Posted on by Matthew Freedman

Rewatching Margin Call During the Coronavirus Crisis

I wouldn’t say that the 2011 film Margin Call is actually a great movie, but it’s one that has somehow stuck in my mind since I first saw it.

Based on the events of the 2008 financial crisis, Margin Call seems especially relevant as we move further into a coronavirus-induced recession.

Perhaps the most famous scene in the movie is the senior partner emergency meeting. As I rewatch it now, I’m struck by several points in the scene.

UPDATE (Mar. 29): Thanks to @BluesFan69_ for pointing out the Feb. 17 episode of the Animal Spirits podcast, “A Random Watch Down Wall Street: Margin Call,” in which Ben Carlson and Michael Batnick break down the movie.

“And, Please, Speak as You Might to a Young Child”

When CEO John Tuld (Jeremy Irons) asks risk analyst Peter Sullivan (Zachary Quinto) to explain the problem to him, he puts it like this.

Maybe you could tell me what you think is going on here. And, please, speak as you might to a young child or a golden retriever. It wasn’t brains that got me here, I can assure you of that.

There’s something obnoxious about Tuld’s phrasing, but there’s also more than a modicum of humility. He knows he doesn’t know even the most basic of facts.

That’s how I feel about the coronavirus: There’s so much I don’t know, and I’d like to have it explained to me as if I were a small child.

As it happens, the Mar. 27 episode of The Daily podcast is a kids’ guide to the coronavirus.

Not to sound like an idiot, but I can honestly say it is one of the most informative podcasts I’ve heard about the coronavirus over the past two months — at least from a science perspective.

Sometimes it’s good to remember that when we’re outside our areas of expertise, we’re all basically children.

“What’s Already Taken Place Over the Last Two Weeks”

I love the interaction between Tuld and Sullivan. It’s one of the best parts of the movie.

Tuld: What I’m guessing your report here says — and give me some rope here — what I’m guessing it says is that, considering the, shall we say, bumpy road we’ve been on the last week or so — is that the figures your brilliant coworkers up the line ahead of you have come up with don’t make much sense anymore, considering what’s taken place today.

Sullivan: Actually, not what’s taken place today, but what’s already taken place over the last two weeks.

Tuld: So you’re saying this has already happened.

Sullivan: Sort of.

When Sullivan says that what he sees in the numbers is reflective not of what has recently happened or what will happen in the future but of what happened two weeks ago, that’s a real kick in the crotch.

And that’s where I think we are with coronavirus testing.

U.S. coronavirus testing is incredibly important.

Every day, Ryan Struyk of CNN posts the most recent reported U.S. statistics for the coronavirus.

What we are seeing now in the numbers is not a result of what just happened yesterday. It’s the result of what happened 2-8 weeks ago.

If everyone in the U.S. went into quarantine immediately, the number of reported cases would still rapidly rise over the next 1-2 weeks and perhaps longer.

In a very real sense, the future is now. Or phrased differently: “Whatsoever a man soweth, that shall he also reap” (Galatians 6:7).

“I’m Afraid That I Don’t Hear a Thing”

What strikes me about Tuld is how quickly he recognizes the threat facing his investment firm.

Within a matter of minutes, he goes from “Speak as you might to a small child” to “I earn the big bucks” — and with that flex he rapidly reaches the terrifying conclusion that his company is about to be destroyed.

Sullivan: If those assets decrease by just 25% and remain on our books, that loss would be greater than the current market capitalization of this entire company.

Tuld: So what you’re telling me is that the music is about to stop and we’re going to be left holding the biggest bag of odorous excrement ever assembled in the history of capitalism.

Sullivan: Sir, I’m not sure that I would put it that way, but let me clarify. Using your analogy, what this model shows is the music, so to speak, just slowing. If the music were to stop, as you put it, then this model wouldn’t be even close to that scenario. It would be considerably worse.

Tuld: Let me tell you something Mr. Sullivan. Do you care to know why I’m in this chair with you all? — I mean, why I earn the big bucks?

Sullivan: Yes.

Tuld: I’m here for one reason and one reason alone. I’m here to guess what the music might do a week, a month, a year from now. That’s it. Nothing more. And standing here tonight, I’m afraid that I don’t hear a thing. Just silence.

