Margin Call & The Bankers

by Rick Gould, CPA, JD

I saw the movie “Margin Call” a couple of weeks back. It hit home for me for two reasons:

1. It took place in the StevensGouldPincus office building in NYC, One Penn Plaza.

2. It was reminiscent of the financial crash of 2008 (the downfall of Lehman, AIG & Merrill Lynch) as well as the recent implosion and bankruptcy of MF Global.

The movie is about 24 hours in the life of a bank modeled after Lehman- fancy offices, great view, young brokers that believed they had the world in the palm of their hands. Fancy sports cars, posh apartments, getaway weekends in Paris. Kevin Spacey, Demi Moore, Stanley Tucci and Jeremy Irons did a great job portraying very successful executives. They saw their careers implode and their firm on the brink of failure as a result of the liquidation of its mortgage backed securities, in an attempt to raise cash to meet its required reserve margins- the “Margin Call”.

We saw the futile attempt to sell off toxic assets, the midnight board meeting, and the mass firing of traders and staff the next morning. What the events in the movie clearly showed, very reminiscent of the Lehman debacle, was that the bankers placed way too much faith in Ivy League MBA’s who functioned using complicated analytics, spreadsheets and mathematics.

Their Board of Directors was comprised of multi-degreed entrepreneurs, attorneys and accountants, all supported by very smart economists. But few of them fully understood the complexities of their business models and the risks these models created. Conservatism was not in their philosophy.

What was needed in the movie, and in the Lehman scandal, was the ability to interpret, to benchmark, and to predict what was in store, as well as how to protect vital assets and make the inevitable “margin call” survivable.

In both the movie and the real-life scenarios, the bankers did not have a clue what was “really” going on. Honest, hard-working people are now paying the price for the ignorance and arrogance of these secure, high salaried bankers.

In my opinion, these “masters of the universe” did not have enough skin in the game to protect investors from losing most, if not all, of their “safe” investments. The bankers did not have enough to lose personally. If they did, they would have hedged against the worst possible result.

American society has always embraced scholars for these positions, especially those from the top biz schools who populate the highest echelons of major investment banks. My preference would be to embrace the down-to-earth, self-made entrepreneurs who run the most successful and profitable PR/communications firms. These executives are smart, savvy and creative. They learn by doing, by trial and error, by rolling up their sleeves and by starting out in the trenches at the bottom.

These successful communications executives learned that keeping the client and all stakeholders in mind when making business decisions is not only smart, but also essential to sustained profitability. Especially for those who have patience and dedication, and who take the time and make the effort to master the business end of their business, the street smarts and communication skills needed to make cautious and correct decisions can be learned.