TheFilm, ‘Margin call’, is the best illustration of howinappropriate microeconomic decisions can lead to market failure andeconomic crisis. It presents the viewer with some clues of how thecredit market operates, and how investors use risk instruments toaccess capital to make more investments. Before making analysis ofhow, ‘Margin call’, takes the viewer into very fundamentalaspects of macroeconomic theory, it is prudent to first provide s asummary of the film. A summary will set the stage for analysis basedon the behavior of characters in the respective roles.
Thefilm is about the final days of the 2008 collapse of WallStreet(Werner3). The setting is an investment firm that is on the brink ofcollapse as a result of disastrous speculation the property marketthat the firm had fallen victim. During the crisis so many otherfirms were closing down with massive lay-offs (4). Many filed forbankruptcy after being unable to pay back their debt even with thecollateral they attached to their loans. The investment bank in thefilm was also experiencing the typical circumstances of other firmsduring the crisis. When the film begins, already eighty percent ofits workers had been laid off, therefore, it is inkling about what ison the where just a few days to come.
Eric(Real name: Stanley Tucci), is one of the victims of the massivelay-offs. He is lost his job because, as a risk analyst of theinvestment company, he did not foresee the credit crunch. In fact hedid not realize that the property industry is merely a ‘house ofcards’. However, as the movie clearly depicts, Eric and otheremployees could not do anything because they had to play along withillicit deals because of the huge profits and bonuses they brought tofirm (7). Eric knew that the firm would collapse but he could not sayit because that would mean less profits and bonuses fromover-speculative mortgage market. As he leaves he hands over a USBdrive to Peter (Real name: Zachary Quinto), another analysts who wasnot fired for untold reasons. Peter goes through the files andrealizes that the firm and the mortgage are headed for collapse. Heimmediately call his supervisor, Will (real name: Paul Bettany), whoin turn calls his boss, Sam (real name: Kevin Spacey). Others jointhem and they hold an emergency meeting for the better of the night.At dawn the Chief Executive Officer of the investment firm, John Tuld(real name: Jeremy Irons) is brought by a helicopter. John is,therefore, forced to make a ‘margin call’ after hours ofdeliberation. Now, John manages a corporation whose dealing he hasno idea.
Johnhad to make the margin call because the investment company had tobring its account up to the amount they had deposited with abrokerage company. It is only through a margin call that they canconvince their customers that the hedge funds they given to them wereworth the amount quoted. This would provide them with an opportunityto dump the holdings before customers could know that they wereworthless- an account that customers could see as a betrayal(Walsh40). From this movie the viewer can learn that many firms mademisleading speculations and created hedge firms that were not worththe value quoted. They used the same hedge funds to bet money againstthem. They would then sell them to their customers knowing that theydid not have as much value.
Thereare a number of microeconomic themes that are evident in the film.They include: therelationship between firms in the economy, the role of investmentbanks in the economy, the concept of hedge funds, private equity andhow it can used to make investments, market failure, the role ofgovernment in mitigating market failure (regulatory considerations),private wealth management, market liquidity and efficiency.
Relationshipbetween firms and households is what produces goods and services inthe economy. In the movie customers get hedge funds from aninvestment bank so that they can invest in mortgage industry(Agarwal,Vikas, and Naik 72). It retains the same concept in macroeconomictheory investments that depends on the speculative motive of usingmoney. The investment bank gave worthless hedge funds to itscustomers because it speculated that the booming mortgage industrywould make very high returns and bonuses.
Hedgefunds- It is a macroeconomic theme in the film that revolves aroundthe speculative nature of investors. Hedge funds are a new productdeveloped by investment banks to allow exposure of customers todifferent asset classes more efficiently and at a lower cost and withless transparency than other risk instruments. Investment banks aresupposed to disclose the value of assets they use to bet hedge funds.In the film, the investment bank quotes hedge funds that have novalue hence, misleading customers to make heavy investments on arisk instrument that is not worth the accumulated value of theilliquid asset (mortgage houses in the movie’s case).
Investmentstrategies- The film reveals how risk analysts could tell the companywas going to collapse due to the continued use hedge fund strategiesunethically while leveraging on the economic conditions of investingpersons. For instance, must have abused the arbitrage strategy andother macro-level strategies to make huge profits from the hedgefunds. They simply exploited pricing inefficiencies in the mortgagemarket and combined long positions to make more return.Alternatively, they must have leveraged bets on the anticipated pricemovements on the stock markets, interests’ rates, and foreignexchange to exploit customers.
Marketinefficiencies due to externalities- The film brings into focus thetheme of government intervention to mitigate market risks associatedwith externalities. Regulatory mechanisms help in bringing the marketback on track. The economic crisis resulted from a lack of regulatoryframework on hedge funds because it is a new product that operateswith minimal transparency. Government should come in to initiate moreinvestor education on the distribution patterns that hedge fundsfollow as it is for private equity.
Liquidityand efficiency of risk instruments such as hedge funds: For a longtime, hedge funds have been known to be the most efficient source ofasset financing. However, the 2008 crisis shown in the movie , callsfor more prudent ways of managing liquid portfolio in a way thatcreates the capacity to counter-balance any aspects of liquiditydistress(Figlewski380). In the investment bank could not hedge customers against anyliquidity outflows because the liquidity portfolio could was of lowquality. Customers did not have the knowledge to learn that in timebecause of minimal transparency in the hedge market.
Agarwal,Vikas, and Narayan Y. Naik. "Risks and portfolio decisionsinvolving hedge funds." Review of Financial studies 17.1 (2004):63-98.
Figlewski,Stephen. "Margins and market integrity: Margin setting for stockindex futures and options." Journal of Futures Markets 4.3(2004): 385-416.
Walsh,Mike. "Notes from the margin: The 2012 Melbourne InternationalFilm Festival." Metro Magazine: Media & Education Magazine174 (2012): 40.
Werner,Andrea. "‘Margin Call’: Using Film to Explore BehaviouralAspects of the Financial Crisis." Journal of Business Ethics(2013): 1-12