Tuld doesn’t shy away from reality. Once he has been informed — once he has heard the opinion of the expert — he immediately knows.

My sense is that we have been incredibly slow in the U.S. to recognize and appreciate the severity of the situation.

Right now, people are acting as if the music is simply slowing down. There’s a chance that the music has actually already stopped and we just don’t know it yet.

“So That We May Survive”

After his conversation with Sullivan, Tuld turns to his senior partners — namely Jared Cohen (Simon Baker) and Sam Rogers (Kevin Spacey) — and asks them how they should proceed.

Tuld: So now that we now the music has stopped, what can we do about it? … What have I told you since the first day you stepped into my office? There are three ways to make a living in this business: Be first, be smarter, or cheat. Now, I don’t cheat, and, although I like to think we have some pretty smart people in this building, it sure is a hell of a lot easier to just be first.

Cohen: Sell it all. Today. …

Rogers: Even if we manage to pull that off, and that’s saying something, the real question is: Who are we selling this to?

Tuld: The same people we’ve been selling it to for the last two years and whoever else will buy it. …

Rogers: If you do this, you will kill the market for years. It’s over. And you’re selling something that you know has no value.

Tuld: We are selling to willing buyers at the current fair market price so that we may survive. … This is it. I’m telling you, this is it.

So many thoughts.

Here’s what I wrote on February 15: “In the short term, it’s better to be first. In the long term, it’s better to be best.” Not coincidentally, I wrote that right as I decided to stop trading options because I felt the stock market wasn’t appropriately pricing in the risk of the coronavirus.

I’m not an investing genius, and I admit I got incredibly lucky with my timing — but Tuld’s “be first” mentality and my recent experience drive to this point: In most instances, it’s better to be early, especially when it comes to preservation.

What especially strikes me about Tuld’s “be first” mindset is that, even though he’s ostensibly focused on what he should do immediately, everything he does is with the long term in mind. “We are selling to willing buyers at the current fair market price so that we may survive. … This is it.”

With his words to Rogers, Tuld articulates a position based on the assumption that the market is destined to die anyway and it’s best that they act aggressively and immediately so that they don’t die with it.

If I were to think about this from a Navalian perspective, I would say that Tuld is turning a short-term game into a long-term game.

A few years ago, FantasyLabs Co-Founder Jonathan Bales wrote a piece about whether you should work for free, ultimately arguing that what makes sense is to maximize your potential value and money for the long term, not the immediate future.

I’m a believer in the long road.

As is Tuld. He acts immediately to amplify his short-term pain — or, rather, to cram the pain he is destined to feel into as small of a time frame as possible — so that he can maximize his long-term odds of surviving and eventually thriving.

And he makes that decision incredibly quickly, like a poker player folding bad hand.

To do that — to crucify yourself in order to reach heaven — you must have a rare combination of humility and confidence.

And you must have the steadfastness to endure the pain and stick to the plan once you’ve commenced.

Right now, even though we are yet to get the coronavirus under control, many people in the U.S. want to pull back on our quarantining and self-isolating protocols because our economy has predictably suffered as we’ve taken steps to safeguard our public health.

In my opinion — and I might be wrong — such people are mistakenly under the impression that they’re playing a short-term game. They’re not.

If we let up on our efforts to reduce the spread of the coronavirus, I expect that we will see a short-term rebound in the economy followed by a recession that is deeper and longer than it would have been if we had remained resolute.

As Tuld understands, it’s better to suffer a lot of economic pain now than even more of it later.

That is the pain we must endure so that we may survive.

In what strikes me as an irrational exhibition of enthusiasm, the stock market moved up about 20% on Mar. 24-26 — even though the coronavirus numbers in the country have continued to worsen and even though the $2 trillion stimulus package passed by Congress was already widely expected.

A lot of people in this country still don’t understand the situation.

This is it. I’m telling you, this is it.

Regardless of whether we feel it’s warranted, we seem due for more pain.

I’m not a financial advisor, and I don’t suggest that you make any decisions based on anything I say or write … but, like Tuld, I think now is a time for selling.