Brandon Lee
The 2011 American drama film Margin Call, written and directed by J. C. Chandor, is based on the events of a 24-hour period at a large Wall Street investment bank during the initial stages of the 2008 financial crisis. The plot centres around a fictional investment bank facing a crisis similar to that of Lehman Brothers, where the firm tries to reduce its exposure to toxic mortgage-backed securities. The film's screenplay was informed by Chandor's own real estate investments in New York City before the financial crash.
| Characteristics | Values |
|---|---|
| Film name | Margin Call |
| Release date | 2011 |
| Genre | Drama |
| Director | J. C. Chandor |
| Cast | Kevin Spacey, Paul Bettany, Jeremy Irons, Zachary Quinto, Penn Badgley, Simon Baker, Mary McDonnell, Demi Moore, Stanley Tucci |
| Based on | Unnamed investment bank, amalgam of investment banks, drawing heavily from the culture of Lehman Brothers, primarily a depiction of the actions of Goldman Sachs |
| Plot | A fictional investment bank going through a Lehman-like crisis, trying to reduce its position in mortgage-backed securities |
| Similarities | Similar to events during the 2008 financial crisis, including the collapse of Lehman Brothers |
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What You'll Learn
The 2008 financial crisis
In the years leading up to 2008, banks and financial institutions in the United States engaged in aggressive lending practices, offering mortgages to individuals with subprime credit ratings. These mortgages were often adjustable-rate mortgages (ARMs) with low initial "teaser" rates that increased significantly over time. As the Federal Reserve raised interest rates, many borrowers found themselves unable to keep up with their mortgage payments, leading to a surge in defaults and foreclosures.
At the same time, banks and investors were bundling these mortgages into complex financial products known as mortgage-backed securities (MBS) and collateralized debt obligations (CDOs). These securities were sold to investors, often with high credit ratings that did not accurately reflect the underlying risk of the mortgages. As the housing market began to decline and default rates increased, the value of these securities plummeted, leading to significant losses for banks and investors.
The crisis reached a critical point in September 2008 with the collapse of several major financial institutions. On September 15, Lehman Brothers, a prominent investment bank, filed for bankruptcy after suffering significant losses due to its exposure to toxic mortgage-backed securities. This event sent shockwaves through the global financial system, triggering a loss of confidence and a liquidity crisis.
In an effort to stabilize the financial system, the US government intervened with a series of bailouts and rescue packages. On September 16, the Federal Reserve and the US Treasury provided an $85 billion loan to insurance giant AIG, which was on the brink of failure due to its exposure to credit default swaps. Additionally, the Federal Reserve announced a series of measures to inject liquidity into the financial system and prevent further failures.
The impact of the 2008 Financial Crisis was profound and widespread. Stock markets around the world experienced sharp declines, and many countries entered into recessions. Millions of people lost their jobs, homes, and life savings as a result of the crisis. The crisis also led to increased regulatory scrutiny of the financial industry, with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, aimed at preventing similar crises in the future.
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Investment banking lingo
The 2011 American drama film Margin Call is based on the events of a 24-hour period at a large, unnamed Wall Street investment bank during the initial stages of the 2008 financial crisis. The film is written and directed by J. C. Chandor, whose father worked in investment banking, and the screenplay was informed by Chandor's own foray into real estate investments in New York City before the financial crash. The film's plot centres around a fictional investment bank going through a Lehman Brothers-like crisis, with similarities to some events during the 2008 financial crisis, including the actions of Goldman Sachs.
The film's title refers to the finance term for when an investor must increase the securities or other assets used as collateral for a loan when their value falls below a certain threshold. In the film, the investment bank begins laying off a large number of employees, including Eric Dale, the head of risk management. Dale attempts to warn his colleagues about the implications of a model he is working on, but his concerns are ignored. The model suggests that the firm's risk profile is wrong, and that their position in mortgage-backed securities is over-leveraged, which will lead to bankruptcy.
The film follows the actions taken by a group of employees, including Dale's colleague, Peter Sullivan, an analyst who completes Dale's model and discovers the firm's over-exposure to toxic, mortgage-backed securities. The firm's CEO, John Tuld, is informed of the problem, and a meeting is held to discuss the course of action. Tuld stresses that avoiding bankruptcy is the top priority, even if it means damaging the firm's relationships and reputation and causing instability in the markets.
The film received positive reviews and was nominated for several awards, including an Academy Award for Best Original Screenplay. It grossed $19.5 million worldwide, against a budget of $3.5 million.
