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What capitalism does when the music stops

Last night I went to the cinema, which I rarely do nowadays, and judging by the size of the audience for the movie that I and my friend saw, not many other people go to the cinema these days either. The place, in the heart of the London West End, was damn near deserted, apart from us and about three other people. Actually, though, the problem was probably the movie we were seeing, as I will now explain.

The movie we saw was Margin Call. Here is a short Rolling Stone review of it, which strikes me as pretty much on the money.

Okay: SPOILER ALERT. Stop reading this very soon if you don’t want the broad outlines of the plot handed to you on a plate.

When I started watching it, I knew nothing about Margin Call other than that a friend of the friend I was with had said it was the best current financial crisis movie he knew of. This makes sense. Margin Call is very much a trader’s eye view of the moment when the first of the waste matter started to move seriously towards the fan, around 2008. And, remarkable to relate, it actually shows “capitalism” (the quotes being because we all here know how government-intervened-in all these sorts of market have been) in a by no means wholly bad light. I am not a bit surprised now to have learned, the morning after, that this movie was written and directed by an ex-trader, a certain J. C. Chandor.

Plot approaching. Final warning. Okay. Bad things are happening at a Wall Street institution of the kind that has lots and lots of computer screens, at least two for each worker. Stanley Tucci is being fired. But just before he is escorted out of the building with his ritual cardboard box of belongings, he hands a memory stick over to a younger colleague, which reveals things about that waste matter. Basically, the mathematical model of risk that the firm has been using for the last few years is in the process of being proved wrong, and the firm is about to be destroyed by the extreme worthlessness of the “assets” it holds. It has taken risks that were far, far too big, and leveraged them insanely. It is about to be wrecked. (For the details of such blunders, try reading this book.)

This is where the action gets truly interesting. In a regular Hollywood movie, this bad news would be suppressed, by villains, and during the rest of the movie, culminating in a huge political crowd scene, these villains would be identified and either themselves killed or else publicly humiliated. Stanley Tucci would jump off a skyscraper to his death, or would be murdered. Major goodies would fight – in several scenes literally fight – to reveal the truth. By the end the ultimate villain, capitalism, would stand accused of having screwed everyone, the villains having all asserted their belief in free market economics and the goodies having also mentioned their preference for state intervention to ensure fairness, justice, etc.

What the script-writers of such junk would want to say at the end of their piece of junk would be something along the lines of: Nationalise – or maybe now globalise – the top hundred “banks”, whatever a bank is these days. Put us and all our idiot lefty friends in charge of everything, and all will be well. But actually saying that would be too ideological. Owners of potential bums-on-seats, who buy and sell other stuff for a living and who grasp that putting idiot lefties in charge of everything is idiotic, might stay away. Plus even the idiot lefty scriptwriter tendency must now suspect, what with the twentieth century and all that, that a world run by them and their idiot friends would be an idiotically evil shambles, rather than any sort of answer to anything. So instead, the idiot lefties end their idiotic tale with a general air of doom, with hints of redemption, a romance maybe, a son united with his long-lost father. You know the kind of dross I mean.

In this movie, events take a quite different turn. The whistle blowers are not set upon by gangsters. Instead their message is attended to. It is fed rapidly up the chain of command, all through the night after Stanley Tucci has been fired. A lot of “fucks” are said, but voices are seldom raised. Instead the bad news is faced, and acted upon. They decide to stage a fire sale of all their dodgy assets, and duly sell them at a huge loss the next day (in a scene right near the end of the movie which lasts hardly a minute) to people who are also going to make further huge losses.

In short, capitalism, having made some truly horrible blunders, does its job. Instead of sweeping the bad news under the carpet, capitalism tries to work out how to minimise its losses. The supreme boss, brilliantly played by Jeremy Irons, states at one point that you make money in this business either by being smarter, by being first, or by cheating. With a combination of all three, he leads the rescue act. His underlings having been smart enough to spot what is happening, he decides to unload his toxic assets at a huge loss and thereby get out the door first. The cheating takes the form of not telling the people they sell all the toxicity to how toxic it is. The sellers will never be trusted on Wall Street again, and will end the next day being fired, so they get huge pay-offs.

