this movie review is sponsored by blinkus use the link in the description below for a one week free trial plus 25 off the annual subscription fee ladies and gentlemen welcome to the plain bagel I'm your host Richard coffin we're back with a third installment of the very popular series investment analyst myself hello explains investing topics and Concepts in pop culture that's our working title that we're going with and today's movie is a very highly requested one when I did my Wolf of Wall Street one this was a very much a top name in the comments section and that is Margin Call this is a 2011 film that talks about the 2008 financial crisis taking the perspective of a Wall Street firm that's trying to save its own ass as things start to collapse around it the main character is Peter Sullivan a risk analyst who discovers that his employer is on the brink of collapse due to its exposure to the falling real estate market and for all the movies about 2008 this one's pretty unique on the one hand it all takes place over roughly a 24-hour period so very quick sequence of events and the film does a really good job of painting a more realistic picture of what Wall Street might be like you know compared to movies certainly Like the Wolf of Wall Street and even The Big Short to an extent it does a really good job of communicating that ruthless Cutthroat and unethical side of Wall Street without turning its characters into caricatures you know the people are very grounded and yet still you see this kind of Detachment from the consequences of their actions so it does a really good job on that front but like other good Finance films it can get confusing at times so my goal here today is to provide a bit of context and to explain some of the more complicated scenes starting off with the title of the movie because for a film called Margin Call there's actually none to be found in the film but simply put a margin call is when your broker requires that you add more money to your account because it's Fallen below a certain value it's lost a certain amount of money and it only ever comes into play when you have leverage meaning you've either borrowed money or used derivatives in both situations it means that you can lose more money than what you yourself have put into the account and because of that the broker will want to protect themselves and make sure that you have a certain level of cash in the account so that if the account keeps falling below a certain threshold they don't absorb that loss of you running away enforce them to take the loss with the debt they've lent to you and the problem with margin calls is that they can lead to a vicious cycle because they force investors to come up with cash very quickly to meet those margin calls which can force them to sell out of other areas or close that position and basically adds to selling pressure in a market that might already be declining so that's why it did play a role in the 2008 financial crisis in this movie not explicitly although you could argue that figuratively it does matter for the context of this film but I figured I'd explain it explicitly since it's never done so in the film anyway with us already a few minutes into the video Let's uh let's hop into the film itself the movie starts off on the trading floor of an unnamed financial institution which many believe is Loosely based on Lehman Brothers although there are very key differences between what this company does and what happened to Lehman Brothers and we see HR Representatives going around and laying off a bunch of people because even though this is before the actual financial crisis people sometimes forget but the United States was already in a recession there was a recession that started of December of 2007 as the Federal Reserve had hyped interest rates and that had depressed economic activity and yes I know it sounds very familiar it's not the first time this has happened and a quick fun fact about the scene for those who aren't as familiar with the finance industry all those computers you see are called Bloomberg terminals they are a special computer that you can rent from Bloomberg that gives you access to all kinds of data about stocks but because they are seen as the gold standard of the industry they are very expensive to rent I think it's roughly 24 000 a year but for Wall Street firmness pain is employees six figures if not millions of dollars it's sort of a drop in the bucket to fill a floor with these Bloomberg terminals but going back to the movie we see the HR Representatives going and laying off Eric Dale who seemingly is the head of the risk analysts and as he's leaving this building he seems very concerned about something he was working on and he hands a flash drive to Peter Sullivan as he's leaving and tells him to look into this thing to finish his work for him and to be careful so Peter puts in a late night tinkering away at this model and eventually discovers whatever was is missing and comes upon a very scary realization so much so that he calls back his boss and co-worker from the bar to help him deal with it and as he explains the firm has been violating its VAR model and the way things are going The Firm might be on the hook for losing more money than what the whole company is actually worth oh huge well the losses are greater than the current value of the company projected so it's a projected loss as well now VAR stands for value at risk and it stands for the maximum amount that a company expects to lose over a fixed period of