on its side of the table. When the croupier puts down his skinny money rake and grabs the dice, we all get into big trouble.