An unnamed investment bank holding enough of its own
subprime-mortgage-based securities on its books to more than erase the firm’s
entire market value should those derivatives lose only 25% of their value. What
to do? In Margin Call (2011), the CEO, played by Jeremy Irons, makes the call—the firm’s traders are
to unload the entire asset class the next morning. Kevin Spacey’s character has
two major objections—one normative and the other operational. The marginal
place of ethics on Wall Street is well illustrated by how these objections pan
out in the film.
Spacey plays Sam Rogers, the supervisor of a trading floor
who had been with the firm for over thirty years. Operationally speaking, he
warns John Tuld, the firm’s CEO, at 3 or 4 am that the fire sale would have to
be done by early afternoon or the unloading strategy would not work. After a
few hours of heavy unloading without any buying of the asset class from the counterparties
(i.e., swaps), word on the street would pummel the remaining securities’ market
value; claims of readjusting a firm’s overall risk only go so far in the face
of such mass selling, and it would be only a matter of time before the market
learns that the derivative securities are largely worthless.
Hence, Sam warns both his boss and the CEO that knowingly
selling crap to the long-established counterparties of the firm’s soon-to-be
unemployed traders would effectively trash the credibility of the firm and its
traders on the Street, and be highly unethical to both the traders and their
counterparties.
Apart from the film, Goldman Sachs knowingly sold its
derivative securities to its counterparties even though the firm’s traders were
referring to the instruments as “crap.” Whereas the fictional firm in the film
lied to counterparties to unload the firm’s entire holdings of the asset,
Goldman Sachs traders lied about the actual worthlessness of the bank’s
mortgage securities in the regular course of business—the profit margins being
too good to pass up. Unlike the fictional firm, Goldman bought insurance that
essentially transferred the risk of the derivatives on the books to AIG and shorted
derivatives sold by other banks. In selling derivatives it would buy later, Goldman
was betting that the value of derivatives would decrease even as the bank’s
traders knowingly sold the bank’s own securitized mortgages to even the bank’s
best counterparties. Goldman’s executives were both smarter and more unethical
than the characters in the film’s fictional bank.
In the film, the CEO has more of a basis in pointing to the
firm’s survival because continuing to hold onto its derivatives that were in
its “pipeline” risked being left standing when the music stops. Looking out
onto a dark Manhattan at 3am from the bank’s high conference room, John says he
does not hear any music in the near future, and it would not be long until
other people in the bewindowed towers see the writing on the wall too. So the
firm must sell all the crap it has as soon as possible, or in all likelihood the firm would face bankruptcy and everyone in
the room would be unemployed. Survival is a given that does not permit
alternatives; moreover, the CEO depicts it as a sort of a moral principle countering
all the resulting harm to others, rather than admitting that it is actually naked
self-interest that is fueling the deceitful fire sale that he was about to
unleash on the firm’s counterparties.
As if the firm were an end in itself, its survival is vital.
The same holds at the individual level; expensive mortgages and other commitments
such as alimony (e.g., to Sam’s ex-wife, who lives in a mansion) make it seem
that continuing those mammoth executive compensation inflows counts as nothing
less than survival. Ethics is easily cast by the wayside as though scruples
were an interesting though irrelevant observation on the way to what must be done. It is as though there were
absolutely no choice in the matter, just as there had been little perceived
choice for Demi Moore’s risk-management character, Sarah Robertson, a year or
two earlier when she passed on the red-flag warnings of Stanley Tucci’s
character, Eric Dale, without due urgency. The lack of urgency, Sarah finally
admits to him just after both had been fired, had seemed at the time to be
necessary.
The lure of the large profit margins on the firm’s manufactured
mortgage-based bonds had undoubtedly been behind the “necessity” not to blow
the whistle. For when an oilman has a gusher spewing out black gold, only a
fool risks what can be extracted for certain today for what one expects will still be available
tomorrow. A bird in the hand is worth two in the bush. Even with Eric’s dire
warning in hand, Sarah could only have saved the firm from its own incompetence
only if the executive committee had gone along.
“How could we have fucked it up so badly?” Sam asks the CEO
at the end. “Don’t be a sour-puss,” replies the enabling top executive in
denial; he had already procured Sarah’s head on a plate for the board, which is
different than going after the incompetence that led to the self-inflicted disaster.
Incredibly, the risk management executives still assumed a sort of entitlement
to hold onto their jobs, as if having nearly brought the firm down was a sufficient
reason to be fired, or resign. There
is apparently no honor on Wall Street—no Japanese willing to fall on their
swords (or even feel the natural sentiment of humiliation)—and no serious
consideration given to the ethical dimension in its own right.
The CEO does not even try to hide his dismissiveness of Sam’s
ethical point that selling stuff that only the seller knows will soon be
worthless in the hands of the counterparties. So Sam tries to appeal to the
firm’s own financial interest. “We won’t be able to sell anything again to our
counterparties,” he warns. Tuld is unswayed, and probably with good merit.
Apart from the film, Wall Street did not punish Goldman Sachs too much for
having knowingly sold “crap” in what Lloyd Blankfein would tell a U.S. Senate
committee was merely “market making.” In general, the lure of profits proves to
be a good thickener of once-aggrieved slights from the past.
In the film, the CEO is utterly unconcerned about the
tarnished reputations of the bank’s traders (many of whom will soon be without
a job). However, it can be argued that approving the $1 million bonuses in the
event of a successful unloading of the sordid excrement is not only oriented to
providing sufficient incentive (i.e., in the firm’s financial interest), but
also makes up for the traders’s loss of established trading relationships.
Even so, the CEO’s maxim treats self-interest itself as a
esteemed, even ethical, principle. It is about one’s own survival and that of
the firm; the strongest surviving both at the firm and individual level. Being
the first out of a burning building is no vice, the CEO contends. In fact,
being the first to spot the fire and get out is laudatory rather than
blame-worthy. However, what of the utter incompetence that had gotten the firm
into such an over-leveraged, risky position in which the established “VAR”
numbers no longer held—the risk being now too great? Does the firm, not to
mention its occupants, deserve to
survive in the exclusive club known as Wall Street? Being the first out of a
burning building could be nothing more than the basic animal instinct of
flight, rather than intelligence.
Moreover, the bloated claim of survival necessity could
simply be selfishness and greed with a complete disregard for the harm one is
inflicting on others (e.g., colleagues in the firm as well as the
counterparties). Yet in the face of the inexorable path of money, such
normative concerns are mere diversions like store windows during the Christmas
season. To a selfish kid bent on what he or she is going to get on Christmas
morning, barely a glimpse goes to the ascetics, not to mention the ethical.
Perhaps the overarching impression that the film presents is that of selfish
children in such lofty positions not only on the Street, but societally as
well.
