Watched Margin Call last night on iTunes and woke up cranky. Here is a short list of things that it gets wrong about Wall Street.
- Helicopters can’t land on rooftops in Manhattan, ever since the Pan Am building incident.
- They don’t do 2am partner meetings. More likely, an emergency conference call, and an early morning meeting.
- Sorry, anonymous grim reapers do not prowl the trading floor. If you get fired, it’s your boss, plus someone from HR/legal, as a witness, to make it less likely the employee will go bizonkers in front of a stranger, and for all the formalities. And yeah, in many cases, if you have a sensitive job, you get cut off promptly, to prevent you sending mail to all, downloading customer files, sabotaging systems.
- Floors always have at least one conference room with frosted glass, or tucked away in the back, so you can do sensitive stuff without everyone on the trading floor knowing about it.
- OK _ terrible IT nitpick but _ trading PCs need to lock after about 30 minutes unattended. The whole floor is not logged into Bloomberg and the trading system in the middle of the night so the cleaning lady can see positions, send some emails, book some trades.
- Sorry, the office culture of top firms is more Seal Team 6 than this sad sack bureaucracy. Your boss doesn’t say that he doesn’t know what the fuck you even do. There are people with the charisma of Vince Lombardi, the humor of Robin Williams, the brains of Richard Feynman (OK, exaggerating a little). And of course complete tools with unbridled ambition and lack of scruples. They don’t do these Glengarry Glen Ross speeches where they say you will get $1.4m to blow up all your customers. The sad part is they don’t have to. The circumstances are ambiguous, motives are plausibly deniable, no one knows what the market is going to do, salesman actually believe they’re giving their customers a great deal.
- OK, here are the things that really put the piss in my oatmeal. RISK DOES NOT COME OUT OF NOWHERE AND GROW LIKE MOLD IN THE BASEMENT. You don’t just wake up one day and realize the firm is going to blow up. The first question would be, who the fuck is in charge of hedging and monitoring this book, and how the fuck did they not do it?
The basic problem in the financial crisis was, if you originate mortgages the old fashioned way, you get a small number of randomly distributed defaults, which are predictable in a big pool. If you have high pressure mortgage salesmen faking applications, you get a very large number of defaults. And if you take the worst subprime loans, and try to sprinkle AAA fairy dust on them with ‘overcollateralization’, models assuming old-fashioned underwriting, and compliant credit rating agencies, you’re going to have a big problem.
- The next question would be, WHO LEVERED THE FIRM UP TO THE POINT A MODERATE INCREASE IN VOLATILITY TAKES IT DOWN? It’s one thing if the market crashes and blows it up. But it’s not inevitable and innate and part of the circle of life that firms blow up. Well, it is and it isn’t. Wall Street breeds panics like Kansas breeds twisters, and someone is always going to screw up and end up with their ass hanging in the wind. But some firms and some financial systems are going to be resistant to storms, and some aren’t. Someone went and built this firm out of bad lumber because it was cheaper. In a normal business, there is nothing that makes you take on market risk that can bring down a properly capitalized firm. You do it because you get the upside and someone else gets the downside _ moral hazard.
To use another analogy, there are always going to be fires in cities. In the old days, cities would burn down periodically. But it’s now possible to have building codes that ensure fires don’t spread, and to have fire departments and inspectors on the job, and smoke detectors in people’s homes. The questions are: who set the fire, who built the building out of bad lumber to make it a fire hazard, and then why did it spread to the whole city?
Beyond the proximate effects of the real estate debacle, the financial crisis went down because of moral hazard (in some cases thinly disguised looting), excessive leverage, and dangerous interconnections that made the whole system vulnerable to a domino effect if one big firm went down.
And that leads to the biggest question of all: granted that there may be firms taking big risks and blowing themselves up from time to time, how the hell does it become the job of the taxpayer to give them money when they do?
This stuff is not too complicated to explain. If you don’t take a stand on the causes, ascribe it to the fickle winds of fate, the risk fairy, and normal people just doing their jobs, then wittingly or not, this film is a tool of the people who manufactured the crisis, and now try to blame everyone but themselves.
Skip this move. Go see ‘Inside Job’ instead.