time on its portfolio or its Investments as explained in the movie the way it's built is that they take historical volatility so how much prices fluctuate for the underlying assets and then use that to forecast how much they think asset prices will move in the future add a buffer to that roughly 10 to 15 percent and then use that to estimate how much maximum they expect to lose on these assets so five percent vaar of 10 million dollars means that a company is 95 confident that they won't lose more than 10 million dollars on any given trading day and the reason why it's important is because a lot of companies base their Capital decisions and their risk tolerance off of this figure assuming that hey so long as we don't lose more than 10 million dollars we can invest this amount we can borrow this amount and we'll just keep this amount on hand to cover that potential loss but as mentioned in the movie The Firm was already violating its maximum expected loss a number of times over the past two weeks that the model was now worthless now part of the ass is violating this model well as explained later on in the movie but it's mortgage-backed Securities which we've explained before on the channel but are essentially just a pool of mortgages meaning the actual loans that are given to homeowners that earn interest payments those are taken pooled into this investment vehicle and then people can buy into this pool to earn that interest rate as a return so this Investment Bank has a bunch of these mortgages on its book and mortgages are now deteriorating and that's all related to The subprime Lending crisis where financial institutions prior to 2008 were lending money to people who could not afford these loans and it was sort of a ticking time bomb especially when rates started to increase and those loans got more and more expensive that people were going to start defaulting so when you're an investor who owns a mortgage is receiving those interest payments from the borrower in more and more borrowers are starting to default being unable to pay you back you're going to absorb a loss and that's sort of the situation of this Investment Bank because their VAR model is based on historical information which does not reflect a housing crisis they were now being violated by these mortgage assets which were fluctuating by law because of the underlying credit situation so Peter explains this to his boss will and his co-worker Seth and will goes on to call in Sam Rogers who is the trading floor boss and Peter and Seth go off to find Eric Dale the guy who was laid off who started this model now for those wondering why the company seems to be so desperate throughout the whole movie to find Eric Dale it really just has to do with the sensitive nature of the information that he stumbled upon if he were for example to give that information to a competitor now that he's been laid off from this company that would be devastating to the firm because as we'll see later it will impact how they're able to unwind their asset position which we'll touch on later so the trading floor boss Sam shows up at the office and will explains the situation to him it's the first time that Leverage is mentioned as to why the company might lose more money than what it's actually worth we're now so leveled up that once it gets outside of these limits it gets ugly in a hurry it all has to do with the fact that they're dealing in real estate they were allowed to borrow so much money because it was seen that mortgages were a relatively safe asset not only were at the time mortgage-backed Securities being given false credit ratings by credit rating institutions but there was also this belief that real estate lending was a very safe practice because sure the borrower might default but then you'll come into possession of the property and be able to sell it to recuperate your losses but that's when times are normal the problem was because of the subprime lending crisis there were a bunch of mortgages that were all deteriorating at the same time and so all of a sudden there's a lot more risk than people ever expected in the mortgage lending sector so with the situation being so dire the team calls a meeting with some Executives including the chief risk officer and Sam's boss Cohen it's a very tense meeting it's where we come across the main dilemma of the company which is that as Sam explains to Cohen it would take weeks to offload these assets onto the market to get rid of these assets so that the company is no longer in danger and the reason for that as to why it would take so long just to sell assets that you hold is on the one hand you know to say sell hundreds of millions if not billions of dollars worth of assets you obviously need hundreds of millions or billions of dollars on the other side of that trade willing to buy that asset so that's hard enough to find a buyer for all those assets and on top of this making such a big sell order would really impair the price that you're able to realize on those assets and you might actually not be able to even sell those assets if you try to sell them all at once because interestingly the trades you put into the market are themselves Market information it's sort of communicating what you know about these assets so if you see a company that's suddenly trying to offload millions or sorry billions of dollars of assets onto the market other Traders on the other side of that trade will say hey this company obviously knows something we don't they're trying to sell all these