There are no heroes or villains, or at any rate no villains who do anything conventionally villainous other than some of them talking with British accents. The Jeremy Irons character is only a baddie if you already think that such people are bad. The power that his enterprise exerts over those it employs, and from time to time terminates, is only scandalous if you consider people consenting to very tough and chancy working conditions in exchange for way above average remuneration to be, in general, also scandalous. There are no suicides, although suicide is flirted with by one of the characters. There are no murders. Throughout the movie, everyone talks of people who have been fired as having “died”, as in: forget them. But the only character in the movie who actually does die is Kevin Spacey’s dog.

And there are no noisy crowd scenes where guys in braces and white shirts scream down telephones in a huge chorus. After all, the whole point of the fire sale is to postpone such craziness until the sale is done.

A higher reach of capitalism is shown, in other words, not as an out-of-control mob, but as an intelligent conversation among intelligent people who are willing to accept the personal consequences to them of their blunders and to deal with some of the consequences of these blunders as best they can. They know that the bad news, which they have decided to pass on to the world (with their actions if not with their words during the fire sale) just as soon as they themselves have worked out how bad it is, is going to be very bad indeed. But it is in their interests to pass on the bad news (almost) as quickly as they can, which they do.

These guys were grabbing off huge amounts of money for what turned out to be the time when they were making all their worst blunders. The Jeremy Irons character apparently got 86 million dollars last year. He will lose a large chunk of his huge fortune, but by no means all of it. So if you want to interpret all this as capitalism being evil, you won’t have any problem doing so.

On the other hand, there is no talk of any politicians being dragged in to rescue things, i.e. to do what politicians do, which is suppress bad news until they have worked out how not to take any of the personal blame for it themselves. The contrast between what happens in this movie and how politics works is made very clear, for any who are inclined already to note such contrasts. Politicians deal with problems by fudging them over a period of months, years, even decades. Capitalists deal with their problems pretty much over night. In this movie, this is literally what they do.

I guess this is the kind of story that only a very few people want to be told, hence perhaps the emptiness of the West End cinema we were in. This despite the movie having been nominated for an Oscar for its screenplay, a fact I learned here, at its official website. Warning: there is stupid music at that website. I learned from this website that this movie, because of its lack of “action” and of huge and insane crowd scenes and despite the star or near star status of several of its lead actors, only cost just under four million dollars, i.e. less than a twentieth of the Jeremy Irons character’s take-home pay last year. Despite the emptiness of the cinema I saw it in, Margin Call has already made money. Good, because that means that J. C. Chandor will presumably get the chance to make more movies.

On the subject of music, all great movies – and this one is at least a very good movie – have their own special atmosphere. A key atmospheric ingredient of this movie is not, as I say, noisy hysteria. Instead we contemplate the musically unaccompanied silence of the night. But music features prominently as a metaphor, that silence being the point. Jeremy Irons says that his job is to listen to the music, and from where he stands, there is now no music. It just stopped. The economic news from now on, in other words, is going to be very, very bad. Music, as in actual music, is used very sparingly in this movie, and all the more tellingly because of this. The only really assertive music comes when Kevin Spacey is asleep in his chair at about 5 a.m., and it stops abruptly when he suddenly wakes. It’s a great classical piano piece that I recognised the tune of and know perfectly well but could not name. Chopin, I think, but dammit, I can’t be sure. This, and the fact that I don’t really quite get the movie’s title, were the only irritating things to me about Margin Call.


13 comments to What capitalism does when the music stops

  • Jack Olson

    I saw the movie on DVD. It is one of the best movies I have ever seen about the financial industry, much better than “Wall Street”. If the movie has a villain, it is Irons’s character, who orders his staff to unload all the bad investments before the news gets out about how bad they are. He rationalizes this by pointing out many financial debacles of the past and arguing that they are periodically inevitable. While he is an unattractive character, he is correct.

