“It's just money;
it's made up. Pieces of paper with pictures on it so we don't have to kill each
other just to get something to eat. It's not wrong. And it's certainly no
different today than it’s ever been. 1637, 1797, 1819, 37, 57, 84, 1901, 07,
29, 1937, 1974, 1987, […], 92, 97, 2000 and whatever we want to call this. It's
all just the same thing over and over; we can't help ourselves. And you and I
can't control it or stop it, or even slow it, or even ever-so-slightly alter
it.” (Irons, 2011, 01:36:50)
Back in 2011, roughly 4 years after the outbreak of the
great recession, director J. C. Chandor and his team released one of the most
interesting movies about the financial crisis by taking a different perspective
on the crash. Margin Call, as the movie is titled, shows the happenings inside
a fictional investment bank during the last 24 hours before the financial
collapse. In summary, everything starts with the junior risk management analyst
Peter Sullivan (Zachary Quinto) whose financial models show that the firm’s mortgage-backed
securities, financial instruments that pool securitized mortgages, were valued
incorrectly. He predicts that a 25% depreciation of those products would be
enough to force the bank into insolvency whereupon the executive staff meets
immediately to discuss how to handle the situation.
This is the point where Margin Call manages to stick
out of the list of historical examinations of the 2007 financial crisis: It
tries to focus on the personal reasons, thoughts and fears of the people behind
the desks instead of analysing technical details like who really could be
blamed for the existence of collateralized debt obligations. It is indisputable
that many personal mistakes in form of unethical behaviour were made on sides of
the bankers in the years before the crash and the list of unscrupulous activities
reaches from excessive greed to misleading investors. Although, it is a fact that
great parts of the emotionalized public debate on the topic failed to take into
consideration that bankers are not part of a vicious sect that plans on how to
rob the society’s wealth but just human beings that got the same fears and
burdens like everyone else. However, one of the major differences between those
2 groups is the circumstance that senior bankers work in positions where any
kind of action can have severe systemic impact on the globalized world and
whenever at the same time, regulations fail to keep bad incentives in check, people
tend to exploit the system if they have no other motives to not do so.
Therefore, one could argue that the solution is simple: Regulate
the financial markets! But taking into consideration the quote at the
beginning of this blog, why were people in history not been able to control the
markets if regulation was the answer? Proponents of regulation will state that the
regulative measures and activities that have been used in the past were not efficient
enough, so they call for higher influence and funding of regulative authorities.
On the contrary, opponents will highlight the failures of regulative activities
in the past and point to idealistic liberal theories of self-regulation due to market
efficiency.
Looking at those controversies
from a non-institutional shareholder point of view, investors have no other
choice than to admit that they just can not know if politicians and regulators can
keep our financial ecosystem stable. This is surely not an academical approach
at all, but it might make sense on a personal level as regulatory jurisdiction is
also often way too complex for regular investors to understand and analyse. However,
as soon as they admit that the system we live in is not perfect and vulnerable
to crises, shareholders can start taking measures to prepare and protect themselves.
Examples would be portfolio diversification in form of buying stocks that
historically performed above average in recessions like utility, energy or
pharma companies, investments in stocks that pay historically stable and
constant dividends or insurances that grant the investor safe income in times
of crisis.
Finally, I think that academic
research in the field of regulation leads us to efficient markets closer every
day. Although, it would be naive to think that we are even close to a “perfect”
and infallible market system. Margin Call shows us certain reasons for this
fallibility on a human and psychological level and as an investor, I should learn
the lessons of this and integrate them into my investment strategy every day.
Bibliography
Barnum, A. O., Benaroya, M., Quinto, Z., Dodson, N., Moosa, C., Jenckes, J. (Producers), Chandor, J. C. (Director), & Irons, J. J. (Performer). (2011). Margin Call [Movie]. United States: Before the Door Pictures. Retrieved from https://learningonscreen.ac.uk/
No comments:
Post a Comment