assets therefore I'm not going to be the one to you know pick up their hot potato and so Sam's concern here is that if you put all these cells into to the market the market will know what you're doing they'll know that something's going on and you might even fail to find a buyer people might just stop buying from you because they know that you know something they don't you cannot be doing what you're thinking of doing well I don't see any other choice still Cohen is interested in just getting rid of everything regardless of the consequences so they decide to call in the big guns the CEO of the company John told now quick fun fact John told actually rhymes with Richard fold who was the last CEO of Lehman Brothers so very clear nod to that situation now this last big meeting with the CEO Peter gives the last bit of detail in terms of why this Bank even has all these problematic assets to begin with and as he explains the firm has been taking mortgages and repackaging them into collateralized debt obligations now collateralize that obligations can get a little complicated but to oversimplify it involves taking a bunch of mortgages much like a mortgage-backed security but then charging their cash flows into different risk classes or profiles meaning that investors can buy bonds of this collateralized that obligation with different risk characteristics there can be high risk bonds that are the First to absorb losses if mortgages stop paying in that pool and then there are lower risk bonds that are given higher priority it's very similar to Junior and senior bonds for a corporation where senior bonds if a company experiences hard times the senior bonds are given priority in terms of payment very similar cdos do the same thing they take a pool of mortgages give priority to certain investors and let other investors take on more risk for a higher return and cdos play a very big role in the 2008 financial crisis because they sort of obscured the actual underlying risk of those mortgages by repackaging them into these different tranches so some of these tranches were given very appealing credit ratings at times AAA safety ratings even though at the end of the day those underlying mortgages were deteriorating people weren't seeing that these mortgages were falling apart because the cdos were given very attractive safety ratings and as Peter explains the company itself wants the whole process of creating a CDO is finished doesn't take on any risk because they buy mortgage-backed Securities they repackage them into cdos and then they sell those cdos and make a fee along the way they themselves don't care at the end of the day if those mortgages default after the process is complete the problem however is that it takes roughly a month for that mortgage to be converted into a CDO and that's where Peter explains is why the company is in this predicament because the assets on this book are all these mortgages that have yet to be turned into a CDO offloaded to other investors and those mortgages are deteriorating faster than they're able to package those mortgages and as Peter puts it a decline of just 25 of the value of those mortgages would lead the company to lose more than what it's worth again because of the excessive leverage that it's taken on so told having been presented with all this information decides you know what screw the market let's just offload this as quickly as possible siding with Cohen you know it doesn't matter that this will prompt a financial crisis we just need to get rid of these before people know what's happening before they know what hit them leading to some protests from Sam and later infighting in the film if you do this you will kill the market for years it's over and that's basically what happens for the rest of the movie is a company prepares for and then sells all these troubled assets onto the market passing off the risk to others but there are some interesting tidbits that happen along the way for one there's a scene where the CEO tells the Robertson the chief risk officer that she's basically going to have to be the Fall Guy for the company that she's going to be the face of this failure because they want the traders to have someone to focus on rather than blaming told or you know other management even though as she explained she did bring this up to them about a year ago and a really cool fact is that this is actually another nod to Lehman Brothers because there was a situation where the CFO of the company Aaron Kalin was laid off and made a scapegoat she was made to present the increasingly disappointing earnings figures of Lehman Brothers to the public and then when times got tough she was laid off to sort of convince people that you know the company was dealing with with its situation by you know getting rid of the bad management and there was a lot of uproar about it because she was one of the few kind of top female Executives in the space so it's kind of a fun nod to um all fine an interesting uh you know a nod to that situation and just before things start we see the scene where Sam explains to his Traders what's going on explaining to them that yes they basically have to Kamikaze their careers because they'll be ruining relationships with all the Traders they've been dealing with on the other side because they're offloading Bad Assets onto them but presenting the incentives to companies willing to to give them for doing so uh he mentions that he doesn't want any swaps no swaps when doing these trades and all he means by that is he