    Don’t believe anyone who tells you that our present economic problem, or that of any era, is due to rich men’s greed. Poor people have just as much greed as the rich, as you can easily prove by the social class of the typical lottery ticket buyer. Poor people merely have less money. The problem isn’t rich men’s greed, it’s their access to government power, of which they have vastly more than poor people do.

  • Laird

    I saw a review of “Margin Call” in the Wall Street Journal a few months ago. It certainly looks interesting. Thanks for reminding me about it.

    If you’re interested in a movie which basically tells the same story from the government’s side, “Too Big to Fail” is worth seeing. Some very good actors, and the events chronicled are reasonably accurate (if a bit skwede toward the perspective of government). No sex, violence or car chases, however; sorry.

  • I am going to guess that this film is actually set in August/September 2007. That was the moment when all kinds of factors that were supposed to be uncorrelated or lightly correlated in the risk models all moved in unison and everything collapsed. It wasn’t until 2008 that the markets tanked in general as a response to this (taking various institutions with them), but people watching carefully in the markets then knew that everything was over, and nothing that has happened since has come as much of a surprise to such people, except, perhaps, that politicians and bureaucrats have turned out to be even stupider than was supposed. (The principal sin of politicians and bureaucrats since 2007: being unwilling to accept that it is all over and thus unwilling to let it collapse. Instead, they generally try to do more of it). These risk models had been invented by people with relatively little experience of markets, and in a lot of cases then imposed by regulators on institutions, before being gamed by market participants (which means everyone from market traders down to someone borrowing money to buy a car) who discovered their weaknesses either deliberately or through the wisdom of crowds.

    On the title. When you buy a normal product such as a house or stock in a company and put up the money yourself, you put up the whole price, and if the price goes down, you can lose any amount up to the whole value of the stock or house.

    If, on the other hand, you borrow money to invest in that stock or the house, you will put up a portion of the value but not all of it, and borrow the rest. When buying a house, this will be called a “deposit”. When buying stock with borrowed money or when investing in other financial instruments, this is called “margin”. It may be 25% of the value of the underlying instrument or some other value, but the idea is that your loss (at least in the short term) is unlikely to be greater than the margin. However, such a loss is possible if the value of the underlying asset goes down by more than the amount of the (deposit or) margin.

    In the event that the markets move such that the loss on the underlying asset eat up most of the margin, your broker will call you and ask you to deposit more margin, so that he is not at risk if your investment loses more value. To keep the investment, you must give him more money so that the margin will once again be 25% (or whatever the appropriate margin ratio is) . This is called a “margin call”. In the event that you do not pay him more margin, he will automatically close out your position (sell the stock or other asset), and deduct the loss that has been made on it from your margin. If this happens to a lot of people at the same time, then this will cause the value of the asset to fall further. If the market falls so far that the losses of many people are greater than the margin they have deposited with the broker, then the broker is potentially in trouble. (This is akin to a bank foreclosing on a mortgage, and then selling the house for less than the remaining value of the loan).

    When you get into derivatives markets, the expression “margin call” is more general than this, but this is the gist of it. The investor’s liability for losses is greater than the money he has given the broker. When the value of the losses approaches the amount of money the investor *has* given the broker, the broker will ask for more money. This request is a “margin call”

  • Since writing this posting, I got the chance to talk to someone else about this movie, and he said something quite illuminating, which is that it is the story of what Bear Stearns should have done (had a quick fire sale), as opposed to what they did do (drag in the politicians). That sounds right, I think.

  • Percy Dovetonsils

    Poor people have just as much greed as the rich…

    I worked in non-profits (NGOs) for close to a decade. I can assure you that the “human services” industry is as conniving and full of entitlement as any Wall Street firm.

    Glad to see this movie discussed somewhere where people have an idea of how markets actually work. I personally loved it, for the reasons noted above and more. But here’s something that didn’t sit with me upon thinking about it:

    Markets run on trust, and the broker/dealer/investment community is a finite one, where information/gossip flows quickly. By screwing their customers with this fire sale, and knowingly starting a meltdown that will ruin other traders if not firms (the movie seemed pretty clear on this), wouldn’t this firm’s name be sullied completely? Would you buy anything from them after this?

