Margin Call holds surprises about life on Wall Street

Advisor versus Film: Margin Call

Film: Margin Call (2011)

Expert: Kent Womack, professor of finance at the University of Toronto’s Rotman School of Business, and past vice president of equities at Goldman Sachs.

Accuracy rating: 7/10

Set at a fictional Lehman Brothers-style investment firm in the early days of the 2008 financial crisis, Margin Call (2011) bills itself as an inside look at the meltdown. It stars Zachary Quinto as a young risk analyst, Peter, who discovers unstable assets could bankrupt the firm. The news goes up the corporate ladder, from Peter’s manager Will (Paul Bettany) to his boss’s boss, Sam (Kevin Spacey) all the way to CEO John (Jeremy Irons). Over the course of a night, they concoct a risky trading scheme in a last-ditch effort to limit damage to the company.

Writer and director J.C. Chandor says he drew on his father’s nearly 40-year career at investment bank Merrill Lynch for the screenplay. What’s more, the film was shot in the recently vacated New York offices of an investment firm.

Beyond these touches of authenticity, the film gets most things about the investment world right, but exaggerates some aspects, says Kent Womack, finance professor at the University of Toronto’s Rotman School of Business.

So what’s right and what’s wrong?

The unstable assets

The fictional firm has been acquiring mortgages and packaging them to be sold to investors. These are known as mortgage-backed securities.

The problem is, as Peter discovers, their worth on the market is faltering. If the firm doesn’t sell all its mortgage-backed securities, it could go bankrupt.

Womack says this is broadly faithful to what happened in 2008.

“Many of these investment banks that had sold these packages of mortgages to investors were still holding a lot themselves. That was a fairly significant issue in the Lehman Brothers collapse,” he says.

But the intense 24-hour period between discovery and damage control in the movie is too fast, he adds. In 2008, it took months for people to realize the scale of the problem. And, “one of the bigger artistic licences taken in the movie” is that a single risk analyst would uncover the unsteady value of these products, he adds.

“There’s very little evidence that [the crisis] was a big surprise to anybody. They knew that the risks were big.”

Work culture

Some of the film’s most telling inaccuracies are about how the traders live and work.

Through the movie, as senior management learns of the firm’s problem, it’s clear they don’t understand what the traders and risk analysts do. In real life, their ignorance would be unlikely, says Womack.

“There’s pretty good informational flow all the way to the top,” he says, and the movie’s suggestion otherwise is “a little bit naïve.”

But the firm’s cutthroat culture is accurate, he says.

While atmosphere varies between firms, Womack says some are shark tanks. He cites now-defunct firm Salomon Brothers, where in the 1980s, workers were “just meaner than mean, and people didn’t have any loyalty to each other.”

At least there are more women working on Wall Street than the movie lets on, says Womack. Margin Call features one woman, Sarah (Demi Moore), who is chief risk management officer. “It’s not that extreme these days,” he says.

Sarah is turned into a scapegoat by her colleagues – much like real-life Lehman CFO Erin Callan. She was promoted to the position in 2007, and “suddenly found herself defending the company’s financial position against skeptics and short sellers” in 2008, reports Bloomberg. She left the company in July 2008 and the industry itself in 2009.

The degree of amorality portrayed at the fictional firm, where few blink at mass layoffs and everyone goes along with a plan to sell investors the bad assets, is also exaggerated, says Womack.

Sky-high salaries

In the film, junior risk analyst Seth (Penn Badgley) irritates his co-workers by talking incessantly about salaries.

“We’re 23 years old […] I made nearly a quarter of a million dollars last year,” he says, in one of many non sequiturs about how much he earns.

This isn’t a myth, says Womack, explaining that even young Wall Streeters can make between $200,000 and $400,000 a year. But the detail that the film’s former head of risk management Eric (Stanley Tucci), was living paycheque-to-paycheque before being fired, is still realistic, he says.

“Absolutely true,” says Womack. “I had a boss who was making in the neighbourhood of $1 million. He would be borrowing all year long, and by the time he got his bonus [the next] January he had to pay it all to the bank.”

The escape plan

The climax of Margin Call comes when firm’s CEO decides the only way to save the company is to sell its risky assets before other investors catch on—a real-world concern, says Womack.

“Once everybody sees that you’re desperate, the prices are just going to fall out of the sky,” he explains.

The traders initially object, saying that their relationships with people across Wall Street will be ruined, but ultimately go through with the plan. The traders then have to make all deals within the span of a day.

In the movie, traders call buyers instead of using a computer, which may seem antiquated. But Womack says many trades are still done person-to-person.

“The buyer wants to hear the qualitative information as much as possible—why are you doing this? If all you see is numbers on the screen, for small-dollar volume, you don’t care one bit. But when it gets to ten times the normal volume [as it was in the movie], people are saying, ‘Is there a story behind this? I need to know it before I commit myself,’ ” he says.

Womack says while it’s “a stretch” to label Margin Call the best Wall Street movie ever, as some critics have, it does capture how seriously the financial industry misjudged the risk of mortgage-backed securities.