Margin Call – The Film

Happened to watch the movie ‘Margin Call‘ the other day. I have to say this – it’s one well-made film on the financial crisis of 2008.

The film is set on the trading floor of a fictional (?) investment bank on the Wall Street. The events unfold over a timeframe of a little more than 24 hours or so.

What attracted me to click on the ‘Play’ button for this one? The actors’ names of course – Kevin Spacey, Paul Bettany (familiar to me through the ‘Avengers’ franchise) and Stanley Tucci (I’d liked him in one of the ‘Transformers’ movies).

A few things that I think the film got it right:

• Not dumbing down the jargon and the use of natural conversation style among the bankers – e.g., the bit about actuals exceeding the threshold shown by VaR models.
• A rocket scientist works as a trader.
• The top management is shown to be almost clueless about the actual business model followed by their firm and their ignorance of operational nitty-gritties appeared very real! The head of the firm seeks to know the issue thus: “Maybe you could tell me what is going on. And please, speak as you might to a young child. Or a golden retriever. It wasn’t brains that brought me here; I assure you that.” (Emphasis mine)
• Clueless though they are, the top guys very well know how to get out of a sticky situation by hook or crook – here, they decide that a fire sale is the best option, hence set up incentives for traders to achieve this; at the end of the day, many are retrenched too.
• The way the retrenched employee played by Tucci is cajoled (or in a way, threatened) to return to and stay in office till the fire sale is over. And just how is he threatened? He’s told that his severance package and health cover – which he’d been promised less than 24 hrs earlier – will be withheld and also he’d be put through litigation, if he doesn’t oblige; on the other hand, he’d be paid by the hour, if he agrees to come over!
• A scapegoat in the form of the Risk Officer, a lady, is also found really fast so that the management can easily hide their incompetence and move on. This is despite the fact that she had alerted about the build-up of risks earlier but was not taken seriously by the management. The misogyny is hard to miss!

In India, there is no active bond market unlike in the US. Instead, it’s the banks which fund the working capital and capex of businesses. And, at least from 2015, the growth in NPAs of banks has been a matter of concern in the economy. I recalled a few real life parallels i.e., some I have seen/experienced in my career, for some of the conversations / events shown in the movie.

At one point, the character played by Bettany says this:

“The funny thing is, tomorrow if all of this goes tits up they’re gonna crucify us for being too reckless but if we’re wrong, and everything gets back on track? Well then, the same people are gonna laugh till they piss their pants cause we’re gonna all look like the biggest pussies God ever let through the door”

More often than not, it is the frontline officials who are able to identify stress in an account – both in the case of existing relationships and new ones. However, again more often than not, they are unable to take proactive action to prevent slippages in asset quality or prevent extending finance to weak ones. Why, you may wonder. I’d say it is due to the fact that it’s more beneficial to the bank and the borrower to not recognise an NPA at the earliest – the bank doesn’t have to make provisions and take a hit on the bottomline and the borrower doesn’t get to worry about increased finance costs.

In the case of onboarding of new borrowers, if the appraising officials detect something wrong while carrying out due diligence, top management tended to ignore the warnings for the sake of business figures – if the dire warnings come true on a later date, they’d blame the dealing officials for not doing enough and correctly earlier, and if they don’t, they’d haul them over the coals for lost business! I recall how I’d fought (unsucessfully, though) to not onboard a particular business entity, and it turned NPA just after two years.

Another parallel is the way a sacrificial lamb is identified and given up when some loan goes wrong, instead of rectifying the underlying systemic gaps that lead to the issues. In the public sector banking space, in case of bad loans, the dealing officials are often caught up in the disciplinary proceedings of the employer and are also in the crosshairs of institutions like the CBI, CVC & CAG as well as the judiciary. All efforts are directed at ‘nailing’ someone at the earliest, instead of trying to identify whether the processes were faulty. It needs to be remembered that the sector is ever evolving and the borrowers are often a step ahead – the banks’ internal SOPs often fail to keep pace. The information asymmetry in a bank-borrower relationship also works in the borrowers’ favor.

I’d say, Conservatism and a healthy Scepticism are the best friends for a Banker on the lending side of the business.

Coming back to the movie, it is important to note that the movie does not set up anyone as the purely evil antagonist with mala fide intentions to game the system all along. The characters do what they do, as the system itself is so set up and they have to act in the best interests of the firm. It’s very well summarized in this dialogue:

“It’s just money; it’s made up. Pieces of paper with pictures on it so we don’t have to kill each other just to get something to eat. It’s not wrong. And it’s certainly no different today than its ever been. 1637, 1797, 1819, 37, 57, 84, 1901, 07, 29, 1937, 1974, 1987…..92, 97, 2000 and whatever we want to call this. It’s all just the same thing over and over; we can’t help ourselves. And you and I can’t control it, or stop it, or even slow it. Or even ever-so-slightly alter it. We just react. And we make a lot money if we get it right. And we get left by the side of the side of the road if we get it wrong. And there have always been and there always will be the same percentage of winners and losers” (Emphasis mine).

But, is there no way to remedy the ills? In my view, at least a part of the problems can be solved by altering the incentive structure in the system – by this, I do not mean the remuneration pattern, but incentives to nudge behavior of the participants in a certain manner. Noted financial sector analyst Vivek Kaul talks about this in his book “Bad Money: Inside the NPA Mess and How It Threatens the Indian Banking System“.