Sunday, November 6, 2011
- Finally An Accurate 2008 Market Crash Movie
There’s never been a good movie about hedge funds. There is that 60 minutes hit piece about my old boss Paul Tudor Jones, that some people think did the job. But rather than tell the truth about him, it did it’s best to describe him as an ego driven lunatic who lives the 'ultra high speed' wild life. Absolutely nothing could be further from the truth about him.
When you’re a Billionaire like Paul, sycophants are everywhere. And you don’t really know how good you are at resisting their flattery until you’ve actually coped with it. But if it turns out that you’re supremely good at staying grounded, you may turn out to be half as good at it as Paul Jones. I’ve never met a man who had more valid claim to a monstrous ego, but was actually less effected by it.
Anyway, there has never been a good movie about hedge funds. And until now, there has never been a good movie about the 2008 financial crisis. Wall Street 2 was a joke where Gordon Gecko gets out of jail and tells the liberals in the audience that they were right about capitalism all along. Laughable.
HBO's "Too Big To Fail" told the story of the brave and wise bureaucrats and civil servants that sprang into action to save America from the evil corporations and banks, by throwing gazillions of taxpayer dollars at them. That was a joke too, it just wasn’t as funny as Wall Street 2.
But Margin Call is different. It's not a cartoon fantasy told by againg 60's Marxists, or politicized commercial for bigger government told by a NYTimes reporter. It's a movie that does it's level best to describe what happens to a firm in crisis, and how that crisis spreads even though everyone is only doing their jobs as best they can. There are no cartoon villains in Margin Call, just like there aren't in real life.
The movie tells the fictionalized story of a sell side bank learning about it's exposure and making the rational decision to cut their leverage, knowing full well that in the process, they will probably be setting off a genuine liquidity crisis. It describes the players (both their virtues and faults), the chain of decision making, the inter-departmental politics, and the various components of expertise that are applied at the various points in the descent. At the end of the movie I was saying to myself that “I know those guys”.
At hedge funds, all we do is find things that we can buy for less than they’re worth, and things that we can sell for more than they’re worth. Risk management is our bread and butter – really our only job. So it’s always a first principle inside a successful hedge fund to have both a deep understanding of, and close management of, all of our risks.
But investment banks do lots of things. For them risk management is often seen as a cost center, and not a division that has much control over business decisions for much of the time. The movie actually starts at the moment when the senior risk manager at the firm is being laid off. The risk department is important and so are the folks in it, but if things are working as they should at a bank then there is never any reason for risk management to get involved do they tend not to be big the power players that they often are in hedge funds.
Most banks try to stay as close as they can to risk neutral, or if they do end up accumulating a risk, they try to keep it to a manageable size. Back in the stone age when I was at JPMorgan, 'Delta Neutral, Gamma Neutral and Rho positive' was our risk management mantra. That meant we should be neutral to a change in the market, neutral to a change in volatility, and if interest rates rose, we should gain just a tiny little bit. But by 2008, the banks had wandered far away from that goal and you know how that story ended.
The truth is, there are a few bones tossed to the political left in this movie. You probably can't make a movie in Hollywood otherwise. There are some strip club references and some talk about how none of the players 'deserves' their huge salaries. It’s Hollywood. What are you going to do?
But on the whole I was very impressed with how accurately they told the story of how these things happen. And the best way to tell that it’s accurate is that just like in real life, there is no villain. No one has a handlebar mustache or gets sexual pleasure from setting kittens on fire or anything. It's a movie about a bunch of people who were doing their jobs the best they can, and trying to manage a crisis. You might not like some of the characters in the movie, but you don’t walk away pointing fingers at them.
If you want to understand what happened in 2008, then this is the only movie that makes an honest, non-politicized attempt to explain it. It’s a first rate film that will hold your attention. I couldn’t recommend more highly.
Upon reflection, there is one important way that this movie differs from real life. With a very few highly notable exceptions the vast majority of the people I worked for on the sell side were real shit heels. They were political animals who sucked on the right appendage of a senior staffer to get where they were.
Not only that - by the time I got to Wall Street, to even get on that track you needed to start out with real advantages. Either you had to have an uncle who was on Federal reserve board, or the Harvard Alumni association, or was a dictator in a third world cesspool or OPEC member state. If you ask me I think it's probably been a VERY long time since anyone rose to the upper ranks of an investment bank on merit alone.
There were plenty of good people there when I was, and I'm sure there still are. But during my sell side tenure, most of the decent people were pulling the chariot not riding in it. But I guess in order to get people to focus on the real problem in the movie, they had to make the key people themselves a little more likable. and even the worst boss I've ever had (he was a member of the British peerage who used to refer to the Indian guy on our team as 'the little brown fellow') probably thought of himself as a good guy with decent motives.