Imagine if Merrill had been smart like Goldman

October 14, 2011

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Imagine if Merrill Lynch had been smarter, like Goldman Sachs, a few years ago. The investment bank would have realized it was holding too many dodgy mortgage securities and sold them off to buyers who didn’t yet think the market would blow. Those clients might have then landed in trouble. But Merrill would have avoided a fire sale to Bank of America.

That’s the basic premise behind the latest film to emerge in the financial crisis genre, “Margin Call.” The movie, which premiered at Sundance and is slated to open in U.S. theaters next week, presents, however clumsily, a fictional morality tale with real parallels in the Wall Street banking panic that began in 2007.

The plot is simple. Indeed, for anyone with a modicum of understanding of financial business it is downright simplistic. Kevin Spacey stars as Sam Rogers, the head of a big trading desk at an investment bank located, in the first of a handful of incongruities, in One Penn Plaza. The bank has just fired Eric Dale, one of its key risk management executives.

But before disappearing to his Brooklyn Heights brownstone, Dale, played by Stanley Tucci, hands a hotshot associate a memory stick with a file, cautioning him that its contents could be dangerous. In fine clichĂ©d fashion, the whiz-kid, Peter Sullivan, holds a PhD in rocket propulsion. And cast in the role is Zachary Quinto, reprising his role as Star Trek’s Spock, but this time in pinstripes and human ears.

After much cogitation and scribbling of numbers, Sullivan discovers that the firm is sitting on a time bomb of mortgage-backed securities whose implied losses are greater than the entire market value of the company. No numbers are provided. But we know it’s bad because grown men are gasping at Bloomberg terminals and saying really profane things.

And so the action begins — insofar as eight hours of conference room meetings constitute action. Tense discussions ensue between a risk manager played by Demi Moore and a senior executive, with an uncanny resemblance to JPMorgan boss Jamie Dimon, who ignored her warnings. Jeremy Irons hovers above in his usual role as a morally-challenged and ruthless leader, in this case CEO John Tuld, who somehow gets to fly a helicopter onto the roof in apparent defiance of New York City laws.

Of course, all this sounds a bit like the story of Merrill Lynch. The firm found itself with tens of billions of dollars of similarly dodgy mortgage securities it couldn’t sell and whose losses threatened to overwhelm its capital. As Lehman Brothers was going under, Merrill had to sell itself to BofA in a hurry three years ago in September.

But “Margin Call” posits a different end for its fictional firm. Over the course of a few hours, Chief Executive Tuld, whose name rather obviously rhymes with that of Lehman’s disgraced ex-boss, convinces his troops that they must sell every lick of MBS on the balance sheet, knowing full well that the assets are essentially worthless. Though Spacey objects on principle, by morning, and before the market opens, he rallies his sales team with a rousing, twisted Wall Street version of Henry V’s St. Crispin’s Day Speech. A crowded conference room stands in for Agincourt.

The tradeoff is made plain: sell this dodgy stuff and you save the firm. But know that your clients will never talk to you again. In the moralizing tone that has become a hallmark of all financial crisis genre films, particularly the polemic “Inside Job” that won the Oscar for best documentary, everyone does what they’re told because they are paid handsome bonuses. They can then blow it all on “hookers and booze,” as Paul Bettany’s character Will Emerson did with some $76,500 of his earnings.

The firm lives to fight another day in the markets, and its executives must live with the consequences, though it’s not clear what these may be apart from some burnt relations with other people who would probably have done the same. But J.C. Chandor, who wrote the screenplay and directed “Margin Call,” suggests this is just how Wall Street works. And there is ample evidence from the crisis to lend credence to much of his oversimplified finger-pointing.

In reality, dumping massive amounts of mortgage bonds in a heartbeat before everyone else had worked out they were toxic would have been nearly impossible. But the fictional dilemma is one worth considering — at least for the director it was. His father was a senior executive at Merrill.

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