    I didn’t get the feeling that this firm was large enough/central enough so that others HAD to deal with them, as with Goldman Sachs; I got the impression this was a firm more along the size/clout of Lehman or Bear.

    Or was the movie essentially saying, “yes, well, this sort of thing happens. People will be angry, then cool off, and we’ll be back to business”?

    (And yes, Jeremy Irons is utterly fantastic in this. The acting across the board is excellent in this.)

  • BigFire

    Michael Jenning is correct. This film does not have a timestamp on it, but it’s far more likely that it took place in 2006-2007. The unnamed firm is most certainty Goldman Sach, who offloaded most of their MBS and actually bet against their own customers on these products.

    There are 4 good speech in this film, the one by Tucci’s character’s on his contribution to society when he was an engineer, building bridges, and his just fired position of crunching a different sets of numbers. Two speech by Paul Bettany’s senior floor trader about how to spend $2 million and his disdain for the normal people wanting his service of bending financial rules. And finally Spacey’s final sales briefing speech where he went completely off company script and just tell the truth to his troops.

  • Jack Olson

    One illegal way to make money in the financial industry is “front-running.” If you run a wirehouse processing customers’ buy and sell orders and you also run an investment company, you can place orders for your investment company ahead of the customers’ orders. If you know that processing a buy order will cause the price of a stock to rise, you place an order for your own account ahead of the customer’s so you get a lower price. It works conversely on sale orders, in which you sell on your own account before executing the customer’s sell order so you get a higher price.

    Bernard Madoff ran both a wirehouse and an investment fund which produced good returns with remarkable regularity. At least some of his investors assumed he was producing these steady returns through front-running and wanted to get in on it. They are victims of a Ponzi yet how much sympathy do they deserve?

  • Bod

    Bernie’s investors ran from little old ladies who put all their money in his fund because he seemed so honest, right thru’ to hard-nosed investors with diligence teams who know the business inside-out, and all sorts in the middle, with financial advisors.

    You can’t do financial advisory services in the US unless you know about front-running, and, since most of the dollars weren’t from little old ladies, I think we can be utterly certain that most of the investors either failed in their fiduciary responsibilities to their investors and were simply greedy, or were just greedy.

    Let’s not forget the veneer of respectability that fund management firms acquire by being audited regularly by the SEC, who permit them to stay in business.

  • Johnathan Pearce

    Thanks for posting this, Brian. I am going to see this tomorrow evening. And don’t worry about the spoilers – I will enjoy the film even though some of the plot is familiar to me. And being in the financial industry myself, having worked in it in some shape since the early 90s, it will be interesting to note how accurate it is.

  • Thanks JP. Look forward to hearing your take on this.

  • By the way, last night I learned something else of interest about this this movie. Apparently the whole thing was shot in about a week, which was why they were able to afford the likes of Spacey, Irons, Demi Moore, and so on, to be in it. Also present, Simon Baker, aka (for TV addicts like me) The Mentalist.

    Such people cost, but not so much for only a few days. Also I bet they dropped their rates a bit to be in such an intelligent movie, with no tedious action fakery to do a dozen times over while the techies invent incomprehensible reasons for doing this shot once AGAIN. And then again… and again…

    Interestingly, the thing had the feel of a play about it. I think the above goes some way to explaining that feeling. It meant that the scenes were being freshly acted, so to speak, before your eyes, by people who really understood what they were saying, the way it must be difficult to if you are acting over a period of weeks or months with lots of special effects going on.

  • jhc

    My wife and I watched Margin Call at home recently and I agree it’s a good film. I’d recommend it as well.

    I was pleasantly surprised to find that the characters acting in very believable ways, as opposed to the characterizations in many other films (about many topics, not just finance) these days.

  • Myno

    Wow. I had stayed away because of Spacey’s politics. Boyo was I wrong. Terrific film. Thanks for the heads up.