Margin Call: From Movie to Reality Show

The film Margin Call is an entertaining portrayal of big bank culture and behavior during the Financial Crisis. The basic plot involves a Wall Street bank that realizes that it holds a lot of toxic real estate/mortgage securities, and wants to unload them before everyone else figures out that their price is going to collapse. It succeeds, and saves itself from the fate of Lehman or Bear. I had to look past the basic plot vehicle: the ability of the bank to execute such massive sales without causing the price decline that it predicted is rather doubtful, at best. That said, the plot does provide an excellent backdrop for the personal dramas and interpersonal dynamics and characters that are Wall Street (and the City).

The Archegos implosion is a reality show version of Margin Call–right down to the title. The massive “private office” run by former Tiger Management wunderkind Bill Hwang put on massive positions (some long, some short) in a relatively small set of stocks. At least some of those positions were in the form of total return swaps, rather than purchases of the underlying stocks. Swaps embed leverage. A TRS is equivalent to a position in the stock financed with borrowing. It’s not clear from the reporting, but some may also have been old fashioned leveraged bets, with purchases of stocks on margin.

When prices went against the positions, Hwang faced huged margin calls that he did not meet. The prime brokers with whom he dealt then needed to liquidate large positions in the losing securities. Some of these stock holdings might have been the collateral that Hwang had posted, which the prime brokers seized when he defaulted. Some of them were almost certainly shares that the banks had bought as hedges of the total return swaps. Once Hwang defaulted, the banks’ short positions in the TRS went away, and they no longer needed the hedges.

Here’s where the Margin Call analogy really kicks in. Apparently Hwang’s major prime brokers, including Credit Suisse, Nomura, Morgan Stanley, and Goldman, discussed a coordinated liquidation of the stock positions in order to mitigate a panicked . Goldman (and maybe MS) listened politely, then pipped the others to the post and sold the stocks in big blocks before the others did. As a result, Credit Suisse and Nomura lost billions, and apparently Goldman and Morgan Stanley didn’t.

Goldman’s behavior is redolent of what they did in the Long Term Capital Management (LTCM) situation. One would have thought that CS and Nomura would have taken that into consideration, and hadn’t made themselves into the hindmost for the Devil’s taking.

Interestingly, although the block “fire sales” impacted the prices of the stocks Hwang traded, there doesn’t appear to have been a wider market fallout. Billions ain’t what they used to be. Even tens of billions ain’t what they used to be.

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