doesn't want the traders to take on any assets sort of as payment for their assets he wants cash for these sales a swap is a derivative agreement where you trade one type of cash flow for someone else's type of cash flow so a common example is to trade a fixed cash flow for a variable cash flow so you make a fixed payment and someone else pays you a variable payment based on marketing conditions uh but he's saying he doesn't want that he doesn't want these people to accept other assets or other cash flows they just want cash they want to completely exit this Market that they're blowing up but with everyone now on the same page page we hear the trading Bell kickoff and the offloading begins and the whole trading today is shown in just a few minutes but it's a really cool scene that shows how Wall Street trading can happen it's a lot more verbal in some situations there are relationships involved between different Traders and it's cool how it shows different time stamps and how with every trade that will is doing the other party is getting a lot more agitated a lot more aggressive as well Amazon [ __ ] you you fly me fast come on why are you still angry about it I'm hanging up now and willing to pay a much lower price starting at 93.5 cents on the dollar at the start of the day and quite literally getting the last trade-in at 359 at 65 cents on the dollar for a 375 million dollar mortgage-backed security but at the end of the day the key thing here and the big difference between it and Lehman Brothers is that the company survives it manages to offload this risk whereas Lehman Brothers ended up going bankrupt afterwards the company basically lays off all of its Traders showing just how heartless they kind of are and told has this conversation with Sam where he basically washes his hands clean saying hey I have no guilt here um this is just how the market Works we've repeated this many times throughout history many goes on to list a bunch of crashes throughout the span of time starting with actually 1637 which is the tulip bulb crisis and ending with the.com bubble of 2000 and whatever this is 2008. in the final scene of the movie we see Sam burying his dead dog this kind of mentioned at the beginning of the film that Sam's dog is sick it's just kind of a side and there's some symbolism here I'm sure because a dog is used to refer to an investment that's not doing well so movie ends on a note of Sam bearing a dead dog which uh sort of reflects the state of the market at that time so that's the movie Margin Call explained by an investment analyst I hope you enjoyed it two quick things before I sign off the first is that as mentioned this video is sponsored by blinkist and if you enjoyed learning a bit more about the 2008 financial crisis and you want to learn about other topics whether it be Investments or otherwise it's a really cool service for that I think this is an audio app designed to help users learn the key insights and ideas of non-fiction books summarizing them into blanks that you can either read or listen to in typically under 15 minutes they have a number of great finance and economic pieces on there for example the Black Swan by Nasim taleb which talks about the logical fallacies and economic risks that people underplay until they actually happen there's one link on there that has this great analogy of a turkey who lives on the farm you know has this farmer feeding it giving it shelter and believes itself to be safe right up until Thanksgiving but if finance and economics isn't your area of Interest they have over 5000 other titles on a wide range of other topics from relationships to science so it's a really cool service and I actually quite like it for browsing other types of subjects because I have such a large to read list in the investment field it's nice to go to other areas and learn about you know different things like philosophy and stuff that I'll probably not get to otherwise so it's a cool service for people who like their Audio Apps which definitely includes me as you might have guessed from the types of sponsors I take on and in addition to their core service they also host podcast summaries have full-length audiobooks where members get a discounted price and they also have a new feature that's called Linkus connect that actually lets you share your premium account between two users it's quite literally a two for one deal where you can share books ideas and talk with your friends about what you've learned if you want to check it out you can use the link in the description below for one week free plus 25 off the subscription fee so thank you blinkers for sponsoring this video in a second quick point a personal update if if you will is that Mrs bagel and I have actually had our second baby this is a George coffin everyone say hi and if you're wondering why I might look a bit more tired than normal in this video maybe I want to just mention it because I might be changing the type of content I do for the next little while as we adjust I will always go back to and stick to education focused content but if there are other types of videos you want to see over this time period whether it be other movie reviews or really anything that you want to see me do do let me know and I'll try my best to cater to that but I really do appreciate you guys joining me today for all the support you've shown me over the years I don't say it enough but thank you thank you so much I hope you found this video helpful and yeah we'll see in the next one bye for now