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The fall of Lehman Brothers
The 2011 film Margin Call is based on an amalgam of investment banks, drawing heavily from the culture of Lehman Brothers. The film is a fictionalised account of the 2008 financial crisis, focusing on the actions of a group of employees during the financial collapse. The plot centres around a fictional investment bank facing a Lehman-like crisis, trying to offload its exposure to toxic mortgage-backed securities to save the firm.
Lehman Brothers, the fourth-largest US investment bank, collapsed in 2008 during the financial crisis. The fall of Lehman Brothers was precipitated by the subprime mortgage crisis. Lehman had held on to large positions in subprime and other lower-rated mortgage tranches, and when market volatility increased, many of its hedges became ineffective. On June 9, 2008, Lehman Brothers announced a $2.8 billion second-quarter loss, its first since being spun off from American Express. This led to a major management shake-up, with CEO Richard Fuld and his senior executives being stripped of their authority. Joe Gregory resigned as president and COO, and Erin Callan, who had only been appointed CFO in March of that year, was also forced to resign.
Lehman Brothers' collapse caused extreme volatility in the already distressed financial markets. The Dow experienced its largest single-day point loss, largest intra-day range (over 1,000 points), and largest daily point gain. The fallout from the collapse of Lehman Brothers led to what many have called a "perfect storm" of economic distress factors, eventually resulting in a $700 billion bailout package prepared by Henry Paulson, the Secretary of the Treasury, and approved by Congress.
The film Margin Call captures the complexity of the crisis at Lehman Brothers, portraying an unnamed investment bank that has bought too many subprime mortgage assets, which have turned out to be toxic. The film also reflects the culture of Lehman Brothers, with the fictional CEO John Tuld being a combination of Merrill Lynch's ex-CEO John Thain and Lehman Brothers' ex-CEO Dick Fuld. The character of Tuld, played by Jeremy Irons, is described as never being allowed to be as fearsome as the real-life Dick Fuld, known as "the Gorilla of Wall Street".
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Goldman Sachs' early move
The 2011 film Margin Call is based on the events of a 24-hour period at a large, unnamed Wall Street investment bank. The film is a fictionalised account of the 2008 financial crisis and does not depict any real Wall Street firm. However, the plot has notable similarities to the actions of Goldman Sachs during that time.
Goldman Sachs, like the firm in Margin Call, was heavily exposed to mortgage-backed securities. At the urging of two employees, the firm moved early to hedge and reduce its position in these securities. This mirrors a comment made by the CEO in Margin Call, John Tuld, about the advantage of moving first. In the film, the investment bank discovers that the assumptions underpinning its risk profile are wrong. The firm's position in mortgage-backed securities is over-leveraged, and the debt incurred from these assets will lead to bankruptcy.
In real life, Goldman Sachs was facing similar issues with its exposure to subprime and other lower-rated mortgage tranches. The firm had held on to large positions in these securities, and it is unclear if they were unable to sell the lower-rated bonds or chose to keep them. However, the similarities between the film and reality end there. Unlike the fictional firm, which considers a fire sale of its problematic assets, Goldman Sachs did not have to contend with the moral dilemma of whether or not to sell off its MBS positions.
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The housing market crash
The 2011 American drama film Margin Call is based on the events of a 24-hour period at a large, unnamed Wall Street investment bank during the initial stages of the 2008 financial crisis. The film does not depict any real Wall Street firm, but the plot has similarities to some events during the crisis. The fictional firm in the film is facing a Lehman Brothers-like crisis, where it is trying to reduce its exposure to soured mortgage-backed securities to save the company.
In the film Margin Call, the investment bank begins laying off a large number of employees, including Eric Dale, the head of risk management. Dale tries to warn his colleagues about the implications of a model he has been working on, but his concerns are ignored. The model predicts that the firm's risk profile is wrong and that their position in mortgage-backed securities is over-leveraged. The debt incurred from these over-leveraged assets will bankrupt the company.
The film depicts the actions taken by a group of employees during the financial collapse, including their attempts to sell off their mortgage-backed securities. This is a moral dilemma for the characters, as they believe the housing market is about to crash, but they are unsure if it is ethical to try and unload their stock. The firm is not using insider information, but rather their own risk projections and trending data.
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Frequently asked questions
The film Margin Call is based on an amalgam of investment banks, drawing heavily from the culture of Lehman Brothers. The film also depicts the actions of Goldman Sachs.
Lehman Brothers was at the centre of the 2008 financial crisis. In 2008, the company faced an unprecedented loss due to the subprime mortgage crisis. This resulted in a major management shake-up, with CEO Richard Fuld and his team being stripped of their authority.
Goldman Sachs moved early to hedge and reduce its position in mortgage-backed securities, essentially mirroring the actions of the fictional firm in Margin Call.
