A Film about the Lehman Collapse and the Problem of Dirty Hands

November 30, 2011

Dirty Hands


Here is a trailer of the new film, Margin Call which is loosely based around the collapse of one of the largest investment banks, Lehman Brothers. However, this film is not about Lehman Brothers specifically. The firm in the film is completely made up.

I watched this film recently and it dawned on me that it tied into the problem of Dirty Hands. Don’t be fooled by the “24-like” time updates during the trailer, this film actually moved very slowly (unlike HBO’s “Too Big to Fail”). If you couldn’t decipher from the trailer, the crux of this film is based around the findings of a junior analyst (Zachary Quinto) who was handed a USB drive from his boss about material that he said he should “be careful” about. After spending a night working on projections off of the data from the USB, the analyst arrives at data that what would define the future of the firm. The analyst “discovers that trading will soon exceed the historical volatility levels used by the firm to calculate risk. Because of excessive leverage, if the firm’s assets in mortgage backed securities decrease by 25%, the firm will suffer a loss greater than its market capitalization.” (http://www.sysmaster.tv/index.php?mapa=webtv&accion=clip&id=77.)

In English, this discovery set off a series of events. This firm made many very risky loans adding to their historical volatility levels. If the firm’s assets in MBS decrease by 25% (which they will due to many of the bad loans that real banks made prior to the Fall of 2008 to people who couldn’t afford them and defaulted on their mortgages), then the firm will suffer a loss greater than the Market Capitalization (basically the value of the company) of the firm. Due to these bad loans, this formula that the firm relied on couldn’t account for such risky leverage (loaning). So, all of this toxic stock that is on their books could sink their company. So here is where we encounter the problem of Dirty Hands.

The firm has two decisions: either hold on to this toxic stock that they know will kill their company within days or attempt to sell off all of these worthless assets all in one day before the market can react and realize what their selling is absolutely worthless. Eventually, other investors will soak up their risk but no other companies will ever want to do business with them again and there will be no trust in their firm and furthermore will kill their ability to lend which is a vital for a bank to survive). Damned if you do, damned if you don’t. This problem was unavoidable because no matter what the firm’s executives did their company was going to go bankrupt once they realized this startling figure.

The Dirty Hands problem usually pertains to politicians and their constituencies, however this idea is as political as it philosophical. Due to that, there is no reason why this conundrum couldn’t occur in such contemporary financial times. Do you agree withthis belief?

This film has been received as considerably liberal, so what do people who on the other side of the political spectrum believe? Even though most people haven’t seen this film yet, how would people entertain the message of this film which is that the big banks humanely initiated the economic recession? (Note: this is solely my interpretation of this film message on why the economic recession started, obviously not a fact and absolutely up for debate).

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6 Comments on “A Film about the Lehman Collapse and the Problem of Dirty Hands”

  1. benjishanus Says:

    I think it is unfair to solely accuse large banks for triggering this horrific economic recession that we are currently stuck in. It is important to keep in mind that we live in society that changes and advances every day. In other words, nothing is constant, nor will ever be constant. The most basic economic models show that peaks and recessions are inevitable. Despite the greatest efforts of our country to avoid times like we’re in now, the history of our economy resembles the path of a roller coaster, and this likely won’t change anytime soon.

    Is it possible that some factors such as these large banks, are more responsible for causing the recession that other factors? Absolutely. But regardless, as I just indicated, they’re only one of countless factors that enter the equation. That being said, I believe that the message this movie is giving is unfair and inaccurate. There is no one factor, or in this case bank, that can be held fully accountable for landing us in the downfall that we are currently fighting.

  2. lnk72792 Says:

    I don’t think this is a case of dirty hands. The bank in the movie initiated a fire sale of all their assets for one sole purpose: to salvage themselves. There was no greater good that they were motivated by. They lied to other banks to sell off these toxic bundles of mortgages for cents on the dollar until other firms finally began to realize what they were doing. I saw this movie also, and I thought it was a bad depiction of the crisis. I didn’t really enjoy the movie. Having said all of that, your post was still informative for those who have not seen the movie yet, which I do not recommend.

  3. goldman13 Says:

    I’m not sure how you can relate this movie/situation to the collapse of Lehman Brothers, and then make the next connection to the Dirty Hands issue. Not to get too caught up on the details, but Lehman did not try to coverup its defaulted securities, let alone sell its worthless assets. Rather, they searched for another bank to buy the good with the bad in an effort to keep the Lehman name afloat even if that meant being controlled by another institution. The movie Margin Call seems to be a coverup sort of scheme by bank executives that are unwilling to relinquish the power they have garnered (“There are three ways to succeed in this business; be first, smart, or cheat”).

    However, i think you could make the connection between Dirty Hands and the real financial sector collapse/government bailout situation. In the final moments of the collapse, the government had two options; either let unhealthy banks collapse and take down the entire world economy with them, or create an influx of money into the entire system to keep everyone in the green (at least for the time being). Of course, the government chose option #2. The Dirty Hands part would be the immoral act of merging the federal government with private industry (the bailout was basically an indirect method of the government buying overvalued stocks) in order to keep the financial system afloat.

  4. #jasonschwartz Says:

    The sad truth about this problem is that the people who sold off these toxic assets were acctually doing what they had been taught right here in college. They were simply trying to make as much profit as possible. Nowadays, if you were to walk into a econ 101 class at michigan, you would find that students atre learning one and only one major principle throughout the course… how to become profitable. When students go out in to the real world, they hold this teaching thickly in their minds and as a result, greed, money, power, and corruption ensue. We need to drastically rethink the way in which we teach our nations youth. The root of the problem is that classes are teaching profit rather than sustainability. If courses in school were restructured, I truly feel that they could drastically change the way in which our youth think within our lifetime.

  5. kpatch Says:

    With the case of Lehman collapsing I think that dirty hands were definitely involved but spread out over a long time. It is easiest to throw the blame for the 2008 crash on the big banks, but I think the root of that problem was spread across to individuals. The spending habits of Americans had been building up for years, as it is in our nature to think optimistically for the future. Americans were spending more than they had, they were taking loans out carelessly for houses and cars and anything else they desired that they could not afford just assuming that they would be able to afford it eventually. The blame is not totally on the individual though. Banks, being the professionals that they should be were granting loans far more easily than they should have. They over extended themselves across the board. The economic crisis was a bubble that was just waiting to be burst. The collapse of Lehman certainly spurred the state of hysteria. It nerve racking to see one of the best banks collapse. I think the buildup and the reaction to the collapse is what has mostly led America to be in the financial crisis that we are currently in. The trailer to this film makes it seem as though the executives at this big name bank were the specific people who caused the entire collapse.

  6. bmschmid Says:

    In response to Kpatch’s comment, I must say a few points. I agree that the Financial crisis of 2008 was a long time coming, but the consistent decisions of big banks over the 2000’s to loan to people who they knew couldn’t afford that new house or new car was at the hands of the people in this film. The executives that are represented in this film were the decision makers who thought of this unsustainable formula for risk and then continued to use it. I agree with you that the big bank executives did not start the crisis, but they got the ball rolling. In response to lmk72792, I agree that Margin Call isn’t that great of a film, but it did expose an insider look at what financial firm executives had to think and their thought processes. As for the argument about profitability, it seems that in this film it is possible to stay profitable but at what price?

    Are the big banks the only reason we find our country and now Europe in a severe recession? Obviously not. However, when describing the origins of the recessions it is impossible to not look at the role the big banks played in the debacle. The flow of a Capitalist society does ebb and flow between peaks and troughs but there are certain moves large financial firms could have done to lessen the damage of the oncoming crash.

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