October 3, 2019

MARGIN CALL (2011)

An Argumentative Essay

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Aduna, John Flomer D. Villanueva, John Mark
H067 - Economics
Margin Call is a 2011 American drama film that was written and directed by J.C. Chandor. The
film was inspired by true events and it took place in a 24-hour period at a fictional investment bank
in the evening of 2008 during the initial stages of financial crisis of 2007-08, or also known as the
global financial crisis (GFC). It was the most serious financial crisis that ever happened since the
Great Depression of the 1930s in the United States. A series of events that shows what really
must have happened at several real-world banks. Where some guy discovers that the high risk
exposure to mortgage-backed securities could lead the whole company to bankruptcy.

The financial crisis started with the mortgages. But first, what is mortgage? Mortgage is a loan
from a bank or a financial institution that helps the burrower purchase a house. To put it simply,
In order for someone to buy a house they have to borrow hundreds of thousands of dollars from
a bank. In return, the bank gets a piece of paper, called mortgage. Every month, the homeowner
has to pay back a portion of the principle, plus interest, to whomever holds the piece of paper. If
they stop paying, they call it default and whomever holds that piece of paper gets the house. It
would be difficult for someone to get a mortgage if they had a bad credit or didn’t have a steady
job. It is a risk for the lenders which they would not want to take. A risk that the burrowers might
just end up defaulting on the loan. But it all changed in the 2000s when investors in the U.S. and
abroad was looking for a low risk, high return investment. They started throwing their money at
the U.S. housing market thinking that they could get a better return from the interest rates the
home owners paid on mortgages. But big time global investors would not want to buy mortgages
from each individuals because that would be a lot. That’s where the MBS comes in. Mortgage-
backed Security is made up of a bundle of home loans bought from the banks that issued them.
Basically, financial institutions bought thousands of individual mortgages, bundle them together,
and sell shares of that pool to the investors. Investors saw that MBS pays a high rate of return
and that it is a safe-bet. Knowingly that the prices of houses are constantly rising up they simply
thought that the burrower would just default on the mortgage which means they could just sell the
house again for more money. Investors went crazy about this and they were desperate to buy
more of these securities. So financial institutions putted in a lot of effort in creating more mortgage-
backed securities. But to create more of MBS they needed to get more mortgages. That is when
they started to loosen their standards and made loans to people with low income and poor credit.
These are called Subprime Mortgages. While investors, traders, and bankers are throwing money
in the housing market, the U.S. price of homes kept rising and rising to the point that nobody could
afford it anymore. A lot of houses were put back to the market and nobody would like to buy due
to its high price. To simply put, the supply went up and the demand went down, and home prices
started collapsing.

That is what happened in the film. The film showed a great display of what happened inside the
financial firms during the times of financial crisis in 2008. The company realized the high volatility
of their market and it started going down. The people does not buy what they are selling anymore.
They had a meeting and discussed the situation and the problem they are currently facing. I agree
with Cohen's plan to remove all the toxic assets before they became exposed to the market with
their worthlessness. Because their market will completely stop if they do not make a move right
away. It's a do or die situation. But Sullivan said that it is only moving slowly and it hasn't stopped
yet. That means they could still make it. Later that morning Will and Seth went after Eric to inform
him about the company's plan and ask him to come back to the office and participate or else the
firm will not be paying his severance and other benefits.

So morning comes and the markets are yet to open, Tuld convinced Roger to go along with
Cohen's plan to remove all the toxic assets. So Roger went on and started the speech to his
traders in preparation for the fire sale. He warned them that by participating, they are effectively
ruining their reputations and ending their careers in the industry. But the firm offers a $1.4 million
bonus to those who would be able to sell 93% of their assigned MBS and another bonus if the
entire sales floor can reach 93% as a whole. After the sales, the firm had a huge loss and then
dumped positions for cents on the dollar, but they were able to sell all of their toxic assets. This
move was really the best move they could do in this kind of situation. What they did is that in order
to save their firm and to survive the crisis they have to give up some of their human resources in
exchange for the greater good of the economy.

Overall, the movie clearly displayed, not only how the financial system really works, but it showed
how and why the financial crisis of 2008 happened. The hype of MBS triggered the crisis. Because
all the other banks and firms are doing it. They were seeking higher profits as it is the basis of its
survival. They did not let themselves fall behind their competitors. There is no one to blame in this
crisis, but everyone. The only enemy is the system itself. In a mixed economy, the people are
responsible with their actions in the marketplace. People set the rules and they took advantage
of the massive expansion of cheap credit and affordable housing and ballooning asset prices. It's
easier and beneficial for everyone, just like it is hard dealing with its aftermath today.