A broker's demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when an account value depresses to a value calculated by the broker's particular formula.
So your firm is leveraged 40 to 1. And its holdings are shaky - those damned European investments. Regulators show up to make sure you have enough capital to be legit. You’re ready for them -the day before, you moved funds to cover yourself.
But now Europe sinks further. Your investments there are worth a fraction of the $6.3 billion bet you made. Frantically, you try to sell parts of the firm, then the whole thing. Meanwhile, your clients are pulling their money as fast as they can --- to slow the drain, you stop wiring funds and start mailing checks.
Nothing works. You declare bankruptcy. Government agents swoop in - and can’t locate $600 million in client funds. Crazy! Where did $600 million go?
You resign. Because that’s what CEOs should do when it gets this bad. (Magnanimously, you refuse to take the $12.1 million payout specified in your contract. The checks you mailed to your customers? They bounced.) Now you must decide whether to testify at a government hearing or take the Fifth Amendment, a virtual admission of guilt.
A movie plot? Not at all. This is what happened in 2008, just with mortgage-backed securities as the falling knife and Lehman Brothers and Bear Stearns as the first domino's. But yes, this is, in broad strokes, the story of “Margin Call.”
It’s also a story in the news -and the CEO I’m talking about here is Jon Corzine, former Governor of New Jersey and onetime CEO of Goldman Sachs.
I don’t imagine Corzine would like to see a movie about his company, but you might - and you can stream it, or see it at a local theatre where it is still playing.
Why see “Margin Call”? As the poster says, “Something big is going down.” Sadly, financial powerhouses can take you down with them; it’s good to know how these things happen. And they will happen again.
The first great thing about this nail-biter of a movie is that there are no easy-to-spot villains. Terrible things happen -this is Wall Street, where clients have become counter-parties and it makes perfect sense to bundle a bunch of crap, tie a ribbon around it and hawk it, even as you are selling it short in the firm’s account because you know it’s going to crash and burn. So what? The counter-parties are adults. No one held a gun to their heads. That’s why, in the preview, I see the key line as Jeremy Irons saying, as only he can, “That we may survive.”
Stanley Tucci, Kevin Spacey, Simon Baker and Demi Moore all have their roles to play. But the overview belongs to Irons, as the head of the firm:
“So you think we might have put a few people out of business today. That it’s all for naught. You’ve been doing that every day for almost forty years, Sam. And if this is all for naught, then so is everything out there. 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 it’s ever been. 1637, 1797, 1819, ‘37,’ 57, ‘84, 1901, ‘07, ‘29, 1937, 1974, 1987- 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 of money if we get it right. And we get left by 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. Happy foxes and sad sacks. Fat cats and starving dogs in this world. Yeah, there may be more of us today than there’s ever been. But the percentages - they stay exactly the same.”
Grown-up talk. For grown-ups (and their smarter kids). So gather the clan, skip the shopping, and watch closely. Because this is going to happen again.